Econ Chapter 4 Part 2

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

the expected inflation rate

How much would you pay for a perpetual bond that pays an annual coupon of $50 per year and yields on competing instruments are 20% You would pay ____.

$250

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 the bond is

-5%

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

0%

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

12%

Inflation rate was most stable in the ___. Disinflation is experienced during the ___. On average, the real interest rate is highest during the ___.

1990s; 1980s; 1980s

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 %

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

Long-term; short-term

Assume you deposited 1,150 into a bank account. Current real interest rate is 3%, and inflation is expected to be 7% over the next year. What nominal rate would you require from the bank over the next year? How much money will you have at end of year? Will you have enough to buy a $1200 bicycle?

10% $1265 Uncertain, depends on whether the price of the bike increased with inflation.

True/False: Only a coupon bond can have a negative nominal interest rate

True

Retired persons often have much of their wealth placed in savings accounts and other interest-bearing investments, and complain whenever interest rates are low. Which would be a valid complaint? a. Expected inflation is falling at a slower rate then nominal interest rates b. Expected inflation is falling at the same rate as nominal interest rates

a. Expected inflation is falling at a slower rate than nominal interest rates

A discount bond will have a negative nominal interest rate when the:

current bond price is greater than its face value