Money and Banking final part 1
Find the present value of a payment of $200 one hundred years from now if the relevant interest rate is 10%
$0.01
A special bond pays $200 after 3 years and $500 after 6 years. If the relevant interest rate is 4%, what is the present value of the bond
$177.799 + $395.157 = $572.96
The coupon payment for a consol is $100 and the yield to maturity is 5%. What is the price of the bond?
$2000
Find the present value of a payment of $50 four years from now if the relevant interest rate is 6%
$39.60
) Find the future value of a four-year investment of $50 at an interest rate of 6%.
$63.12
Find the future value of a 50-year investment of $2 at an interest rate of 3%.v
$8.77
A coupon bond has two years to maturity, a face value of $1,000 and a coupon payment of $50. If the yield to maturity is 10%, what is the price?
$93.22
A coupon bond has two years to maturity, a face value of $1,000 and a coupon rate of 2%. If the yield to maturity is 3%, what is the price?
$980.87
The coupon payment for a consol is $100 and its value is $400. What does this imply about the yield to maturity?
25%
A coupon bond has two years to maturity, a face value of $1,000 and a coupon rate of 4%. You buy the bond at par, and, after 1 year, market yields fall to 2%. Find the rate of return on your bond for the first year
5.96%
Why is a dollar today worth more than a dollar tomorrow in fiat money?
A dollar today is worth more than a dollar tomorrow in fiat money because prices tend to rise every year
A discount bond has a face value of $1,000 and two years to maturity. Find the price of the bond if the yield is 9%. Find the price if the yield is 10%. Explain briefly why the price and yield to maturity are inversely related
At a yield of 9%, the price is $917.43 At a yield of 10%, the price is $909.09. Money today is relatively more valuable than future payments, so as the yield rises, the value of the bond falls. Alternatively, the future payment for the bond is fixed, so as the price rises, the percentage increase of the future payment over the price falls
Two discount bonds both have a face value of $100 and yield 5%, but one has one year to maturity and the other has two years to maturity. Find the price of both bonds and explain why one is higher than the other
At one year to maturity, the price is $95.25. At two years to maturity, the price is $90.70. The longer the payment is put off into the future, the lower the value of the bond
Why do longer term bonds have greater interest rate risk?
Changes in yields have a greater effect on longer term bonds since more payments are affected.
What is the difference between ex-ante and ex-post judgments?
Ex-ante judgments are made before an event, while ex-pose judgments are made after.
Write the equation relating the present value and future value of a payment, identifying all the parts.
PV = FV/(1+i)n i - interest rate n - time until the payment
What is the name of the relation between real and nominal interest rates?
The Fisher equation
If a bond is sold before maturity, under what circumstance would the rate of return equal the yield when the bond was purchased?
The market yields are the same at the time of sale and purchase
Why is unexpected inflation bad for lenders?
The value of payments received in the future will be less
Why are interest rates so important?
They determine the price of assets and general macroeconomic conditions, including economic growth.
A _____ is a type of perpetual bond issued by the British government. a) consol b) money market bond c) discount coupon d) none of the above
a
A _____ is the type of loan where the borrower repays the principal and interest at the end of the loan. a) simple loan b) fixed-payment loan c) principled interest loan d) none of the above
a
A one-year discount bond with face value $1,000 and price $800 has a yield of a) 20%. b) 25%. c) 80%. d) none of the above.
a
A two-year discount bond with face value $500 and price $450 has a yield of a) 4.9%. b) 10%. c) 11.1%. d) none of the above.
