Finance 300 Ch. 5 and 6

Suppose a 15-year $1,000 2% Treasury note with semiannual coupon payments is priced at $980.50. What is the yield to maturity at the current price?

2.15%

Suppose a five-year $1,000 10% corporate bond with semiannual coupon payments is priced at $1,150. What is the yield to maturity at the current price?

6.44%

You would like to have $1,000,000 saved for retirement by your 65th birthday. You turned 21 today and plan to save $313.14each month, starting at the end of this month. What APR must you earn to reach your goal?

6.69%

Which of the following statements about the U.S. Federal Reserve is TRUE?

All of these

What might an inverted yield curve indicate?

All of these.

Which of the following statements about bond prices and yields is TRUE?

As yield increases, bond prices decrease. As yield decreases, bond prices increase.

Why do corporate bonds tend to offer higher interest rates than U.S. Treasury securities of similar maturity?

Corporate bonds tend to have more default risk than similar maturity Treasuries, so investors demand higher yields to compensate for the increased risk.

Suppose a 10-year $1,000 5% corporate bond with semiannual coupon payments offers a 4% yield. What price would an investor pay to buy this bond?

$1,081.76

You would like to purchase a commercial truck to add delivery service to your business. You have found a truck and negotiated a purchase price of $75,000. The bank has offered to finance the purchase using a four-year loan with monthly payments and an APR of 6% (the first payment is due one month after taking out the loan). What is the monthly payment of this loan?

$1,761.38

You took out a $150,000 loan exactly six years ago. The loan required monthly payments of $908.97 for 20 years, had an APR of 4%, and you just made the 72nd payment. Interest rates have fallen over the last five years and you could take out a new loan today at 2% APR with monthly payments. You would like to refinance the original loan with a new one that has lower monthly payments. That is, you would like to take out a new loan that will exactly pay off the remaining balance of the existing loan. How much will the new loan be for (i.e., what is the balance on the original loan immediately after making the 72nd payment)?

$116,782.34

Your parents have been depositing the same amount in your college savings account every month since you were born, with the first deposit one month after you were born. The account balance immediately after the last deposit on your 18th birthday was $74,900.49. If the account paid 8% interest per year, what amount did they deposit to your account each month?

$156.02

You would like to purchase a new vehicle for your business. You plan to finance the purchase through your bank. Looking at your budget, you believe you can afford a loan payment of $600 per month. Your bank is offering financing at 7% APR over four years with monthly payments. What is the maximum you can borrow to purchase the vehicle and stay within your budget?Assume the first payment will be due one month after taking out the loan.

$25,056.12

You just had your first child and would like to start saving for her college expenses. You decide to deposit $100 at end of each month of her life, starting one month after she is born, and continuing each year until her 18th birthday (you will make the last deposit on her 18th birthday). If you expect to earn 5%on your savings, how much will be in the account immediately after making the last deposit?

$34,920.20

You would like to give your alma mater $1,000,000 as gift to establish a scholarship in your name. If the university expects to earn 6% APR on its investments and plans to invest your gift for one month before paying out the interest from the investment as a scholarship every month forever, what is the expected size of the monthly scholarship?

$5,000.00

Suppose a 20-year $1,000 2% Treasury note with semiannual coupon payments offers a 3% yield. What price would an investor pay to buy this note?

$850.42

The average yield on AA+ 30-year T-bond is 5%. The average yield on 10-year AA−corporate bonds is 4.5%. What is the yield spread between AA+ T-bonds and AA−corporate bonds?

0.5%

A one-year $1,000 T-bill is priced at $990. What yield is it offering?

1.01%

You owned an investment that returned 12% over the last year. According to the latest Consumer Price Index (CPI) numbers, inflation was 3% over the same period. What was your exact real rate of return (i.e., what was your change in purchasing power for the money in the investment)?

8.74%

You are looking for an investment that will return a real rate of 6% over the next year. If you expect inflation to be 3% over the same period, what nominal return must the investment offer so that you earn a real rate of 6%?

9.18%

Which of the following bonds will have the greatest price sensitivity to changes in yield? That is, which bond will experience the largest percentage change in price for a given change in yield? Assume all listed bonds have the same face value and credit rating. 2

A 10-year 2% coupon bond.

