Rate of Return 1. If a bond has a current yield of 6% and a rate of return of 2%, it has a capital gain or loss. 2. If a bond has a 2% rate of return and a capital loss of 4%, its current yield is Real and Nominal Interest Rates 3. If the nominal interest rate is 4% and expected inflation is -4%, the real interest rate is ? 4. If the nominal interest rate is 6%, the expected rate of inflation is 4% and the actual rate of inflation is 6%, the ex post real interest rate is ?

Rate of Return 1. If a bond has a current yield of 6% and a rate of return of 2%, it has a capital gain or loss. 2. If a bond has a 2% rate of return and a capital loss of 4%, its current yield is Real and Nominal Interest Rates 3. If the nominal interest rate is 4% and expected inflation is -4%, the real interest rate is ? 4. If the nominal interest rate is 6%, the expected rate of inflation is 4% and the actual rate of inflation is 6%, the ex post real interest rate is ?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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If interest rates fall after a bond issue, the bond’s price will _____. This change will be more noticeable for _________ bonds. a. decrease ... long-term b. increase ... short-term c. decrease ... short-term d. increase ... long-term
3. Suppose you are looking to buy a bond that promises to pay $600,000 on the date of maturity in one year. A. If you bid for the bond and wind up paying a price of $590,000, solve for the interest rate on this bond. Round your answer to four decimal places. b. If on the next day, you bid for the bond and pay a price of $575,000, solve for the interest rate on the bond now. Round your answer to four decimal places. C. What is the relationship between the bond price and the interest rate on the bond?
1. A security promises a future cash flow of exactly $4,200 in 5 years and $1,001 in 6 years. If the interest rate is 5%, then what is the present value of this security? 2.There are decreasing opportunities for businesses to make profitable investments. In the market for bonds we expect that the equilibrium price will and the equilibrium interest rate will
The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, and two years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of £)as a function of the price of the bond is S = 2P + 400. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantity demanded/supplied at this interest rate? What happens to the demand/supply of the bond as the interest rate increases? Explain why. c) What is the equilibrium interest rate? d) Suppose that the bond trades at premium. Is there excess demand or supply? Explain. e) There is a business cycle contraction, so both supply and demand shifts. After the shift, the new demand curve is given by: D = 4000 + X − 2P , whereas the new supply curve is S = 2P + 200. For which values of X will the interest increase/decrease? Which values of X are in line with empirical data?
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Which of the following is a true statement? a. In a bubble, the price of the asset is the expected present value of its future returns. b. The overall real value of the stock market may fluctuate significantly over a year. c. The higher the one-year interest rate, the higher the present discounted value of a payment next year. d. The yield curve normally slopes down.