The yield to maturity on a new one-year discount bond equals ( F V- P )/ P . ( D
ID: 1169485 • Letter: T
Question
The yield to maturity on a new one-year discount bond equals
(F V- P)/P.
(D - FV)/P.
(FV - P)/FV.
(P - FV)/FV.
What is the price of a coupon bond that has annual coupon payments of $75, a par value of $1000, a yield to maturity of 5%, and a maturity of two years?
$1043.08
$1046.49
$1000.00
$1150.00
A capital gain occurs when the
coupon rate increases.
current yield increases.
price of an asset increases.
yield to maturity increases.
The bid price for a bond is
the minimum price that you are allowed to bid for a bond that is being auctioned by the government.
the maximum price that you are allowed to bid for a bond that is being auctioned by the government.
the price that you will receive from a securities dealer if you sell the bond.
the price that you must pay a securities dealer to purchase a bond.
Someone offers you the following deal. They will pay you $5000 in two years if you agree to pay them $4500 today. If you accept the deal, what is your rate of return?
0.0731
0.0541
0.1111
0.0342
Suppose the present value of $524 paid at the end of one year is $495. What is the one-year discount rate?
0.0553
0.0586
0.0943
0.2525
0.1437
Assume the future value of $550 paid at the end of one year is $675. What is the growth factor?
1.9385
0.8148
1.2273
0.7321
1.3486
Why may investors buy a Treasury bill with a negative real interest rate?
concern about high yields on other bonds
concern about the high default risk of alternative investments
fear of default by the US government
fear of rising inflation
Which type of bond would you purchase if you expected higher rates of inflation during the life of the bond?
Treasury bond
corporate bond
TIPS
municipal bond
Assume the present value of $262 paid at the end of one year is $195. What is the one year discount factor?
0.7443
0.5729
0.3436
0.9456
1.3436
(F V- P)/P.
(D - FV)/P.
(FV - P)/FV.
(P - FV)/FV.
Explanation / Answer
(1) Option 1.
YTM = (Face value - Price) / Price
(2) Option 2
YTM = [C + (F - P)/N] / (F + P) / 2
0.05 = [75 + (1000 - P)/2] / (1000 + P)/2
50 + 0.05P = 2 x [75 + 500 - 0.5P] = 1150 - P
1.05P = 1100
P = 1048
(The slight difference in result is because we used the approximation method here]
(3) Option 3.
A price gain is called capital gains.
(4) Option 1
Discount rate = 495 / 524 - 1 = 0.0553
(5) Option 3
Growth factor = 675 / 550
(6) Option 2
T-Bills are good investments because they are assumed default free.
(7) Option 3
Treasury Inflation Protected Securities (TIPS) are inflation adjusted securities.
(8) Option
Discount factor = 195 / 262 = 0.7443
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