Exhibit 16-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

question 34

Multiple Choice

Exhibit 16-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
The following information is given concerning a substitution swap: You currently hold a 25 year, Aa 8% coupon bond priced to yield 10%. As a swap candidate you are considering a 25 year, Aa 8% coupon bond priced to yield 10.50%. Assume a reinvestment rate of 10%, semiannual compounding, and a one-year workout period. $\begin{array}{lcc}&\text { Current Band } & \text { Candidate Band } \\\hline\text { Dollar Investment } & \$ 817.44 & ? \\\text { Coupon } & 80.00 & 80.00 \\\text { on One Coupon } & 2.00 & 2.20 \\\text { Principal Value at Year End } & 819.23 & 782.33 \\\text { Total Accrued } & 901.23 & 864.53 \\\text { Total Gain } & 83.79 & ? \\\text { Gain per Invested Dollar } & ? & ? \\\text { Realized Compound Yield } & ? & ?\end{array}$

-Refer to Exhibit 16-4. The dollar investment in the candidate bond is

• A) $780.34
• B) $1483.25
• C) $1361.54
• D) $1413.95
• E) $1000.00

---

Definitions:

ATC

Average Total Cost; the total cost of production divided by the quantity of output produced.

Price Charged

The amount of money required for the purchase of a good or service, set by the seller.

Maximize Profits

The process by which a company seeks to achieve the highest possible financial gain from its operations, often by adjusting production, prices, and costs.

Marginal Revenue

The extra revenue generated by the sale of an additional unit of a product or service.