FIN 319 Ch 3

A $10,000, 8% coupon bond that sells for $10,000 has a yield to maturity of

8%

An investor buys a ten-year, zero coupon bond for $425.75. What is the YTM of the bond?

8.91%

The price of a 3-year bond with an 8% coupon rate (annual payment) will __________ by _________ when the market interest increases by 1%?

decrease by $25.31

If a $5,000 coupon bond has a coupon rate of 13%, then the coupon payment every year is

$650

If a 7% coupon rate (annual payment), 7-year coupon bond is currently worth $918.38, how much will it be worth one year from now if the YTM of the bond remain unchanged?

$927.36

What is the return on a 5% coupon bond that initially sells for $1,000 and sells for $900 one year later?

-5%

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

15%

The yield to maturity on a consol bond that pays $100 yearly and sells for $500 is

20%

What is the rate of return for an investor who pays $1,010 for a three-year bond with a 6% coupon and sells the bond one year later for the price carrying 6% YTM?

4.95%

An $8,000 coupon bond with a $400 annual coupon payment has a coupon rate of

5%

A coupon bond that matures in 10 years sells for $950 with $1,000 par. The bond currently yields 6.488%. What is the bond's coupon rate if coupons are paid in semi-annual base?

5.80%

What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 8% coupon and sells the bond one year later for $1,037.19?

5.95%

A coupon bond that matures in 10 years sells for $985.85. The bond has a par value of $1,000 and a 6% semi-annual coupon. What is the bond's YTM?

6.19%

Which of the following are true concerning the distinction between interest rates and return? A) The rate of return on a bond will not necessarily equal the interest rate on that bond. B) The return can be expressed as the sum of the current yield and the rate of capital gains. C) The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1.

A and B are true

The nominal interest rate minus the expected rate of inflation A) defines the real interest rate. B) is a better measure of the incentives to borrow and lend than the nominal interest rate. C) is a more accurate indicator of the tightness of credit conditions than the nominal interest rate.

All of the above

Which of the following are generally true of all bonds? A) The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period. B) A rise in interest rates is associated with a fall in bond prices, resulting in capital losses on bonds whose term to maturities are longer than the holding period. C) The longer a bond's maturity, the greater is the price change associated with a given interest rate change.

All of the above

Which of the following are true of coupon bonds? A) The owner of a coupon bond receives a fixed interest payment every year until the maturity date, when the face or par value is repaid. B) U.S. Treasury bonds and notes are examples of coupon bonds. C) Corporate bonds are examples of coupon bonds.

All of the above

Which of the following are generally true of all bonds? A) The longer a bond's maturity, the lower is the rate of return that occurs as a result of the increase in the interest rate (YTM). B) Even though a bond has a substantial initial YTM, its return can turn out to be negative if interest rates rise. C) Prices and returns for long-term bonds are more volatile than those for shorter-term bonds.

All of the above are true

Which of the following are true for a coupon bond? A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. B) The price of a coupon bond and the yield to maturity are negatively related. C) The yield to maturity is greater than the coupon rate when the bond price is below the par value.

All of the above are true

In which of the following situations would you prefer to be making a loan? 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.

B

Which of the following $1,000 face value securities has the lowest yield to maturity? A) A 5% coupon bond selling for $1,000 B) A 7% coupon bond selling for $1,100 C) A 15% coupon bond selling for $1,000 D) A 15% coupon bond selling for $900

B

Which of the following $1,000 face value securities has the highest yield to maturity? A) A 5% coupon bond selling for $1,000 B) A 10% coupon bond selling for $1,000 C) A 12% coupon bond selling for $1,000 D) A 12% coupon bond selling for $1,100

C

A 10-year, 7.35% coupon bond (annual payment) has a par value of $1,000 and sells for $980. What is the bond's current yield and yield to maturity?

Current yield=7.50%; YTM= 7.61%

In which of the following situations would you prefer to be borrowing? 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.

D

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

D

Which of the following statements is correct? A) The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates. B) The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates. C) The zero coupon bond will experience the smaller percentage of price change in response to a given change in interest rates. D) The zero coupon bond will experience the larger percentage of price change in response to a given change in interest rates.

D

Which of the following statements is not correct? A) All else equal, if a bond's YTM increases, its price will fall. B) All else equal, if a bond's YTM increases, its current yield will increase. C) If a bond's coupon rate exceeds its YTM, the bond will sell at a premium over par. D) If a bond's YTM exceeds its coupon rate, the bond will sell at par

D

An ex post real interest rate is adjusted for ________ changes in the price level.

actual

Reinvestment risk is the risk that

a bond's future coupon payments may have to be invested at a rate lower than the bond's yield to maturity

A coupon bond pays the owner of the bond

a fixed interest payment every period, plus the face value of the bond at the maturity date

A frequently used approximation for the yield to maturity on a long-term bond is the

current yield

The riskiness of an asset's return that results from interest rate changes is called

interest-rate risk

A credit market instrument that pays the owner the face value of the security at the maturity date and nothing prior to then is called a

discount bond

The real interest rate is actually the ex ante real interest rate because it is adjusted for ___________ changes in the price level or inflation.

expected

A loan that requires the borrower to make the same payment every period until the maturity date is called a

fixed-payment loan

A $10,000, 8% coupon bond that sells for $10,100 has a yield to maturity ____________ 8%.

less than

A consol bond is a bond that

pays interest in perpetuity and never matures

If an investor's holding period is longer than the term to maturity of a bond, he or she is exposed to

reinvestment risk

When a bond's price falls, its yield to maturity ____________ and its current yield ___________.

rises; rises

When the lender provides the borrower with an amount of funds that must be repaid to the lender at the maturity date, along with an additional payment for the interest, it is called a ___________.

simple loan

The return on a bond is equal to the yield to maturity when

the holding period and the maturity of the bond are identical.

The Fisher equation states that

the nominal interest rate equals the real interest rate plus the expected rate of inflation; the real interest rate equals the nominal interest rate less the expected rate of inflation

Financial economists consider the __________ to be the most accurate measure of interest rates.

yield to maturity

The interest rate that equates the present value of the cash flow recieved from a debt instrument with its market price today is the

yield to maturity