Question 1

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 one year later?

Accepted Answer

The return is calculated by adding the coupon payment to the capital gain and dividing by the initial price: (($1,200 - $1,000) + $50) / $1,000 = 25%.

Question 2

If a $10,000 face value discount bond maturing in one year is selling for $5,000,then its yield to maturity is

Accepted Answer

The yield to maturity (YTM) on a discount bond is calculated based on the return it provides by the end of its term relative to its current price. Here, the bond will pay $10,000 at maturity but is currently priced at $5,000, effectively doubling the investment in one year. This represents a 100% return, or yield to maturity.

Question 3

The nominal interest rate minus the expected rate of inflation

Accepted Answer

The nominal interest rate minus the expected rate of inflation defines the real interest rate. It is a better measure of the incentives to borrow and lend than the nominal interest rate, as it reflects the true cost of borrowing or the true return on lending. It is also a more accurate indicator of the tightness of credit market conditions than the nominal interest rate, as it takes inflation into account. Therefore, all of the above choices are correct.

Question 4

(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.

Accepted Answer

Longer-maturity bonds are more sensitive to interest rate changes, making their prices and returns more volatile than those of shorter-term bonds.

Question 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?

Accepted Answer

The yearly return on the bond includes the interest payments plus the change in price. Since the bond is maturing in one year, the return is the coupon payment plus the redemption at par value, which is not affected by the interest rate change. Therefore, the return is the yield to maturity at the time of purchase, which is 15 percent.

Question 6

The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100 one year later is

Accepted Answer

The answer of The return on a 5 percent coupon...

Question 7

The return on a 10 percent coupon bond that initially sells for $1,000 and sells for $900 one year later is

Accepted Answer

The answer of The return on a 10 percent coupon...

Question 8

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

Accepted Answer

The real interest rate can be approximated using the Fisher equation: real interest rate ≈ nominal interest rate - inflation rate. Therefore, 7% - 5% = 2%.

Question 9

Which of the following are generally true of all bonds?

Accepted Answer

All the statements provided are generally true regarding bonds. Statement A is correct because if a bond is held to its maturity, its return will indeed equal the initial yield to maturity, assuming no default. Statement B is accurate as bond prices and interest rates have an inverse relationship, meaning when interest rates rise, bond prices fall, which can lead to capital losses if the bond is sold before maturity. Statement C is also true because bonds with longer maturities are more sensitive to interest rate changes, leading to larger price fluctuations for a given change in interest rates.

Question 10

(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.

Accepted Answer

The statement (I) is true as longer-maturity bonds are more sensitive to changes in interest rates. On the other hand, statement (II) is false as long-term bonds tend to have higher volatility due to their longer duration, which leads to greater fluctuations in prices and returns.

Question 11

The Fisher equation states that

Accepted Answer

The Fisher equation posits that the nominal interest rate is the sum of the real interest rate and the expected inflation rate, which is statement A. It also implies that the real interest rate can be derived by subtracting the expected inflation rate from the nominal interest rate, which is statement B. Therefore, both A and B are correct interpretations of the Fisher equation.

Question 12

In which of the following situations would you prefer to be making a loan?

Accepted Answer

Option B has a low interest rate and a low expected inflation rate, making it the best choice for making a loan. Option A has a high inflation rate, which reduces the real value of the loan. Option C and D have high-interest rates and very high inflation rates, making the loan very risky, and the repayment value may be much higher than the original loan amount.

Question 13

The nominal interest rate minus the expected rate of inflation

Accepted Answer

The difference between the nominal interest rate and the expected rate of inflation is the real interest rate, which is a more accurate measure of the incentives to borrow and lend because it takes into account the impact of inflation on the purchasing power of money. Option B and C are incorrect because the real interest rate is a more accurate measure than the nominal interest rate for both incentives and credit market conditions. Option D is incorrect because the discount rate is the interest rate at which banks can borrow from the Federal Reserve, and is not related to the nominal or real interest rates.

Question 14

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 one year later?

Accepted Answer

The answer of What is the return on a 5...

Question 15

If a $5,000 face value discount bond maturing in one year is selling for $5,000,then its yield to maturity is

Accepted Answer

If a discount bond is selling for its face value, then its yield to maturity is zero percent.

Question 16

Which of the following are true concerning the distinction between interest rates and return?

Accepted Answer

A) This is true as the rate of return on a bond takes into account both the interest earned and any capital gains or losses from changes in the price of the bond.
B) This is also true as the current yield measures the interest earned from a bond as a percentage of its current market price, while the rate of capital gains (or losses) reflects any changes in the price of the bond.
C) This statement is false, as a fall in the price of a bond will lead to a lower rate of return, which may be less than the interest rate on that bond. Therefore, choice D is incorrect.

Question 17

In which of the following situations would you prefer to be borrowing?

Accepted Answer

The answer of In which of the following situations would...

Question 18

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

Accepted Answer

The real interest rate can be approximated using the Fisher equation: real interest rate ≈ nominal interest rate - inflation rate. Therefore, 7% - 15% = -8%.

Question 19

If a $10,000 face value discount bond maturing in one year is selling for $9,000,then its yield to maturity is approximately

Accepted Answer

Yield to maturity (YTM) is the rate of return anticipated on a bond if it is held until maturity, taking into account the bond's purchase price, face value, coupon rate, and time to maturity. We can use the following formula to calculate YTM:

YTM = [(face value / current price)^(1/n) - 1] x 100%

where n is the number of years to maturity.

In our case, the face value of the bond is $10,000, and it is selling for $9,000. Therefore, the current price of the bond is $9,000. Additionally, the maturity of the bond is one year, so n = 1. Plugging this into the formula, we get:

YTM = [(10,000 / 9,000)^(1/1) - 1] x 100%
YTM = [(1.111) - 1] x 100%
YTM = 11%

Therefore, the approximate yield to maturity of the bond is 11%, which is option C.

Question 20

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?

Accepted Answer

The bond with one year to maturity is the best choice because it will mature soon, allowing for reinvestment at the new, higher interest rate. The longer-term bonds would be locked in at the lower interest rate for a longer period of time.

Quiz 3: What Do Interest Rates Mean and What Is Their Role in Valuation?

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 one year later?

If a $10,000 face value discount bond maturing in one year is selling for $5,000,then its yield to maturity is

The nominal interest rate minus the expected rate of inflation

(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.

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?

The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100 one year later is

The return on a 10 percent coupon bond that initially sells for $1,000 and sells for $900 one year later is

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

Which of the following are generally true of all bonds?

(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.

The Fisher equation states that

In which of the following situations would you prefer to be making a loan?

The nominal interest rate minus the expected rate of inflation

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 one year later?

If a $5,000 face value discount bond maturing in one year is selling for $5,000,then its yield to maturity is

Which of the following are true concerning the distinction between interest rates and return?

In which of the following situations would you prefer to be borrowing?

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

If a $10,000 face value discount bond maturing in one year is selling for $9,000,then its yield to maturity is approximately

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?