Econ 2035 Ch4.2

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

-5%

The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is

0%

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?

15%

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?

25%

When I purchase a 10 percent coupon bond, I calculate a yield to maturity of 8 percent. If I hold this bond to maturity, then my return on this asset is

8%

If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding?

A bond with one year to maturity

Which of the following are generally true of all bonds?

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

Your favorite uncle advises you to purchase long-term bonds because their interest rate is 10%. Should you follow his advice?

It depends on where you think interest rates are headed in the future. If you think interest rates will be going up, you should not follow your uncle's advice because you would then have to discount your bond if you needed to sell it before the maturity date. Long-term bonds have a greater interest-rate risk

Which of the following are generally true of bonds?

The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period

Which of the following are true concerning the distinction between interest rates and returns?

The rate of return on a bond will not necessarily equal the interest rate on that bond

An equal increase in all bond interest rates

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

An equal decrease in all bond interest rates

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

Interest-rate risk is the riskiness of an asset's returns due to

interest rate changes

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

interest-rate risk

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

long-term;short-term

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

no interest-rate risk

The ________ is defined as the payments to the owner plus the change in a security's value expressed as a fraction of the security's purchase price

rate of return

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

rate of return