ECON 353 - Chapter 4

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.

Since the early 1950s, nominal interest rates and real interest rates in the United States

do not always move in the same direction.

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

ex ante real

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

ex post real interest rate.

If a $1,000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon payment every year is

$37.50.

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

$400.

What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent?

$453.51

If you expect the inflation rate to be 12 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is

-5 percent.

If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is

-8 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 percent.

If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is

12 percent.

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 percent

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

25 percent

If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is

3 percent.

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

5 percent.

Assuming the same coupon rate and maturity length, when the interest rate on a Treasury Inflation Indexed Security is 3 percent, and the yield on a nonindexed Treasury bond is 8 percent, the expected rate of inflation is

5 percent.

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

5 percent.

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

8 percent.

Which of the following are generally TRUE of bonds?

A bond's return equals the yield to maturity when the time to maturity is the same as the holding period.

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.

The ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation.

Fisher equation

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

The interest rate is 25 percent and the expected inflation rate is 50 percent.

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

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

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.

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.

All of the following are examples of coupon bonds EXCEPT

U.S. Treasury bills.

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

a 12 percent coupon bond selling for $1,000

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

A fully amortized loan is another name for

a fixed-payment loan.

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

coupon bond; face

The ________ is calculated by multiplying the coupon rate times the par value of the bond.

coupon payment

An equal increase in all bond interest rates

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

The nominal interest rate minus the expected rate of inflation

defines the real interest rate.

In the United States during the late 1970s, the nominal interest rates were quite high, but the real interest rates were negative. From the Fisher equation, we can conclude that expected inflation in the United States during this period was

high.

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.

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

initial price.

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

interest-rate changes.

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

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

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

no interest-rate risk

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

par value

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.

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

real

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

real; borrow; lend

Short-term bonds are subject to ________ risk because proceeds must be put into some future asset at an unknown interest rate.

reinvestment

Assuming the same coupon rate and maturity length, the difference between the yield on a Treasury Inflation Indexed Security and the yield on a nonindexed Treasury security provides insight into

the expected inflation rate.