Exam 4: Interest Rates and Rates of Return

Winners of state lotteries are often given the choice of receiving their winnings either as one lump sum or as annual payments spread out over a period of twenty or more years. For example, a state lottery winner may be given the choice of receiving $1.2 million at once, or $125,000 per year for twenty years. In states where it is allowed, investors will sometimes approach lottery winners and offer to pay them a lump sum greater than the state is offering them (in this case, say, $1.4 million) in exchange for the lottery winner signing over to the investor the right to receive the annual payments. Under what circumstances might this be a good deal for both the lottery winner and the investor?

A bond's price and its yield to maturity are inversely related because

What is the total rate of return on a bond with a coupon of $55 that was purchased for $900 and sold one year later for $950?

Which of the following is a coupon bond?

If you deposit $500 in a savings account at an annual interest rate of 5%, how much will you have in the account at the end of five years?

In comparing the yield to maturity on a Treasury bill with the yield on a discount basis on the same bill, we can say that the yield to maturity

The only case for which the bond price does not react to a change in the yield to maturity is when

At an interest rate of 3%, what is the present value of $1000 to be received five years from now?

What is the yield on a discount basis for a U.S. Treasury bill that has a face value of $10,000, has a price of $9500, and will mature in 180 days?

On a coupon bond, the yield to maturity

A simple loan involves

An investor who buys a fifty-year corporate bond

If you deposit $10,000 in a savings account at an annual interest rate of 6%, how much will you have in the account at the end of three years?

Treasury STRIPS are

Suppose you are considering buying one of two coupon bonds. Bond A has a current market price of $975 and a face value of $1000. Bond B has a current market price of $1025 and a face value of $1000. Is Bond A the better investment?

The key to present value calculations is that they

What is the yield to maturity of a consol with a coupon of $85 and a price of $944.44?

Issuers of coupon bonds

During the late nineteenth century many farmers in the American Midwest complained that the real interest rates they were paying on their mortgages were higher than the nominal rates. Is this possible? Aren't real rates always lower than nominal rates?

What is the price of a coupon bond that has annual coupon payments of $85, a par value of $1000, a yield to maturity of 10%, and a maturity of three years?