a
If you had a fixed-payment loan of $500,000 for thirty years at 6%, how much of your payment is principal in year 10? a) $520.60 b) $752.25 c) none; the principal isn't paid until year 30 d) none of the above
a
James decides that going to graduate school would not be a good idea and applies for the Peace Corps. This is a(n) _____ decision. a) ex-ante b) ex-poste c) ceteris paribus d) none of the above
a
The chance that a bond issuer won't make promised payments is called a) default risk. b) credit risk. c) interest rate risk. d) representation risk
a
The present value of a discount bond with one year to maturity, face value $1,000 and yield to maturity 5% is a) $952.38. b) $1,000.00. c) $1,005.00. d) $1,050.00
a
The price of a bond is directly related to a) the face value. b) the yield to maturity. c) both of the above. d) neither of the above
a
The rate of return on a bond can be negative if market yields a) rise. b) fall. c) become negative. d) Rates of return cannot be negative
a
Your uncle Albert gives you a savings bond that pays $500 four years from now. If the relevant interest rate for you is 2%, what is the present value of the bond? a) $461.92. b) $490.19. c) $510.00. d) $541.21b
a
A one-year discount bond has a face value of $1,500 and a price of $1,200. What is the yield to maturity? a) 15% b) 20% c) 25% d) 30%
b
A two-year coupon bond has a face value of $1,000, a coupon rate of 4% and a yield to maturity of 6%. What is the price of the bond? a) $925.60. b) $963.33. c) $980.03. d) $1,037.72
b
After 100 years, a deposit of $1 that compounds annually at 1% returns a) $2. b) $2.70. b) $100. c) none of the above
b
Short maturity bonds have ____ interest rate risk than long maturity bonds. a) more b) less c) equal d) cannot be determined
b
Susan decides that moving in with her boyfriend was a mistake. This is a(n) _____ judgment. a) ex-ante b) ex-poste c) ceteris paribus d) none of the above
b
The present value of a discount bond with two years to maturity, face value of $10,000 and yield to maturity 4% is a) $7,142.86. b) $9,245.56. c) $9,615.38. d) none of the above
b
The relationship between real and nominal rates is called the a) inflation relation. b) Fisher equation. c) Friedman equation. d) none of the above.
b
) The price of a bond is inversely related to a) the time to maturity. b) the yield to maturity. c) both of the above. d) neither of the above.
c
A bond is bought at par and market yields rise after purchase. If the bond is held to maturity, the rate of return at maturity will be _____ the yield at purchase. a) greater than b) less than c) equal to d) cannot be determined
c
A three-year coupon bond has a face value of $1,000, a coupon rate of 5% and a yield to maturity of 3%. What is the price of the bond? a) $1,000. b) $1,052.41. c) $1,056.57. d) none of the above.
c
A two-year coupon bond has a face value of $1,000, a coupon rate of 5% and a yield to maturity of 2%. What is the price of the bond? a) $944.21. b) $1,000. c) $1,058.25. d) $1,078.43.
c
The opportunity cost of money is a) growth rate of prices. b) real GDP. c) interest rate. d) none of the above.
c
A two-year discount bond with face value $1,000 and price $950 has a yield of a) 4.9%. b) 5%. c) 5.3%. d) none of the above
d
After three years, a deposit of $1,000 that compounds annually at an interest rate of 20% returns a) $1,000. b) $1,200. c) $1,440. d) $1,728
d
Brittany and Christina both buy bonds with yield to maturity of 4% but Brittany's bond has 2 years to maturity and Christina's has 5. After one year, yields for these bonds rise. a) The rate of return on both bonds is above 4% but Brittany's is higher. b) The rate of return on both bonds is above 4% but Christina's is higher. c) The rate of return on both bonds is below 4% but Brittany's is lower. d) The rate of return on both bonds is below 4% but Christina's is lower.
