Charles and Camilla Are Getting Divorced

question 9

Multiple Choice

Charles and Camilla are getting divorced.Under the terms of the decree Charles will pay Camilla $50,000 in cash in each of the next five years (or until Camilla's death or remarriage) .In addition,Charles will transfer a castle worth $2,000,000 to Camilla and pay $12,000 per year to support their son,Clyde,until he turns 19 years old.What amount (if any) is included in Camilla's gross income this year?

• A) $2,062,000
• B) $12,000
• C) $50,000
• D) $2,050,000
• E) None of the payments are included in gross income

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Definitions:

Coupon Rates

The annual interest rate paid by bond issuers to the bondholders, usually fixed throughout the life of the bond.

Price Volatility

A statistical measure of the dispersion of returns for a given security or market index, indicating how much and how quickly the value of an asset changes.

Convexity

A measure of the curvature in the relationship between bond prices and bond yields, indicating how the duration of a bond changes as the interest rate changes.

Zero-Coupon Bonds

Debt securities that are issued at a discount and redeemed at face value but do not pay interest during their lifetime.