06/03/2021

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Week5 Debt Mkt 1

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1. Deflation is beneficial for the economy because inflation can lead to an inflationary spiral.

(1 mark)
You scored 1 / 1 mark

True

False

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

2. Which of these two bonds has a higher Effective Annual Yield (EAY)?

Bond 1: price = $900, maturity = 3 years, face value = $1,000, coupon rate = 6%, annual coupon
payment
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Bond 2: price = $900, maturity = 3 years, face value = $1,000, coupon rate = 6%, semi-annual
coupon payment

(1 mark)
You scored 1 / 1 mark

Bond 1 has a higher EAY.

Bond 2 has a higher EAY.

Bond 1 and Bond 2 have the same EAY.

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

3. If an annual-coupon-paying coupon bond has a maturity of 5 years, a par value of $1,000, and a
coupon rate of 10%, what is its price when the market interest rate is 8%?
(1 mark)
You scored 1 / 1 mark

$927.9

$1,000

$1079.9

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

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4. All else equal, a loan that uses the annual rest basis is going to be more attractive to the
borrower than a loan that uses the semi-annual rest basis.

(1 mark)
You scored 1 / 1 mark

True

False

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

5.
Fill in the blanks
(4.5 marks)
You scored 4.5 / 4.5 marks

Flat Basis - Example of amortized loan in the slides: Principal = $100,000, to be repaid monthly
over 3 years, quoted rate = 10%.

Fill blanks of the amortization tables (round to the 2nd decimal) if the interest basis method is
flat basis.

Interest Principal Total Monthly

Period Principal
Payment Repayment Payment
1.
1 100000 2. 2777.78 3. 3611.11
833.33
4. 5.
12 6. 2777.78 7. 3611.11
100000 833.33
8. 9. 10.
13 11. 3611.11
100000 833.33 2777.78
12. 13. 14.
36 15. 3611.11
100000 833.33 2777.78
16.
Total 17. 100000 18. 130000
30000

Enter the correct answer below.

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10

11

12

13

14

15

16

17

18

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

6.
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Fill in the blanks

(4.5 marks)
You scored 3.5 / 4.5 marks

Discount Flat Basis - Example of amortized loan in the slides: Principal = $100,000, to be
repaid monthly over 3 years, quoted rate = 10%.

Fill blanks of the amortization tables (round to the 2nd decimal) if the interest basis method is
discounted flat basis.

Interest Principal Total Monthly

Period Principal
Payment Repayment Payment
1.
1 100000 2. 2777.78 3. 3968.25
1190.48
4. 5.
12 6. 2777.78 7. 3968.25
100000 1190.48
8. 9. 10.
13 11. 3968.25
100000 1190.48 2777.78
12. 13. 14.
36 15. 3968.25
100000 1190.48 2777.78
16. 17. 18.
Total
42857.14 100000 142857.14

Enter the correct answer below.

10

11

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12

13

14

15

16

17

18

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

7.
Fill in the blanks
(4.5 marks)
You scored 2 / 4.5 marks

Annual Rest - Example of amortized loan in the slides: Principal = $100,000, to be repaid
monthly over 3 years, quoted rate = 10%.

Fill blanks of the amortization tables (round to the 2nd decimal) if the interest basis method is
annual rest.

Interest Principal Total Monthly

Period Principal
Payment Repayment Payment
1. 2.
1 100000 3. 3350.96
833.33 2517.62
4. 5. 6.
12 7. 3350.96
100000 833.33 2517.62
8. 9. 10.
13 11. 3350.96
69788.48 581.57 2769.39
12. 13. 14.
36 15. 3350.96
36555.81 304.63 3046.32
Total 16. 17. 18.
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20634.43 100000 120634.43

Enter the correct answer below.

10

11

12

13

14

15

16

17

18

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

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8. A balloon loan is a type of loan that does not fully amortize over its term. It is set up for a
relatively short term, and only a portion of the loan's principal balance is amortized over that
period. The remaining balance, usually a large payment (balloon payment) is due as a final
payment at the end of the term. Bank AS lent out two balloon loans of the same principal ($1
million) at the same time.

Loan J: maturity = 5 years, principal is repaid 15% per year in the first four years and 40% in the
last year, interest rate quoted = 8%, to be paid yearly.
Loan K: maturity = 5 years, principal is repaid 5% per year in the first four years and 80% in the
last year, interest rate quoted = 8%, to be paid yearly.
Assume Loan J and Loan K have the same required rate of return. Ignore any embedded option
risk. Which of the following statements is correct?

(1 mark)
You scored 1 / 1 mark

Borrower of Loan J receives more cash than borrower of Loan K

Borrower of Loan J receives less cash than borrower of Loan K

When interest rate changes by 0.5%, Bank AS's market value is less affected by Loan J
than by Loan K

When interest rate changes by 0.5%, Bank AS's market value is more affected by Loan J
than by Loan K

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

6/8 QUESTIONS ANSWERED CORRECTLY

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