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1. Which of the following statements are most likely to be false?

1. The effective annual interest rate will always be greater than the quoted (or annual percentage) interest rate.
2. All else being the same, the present value of a five-year, $10,000 annuity due will be higher than the present value of a five-year, $10,000 ordinary annuity.
3. If you were depositing funds at a bank, and the quoted interest rate was 4% p.a., you would be better off if the bank used semi-annual compounding rather than quarterly compounding.

• I and II only.
• I and III only.
• II and III only.
• I, II and III.

2. A zero coupon bond maturing in five years has a face value of $1,000 and is currently trading at $638.15. The bond's yield to maturity is closest to:

• 9.4%.
• 9.8%.
• 10.1%.
• The yield to maturity cannot be calculated without additional information.

3. Which of the following statements are most likely to be true?

1. As time passes and a bond approaches its maturity date, its (ex-coupon) price will converge to its face value.
2. All else being the same, bond prices and market interest rates move in the opposite direction.
3. The only factor that has an impact on a bonds price is its yield to maturity.

• I and II only.
• I and III only.
• II and III only.
• I, II and III.

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