This material will be good practice for the upcoming quiz on interest
rates. Do them, and we will go over them in class.
1. Suppose a two year instrument yields 6.2 percent annually to maturity,
while a one year instrument yields 4.55 percent annually. The implicit forward
rate for a one year instrument beginning one years from today is _______.
2. Suppose a three year instrument yields 6.5 percent annually to maturity,
while a one year instrument yields 4.0 percent annually. The implicit forward
rate for a two year instrument beginning one years from today is _______.
3. Suppose a seven year instrument yields 7.2 percent annually to maturity,
while a three year instrument yields 6.05 percent annually. The implicit
forward rate for a four year instrument beginning three years from today
is _______.
4. Suppose a 30 year instrument yields 7.8 percent annually to maturity,
while a 20 year instrument yields 7.35 percent annually. The implicit forward
rate for a ten year instrument beginning 20 years from today is _______.
5. Suppose a 17 year instrument yields 7.2 percent annually to maturity,
while a 10 year instrument yields 7.2 percent annually. The implicit forward
rate for a seven year instrument beginning 10 years from today is _______.
6. Over the past year, a corporate bond had a current yield of 7.5%. During
the year, its price fell to 95 from 102 percent of par. The total rate of
return for the bond was _______%.
7. With a discount rate of 10%, the present value of a security that pays
out $1,100 next year and $1,464 four years from now, and nothing else, is
_____.
8. From the Wall Street Journal; the discount yield quotation asked for
a Treasury bill with 123 days until maturity is 4.55 percent. The bid quote
for the same bill is 4.65 percent. If you buy $1,000,000 in face value of
the bill, the price you will pay is _________.
8a. If you do buy the bill above, the annualized rate of return (yield to
maturity) is ________.
8b. If a $1,000,000 face bill with 44 days to maturity can be bought for
$992,000, what is the asked discount yield?
8.1. The discount yield quotation asked for GE commercial paper with 33
days until maturity is 6.55 percent. The bid quote for the same bill is
6.65 percent. If you buy $8,000,000 in face value of the paper, the price
you will pay is _________.
8.1a. If you do buy the paper above, the annualized rate of return (yield
to maturity) is ________.
8.1b. If you sell the paper above, what amount of discount will be "knocked
off" the value of your paper by the dealer?
8.2. A 90 day T-bill has a yield to maturity, based on the asked yield,
of 5.74%. What is the asked discount yield?
9. The current yield on a $1,000 8% coupon bond selling for $1,150 is _____.
10. What is the total rate of return on a 5% $1,000 face-value coupon bond
that initially sells for $1,000 and sells for $1,200 next year? ________.
11. Why is the bid discount yield on a money market instrument greater than
the asked discount yield?
12. If all interest rates rise by one percentage point, rank the
following by decline in price (most first....least last).
a. 30 year zero coupon bond
b. 30 year 4% coupon bond
c. 30 year 12% coupon bond
d. 8% consol (non-maturing bond)
13. If an 8% coupon $1,000 face value bond is priced at $1,200, and the
inflation rate is expected to be 3 and 2/3 percent per year, the real current
yield on the bond is ________.
14. Which is greater (for money market instruments), the asked discount
yield, bid discount yield, or yield to maturity?
15. What are two reasons for (14.)?
16. Choose the best:
a. a 6% coupon 10 year Treasury note selling at 98:12.
b. a 10 year zero coupon Treasury strip selling at 98:12
c. a 10 year $100,000 face value IBM bond that pays $3,000 every six months,
selling for $98,375?
17. A Canadian Pacific consol is available for $5,882. It has a coupon of
$500 per year. What is its yield to maturity?
18. A Consolidated Coal consol is available that yields 9.0% to maturity.
It has a coupon of $500 per year. What is its price (present value)?
19. Your neighbor wishes to borrow $2,400 for a year from you. Next year,
she will repay the loan by giving you $200 a month for a year. Explain to
her why you will not lend her the money.
20. Do the exercises at the end of the chapter, on page 90-91