Question 1

If the interest rate is 5 percent,what is the present value of a security that pays you $1,050 next year and $1,102.50 two years from now? If this security sold for $2200,is the yield to maturity greater or less than 5 percent? Why?

Accepted Answer

The answer of If the interest rate is 5 percent,what...

Question 2

Which of the following is true concerning the distinction between interest rates and returns?

Accepted Answer

The rate of return includes both interest payments and capital gains/losses, and may differ from the stated interest rate due to changes in the bond's market value.

Question 3

Explain why the current bond prices and interest rates are negatively related.

Accepted Answer

The answer of Explain why the current bond prices and...

Question 4

What is a coupon bond? Describe its basic properties.

Accepted Answer

The answer of What is a coupon bond? Describe its...

Question 5

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.

Accepted Answer

The rate of return 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. This encompasses both the income received from the security and the capital gains (or losses) realized on the security, relative to its purchase price.

Question 6

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

Accepted Answer

A coupon bond that has no maturity date and no repayment of principal is called a consol. Consols are often issued by governments as a way of financing debt with no apparent limit on the time within which the debt must be repaid. Interest is paid to the bondholder at a fixed rate for the life of the bond.

Question 7

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 the bond is selling at its face value, then the yield to maturity is equal to the coupon rate, which in this case is zero as it is a discount bond. Therefore, the yield to maturity is 0 percent.

Question 8

A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of ________.

Accepted Answer

The answer of A discount bond selling for $15,000 with...

Question 9

The yield to maturity for a one-year discount bond equals the increase in price over the year,divided by the ________.

Accepted Answer

Since a discount bond has no coupon payments, its yield to maturity equals the increase in price over the year divided by the initial price. Therefore, the correct answer is A.

Question 10

The yield to maturity for a discount bond is ________ related to the current bond price.

Accepted Answer

The yield to maturity and bond price have an inverse relationship for a discount bond. As the bond price decreases, the yield to maturity increases.

Question 11

How is current yield defined? How can it be used to determine yield to maturity for long-term bonds?

Accepted Answer

The answer of How is current yield defined? How can...

Question 12

The interest rate on a consol equals the ________.

Accepted Answer

The interest rate on a consol is calculated by dividing the coupon payment by the price. Therefore, the correct choice is D.

Question 13

A relative has just won a state lottery paying $20 million in installments of $1 million per year for twenty years.Your relative states that she is $20 million richer.Is she correct? Create a simple example for two years to illustrate your position.

Accepted Answer

The answer of A relative has just won a state...

Question 14

In Japan in 1998 and in the U.S.in 2008,interest rates were negative for a short period of time because investors found it convenient to hold six-month bills as a store of value because ________.

Accepted Answer

The answer of In Japan in 1998 and in the...

Question 15

If a perpetuity has a price of $500 and an annual interest payment of $25,the interest rate is ________.

Accepted Answer

The interest rate can be calculated as the annual interest payment divided by the price of the perpetuity, multiplied by 100 to convert to a percentage:

$25/$500 x 100 = 5%

Therefore, the correct answer is choice B.

Question 16

The price of a consol equals the coupon payment ________.

Accepted Answer

The price of a consol (a type of bond that pays an annual interest forever) equals the coupon payment divided by the interest rate. This is because the price is calculated by dividing the annual payment by the yield (interest rate).

Question 17

A consol paying $20 annually when the interest rate is 5 percent has a price of ________.

Accepted Answer

The price of a consol can be found by dividing the annual payment by the interest rate.

Price = Annual payment / Interest rate

Price = $20 / 0.05 = $400

Question 18

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.

Accepted Answer

The yield to maturity for a perpetuity, when used as an approximation for the yield to maturity on long-term coupon bonds, is referred to as the current yield. This is because the current yield formula, which divides the annual coupon payments by the bond's current market price, provides a simple approximation that becomes more accurate for bonds with longer maturities.

Question 19

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

Accepted Answer

The sum of the current yield (income generated from dividends or interest) and the rate of capital gain (increase in the value of the investment) is known as the rate of return. This represents the total earnings an investor receives from an investment and is an important metric to consider when making investment decisions. B, C and D are incorrect choices as they do not accurately describe the total earnings an investor receives from an investment.

Question 20

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 is the rate of return that would be realized if the bond were held to maturity and all interest and principal payments were made as scheduled. In this case, the bond is being sold at a discount ($5,000 < $10,000), which means the yield to maturity must be higher than the coupon rate. Since the bond is maturing in one year, the yield to maturity is simply the discount as a percentage of the face value: $5,000/$10,000 = 50% or 0.50 as a decimal. To convert to a percentage, we multiply by 100, so the yield to maturity is 100%. Therefore, the correct answer is D, 100 percent.

Quiz 4: Understanding Interest Rates