Question 1

Explain the Fisher equation.Construct a numerical example demonstrating that,depending on the expected rate of inflation,a lower nominal rate may still reflect a higher real cost of borrowing.Explain your example thoroughly.

Accepted Answer

The answer of Explain the Fisher equation.Construct a numerical example...

Question 2

A friend tells you that he can purchase a 10 percent coupon bond at face value.Your friend states that 10 percent is a "high" rate of interest.You know that the current rate of inflation is 8 percent,and you expect inflation to increase.What advice should you give to your friend about this bond?

Accepted Answer

The answer of A friend tells you that he can...

Question 3

All else equal,the ________ the coupon rate on a bond,the ________ the bond's duration.
A) higher; longer
B) higher; shorter
C) lower; shorter
D) greater; longer

Accepted Answer

A higher coupon rate results in a shorter duration because the bondholder receives more substantial cash flows earlier, reducing the bond's sensitivity to interest rate changes.

Question 4

The duration of a coupon bond increases ________.
A) the longer is the bond's term to maturity
B) when interest rates increase
C) the higher the coupon rate on the bond
D) the higher the bond price

Accepted Answer

The longer the term to maturity of a coupon bond, the longer the bond will continue paying out its coupon payments before the bond reaches its maturity date. This means that the bond will have a longer duration, as it will be exposed to interest rate risk for a longer period of time.

Question 5

Would it make sense to buy a house when mortgage rates are 14 percent and expected inflation is 15 percent? Explain your answer.

Accepted Answer

The answer of Would it make sense to buy a...

Question 6

Duration is ________.
A) an asset's term to maturity
B) the time until the next interest payment for a coupon bond
C) the average lifetime of a debt security's stream of payments
D) the time between interest payments for a coupon bond

Accepted Answer

Duration is a measure of the average lifetime of a debt security's stream of payments, including both interest and principal payments. It takes into account the timing and amount of all future cash flows, rather than just one specific point in time. Option A refers more specifically to the maturity of a bond, while options B and D refer to the timing of interest payments on a bond.

Question 7

If a financial institution has 50 percent of its portfolio in a bond with a five-year duration and 50 percent of its portfolio in a bond with a seven-year duration,what is the duration of the portfolio?
A) 12 years
B) 7 years
C) 6 years
D) 5 years

Accepted Answer

The formula for duration-weighted portfolio is:

Portfolio Duration = (Weight of Investment 1 * Duration of Investment 1) + (Weight of Investment 2 * Duration of Investment 2)

Using the formula, we get:

Portfolio Duration = (0.5 * 5 years) + (0.5 * 7 years)
Portfolio Duration = 2.5 years + 3.5 years
Portfolio Duration = 6 years

Therefore, the duration of the portfolio is 6 years.

Question 8

An asset's interest rate risk ________ as the duration of the asset ________.
A) increases; decreases
B) decreases; decreases
C) decreases; increases
D) remains constant; increases

Accepted Answer

The answer of An asset's interest rate risk ________ as...

Question 9

Comparing a discount bond and a coupon bond with the same maturity,________.
A) the coupon bond has the greater effective maturity
B) the discount bond has the greater effective maturity
C) the effective maturity cannot be calculated for a coupon bond
D) the effective maturity cannot be calculated for a discount bond

Accepted Answer

The answer of Comparing a discount bond and a coupon...

Question 10

All else equal,when interest rates ________,the duration of a coupon bond ________.
A) rise; falls
B) rise; increases
C) falls; falls
D) falls; does not change

Accepted Answer

When interest rates rise, the present value of future cash flows decreases, causing the price of the bond to fall. As a result, the duration of the bond decreases.

Quiz 4: Understanding Interest Rates

Explain the Fisher equation.Construct a numerical example demonstrating that,depending on the expected rate of inflation,a lower nominal rate may still reflect a higher real cost of borrowing.Explain your example thoroughly.

A friend tells you that he can purchase a 10 percent coupon bond at face value.Your friend states that 10 percent is a "high" rate of interest.You know that the current rate of inflation is 8 percent,and you expect inflation to increase.What advice should you give to your friend about this bond?

All else equal,the the coupon rate on a bond,the the bond's duration.

The duration of a coupon bond increases ________.

Would it make sense to buy a house when mortgage rates are 14 percent and expected inflation is 15 percent? Explain your answer.

Duration is ________.

If a financial institution has 50 percent of its portfolio in a bond with a five-year duration and 50 percent of its portfolio in a bond with a seven-year duration,what is the duration of the portfolio?

An asset's interest rate risk as the duration of the asset .

Comparing a discount bond and a coupon bond with the same maturity,________.

All else equal,when interest rates ,the duration of a coupon bond .