Exam 6: Bonds, Bond Prices, and the Determination of Interest Rates

Suppose that the interest rate on a conventional 30-year mortgage is currently 8%. You receive a call from a mortgage broker who offers you a 30-year adjustable rate mortgage at 2% that is adjusted once each year. Evaluate each mortgage in terms of the following: risk that the monthly payment will change over the next 30 years and interest-rate risk.

An increase in the nation's wealth, all other factors constant, would cause the:

Suppose that general business conditions improve, and at the same time, wealth increases. Based on this information, we know that:

Consider a $1,000.00 face value bond with a $55 annual coupon and 10 years until maturity. Calculate the current yield; the coupon rate and the yield to maturity under each of the following: a) The bond is purchased for $940.00 b) The bond is purchased for $1,130.00 c) The bond is purchased for $1,000.00

If the quantity of bonds demanded exceeds the quantity of bonds supplied, bond prices:

If a one-year zero-coupon bond has a face value of $100, is purchased for $94, and is held to maturity the:

Explain the relationship between coupon rate (or coupon yield) and current yield.

The market for bonds is initially described by the supply of bonds - S₀, and the demand for bonds - D₀, with the equilibrium price and quantity being P₀ and Q₀. If the federal government were to offer larger tax breaks on the purchase of new equipment for businesses, all other factors constant, we would expect to see:

Which of the following would lead to a decrease in bond demand?

Consider the factors that affect bond demand and bond supply. Describe how the following are likely to change during a period of robust economic growth: wealth, default risk, and general business conditions. For each, state how the factor is likely to change, and discuss the implications for bond demand/supply, bond price, and yield. Bond prices tend to decrease during periods of high economic growth. What does this reveal about which of these factors is important?

If the annual interest rate is 5% (.05), the price of a one-year Treasury bill per $100 of face value would be:

Which of the following statements about the result of a deterioration in business conditions that also causes a decrease in a nation's wealth is false?

If interest rates are expected to rise, the bond prices will:

In reading bond quotes:

Which of the following would lead to an increase in bond supply?

Consider two investors: one is risk-neutral and the other is risk-averse. How do they each assess a risk premium?

Use the example of a consol to show how bond prices and yields are inversely related.

The market for bonds is initially described by the supply of bonds - S₀, and the demand for bonds - D₀,with the equilibrium price and quantity being P₀ and Q₀. If the U.S. government's borrowing needs decrease, all other factors constant:

Compute the change in the price of a five-year (until maturity) $1,000 face value zero- coupon bond that currently yields 7% when expected inflation increases from 3% to 4%.

If the U.S. government's borrowing needs increase, in the bond market this would be seen as the: