Chp 4 ECON 303 MONEY AND BAKING
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 a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200?
10 percent
If a $10,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is
100 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
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
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 Protected Security is 3 percent, and the yield on a nonindexed Treasury bond is 8 percent, the expected rate of inflation is
5 percent
If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the interest rate is
5 percent
If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is
5 percent
If a financial institution has 50% of its portfolio in a bond with a five-year duration and 50% of its portfolio in a bond with a seven-year duration, what is the duration of the portfolio?
6 years
A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of
8 percent
Which of the following bonds would you prefer to be buying?
A $10,000 face-value security with a 10 percent coupon selling for $9,000
Which of the following $1,000 face-value securities has the highest yield to maturity?
A 12 percent coupon bond selling for $1,000
Which of the following $5,000 face-value securities has the highest to maturity?
A 12 percent coupon bond selling for $4,500
Which of the following $1,000 face-value securities has the lowest yield to maturity?
A 5 percent coupon bond selling for $1,000
Which of the following $1,000 face-value securities has the highest yield to maturity?
A 5 percent coupon bond with a price of $600
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 credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a
Coupon Bond
An increase in the time to the promised future payment ________ the present value of the payment
Decreases
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
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.
Would it make sense to buy a house when mortgage rates are 14% and expected inflation is 15%? Explain
Even though the nominal rate for the mortgage appears high, the real cost of borrowing the funds is -1%. Yes, under this circumstance it would be reasonable to make this purchase
The present value of an expected future payment ________ as the interest rate increases.
Falls
The ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation
Fisher equation
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
Which of the following are true of fixed payment loans?
Installment loans and mortgages are frequently of the fixed payment type
Your favorite uncle advises you to purchase long-term bonds because their interest rate is 10%. Should you follow his advice?
It depends on where you think interest rates are headed in the future. If you think interest rates will be going up, you should not follow your uncleȇs advice because you would then have to discount your bond if you needed to sell it before the maturity date. Long-term bonds have a greater interest-rate risk.
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
The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is
0 percent
If the interest rate is 5%, what is the present value of a security that pays you $1, 050 next year and $1,102.50 two years from now? If this security sold for $2200, is the yield to maturity greater or less than 5%? Why
PV = $1,050/(1. +.05) + $1,102.50/(1 + 0.5)2 PV = $2,000 If this security sold for $2200, the yield to maturity is less than 5%. The lower the interest rate the higher the present value.
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
A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a
Simple Loan
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 generally true of bonds?
The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period.
Which of the following are true for discount bonds?
The purchaser receives the face value of the bond at the maturity date
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.
All of the following are examples of coupon bonds except
U.S. Treasury bills
Examples of discount bonds include
U.S. Treasury bills
Which of the following are true for a coupon bond?
When the coupon bond is priced at its face value, the yield to maturity equals the coupon rat
The interest rate that equates the present value of payments received from a debt instrument with its value today is the
Yield to Maturity
A fully amortized loan is another name for
a fixed-payment loan
A coupon bond that has no maturity date and no repayment of principal is called a
consol
A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid.
coupon bond; face
The interest rate on a consol equals the
coupon payment divided by the price.
The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bondȇs
coupon rate
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
An equal increase in all bond interest rates
decreases long-term bond returns more than short-term bond returns.
An asset's interest rate risk ________ as the duration of the asset ________.
decreases; decreases
The nominal interest rate minus the expected rate of inflation
defines the real interest rate
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
A ________ is bought at a price below its face value, and the ________ value is repaid at the maturity date
discount bond; face
The price of a consol equals the coupon payment
divided by the interest rate
For simple loans, the simple interest rate is ________ the yield to maturity
equal to
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.
The ________ is the final amount that will be paid to the holder of a coupon bond
face value
The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value.
greater; coupon; below
All else equal, the ________ the coupon rate on a bond, the ________ the bonds duration.
higher; shorter
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 assetȇs returns due to
interest-rate changes
The riskiness of an assetȇs 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 yield to maturity for a discount bond is ________ related to the current bond price.
negatively
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
A discount bond
pays the bondholder the face value at maturity
The ________ is defined as the payments to the owner plus the change in a securityȇs value expressed as a fraction of the securityȇs 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
All else equal, when interest rates ________, the duration of a coupon bond ________.
rise; falls
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 securityȇs stream of payments
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
Comparing a discount bond and a coupon bond with the same maturity,
the discount bond has the greater effective maturity
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.
The duration of a coupon bond increases
the longer is the bonds term to maturity.
The interest rate on Treasury Inflation Protected Securities is a direct measure of
the real interest rate.
Economists consider the ________ to be the most accurate measure of interest rates.
yield to maturity.
.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.
For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is
$13,310.
If the amount payable in two years is $2420 for a simple loan at 10 percent interest, the loan amount is
$2000
A consol paying $20 annually when the interest rate is 5 percent has a price of
$400
If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is
$650
With an interest rate of 6 percent, the present value of $100 next year is approximately
$94
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
What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year?
-5 percent
