financial intermediaries ch 4
The duration of a ten-year, 10 percent coupon bond when the interest rate is 10 percent is 6.76 years. What happens to the price of the bond if the interest rate falls to 8 percent?
It rises 12.3 percent.
In which of the following situations would you prefer to be borrowing?
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 making a loan?
The interest rate is 4 percent and the expected inflation rate is 1 percent.
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 rate.
Reinvestment risk is the risk that
a bond's future coupon payments may have to be invested at a rate lower than the bond's yield to maturity
The current yield on a coupon bond is the bond's ________ divided by its ________.
annual coupon payment; price
(I) The average lifetime of a debt security's stream of payments is called duration. (II) The duration of a portfolio is the weighted average of the durations of the individual securities, with the weights reflecting the proportion of the portfolio invested in each.
both true
A bond's future payments are called its
cash flows
A frequently used approximation for the yield to maturity on a long-term bond is the
current yield
The nominal interest rate minus the expected rate of inflation
defines the real interest rate
A credit market instrument that pays the owner the face value of the security at the maturity date and nothing prior to then is called a
discount bond
The process of calculating what dollars received in the future are worth today is called
discounting the future.
For simple loans, the simple interest rate is ________ the yield to maturity.
equal to
The interest rate that is adjusted for actual changes in the price level is called the
ex post real interest rate.
A ________ is a type of loan that has the same cash flow payment every year throughout the life of the loan
fixed-payment loan
A loan that requires the borrower to make the same payment every period until the maturity date is called a
fixed-payment loan
The riskiness of an asset's return that results from interest rate changes is called
interest-rate risk.
Dollars received in the future are worth ________ than dollars received today. The process of calculating what dollars received in the future are worth today is called ________.
less; discounting
A consol bond is a bond that
pays interest in perpetuity and never matures.
When a bond's price falls, its yield to maturity ________ and its current yield ________.
rises; rises
When the lender provides the borrower with an amount of funds that must be repaid to the lender at the maturity date, along with an additional payment for the interest, it is called a ________.
simple loan
The return on a bond is equal to the yield to maturity when
the holding period and the maturity of the bond are identical.
The yield to maturity for a one-year discount bond equals
the increase in price over the year, divided by the initial price.
Financial economists consider the ________ to be the most accurate measure of interest rates
yield to maturity
For a simple loan, the simple interest rate equals the
yield to maturity
The interest rate that equates the present value of the cash flow received from a debt instrument with its market price today is the
yield to maturity.
With an interest rate of 10 percent, the present value of a security that pays $1,100 next year and $1,460 four years from now is approximately
$2,000.
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 8 percent, the present value of $100 received one year from now is approximately
$93
With an interest rate of 6 percent, the present value of $100 received one year from now is approximately
$94
(I) A discount bond requires the borrower to repay the principal at the maturity date plus an interest payment. (II) A coupon bond pays the lender a fixed interest payment every year until the maturity date, when a specified final amount (face or par value) is repaid.
(I) is false, (II) true
What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 one year later?
-5%
The Fisher equation states that
-the nominal interest rate equals the real interest rate plus the expected rate of inflation. -the real interest rate equals the nominal interest rate less the expected rate of inflation.
If a $5,000 face value discount bond maturing in one year is selling for $5,000, then its yield to maturity is
0%
The return on a 10 percent coupon bond that initially sells for $1,000 and sells for $900 one year later is
0%
If a $10,000 face value discount bond maturing in one year is selling for $5,000, then its yield to maturity is
100%
The yield to maturity on a consol bond that pays $100 yearly and sells for $500 is
20%
The yield to maturity on a consol bond that pays $200 yearly and sells for $1000 is
20%
If a $10,000 face value discount bond maturing in one year is selling for $8,000, then its yield to maturity is
25%
What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 one year later?
25%
Which of the following $1,000 face value securities has the highest yield to maturity?
A 12 percent coupon bond selling for $1,000
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
An $8,000 coupon bond with a $400 annual coupon payment has a coupon rate of
5%
Bonds whose term to maturity is shorter than the holding period are also subject to
reinvestment risk.
The concept of ________ is based on the notion that a dollar paid to you in the future is less valuable to you than a dollar today.
present value
The change in the bond's price relative to the initial purchase price is
rate of capital gain.
If an investor's holding period is longer than the term to maturity of a bond, he or she is exposed to
reinvestment risk.
A discount bond
is also called a zero-coupon bond.
The interest rate that financial economists consider to be the most accurate measure is the
yield to maturity
With an interest rate of 5 percent, the present value of $100 received one year from now is approximately
$95
(I) Prices of longer-maturity bonds respond more dramatically to changes in interest rates. (II) Prices and returns for long-term bonds are less volatile than those for short-term bonds.
(I) is true, (II) false.
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%
Which of the following are true of coupon bonds?
-The owner of a coupon bond receives a fixed interest payment every year until the maturity date, when the face or par value is repaid. -U.S. Treasury bonds and notes are examples of coupon bonds. -Corporate bonds are examples of coupon bonds.
Which of the following are true concerning the distinction between interest rates and return?
-The rate of return on a bond will not necessarily equal the interest rate on that bond. -The return can be expressed as the sum of the current yield and the rate of capital gains.
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 rate. -The price of a coupon bond and the yield to maturity are negatively related.
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 rate. -The price of a coupon bond and the yield to maturity are negatively related. -The yield to maturity is greater than the coupon rate when the bond price is below the par value.
The nominal interest rate minus the expected rate of inflation
-defines the real interest rate. -is a better measure of the incentives to borrow and lend than the nominal interest rate. -is a more accurate indicator of the tightness of credit market conditions than the nominal interest rate.
If a $10,000 face value discount bond maturing in one year is selling for $9,000, then its yield to maturity is approximately
11%
The yield to maturity of a one-year, simple loan of $400 that requires an interest payment of $50 is
12.5%
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%
Which of the following $1,000 face value securities has the highest yield to maturity?
A 15 percent coupon bond selling for $900
(I) A simple loan requires the borrower to repay the principal at the maturity date along with an interest payment. (II) A discount bond is bought at a price below its face value, and the face value is repaid at the maturity date.
Both are true.
The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100 one year later is
15%
A $10,000, 8 percent coupon bond that sells for $10,000 has a yield to maturity of
8%
The yield to maturity of a one-year, simple loan of $500 that requires an interest payment of $40 is
8%
A coupon bond pays the owner of the bond
a fixed interest payment every period, plus the face value of the bond at the maturity date
(I) Prices of longer-maturity bonds respond less dramatically to changes in interest rates. (II) Prices and returns for long-term bonds are less volatile than those for shorter-term bonds.
all false
Which of the following are generally true of all bonds?
-The longer a bond's maturity, the lower is the rate of return that occurs as a result of the increase in the interest rate. -Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise. -Prices and returns for long-term bonds are more volatile than those for shorter-term bonds.
Which of the following are generally true of all 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. -A rise in interest rates is associated with a fall in bond prices, resulting in capital losses on bonds whose term to maturities are longer than the holding period. -The longer a bond's maturity, the greater is the price change associated with a given interest rate change.
If you expect the inflation rate to be 5 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
2%