Which of the following bonds will have the greatest price sensitivity to changes in yield? That is, which bond will experience the largest percentage change in price for a given change in yield? Assume all listed bonds have the same face value and credit rating. 1

A 30-year 5% coupon bond.

Which of the following statements about how bond prices change over time is TRUE.

A bond's price tends to move closer to face value as the maturity date gets closer.

Suppose interest rates in the market decrease. What might this mean for business investment activity and the demand for loanable funds? If there is a change in the demand for loanable funds in response to decreased interest rates, what will this change tend to do to the equilibrium interest rate?

Business projects will become more attractive, businesses will seek to raise capital to invest in these projects, which will tend to increase the demand of loanable funds. The increase in the demand for loanable funds will tend to increase the equilibrium interest rate.

TRUE or FALSE: A bond will trade at a discount when its coupon rate is higher than the yield to maturity.

False

TRUE or FALSE: Bonds with higher risk and lower credit ratings tend to offer lower yields to attract investors.

False

Which of the following loans offers the lowest effective rate: LO1 Loan A with an APR of 9.8% and monthly compounding Loan B with an APR of 9.6% and daily compounding Loan C with an APR of 10% and annual compounding?

Loan C with an APR of 10% and annual compounding.

According to expectations theory, what does an upward sloping yield curve say about market participants' expectations of future short-term interest rates?

Short-term rates are expected to increase in the future

Which of the following statements is FALSE?

The APR reports the amount of interest, including the effects of compounding.

Which of the following statements about interest rates is TRUE?

The APR will understate the effective rate if there is more than one compounding period per year.

Which of the following is an accurate description of a bond's maturity date?

The date on which the bond pays its face value to the bondholder.

You are purchasing a commercial property for $350,000. The bank has offered to finance the purchase in exchange for monthly payments of $2,713.55 over 20 years (the first payment is due one month after taking out the loan). What is the monthly effective rate on the loan? What is the quoted APR?

The monthly effective rate is 0.5833%, the APR is 7%.

A one-year $1,000 T-bill is issued at a price of $950and offers a 5.26% yield. What is the new price if the yield decreases to 4%?

The new price is $961.54.

Suppose a two-year $1,000 3% bond with semiannual coupon payments offers a 5% yield. What price would an investor pay to buy this bond? If the yield holds constant at 5%, what is the price with exactly one year to maturity?

The price at the time if issue is $962.38 and the price with one year to maturity is $980.73.

A one-year $1,000 T-bill is offering a 5% yield. What price must an investor pay if she wants to buy the bond today?

The price of the bond is $952.38.

An investor purchased a 20-year 3% Treasury note at the issue price of 106.20onJune1, 2021. As the government response toCOVID-19 pandemic continued, investors became worried about the U.S. government's ability to service its growing debt burden and sold large quantities of Treasury securities. The decreased demand pushed Treasury prices down. On June 1, 2022, exactly one year after buying the T-note, the investor sold it for 88.53after receiving two-coupon payments. What was the yield to maturity when the investor purchased the note? What was the investor's realized return, stated as an APR, when she sold the note?

The yield to maturity at purchase is 2.60%, while the rate of return at sale is −14.44%.

An investor purchased a 30-year 4.3% Treasury bond at the issue price of 96.12onJune1, 2019. As the COVID-19 pandemic unfolded, investors fled to investments perceived as safe and purchased large quantities of Treasury securities. The increased demand pushed Treasury prices up. On June 1, 2020, exactly one year after buying the T-bond, the investor sold it for 121.35 after receiving two-coupon payments. What was the yield to maturity when the investor purchased the bond? What was the investor's realized return, stated as an APR, when she sold the bond?

The yield to maturity at purchase is 4.54%, while the rate of return at sale is 28.95%.

TRUE or FALSE: A bond will trade at a premium when its coupon rate is higher than its yield to maturity.

True

TRUEor FALSE: Rates on different loan or investment offers must be converted to effective rates covering the same time period—typically theEAR—before making comparisons.

True

TRUEor FALSE: When a person or business borrows money, the interest rate on the loan is the price the borrower pays to convert future loan payments into dollars today.

True

Most if the time the yield curve is _________.

Upward sloping.

Zero-coupon bonds do not make coupon interest payments. How do zero-coupon bonds pay interest to bondholders?

Zero-coupon bonds usually sell at a discount from face value.The difference between the purchase price and face value received at maturity represents interest earned by bondholders.