PQTopicIII

PQTopicIII - face value and coupon payment , but a maturity...

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Practice Questions: Set 3. Introduction to Interest Rates Lecture Dates: Jan. 10 th i) Define yield to maturity . ii) Explain what yield to maturity is used for, and why it makes sense for this purpose. iii) Consider a bond with a face value of $5000, annual coupon payments of $50 and a ten year maturity . Suppose the price of this bond is $4500. a) How would you calculate yield to maturity (give the formula, but you don’t need to solve it)? Make sure you identify which variable in the formula is the yield to maturity . b) Suppose interest rates on newly issued bonds increased. What would happen to the price of this bond? Explain. c) Consider another bond, with exact the same
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Unformatted text preview: face value and coupon payment , but a maturity of 5 years. If interest rates on newly issued bonds increased, which bond price would be affected more: the 5 year bond, or the 10 year bond? Explain. iv) Consider a bond with a positive yield to maturity . If interest rates rise, this bond could give a negative rate of return . True or False. Explain. v) Explain the difference between a real and a nominal interest rate. Why do we need two different notions of the interest rate? vi) What is the yield curve ? vii) Explain the expectations theory of the yield curve . viii) Explain why the yield curve can be used as a forecaster of future recessions....
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