Finance 405 Das Everything Chap 9

Bond Equivalent Yield (BEY) Formula

(365 X discount yield) / (360- days to maturity X discount yield

EAR formula

1 + EAR= (1 + APR/M)^m

A bond has a nominal rate of return of 5.87 percent and the inflation rate is 4.13 percent. What is the approximate real rate?

1.74

A Treasury bill has 21 days to maturity and a bank discount yield of 1.89 percent. What is the bond equivalent yield?

1.92

An investment will make one payment of $24,500 nine years from now. What is the current value of this investment if the nominal rate of return is 4.8 percent?

16,066.25

Your credit card has an annual percentage rate of 18.9 percent and compounds interest daily. What is the effective annual rate?

20.80

A $50,000 face value STRIPS matures in 9 years and has a yield to maturity of 7.76 percent. What is the current dollar price of this security?

25,199.68

The market rate on a bond fell from 8.76% to 8.73%. This decline of how many basis points

3

What is the current value of a $5,000 face value STRIPS with 6 years to maturity and a yield to maturity of 8.1 percent?

3,105.02

A $5,000 face value bond is quoted at a bank discount yield of 2.8 percent. What is the current value of the bond if it matures in 36 days?

4,986

A Treasury bill matures in 68 days and has a bond equivalent yield of 4.05 percent. What is the effective annual rate?

4.12

You want to purchase a security that will pay you $1,000 six years from now. If you want to earn an annual nominal rate of 7.5 percent, how much should you pay for this investment today?

647.96

A $1,000 face value, 120-day bond is quoted at a bank discount yield of 3.38 percent. What is the current bond price?

988.73

Bankers acceptance

A postdated check on which a bank has guaranteed payment. Commonly used to finance international trade transactions.

US treasury bill (tbill)

A short term US government debt instrument issued by the US Treasury

Pure discount security

An interest-bearing asset that makes a single payment of face value at maturity with no payments before maturity.

Bank discount basis formula

Current Price= Face Value X (1- Days to maturity/360 X Discount yield)

Tbill formula

FV X (1- days to maturity/360 X Discount yield)

Strips price formula

FV/ (1 + YTM/2)^2m

London interbank offered rate (LIBOR)

Interest rate that international banks charge one another for overnight Eurodollar loans.

Maturity preference theory

Long-term interest rates contain a maturity premium necessary to induce lenders into making longer term loans.

Which one of the following debt instruments guarantees investors a positive real rate of return?

TIPS

Call money rate

The interest rate brokerage firms pay for call money loans from banks. This rate is used as the basis for customer rates on margin loans.

Discount rate

The interest rate on the loans that the Fed makes to commercial banks for overnight reserve loans

Expectations Theory

The term structure of interest rates reflects financial market beliefs about future interest rates.

Eurodollars

U.S. dollars deposited in foreign banks outside the U.S. or in foreign branches of U.S. banks

Bank Discount Basis

a method for quoting interest rates on money market instruments

A pure discount security is an interest-bearing asset that pays:

a single payment at maturity

Separate trading of registered interest and principal securities (STRIPS)

are pure discount instruments created by "stripping" the coupons and principal payments of U.S. Treasury notes and bonds into separate parts, which are then sold separately.

Fischer Hypothesis

asserts that the general level of nominal interest rates follows the general level of inflation.

Which one of the following is the method used to quote interest rates on money market instruments?

bank discount basis

Which of the following rates is used by brokerage firms as the basis for determining margin loan rates?

call money

Market Segmentation

debt markets are segmented by maturity, so interest rates for various maturities are determined separately in each segment

Which one of the following is defined as U.S. dollar-denominated deposits held in a foreign bank?

eurodollars

Which one of the following rates is the rate that banks charge each other for overnight loans of 1 million or more?

federal funds

Real interest rates

interest rates adjusted for inflation Formula: nominal interest rate-inflation rate

Nominal interest rates

interest rates as they are observed and quoted, with no adjustment for inflation

HIBOR

is an interest rate based on Hong Kong dollars. Hibor is the interest rate among banks in the Hong Kong interbank market.

Euribor

is an interest rate that also refers to deposits denominated in euros. However, EURIBOR is based largely on interest rates from the interbank market for banks in the European Union.

Which one of the following is the interest rate that the largest commercial banks charge their most creditworthy corporate customers for short-term loans

prime

Euro LIBOR

refers to deposits denominated in euros—the common currency of 16 European Union countries.

Term structure of interest rates

relationship between time to maturity and interest rates for default-free, pure discount instruments

Commercial paper

short-term unsecured debt issued by large corporations

Based solely on the maturity preference theory, long-term interest rates:

should be higher than short-term rates

Prime rate

the basic interest rate on short-term loans that the largest commercial banks charge to their most credit worthy corporate customers

Federal funds rate

the interest rate banks charge each other for overnight loans of 1 million or more

Effective Annual Rate (EAR)

the interest rate expressed as if it were compounded once per year

CDs

the interest rate on certificates of deposit, whcih large-denomination deposits of $100,000 or more at commercial banks

The market segmentation theory states that interest rates on debt vary dependent on market segments which are segmented based upon which of the following?

time to maturity