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Chapter Eight Valuation of Known Cash Flows: Bonds This chapter contains 50 multiple choice questions, 18 short problems and 9 longer problems. Multiple Choice A ________ is a quantitative method used to infer an assets value from market information about the prices of other assets and market interest rates. fixed model perpetual valuation model valuation model variable model Answer: (c) ________ are examples of fixed-income securities. Common stock and pension funds Mortgages and pension annuities Mutual funds and common stock Preferred stock and common stock Answer: (b) Consider a fixed-income security that promises to pay $150 each year for the next five years. How much is this five-year annuity worth if the appropriate discount rate is 7% per year? $534.74 $615.03 $802.50 $867.96 Answer: (b)  Consider a fixed-income security that promises to pay $120 each year for the next four years. Calculate the value of this four-year annuity if the appropriate discount rate is 6% per year. $415.81 $508.80 $531.85 $629.06 Answer: (a) The price of any existing fixed-income security ________ when market interest rates rise because investors will only be willing to ________ them if they offer a competitive yield. rises; buy rises; sell falls; buy falls; sell Answer: (c) A fall in interest rates causes a ________ in the market value of a fixed-income security. a rise a fall no change it cannot be determined from the information given Answer: (a) A change in market interest rates causes ________ in the market values of all existing contracts promising fixed payments in the future. a change in the same direction a change in the opposite direction no change an unpredictable variation Answer: (b)  What happens to the value of a four-year fixed-income security promising $100 per year if the market interest rate rises from 5% to 6% per year? A rise of 1% causes a drop of $4.87 in market value. A rise of 1% causes a rise of $4.87 in market value. A rise of 1% causes a dr