econ353 ch 4

An equal increase in all bond interest rates

decreases long-term bond returns more than short-term bond returns.

Since the early 1950s, nominal interest rates and real interest rates in the United States

do not always move in the same direction.

The ________ interest rate is adjusted for expected changes in the price level.

ex ante real

An equal decrease in all bond interest rates

increases the price of a ten-year bond more than the price of a five-year bond.

Interest-rate risk is the riskiness of an asset's returns due to

interest-rate changes.

all bonds that will not be held to maturity have interest rate risk which occurs because of the change in the price of the bond as a result of

interest-rate changes.

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

When talking about a coupon bond, face value and ________ mean the same thing.

par value

Assuming the same coupon rate and maturity length, the difference between the yield on a Treasury Inflation Indexed Security and the yield on a nonindexed Treasury security provides insight into

the expected inflation rate.

in whichof the following situations would you prefer to be the borrower?

the interest rate is 25 percent and the expected inflation rate is 50 percent.

Which of the following are TRUE concerning the distinction between interest rates and returns?

the rate of return on a bond will not necessarily equal the interest rate on that bond.

If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is

-8 percent.

If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is

3 percent.

an $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of

5 percent.

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

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

coupon payment

a consol paying $20 annually when the interest rate is 5 percent has a price of

$400.

If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is

10 percent.

Suppose you are holding a 5 percent coupon bond maturing inone year with a yield to maturity of 15 percent. If the interest rate on one-year bonds rises from 15 percent to 20 percent over the course of the year, what is the yearly return on the bond you are holding?

15 percent

All of the following are examples of coupon bonds EXCEPT

U.S. Treasury bills.

Which of the following are generally TRUE of bonds?

a bond's return equals the yield to maturity when the time to maturity is the same as the holding period.

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

the ________ interest rate more accurately reflects the true cost of borrowing.

real

The nominal interest rate minus the expected rate of inflation

defines the real interest rate.

A bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a

discount bond.