Money & Banking Chapter 5 homework

Calculate the YTM of a perpetuity when it has a price of $15,000 and an annual coupon payment of $900.

6% P = C/i i = 900/15,000 = 0.06

The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value. A) greater; coupon; below B) greater; coupon; above C) greater; perpetuity; above D) less; perpetuity; below

A) greater; coupon; below

The sum of the current yield and the rate of capital gain is called the A) rate of return. B) discount yield. C) perpetuity yield. D) par value.

A) rate of return.

In which of the following situations would you prefer to be the lender? A) The interest rate is 11 percent and the expected inflation rate is 7 percent. B) The interest rate is 12 percent and the expected inflation rate is 15 percent. C) The interest rate is 7 percent and the expected inflation rate is 1 percent. D) The interest rate is 25 percent and the expected inflation rate is 50 percent.

C) The interest rate is 7 percent and the expected inflation rate is 1 percent.

Which of the following $1,000 face-value securities has the highest yield to maturity? A) a 5 percent coupon bond with a price of $800 B) a 5 percent coupon bond with a price of $900 C) a 6 percent coupon bond with a price of $800 D) a 6 percent coupon bond with a price of $900

C) a 6 percent coupon bond with a price of $800

When the expected inflation rate increases, the real cost of borrowing ________ and bond supply ________, everything else held constant. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases

C) decreases; increases

When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________. A) nominal; lend; borrow B) real; lend; borrow C) real; borrow; lend D) market; lend; borrow

C) real; borrow; lend

Holding everything else constant, if the expected interest rate is up, the demand for bonds ________ and the demand curve shifts to the ________. A) increases; right B) decreases; right C) increases; left D) decreases; left

D) decreases; left

An increase in the riskiness of bonds relative to alternative assets, everything else held constant, causes the demand for bonds to ________ and the demand curve to shift to the ________. A) rise; right B) rise; left C) fall; right D) fall; left

D) fall; left

The demand curve for bonds has the usual downward slope, indicating that at ________ prices of the bond, everything else equal, the ________ is higher. A) higher; demand B) higher; quantity demanded C) lower; demand D) lower; quantity demanded

D) lower; quantity demanded

Holding all other factors constant, the quantity demanded of an asset is A) negatively related to its liquidity relative to alternative assets. B) negatively related to its expected return relative to alternative assets. C) positively related to the risk of its returns relative to alternative assets D) positively related to wealth.

D) positively related to wealth.

If a discount bond selling for $1,850 with a face value of $2,000 in two years, what is the yield to maturity of this bond?

i = 3.97% 1,850 = 2000/(1+i)^2