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

Suppose that a bond is purchased at a discount (meaning that it is sold for less than face value). Could the yield to maturity ever be less than the coupon rate? Could the holding period return be less than the coupon rate? Explain.

When the current yield and the coupon rate are equal, the bond is:

Suppose a family member approaches you to borrow $2,000 for the down payment on an automobile. You have the cash available in a savings account that currently earns 5% annual interest. You and the family member consider the following repayment options: (i) Borrower repays $259 each year over the next ten years (ii) Borrower repays $300 each year over the next five years, plus a lump-sum payment of $895 in the fifth year. (iii) Borrower repays you $2,100 at the end of one year. For each of the options above, show that the present values of each option are approximately equal. Then, relate each of the options above to the four types of bonds, indicating which option is equivalent to which type of bond. Explain why.

Calculate the price of a $1,000 face value bond that offers a $45 annual coupon, and has six years to maturity, when the interest rate is 6.0% (0.060).

The bond dealer's spread is:

Interest-rate risk results from:

A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has a:

When the price of a bond is above face value the yield to maturity:

Bond prices and yields:

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 the:

The U.S. Treasury issues bonds where the return is indexed to the consumer price index. We should expect that these bonds, relative to other U.S. Treasury bonds, will have:

When expected inflation decreases for any given nominal interest rate, all of the following occur except the:

A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has a:

In calculating the current yield for a bond the:

The larger the bond dealer's spread the:

Which of the following is true of interest-rate risk?

The holding period return has relevance because:

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

If the risk on foreign government bonds increases relative to U.S. government bonds, the price of U.S. government bonds should:

The most common form of zero-coupon bonds found in the United States is: