HW_4_Questions_Chapters_3_4_5[1]

# HW_4_Questions_Chapters_3_4_5[1] - Homework 4 Questions...

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Homework 4 Questions Chapter 3 1. If there is a decline in interest rates, which would you rather be holding, long-term or shot-term bonds? Why? Which type of bond has the greater interest rate risk? 2. A financial adviser has just given you the following advice: “Long-term bonds are a great investment because their interest rate is over 20%.” Is the financial adviser necessarily right? 3. Consider a bond with a 7% annual coupon and a face value of \$1,000. Complete the following table: Years to Maturity Discount Rate Current Price 3 5 3 7 6 7 9 7 9 9 4. Assume you just deposited \$1,000 into a bank account. The current real interest rate is 2% and inflation is expected to be 6% over the next year. What nominal interest rate would you require from the bank over the next year? How much money will you have at the end of one year? If you are saving to buy a stereo that currently sells for \$1,050, will you have enough to buy it? 5. A 10-year, 7% coupon bond with a face value of \$1,000 is currently selling for \$871.65. Compute your rate of return if you sell the bond next year for \$880.10.

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Chapter 4 1. What effect will a sudden increase in the volatility of gold prices have on interest rates? 2. How might a sudden increase in people’s expectations of future real estate prices affect interest rates? 3. Explain what effect a large federal deficit might have on interest rates? 4. Using a supply and demand analysis for bonds, show what the effect is on interest rates when the riskiness of bonds rises. 5. Will there be an effect on interest rates if brokerage commission on stocks falls? Explain. 6. The president of the US announces in a press conference that they will fight the higher inflation rate with a new anti-inflation program. Predict what will happen to interest rates? 7. The chairman of the Fed announces that interest rates will rise sharply next year
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HW_4_Questions_Chapters_3_4_5[1] - Homework 4 Questions...

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