Homework 4...

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

An equal increase in all bond interest rates _______.

Decreases

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

8%

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

1. Discount Bond 2. Face

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

Discount Bond

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 _________________.

Coupon Paid / Yield =10/0.04 =$250

A consol paying $10 annually when the interest rate is 4 percent has a price of $___________.

Consol

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

Coupon Bond

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 _____________.

Simple Loan

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 ____________.

Fixed - Payment Loan

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

$13,310

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

5%

If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the interest rate is _______________%. (Hint: use square roots.)

a bond with one year to maturity

If the interest rates on all bonds rise from 3 to 4 percent over the course of the year, which bond would you prefer to have been holding?

1.Negatively 2. Rises 3.Falls

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 ________.

Interest-rate risk

The riskiness of an asset's returns due to changes in interest rates is __________.

Present

______________ value is the current worth of a future sum of money or stream of cash flows given a specified rate of return.

95.24%

With an interest rate of 5 percent, the present value of $100 next year is approximately $________________(Round to two decimal places).

Divided by the interest rate

The price of a consol equals the coupon payment ________.

Falls

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

Zero-coupon bond

A discount bond is also called a ________ because the owner does not receive periodic payments.

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 ______.

Ex ante real

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

Annual coupon payment/Par Value of Bond $500 / $8,000 = 6.25

An $8,000 coupon bond with a $500 coupon payment every year has a coupon rate of _______________%. (Round to two decimal places)

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

An equal decrease in all bond interest rates ________.

i = F/P -1 = 1000/800 -1 = 25%

If a $1,000 face-value discount bond maturing in one year is selling for $800, then its yield to maturity is _________ percent.

1000* 0.0555 =55.5

If a $1000 face value coupon bond has a coupon rate of 5.55 percent, then the coupon payment every year is $______________(Round to two decimal places).

5%

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

4%

If a security pays $5,200 next year and $10,816 the year after that, what is its yield to maturity if it sells for $15,000?

$Simple interest=Principal*Interest Rate*Time Period =(Principal *0.04* 2)=0.08 Principal Amount payable=Simple interest+Principal 5408=0.08 Principal+Principal Principal=5408/(0.08+1) =$5007.41

If the amount payable in two years is $5408 for a simple loan at 4 percent interest, the loan amount is $____________.

The interest rate is 4 percent and the expected inflation rate is 1 percent

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

long-term; short-term

Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant.

15%

Suppose you are holding a 5 percent coupon bond maturing in one 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?

Real

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

Face Value

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

Coupon Rate

The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's _____________.

ex post real interest rate

The interest rate that describes how well a lender has done in real terms after the fact is called the _______.

Yield To Maturity

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

Rate of return (holding period return)

The sum of the current yield and the rate of capital gain is called the ___________.

Negativity

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

Below

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

No interest-rate risk

There is ________ for any bond whose time to maturity matches the holding period.

400/1.05^2 =$400*0.907029478 =$362.81

What is the present value of $400.00 to be paid in two years if the interest rate is 5 percent? $________________(Round to two decimal places)

10

What is the rate of return (holding period return) on a 5 percent coupon bond (with a two year maturity) held only for a year that initially sells for $712 and sells for $733.2 next year? (Face value of the bond = $1,000) ______________%

Annual coupon=$1000*5% =$50 rate of return=(End price+Annual coupon-Beginning price)/Beginning price =(50+1000-800)/800 =31.25%

What is the rate of return on a 5 percent coupon bond held to maturity that initially sells for $800 and matures within a year? (Market value of the bond when it matures = Face value of the bond = $1,000) ______________%

31.25

What is the yield to maturity on a 5 percent coupon bond (with a one year maturity) that initially sells for $800? (Face value of the bond = $1,000) ______________%

25

What is the yield to maturity on a 5 percent coupon bond (with a two year maturity) that initially sells for $712? (Face value of the bond = $1,000) ______________%

real; borrow; lend

When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.

A 12 percent coupon bond selling for $1,000

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

Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise

Which of the following are generally TRUE of all bonds?

A bond's return is equal to its yield to maturity when the holding period is equal to the time to maturity

Which of the following are generally true of bonds? (Look at #34, 35, 36, and 37)

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

Which of the following are true for a coupon bond?

A $10,000 face-value security with a 10 percent coupon selling for $9,000

Which of the following bonds would you prefer to be buying?