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

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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?

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Question 1

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

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Question 2

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The risk-neutral investor seeks a risk premium that has the price of the bond (and its subsequent yield) such that the price equals the expected value (the sum of the payoffs times the probabilities).The risk-averse investor would offer a price less than this (and therefore seek a higher yield) since he/she requires additional compensation for risk.Therefore, the risk-averse investor's risk premium would be greater.

Calculate the holding period return for a $1,000 face value bond with a $60 annual coupon purchased for $970.00 and sold three years later for $1,060.00.

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9.02%.Here we have to consider the present value of the three coupon payments as well as the present value of the capital gain that results from purchasing the bond for $970 and selling it for $1,060.

Which of the following best expresses the equation for holding period return?

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Question 4

Which of the following makes fixed payments indefinitely?

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Question 5

One characteristic that distinguishes holding period return from the coupon rate, the current yield, and the yield to maturity is:

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Question 6

Most home mortgages are good examples of:

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Question 7

Explain why two countries with the same average rate of inflation may not present the same inflation risk for holders of those countries' bonds?

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Question 8

Which bond will have a higher yield to maturity, a $1,000 face value bond, with a 5.0% coupon rate that sells for $900; or a $1000 face value bond, with a $50 annual coupon that sells for $1,050? Explain your choice.

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Question 9

If the U.S.government's borrowing needs decrease, all other factors constant:

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Question 10

If a consol is offering an annual coupon of $50 and the annual interest rate is 6%, the price of the consol is:

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Question 11

U.S.Treasury strips are:

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Question 12

An increase in expected inflation for any given nominal interest rate will cause:

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Question 13

A pure discount bond is also known as:

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Question 14

The yield on a discount basis:

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Question 15

Suppose that the return on assets other than bonds falls.In the bond market this will result in:

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Question 16

As general business conditions deteriorate, all other factors constant:

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Question 17

The yield on a discount basis:

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Question 18

Could the holding period return ever be less than the yield to maturity? Explain.

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Question 19

Calculate the monthly payment for a 30-year mortgage, where the amount borrowed is $100,000 and the annual interest rate is 6.0%.

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Question 20

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

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?

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

Calculate the holding period return for a $1,000 face value bond with a $60 annual coupon purchased for $970.00 and sold three years later for $1,060.00.

Which of the following best expresses the equation for holding period return?

Which of the following makes fixed payments indefinitely?

One characteristic that distinguishes holding period return from the coupon rate, the current yield, and the yield to maturity is:

Most home mortgages are good examples of:

Explain why two countries with the same average rate of inflation may not present the same inflation risk for holders of those countries' bonds?

Which bond will have a higher yield to maturity, a $1,000 face value bond, with a 5.0% coupon rate that sells for $900; or a $1000 face value bond, with a $50 annual coupon that sells for $1,050? Explain your choice.

If the U.S.government's borrowing needs decrease, all other factors constant:

If a consol is offering an annual coupon of $50 and the annual interest rate is 6%, the price of the consol is:

U.S.Treasury strips are:

An increase in expected inflation for any given nominal interest rate will cause:

A pure discount bond is also known as:

The yield on a discount basis:

Suppose that the return on assets other than bonds falls.In the bond market this will result in:

As general business conditions deteriorate, all other factors constant:

The yield on a discount basis:

Could the holding period return ever be less than the yield to maturity? Explain.

Calculate the monthly payment for a 30-year mortgage, where the amount borrowed is $100,000 and the annual interest rate is 6.0%.

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value, and Interest Rates

Understanding Risk

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets, and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: the Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange-Rate Policy and the Central Bank

Money Growth, Money Demand, and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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