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118.
An investment offers a 10.5 percent total return over the coming year. Sam
Bernanke thinks the total real return on this investment will be only 6.2
percent. What does Sam believe the inflation rate will be for the next year?
119.
Bond S is a 4 percent coupon bond. Bond T is a 10 percent coupon bond.
Both bonds have 11 years to maturity, make semiannual payments, and
have a yield-to-maturity of 7 percent. If interest rates suddenly rise by 2
percent, what will the percentage change in the price of Bond T be?
120.
Technical Sales, Inc. has 6.6 percent coupon bonds on the market with 9
years left to maturity. The bonds make semiannual payments and currently
sell for 92.5 percent of par. What is the effective annual yield?
121.
Bonner Metals wants to issue new 18-year bonds for some much-needed
expansion projects. The company currently has 11 percent bonds on the
market that sell for $1,459.51, make semiannual payments, and mature in
18 years. What should the coupon rate be on the new bonds if the firm
wants to sell them at par?
122.
You purchase a bond with an invoice price of $1,460. The bond has a
coupon rate of 7.5 percent, and there are 3 months to the next semiannual
coupon date. What is the clean price of this bond?
123.
Suppose the following bond quote for the Beta Company appears in the
financial page of today's newspaper. Assume the bond has a face value of
$1,000 and the current date is April 15, 2009. What is the yield to maturity
on this bond?
124.
You want to have $1.04 million in real dollars in an account when you retire
in 38 years. The nominal return on your investment is 8 percent and the
inflation rate is 3.5 percent. What is the real amount you must deposit each
year to achieve your goal?
125.
The yield-to-maturity on a bond is the interest rate you earn on your
investment if interest rates do not change. If you actually sell the bond
before it matures, your realized return is known as the holding period yield.
Suppose that today, you buy a 12 percent annual coupon bond for $1,000.
The bond has 13 years to maturity. Two years from now, the yield-to-
maturity has declined to 11 percent and you decide to sell. What is your
holding period yield?
Essay Questions
126.
Define liquidity risk, default risk, and taxability risk and explain how these
risks relate to bonds and bond yields.
127.
Inflation has remained low for the past three years but you have come to
the conclusion that trend is ending and inflation will increase significantly
over the next 18 months. Assume you have reached this conclusion prior to
other investors reaching the same conclusion. What adjustments should you
make to your bond portfolio in light of your conclusions?
128.
Explain the conditions that would need to exist for the Treasury yield curve
to be downward sloping.
129.
Describe the relationships that exist between the coupon rate, the yield to
maturity, and the current yield for both a discount bond and a premium
bond.
