1. Consider a five-year bond with a face value of $1,000 paying annual coupons at a rate of 12% which has a current yield to maturity of 10%. If all interest rates remain unchanged, one year from today the price of this bond:
a) Will be higher.
b) Will be lower.
c) Will be the same.
d) Cannot be determined without additional information.
2. Your favorite aunty has finally agreed to contribute towards funding your retirement. Specifically, she will start with a contribution of $6,000 today (that is, end of year 0) but this amount will then decline at a constant rate of 3% p.a. over the foreseeable future. If the interest rate appropriate for valuing your aunty’s contribution is 12% p.a. its present value today is closest to:
a) $38,800.
b) $44,800.
c) $56,000.
d) $70,667.