Chapter 4: Understanding the interest rate

Examples of discount bonds include

U.S. Treasury bills

Which of the following are true for a coupon bond

When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.

A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid

coupon bond; face

The interest rate on a consol equals the

coupon payment divided by the price

The ________ is the final amount that will be paid to the holder of a coupon bond.

face value

The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value.

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

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

par value

A discount bond

pays the bondholder the face value at maturity.

The present value of a fixed-payment loan is calculated as the ________ of the present value of all cash flow payments

sum

Economists consider the ________ to be the most accurate measure of interest rates.

yield to maturity

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

$650

With an interest rate of 6 percent, the present value of $100 next year is approximately

$94

If a $5,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is

0 percent

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

10%

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

Which of the following $1,000 face-value securities has the lowest yield to maturity?

A 5 percent coupon bond selling for $1,000

For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is

$13,310

If the amount payable in two years is $2420 for a simple loan at 10 percent interest, the loan amount is

$2000.

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

$400

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

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 $5,000 face-value securities has the highest to maturity?

A 12 percent coupon bond selling for $4,500

Which of the following $1,000 face-value securities has the highest yield to maturity?

A 5 percent coupon bond with a price of $600

Which of the following are true for discount bonds?

The purchaser receives the face value of the bond at the maturity date

All of the following are examples of coupon bonds except

U.S. Treasury bills

A fully amortized loan is another name for

a fixed-payment loan.

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

An increase in the time to the promised future payment ________ the present value of the payment.

decreases

For simple loans, the simple interest rate is ________ the yield to maturity.

equal to

The present value of an expected future payment ________ as the interest rate increases.

falls

A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a

fixed-payment loan

The yield to maturity for a one-year discount bond equals the increase in price over the year, divided by the

initial price

The yield to maturity for a discount bond is ________ related to the current bond price.

negatively

If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is

5 percent

If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200?

10 percent

If a $10,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is

100 percent

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

5 percent

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

5 percent

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

8 percent

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 $2200, is the yield to maturity greater or less than 5%? Why?

Answer: PV = $1,050/(1. +.05) + $1,102.50/(1 + 0.5)2 PV = $2,000 If this security sold for $2200, the yield to maturity is less than 5%. The lower the interest rate the higher the present value

Which of the following are true of fixed payment loans?

Installment loans and mortgages are frequently of the fixed payment type

A coupon bond that has no maturity date and no repayment of principal is called a

consol

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 dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bondʹs

coupon 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

A ________ is bought at a price below its face value, and the ________ value is repaid at the maturity date

discount bond; face

To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of

discounting the future

The price of a consol equals the coupon payment

divided by the interest rate

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today

present value

A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a

simple loan

In Japan in 1998 and in the U.S. in 2008, interest rates were negative for a short period of time because investors found it convenient to hold six-month bills as a store of value because

the bills were denominated in large amounts and could be stored electronically

The interest rate that equates the present value of payments received from a debt instrument with its value today is the

yield to maturity.