Chapter 2 Practice Question Answers
- 1. Answer: C. Yield to maturity is the anticipated yield of a bond that is bought and held to maturity based on its current value in the market. When a bond’s market value goes up, its yield to maturity goes down. When a bond’s yield to maturity goes up, the price of the bond goes down. This is because the coupon rate is fixed for the life of the contract.
- 2. Answer: B. A callable bond can be redeemed prior to its maturity date. An issuer may wish to redeem a callable bond when interest rates drop significantly so the company can pay off the bonds and issue new ones at a lower interest rate.
- 3. Answer: A. The bank discount yield = ((face value – purchase price) / face value) x (360 / number of days to maturity). The bank discount yield = (($1,000 – $996) / $1,000)) x (360 / 90) = 1.6%.
- 4. Answer: B. Treasury bills are issued at a discount from the $100 face value of the bill. They make no periodic interest payments.
- 5. Answer: A. When a T-bill futures contract matured, it required the delivery of a U.S. Treasury bill with a $1 million face value. Contracts taken to delivery were never settled on a cash basis. T-bills futures, of course, no longer exist.
- 6. Answer: C. When it existed, a T-bill futures contract was required to be delivered on one of the three successive business days beginning with the first day on which a new T- bill is issued in the third week of the contract month. That means that the latest date that Jackie can make delivery is Monday, March 25.
- 7. Answer: D. The contract size of a T-bill futures contract is $1 million. To find the market price of a T-bill knowing the IMM index and days to maturity, one must apply the following formula:
The result of this calculation is $995,188.
- 8. Answer: A. If an organization wants to purchase T-bills in the future, it runs the risk that interest rates m