Part 1: True or False—write down true or false for each statement
(1 point for each question, 8 points in total)
1. You hold a winning ticket from your provincial lottery. It entitles the bearer to receive
payments of $50,000 at the end of each of the next 20 years. Given what you know about the
time value of money, you should be able to sell this ticket for no less than $1 million in the open
market.
2. Annuities where the payments occur at the end of each time period are called annuities due,
whereas ordinary annuities refer to annuity streams with payments occurring at the beginning of
each time period.
3. Failure to pay either the interest payments or the bond principle as agreed can cause a firm to
go into bankruptcy.
4. The yield to maturity will be greater than the coupon rate when a bond is selling at a
premium.
5. All else the same, if interest rates fall, the percentage price change for long-term bonds will be
greater than for short-term bonds.
6. All else equal, the market value of a corporate bond is always inversely related to its coupon
rate.
7. Jamie deposits $1,000 into an account that pays 4% interest compounded annually. Chris
deposits $1,000 into an account that pays 4% simple interest. Both deposits were made today.
Chris will never earn any interest on interest.
8. Assume you are considering two bonds identical in every way but for coupon frequency—bond
A pays interest annually, and bond B pays interest semi-annually. Then, if they have the same
price, the yield-to-maturity on bond A will always be greater than that on bond B.