d
The chance that a bond issuer won't make promised payments is called a) representation risk. b) credit risk. c) interest rate risk. d) none of the above
d
The price of a coupon bond is inversely related to a) the face value. b) the coupon rate. c) both of the above. d) neither of the above
d
A borrower periodically pays a portion only of the principal in a fixed-payment true/false
false
A possible problem with Sarbanes-Oxley is that in worsens the free-rider problem for financial intermediaries true/false
false
Interest on loans is an example of a transactions cost that intermediaries can deal with more efficiently than individuals true/false
false
Intermediaries must charge higher rates of interest than individuals true/false
false
It is difficult to make profits in the mortgage market due to the free-rider problem true/false
false
Laws against fraudulent reporting on financial documents are an attempt to solve the free-rider problem true/false
false
The compounding period is the amount of time that passes when interest is no longer accumulating true/false
false
The majority of external finance comes from corporate bond issues true/false
false
The majority of external finance for firms comes from stock issues true/false
false
The majority of funds raised by firms is done through internal finance true/false
false
The majority of internal finance for firms comes from loans for intermediaries true/false
false
The two types of asymmetric information problems are moral hazard and agency problems true/false
false
When a child saves her allowance to buy a toy, she is engaged in external finance true/false
false
When banks refuse to lend to borrowers at very high rates of interest, they are trying to alleviate the moral hazard problem true/false
false
a falling interest rate means nominal rates are falling as well true/false
false
discount bond with three years to maturity makes three future payments true/false
false
if the nominal interest rate s less than expected inflation, the real interest rate is positive true/false
false
rates of return are always positive true/false
false
the current yield is the most accurate measure of the return on a bond true/false
false
the present value of a future payment is always greater than the payment true/false
false
yield to maturity and rate of return on a bond always move in the same direction true/false
false
A one-year discount bond has a face value of F, and a price of P. What is the formula for the yield?
i = (F-P)/P
Write an equation for the Fisher equation identifying all the parts
i_r = i_n - pi i_r - real interest rate i_n - nominal interest rate pi-inflation (or expected inflation)
A bond with three years to maturity has a face value of $1,000 and a coupon rate of 5%. It is initially bought at a yield to maturity of 7%, then sold after one year when market yields have fallen to 5%. What are the sale price and the rate of return for the first year?
price after one year = $1,000 ROR = 8.61%
A possible problem with Sarbanes-Oxley is that it increases transactions costs for financial intermediaries true/false
true
Asymmetric information leads to allocational inefficiencies in financial markets
true
Asymmetric information leads to market inefficiencies true/false
true
Asymmetric information problems increase costs to both borrowers and lenders true/false
true
Credit ratings help with the adverse selection problem inherent in lending true/false
true
Discounts bonds and zero coupon bonds are the same type of debt instrument true/false
true
Examples of debt instruments include bonds, IOUs, and simple loans true/false
true
For a coupon bond, if the price is greater than the face value, then the coupon rate must be greater than the yield to maturity true/false
true
Interest is the opportunity cost of money true/false
true
It is difficult to make profits selling information about stock market analysis due to the free rider problem true/false
true
Laws against fraudulent reporting on financial documents are an attempt to reduce agency problems true/false
true
Longer maturity bonds have greater interest rate risk true/false
true
Shorter maturity bonds have greater interest rate risk true/false
true
Some transactions costs arise from agency problems true/false
true
Specialized lending is intended to minimize adverse selection problems true/false
true
The cost of accounting fees is an example of a transactions cost that banks can deal with more efficiently than individuals true/false
true
The two types of asymmetric information problems are adverse selection and moral hazard true/false
true
When banks refuse to lend to borrowers with low net worth, they are trying to alleviate moral hazard problems true/false
true
When venture capitalists take an active role in the management of a company they finance, they are trying to alleviate the moral hazard problem true/false
true
deflation (falling prices) means that Real rates are greater than nominal rates true/false
true
the accuracy of the current yield increases with the tie to maturity of the bond true/false
true
the annual rate of return on a one year bond is the same as the yield true/false
true
the current yield and the yield to maturity for a consol are the same true/false
true
the present value of a future payment depends on the period of time until the payment true/false
true
the present value of a future payment is higher the longer the period of time until the payment, certeris paribus true/false
true
the real interest rate is a more accurate measure of the cost of borrowing than the nominal rate true/false
true
yield to maturity is the most accurate measure of the return on a bond true/false
true
