Financial Questions

1. Interpreting Bond Yields. Is the yield to maturity on a bond the same thing as the required return? Is YTM the same thing as the coupon rate? Suppose today a 10 percent coupon bond sells at par. Two years from now, the required return on the same bond is 8 percent. What is the coupon rate on the bond now? The YTM?

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2. Interpreting Bond Yields. Suppose you buy a 7 percent coupon, 20-year bond today when it’s first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond? Why?

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3. Bond Prices. Lycan, Inc., has 7 percent coupon bonds on the market that have 9 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 8 percent, what is the current bond price?

4. Bond Yields. The Timberlake-Jackson Wardrobe Co. has 7 percent coupon bonds on the market with nine years left to maturity. The bonds make annual payments. If the bond currently sells for $1,1038.50, what is its YTM?

5. Coupon Rates. Merton Enterprises has bonds on the market making annual payments, with 12 years to maturity, and selling for $963. At this price, the bonds yield 7.5 percent. What must the coupon rate be on Merton’s bonds?

6. Bond Prices. App Store Co. issued 20-year bonds one year ago at a coupon rate of 6.1 percent. The bonds make semiannual payments. If the YTM on these bonds is 5.3 percent, what is the current bond price?

7. Bond Yields. Night Hawk Co. issued 15-year bonds two years ago at a coupon rate of 6.9 percent. The bonds make semiannual payments. If these bonds currently sell for 94 percent of par value, what is the YTM?

8. Coupon Rates. Osbourne Corporation has bonds on the market with 10.5 years to maturity, a YTM of 8.4 percent, and a current price of $945. The bonds make semiannual payments. What must the coupon rate be on the bonds?

9. Calculating Real Rates of Return. If Treasury bills are currently paying 4.1 percent and the inflation rate is 1.6 percent, what is the approximate real rate of interest? The exact real rate?

10. Inflation and Nominal Returns. Suppose the real rate is 2.8 percent and the inflation rate is 3.4 percent. What rate would you expect to see on a Treasury bill?

11. Nominal and Real Returns. An investment offers a 14 percent total return over the coming year. Bill Bernanke thinks the total real return on this investment will be only 10 percent. What does Bill believe the inflation rate will be over the next year?

12. Nominal versus Real Returns. Say you own an asset that had a total return last year of 15 percent. If the inflation rate last year was 2.5 percent, what was your real return?

13. Using Treasury Quotes. Locate the Treasury issue in Figure 6.3 maturing in August 2029. What is its coupon rate? What is its bid price? What was the previous day’s asked price?