Chapter 4 Questions

Consider simple loans, an equal decrease in all bond interest rates

increases the price of a 10 year bond more than the price of a 5 year bond

The return on a 5% percent coupon bond that initially sells for $1,000 and sells for $950 next year is

0%

If the nominal interest rate is 2% and the expected inflation rate is -10%, the real rate of interest is

12% Real Interest Rate= Nominal-Inflation

What is the return on the 5% coupon that initially sells for $1,000 and sells for $1,200 next year?

25%

If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the interest rate is

5%

Which of the following $1,000 face-value securities has the lowest yield to maturity? A) a 5 percent coupon bond selling for $1,000 B) a 10 percent coupon bond selling for $1,000 C) a 15 percent coupon bond selling for $1,000 D) a 15 percent coupon bond selling for $900

5% coupon bond selling for $1,000

Which of the following $1,000 face-value securities has the highest yield to maturity? A 5% Coupon Bond selling for $1,000 A 10% coupon bond selling for $1,000 A 12% coupon bond selling for $1,000 A 12% coupon bond selling for $1,100

A 12% coupon bond selling for $1,000 (C+((F−P)/n))/(F+P)/2 C= FV* Rate

The _____________ is calculated by multiplying the coupon rate times the par value of the bond

Coupon Payment Par value = Face Value

The yield to maturity for a perpetuity is a useful approximation for the yield to maturity on long-term coupon bonds. It is called the ___________ when approximating the yield for a coupon bond.

Current Yield Current Yield= C/P

The Present Value of an expected future payment _______________ as interest rate increases

Falls

In the United States during the late 1970s, the nominal interest rates were quite high, but the real interest rates were negative. From the Fisher equation, we can conclude that expected inflation in the United States during this period was

High

If the interest rate is 5%, what is the present value of a security that pays you $1,050 next year and $1,102.50 two years from now. If this security sold for $2,200 is the yield to maturity great or less than 5%? why?

PV= $2,000 PV= $1,050/(1+.05) + $1,102.50/(1+.5)^2 If the security sold for $2200 the yield to maturity is less than 5%. The lower the interest rate the higher the present value

The______________ is defined as the payments to the owner plus the change in a security's value expressed as a fraction of the security's purchase price.

Rate of Return

Which of the following situations would you prefer to be the lender? A) The interest rate is 9 percent and the expected inflation rate is 7 percent. B) The interest rate is 4 percent and the expected inflation rate is 1 percent. C) The interest rate is 13 percent and the expected inflation rate is 15 percent. D) The interest rate is 25 percent and the expected inflation rate is 50 percent.

The interest rate is 4 percent and the expected inflation rate is 1 percent. Real Interest Rate= Nominal-Inflation Which one you prefer to borrow?

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