Exam 3: What Do Interest Rates Mean and What Is Their Role in Valuation

(I)Prices of longer-maturity bonds respond more dramatically to changes in interest rates. (II)Prices and returns for long-term bonds are less volatile than those for short-term bonds.

Describe the cash flows received from owning a coupon bond.

Why are long-term bonds more risky than short-term bonds?

The process of calculating what dollars received in the future are worth today is called

Why may a bond's rate of return differ from its yield to maturity?

In which of the following situations would you prefer to be borrowing?

Bonds with a maturity that is longer than the holding period have no interest-rate risk.

How is a bond's current yield calculated? Why is current yield a more accurate approximation of yield to maturity for a long-term bond than for a short-term bond?

If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding?

What is interest-rate risk and how is it measured?

The interest rate that equates the present value of the cash flow received from a debt instrument with its market price today is the

Distinguish between coupon rate, yield to maturity, and current yield.

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 one year later?

The return on a 10 percent coupon bond that initially sells for $1,000 and sells for $900 one year later is

With an interest rate of 10 percent, the present value of a security that pays $1,100 next year and $1,460 four years from now is approximately

If you expect the inflation rate to be 5 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is

A consol bond is a bond that

If a $5,000 face value discount bond maturing in one year is selling for $5,000, then its yield to maturity is

For simple loans, the simple interest rate is ________ the yield to maturity.

Describe how Treasury Inflation Protection Securities (TIPS)work and how they help policymakers estimate expected inflation.