Chapter 4
If the amount payable in two years is $2420 for a simple loan at 10 percent annual interest, the loan amount, rounded to the nearest dollar, is
- $2000.
If a $1000 face value coupon bond with the current market price of $900 has a coupon rate of 3.75 percent, then the coupon payment is
- $37.50.
What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent?
- $453.51
With an interest rate of 6 percent, the present value of $100 next year is approximately
- $94.
If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200? Hint: You do not i. You can simply plug all four choices into the equation and see works.
- 10 percent
If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is: (Hint: You do not have to solve for i. You can simply plug the four choices into the equation to see which works.)
- 10 percent.
If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is
- 12 percent.
A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of
- 33.3 percent.
If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the yearly interest rate is
- 5 percent.
If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is
- 5 percent.
Which of the following $1,000 face-value securities has the highest yield to maturity?
- A 12 percent coupon bond selling for $1,000
Which of the following $1,000 face-value securities has the lowest yield to maturity?
- A 5 percent coupon bond selling for $1,000
True or False: With a discount bond, the return on a bond is equal to the rate of capital gain.
- True: A discount bond has no coupon payments so the return on the bond is equal to the rate of capital gain.
A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a
- coupon bond.
The interest rate on a consol equals the
- coupon payment divided by the price.
The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's
- coupon rate.
The yield to maturity is ________ than the ________ rate when the bond price is ________ its face
- greater; coupon; below
The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________.
- negatively; rises; falls
There is ________ for any bond whose time to maturity matches the holding period.
- no interest-rate risk
A discount bond
- pays the bondholder the face value at maturity.
The ________ of a coupon bond and the yield to maturity are inversely related.
- price
Consider the diagram below that shows the nominal interest rate and the inflation rate. The real interest rate:
- was positive from 1981 until about 2002 and then became negative.
For a 3-year simple loan of $10,000 at 10 percent (yearly), the amount to be repaid is
-$13,310.
If a $5,000 coupon bond with the current market price of $6,000 has a coupon rate of 13 percent, then the coupon payment every year is
-$650.
Which of the following bonds would you prefer to be buying?
-A $10,000 face-value security with a 10 percent coupon selling for $9,000
If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding?
-A bond with one year to maturity
When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.
-real; borrow; lend
To pay for college, you have just taken out a $1,000 government loan that makes you pay $126 per year for 25 years. However, you don't have to start making these payments until you graduate from college two years from now. Why is the yield to maturity necessarily less than 12% (this is the yield to maturity on a normal $1,000 fixed-payment loan in which you pay $126 per year for 25 years)?
This is the case because the first payment due begins at a future date.