Exercise

Answer the following questions.

1. 1. Most interest-paying bonds pay interest every:
2. A. Month
3. B. 3 months
4. C. 6 months
5. D. Year
6. 2. An investor purchases a $1,000 TIPS note with an interest rate of 2%, and at the end of the first year, the CPI has risen to 3%. Which of the following is true?
7. A. The second interest payment will be $30.
8. B. The second interest payment will be $15.
9. C. The second interest payment will be $20.
10. D. The second interest payment will be $10.30.
11. 3. A dealer posts a spread on Treasury notes of 103.08 – 103.16. For a $1,000 par note, what is the value of the spread?
12. A. $0.80
13. B. $8
14. C. $2.50
15. D. $1.25
16. 4. Which of the following is the most likely to be a spread of Treasury bills with a par value of $1,000?
17. A. 3.25% – 3.35%
18. B. 3.35% – 3.25%
19. C. 97.5 – 98.0
20. D. 98.0 – 97.5
21. 5. How much would you pay for a $1,000 10-year Treasury bond priced at 95.08 (excluding accrued interest)?
22. A. $95.08
23. B. $950.80
24. C. $952.50
25. D. $1,000.00
26. 6. All of the following are characteristics of a Treasury bill except:
27. A. They are sold at a discount to the par value.
28. B. They pay low periodic interest payments.
29. C. They are considered the safest of Treasury securities.
30. D. They have a maximum 52-week maturity.
31. 7. Trades for U.S. Treasury securities settle:
32. A. The next day
33. B. The next business day
34. C. The day after the next business day
35. D. The third day after the next day

Answers

1. 1. C. Most interest-paying bonds pay interest every six months; this is also known as semiannually.
2. 2. D. At the end of the first year, the CPI has risen to 3%. This means that the Treasury will increase the $1,000 principal by 3% to $1,030. To find the amount of the