Finance Exam 3

Which one of these bonds is the most interest-rate sensitive

10-year zero coupon bond

Treasury bills are currently paying 7 percent and the inflation rate is 3.2 percent. What is the approximate real rate of interest? What is the exact real rate?

Approx. real rate: Exact real rate:

Bond dealers report all of their trading information using the system known as

TRACE

The real rate is 2.9 percent and the inflation rate is 4.5 percent. What rate would you expect to see on a Treasury bill?

Treasury bill rate:

term structure of interest rates

can be humped in the middle

The stated interest payment, in dollars, made on a bond each period is called the bond's:

coupon

An upward-sloping term structure of interest rates indicates:

longer-term rates are higher than shorter-term rates

The specified date on which the principal amount of a bond is repaid is called the bonds

maturity

A bond with a face value of 1000 that sells for 1000 in the market is called a

par value

The profit that is earned on a bond traded by a bond dealer is called the

spread

The relationship between nominal interest rates on default-free, pure discount securities and the time to maturity is called the

term structure of interest rates

Locate the Treasury bond in Figure 8.4 maturing in November 2042. Assume a par value of $10,000. What is its coupon rate? What is its bid price in dollars? What was the previous day's asked price in dollars?

Coupon rate: bid price: previous day's asked price:

An investment offers a total return of 18 percent over the coming year. Jerome Dowell thinks the total real return on this investment will be only 13 percent. What does Jerome believe the inflation rate will be over the next year?

Inflation rate:

If a bond's yield-to-maturity is less than its coupon rate, the bond will sell at a _____ , and increases in market interest rates will

Premium;decrease this premium

All else constant, a bond will sell at ___ when the yield to maturity is _____ the coupon rate

a discount; greater than

All else constant, a coupon bond that is selling at a premium, must have

a yield maturity that is less than the coupon rate

Laurel, Inc., and Hardy Corp. both have 6 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has two years to maturity, whereas the Hardy Corp. bond has 15 years to maturity. a.If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? b. If interest rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of these bonds be then?

a. % change in price of Laurel: Hardy: b. % change in price of Laurel: Hardy:

Assuming semiannual compounding, what is the price of a zero coupon bond with 13 years to maturity paying 1000 at maturity if the YTM is...

a. 4%: b. 8%: c. 12%:

Microhard has issued a bond with the following characteristics: Par: $1,000Time to maturity: 17 yearsCoupon rate: 8 percentSemiannual payments Calculate the price of this bond if the YTM is

a. 8% b. 11% c. 5%

The annual interest paid by a bond divided by the bonds face value is called the

coupon rate

Interest rate risk _____ as the time to maturity decreases and _______ as the coupon rate decreases

decreases;increases

A bond with a face value of $1000 that sells for less than $1000 in the market is called a ____ bond

discount

The market price of a bond increases when the

discount rate decreases

the yield to maturity

equals both the current yield and the coupon rate for par value bonds

The interest paid on any municipal bond is

exempt from federal income taxation and may or may not be exempt from state taxation

The principal amount of a bond that is repaid at the end of the loan term is called the bonds

face value

An increase in the rate of inflation will

increase the nominal interest rate but will not affect the real interest rate

Rosina purchased a 15-year bond at par value when it was initially issued. The bond has a coupon rate of 7 percent and matures 13 years from now. If the current market rate for this type and quality of bond is 7.5 percent, then Rosina should expect:

to realize a capital loss if she sold the bond at todays market price

A newspaper listing of bond prices has an "Asked Yield" column. this yield is based on the asked price and the represents the

yield to maturity

The rate of return required by investors in the market for owning a bond is called the

yield to maturity

a bond is listed in a newspaper at a bid of 105.4844. this quote should be interpreted to mean

you can sell that bond at a price equal to 105.4844 percent of face value

if you want to increase your purchasing power by investing in a bond then

you must earn a positive real rate of return on that bond

A bond that makes no coupon payments and is initially priced at a deep discount is called a _____ bond

zero coupon