Mishkin Chapter 4 - Understanding Interest Rates

An increase in the time to the promised future payment ________ the present value of the payment.

decreases

An equal increase in all bond interest rates

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

The ________ is the final amount that will be paid to the holder of a coupon bond

face value

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.

All else equal, the ________ the coupon rate on a bond, the ________ the bond's duration.

higher; shorter

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.

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

no interest-rate risk

The ________ of a coupon bond and the yield to maturity are inversely related.

price

*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

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

5 percent

If a $5,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is

0 percent

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

5 percent

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 ofborrowing.

real

The present value of a fixed-payment loan is calculated as the ________ of the present value of all cash flow payments.

sum

*Duration is

the average lifetime of a debt security's stream of payments.

*Comparing a discount bond and a coupon bond with the same maturity,

*the discount bond has the greater effective maturity.

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

12 percent.

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.

present value

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

-5 percent

If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is

$650.

*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.

*A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of

*33.3 percent.

*All of the following are examples of coupon bonds except

*U.S. Treasury Bills

*In Japan in 1998 and in the U.S. in 2008, interest rates were negative for a short period of time because investors found it convenient to hold six-month bills as a store of value because

*the bills were denominated in large amounts and could be stored electronically.

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

A 12 percent coupon bond selling for $1,000

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.

*Examples of discount bonds include

U.S. Treasury bills.

The interest rate on a consol equals the

coupon payment divided by the price.

A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a

fixed-payment loan

The interest rate that equates the present value of payments received from a debt instrument with its value today is the

yield to maturity.

The price of a consol equals the coupon payment

divided by the interest rate.