Econ 029 2nd HW

Given the nominal interest rate of 16​% and the expected inflation of 17​%, then the value of the real interest rate is ______ With the real interest rate equal to 3​% and the expected inflation equal to 3​%, then the value of the nominal interest rate is _____ A lender prefers a _______ real interest rate while a borrower prefers a _______ real interest rate.

-1% 6% Higher/Lower

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. A bond with one year to maturity B. A bond with five years to maturity C. A bond with twenty years to maturity D. A bond with ten years to maturity

A

Is it better for bondholders when the yield to maturity increases or​ decreases? Bondholders are better off when the yield to​ maturity: A. ​decreases, since this represents an increase in the price of the bond and a decrease in potential capital losses. B. ​increases, since this represents a decrease in the price of the bond and an increase in potential capital gains. C. ​decreases, since this represents an increase in the coupon payment and an increase in potential capital gains. D. ​increases, since this represents a decrease in the bond maturity and a decrease in potential capital losses.

A

The interest rate on a consol equals the A. coupon payment divided by the price. B. price times the coupon payment. C. price divided by the coupon payment. D. coupon payment plus the price.

A

The​ ________ interest rate more accurately reflects the true cost of borrowing. A. nominal B. market C. real D. discount

C

True or​ False: With a discount​ bond, the return on a bond is equal to the rate of capital gain. A. ​True: A discount bond pays fixed interest payments every year so the return is equal to the rate of capital gain. B. ​False: Bond returns can never equal the rate of capital​ gain; there must be a capital loss or gain indicated. C. ​True: A discount bond has no coupon payments so the return on the bond is equal to the rate of capital gain. D. There is no way to determine this without the knowing the coupon amount and interest rate.

C

A financial adviser has just given you the following​ advice: "Long-term bonds are a great investment because their interest rate is over​ 20%." Is the financial adviser necessarily​ right? A. No. When making an investment​ decision, you should take the yield to maturity into​ account, not the interest rate. B. Yes. The higher the annual interest​ rate, the higher the annual income on bonds. C. Yes. If the interest rate remains unchanged until​ maturity, the price of the bond will be more than its face value. D. No. If interest rates rise sharply in the​ future, long-term bonds may suffer a sharp fall in​ price, causing their return to be quite low.

D

Calculate the present value of an ​$800 discount bond with 7 years to maturity if the yield to maturity is 6​%.

The present value is ​$ 532.05

How much is ​$250 to be received in exactly one year worth to you today if the interest rate is 20​%? This same ​$250 received in one year would be worth ______ to you today if the interest rate rose to 25​%.

The value today is ​$ 208.33. Less

What is the yield to maturity​ (YTM) on a simple loan for ​$1 000 that requires a repayment of ​$2 000 in five​ years' time?

The yield to maturity is 14.87​%

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 A. 7 percent. B. 22 percent. C. -15 percent. D. -8 percent.

D

Retired persons often have much of their wealth placed in savings accounts and other​ interest-bearing investments, and complain whenever interest rates are low. Which of the​ following, if​ true, would be a valid​ complaint? A. There has not been significant growth of nominal interest rates for the last 5 years. B. Expected inflation is falling at the same rate as nominal interest rates. C. Nominal interest rates​ decrease, while there is a slight increase in real interest rates. D. Expected inflation is falling at a slower rate than nominal interest rates.

D

When the​ ________ interest rate is​ low, there are greater incentives to​ ________ and fewer incentives to​ ________. A. ​real; lend; borrow B. ​market; lend; borrow C. ​nominal; lend; borrow D. ​real; borrow; lend

D

Compared to bonds with longer ​maturity, bonds with shorter maturity respond _____ dramatically to changes in interest rates. Bonds with a maturity that is as short as the holding period have _____ interest-rate risk.

Less no