Econ 353

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 $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.

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

5 percent.

I purchase a 10 percent coupon bond. Based on my purchase price, I calculate a yield to maturity of 8 percent. If I hold this bond to maturity, then my return on this asset is

8 percent.

Which of the following are generally TRUE of bonds?

A bond's return equals the yield to maturity when the time to maturity is the same as the holding period.

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.

The ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation.

Fisher equation

The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is

0 percent.

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 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.

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

A coupon bond that has no maturity date and no repayment of principal is called a

consol

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 bond's

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.

The nominal interest rate minus the expected rate of inflation

defines the real interest rate.

The price of a consol equals the coupon payment

divided by the interest rate.

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 yield to maturity is ________ than the ________ rate when the bond price is ________ its face value.

greater; coupon; below

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

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.

All bonds that will not be held to maturity have interest rate risk which occurs because of the change in the price of the bond as a result of

interest-rate changes.

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

Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant.

long-term; short-term

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

Another name for a consol is a ________ because it is a bond with no maturity date. The owner receives fixed coupon payments forever.

perpetuity

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

The ________ is defined as the payments to the owner plus the change in a security's value expressed as a fraction of the security's purchase price.

rate of return

The sum of the current yield and the rate of capital gain is called the

rate of return.

When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.

real; borrow; lend

Short-term bonds are subject to ________ risk because proceeds must be put into some future asset at an unknown interest rate.

reinvestment

Assuming the same coupon rate and maturity length, the difference between the yield on a Treasury Inflation Indexed Security and the yield on a nonindexed Treasury security provides insight into

the expected inflation rate.

The interest rate on Treasury Inflation Indexed Securities can be roughly interpreted as

the real interest rate.

A discount bond is also called a ________ because the owner does not receive periodic payments.

zero-coupon bond

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

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 the amount payable in two years is $2,420 for a simple loan at 10 percent interest, the loan amount is

$2,000.

What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent?

$453.51