1. A risk-free bond has a $200 face value in one year and the nominal interest...
1. A risk-free bond has a $200 face value in one year and the nominal interest rate is 7%. What is the price of the bond today?
2. A risk-free bond has a face value of $500 in one year, the price of the bond today is $472.
a. What is the rate of return (yield) on the bond?
b. If the expected rate of inflation is 2%, what is the real interest rate?
3. a. Show the supply and demand for a given bond and show what will probably happen if the bond’s credit rating is downgraded from AA to A.
b. What happens to the rate of return on the above bond?
4. For each of the following, say whether or not it is counted (directly) as part of GDP.
a. Ringo buys a used car.
b. Ringo washes his car.
c. Ringo takes his car to a carwash.
d. Ringo buys new tires for his used car.
e. Ford buys new tires for use in new cars.
Homework Answers
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1. A risk-free bond
has a $200 face value in one year and the nominal interest...
2. A risk-free bond has a face value of $500 in one year, the price of...
2. A risk-free bond has a face value of $500 in one year, the price of the bond today is $472. a. What is the rate of return (yield) on the bond? b. If the expected rate of inflation is 2%, what is the real interest rate? 3. a. Show the supply and demand for a given bond and show what will probably happen if the bond’s credit rating is downgraded from AA to A. b. What happens to the...
6. A one-year risk free bond with a face value of $500 has a price of...
6. A one-year risk free bond with a face value of $500 has a price of $470. The expected inflation rate is 2%. What is the real interest rate and what is the nominal interest rate?
A zero coupon bond has a face value of $1,000 and matures in 6 years. Investors...
A zero coupon bond has a face value of $1,000 and matures in 6 years. Investors require a(n) 7.2 % annual return on these bonds. What should be the selling price of the bond? If the nominal rate of interest is 12.21 % and the real rate of interest is 8.76 % what is the expected rate of inflation? A Ford Motor Co. coupon bond has a coupon rate of 6.75%, and pays annual coupons. The next coupon is due...
2. A government bond with face value $1,000 matures next year. This means that next year...
2. A government bond with face value $1,000 matures next year. This means that next year the government will send the bond holder a $1,000 cheque (the bond is not worth anything afterwards). If the interest rate is 2.8%, what is the bond’s market price today? Explain.
3) Consider a 5-year risk-free bond with annual coupons of 6% and a face value of...
3) Consider a 5-year risk-free bond with annual coupons of 6% and a face value of $1,000. a) If this bond is currently priced at $1,068.94, what is its yield to maturity? b) If the yield to maturity on this bond increased to 5.2%, what would be the new price?
Consider an eight-year, 11.5 percent annual coupon bond with a face value of $1,000. The bond...
Consider an eight-year, 11.5 percent annual coupon bond with a face value of $1,000. The bond is trading at a rate of 8.5 percent. a. What is the price of the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) Price of the bond $ b. If the rate of interest increases 1 percent, what will be the bond’s new price? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g.,...
Consider a(n) Five-year, 11 percent annual coupon bond with a face value of $1,000. The bond...
Consider a(n) Five-year, 11 percent annual coupon bond with a face value of $1,000. The bond is trading at a rate of 8 percent. a. What is the price of the bond? b. If the rate of interest increases 1 percent, what will be the bond’s new price? c. Using your answers to parts (a) and (b), what is the percentage change in the bond’s price as a result of the 1 percent increase in interest rates? (Negative value should...
Assume that the market risk-free interest rate is 12.00%. Assume that a zero-coupon risk free bond,...
Assume that the market risk-free interest rate is 12.00%. Assume that a zero-coupon risk free bond, with maturity 2 years and 100 face value, is trading at 75. Which of the following is true? (a) By lending today for two years at the market rate, and short-selling the bond, you have an arbitrage. (b) By borrowing today for two years at the market rate, and buying the bond, you have an arbitrage. (c) By buying the bond today and investing...
BOND VALUATION An investor has two bonds in his portfolio that have a face value of...
BOND VALUATION An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 12% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year. Assume that only one more interest payment is to be made on Bond S at its maturity and that 15 more payments are to be made on Bond L. What will the value of the Bond L be if the going interest rate is...
27) A risk-free, zero-coupon bond with a face value of $5000 has 20 years to maturity....
27) A risk-free, zero-coupon bond with a face value of $5000 has 20 years to maturity. If the YTM is 4.6%, which of the following would be closest to the price this bond will trade at? Interest is calculated annually. A) $2441 B) $2034 C) $3254 D) $2848
6. A one-year risk free bond with a face value of $500 has a price of $470. The expected inflation rate is 2%. What is the real interest rate and what is the nominal interest rate?
3) Consider a 5-year risk-free bond with annual coupons of 6% and a face value of $1,000. a) If this bond is currently priced at $1,068.94, what is its yield to maturity? b) If the yield to maturity on this bond increased to 5.2%, what would be the new price?
27) A risk-free, zero-coupon bond with a face value of $5000 has 20 years to maturity. If the YTM is 4.6%, which of the following would be closest to the price this bond will trade at? Interest is calculated annually. A) $2441 B) $2034 C) $3254 D) $2848
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