Econ 353 Exam 3

consider the following scenario: You are investing today, in a 4-year coupon bond which pays a coupon rate of 6% and has a face value of 1000. The market interest rate today is 6% also. You plan to sell of the bond after a year... Suppose that the market interest rate next year is 4%. Then the market price of the bond next year is,

1055.50 approx.

consider the following scenario: You are investing today, in a 4-year coupon bond which pays a coupon rate of 6% and has a face value of 1000. The market interest rate today is 6% also. You plan to sell of the bond after a year Your one period rate of return is,

11.50%

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

12%

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

Refer to the loan in Q4. If the yield to maturity on the loan is 10% instead, then the loan value is

173.55

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

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 non-indexed Treasury bond is 8 percent, the expected rate of inflation is

5%

A 2-year, $100 face value T-note pays 8% annually and has a market price of $101. The current yield on the bond is

7.92% approx

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.

For Qs 5-6 consider the following scenario: You are investing today, in a 4-year coupon bond which pays a coupon rate of 6% and has a face value of 1000. The market interest rate today is 6% also. You plan to sell of the bond after a year. Suppose the market interest rate next year is 8%. Then the market price of the bond next year is,

948.46 approx.

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.

What is the one period rate of return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year?

0 percent

For Qs 5-6 consider the following scenario: You are investing today, in a 4-year coupon bond which pays a coupon rate of 6% and has a face value of 1000. The market interest rate today is 6% also. You plan to sell of the bond after a year Your one period rate of return is,

0.846% approx

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 bonds would you prefer to be buying, assuming that your relevant rate of return is the yield to maturity itself?

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

Which of the following $5,000 face-value securities has the highest yield to maturity?

a 12 percent coupon bond selling for $4,500

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

The current yield and the yield to maturity

are equal for consols

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

consol

the interest rate on a consol equals the

coupon payment divided by the price

The yield to maturity for a perpetuity is a useful approximation for the yield to maturity on long-term coupon bonds. It is called the ________ when approximating the yield for a coupon bond.

current yield

The price of a consol equals the coupon payment

divided by the interest rate

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

greater, coupon, below

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

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

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.

A 2-year, $100 face value T-note pays 8% annually. Refer to the bond in Q6. If If the yield to maturity on the loan is 9% instead, then the market price is

less than the answer to question 6 (less than $100)

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

long term, short term

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

negatively

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

no interest rate risk

Another name for a consol is a ________ because it is a bond with no maturity date. The owner receives fixed coupon payments forever.

perpetuity

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

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

zero-coupon bond

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

-5 percent

A 2-year, $100 face value T-note pays 8% annually. If the yield to maturity on the bond is 8%, what is its market price?

$100

(A 2-year, $100 face value T-note pays 8% annually) Refer to the bond in Q6. If the yield to maturity on the loan is 7% instead, then the market price is

$101.81 approx

The yearly payment on a 2-year fixed payment loan is $100. If the yield to maturity on the loan is 5%, what is the loan value?

$185.94 approx

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

$400