The consumer price index is increasing. The price of gold is also increasing and the Federal Reserve is looking to raise rates in the next 3 months. The current Yield curve shows the one-year note yielding 2%, the five-year note yielding 3% and the thirty-year bond yielding 5%. What bond should you invest in? a. 30-year bond which has the highest yield and interest rates are falling b. 5-year note because you have no idea it rates are going up or down c. 1-year note so you can invest in higher rates in the future d. not enough info e. none of the above

The consumer price index is increasing. The price of gold is also increasing and the Federal Reserve is looking to raise rates in the next 3 months. The current Yield curve shows the one-year note yielding 2%, the five-year note yielding 3% and the thirty-year bond yielding 5%. What bond should you invest in? a. 30-year bond which has the highest yield and interest rates are falling b. 5-year note because you have no idea it rates are going up or down c. 1-year note so you can invest in higher rates in the future d. not enough info e. none of the above

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 11P

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With interest rates on the rise, many Americans are wondering what theirinvestment strategy should be. A safe (i.e., a virtually risk-free) and increasingly popular way to keep pace with the cost of living is to purchase inflation-indexed government bonds. These so-called I-bonds pay competitive interest rates and increase in value when the CPI rises. These bonds can be held for up to 30 years. Suppose you purchased an I-bond for $10,000 and held it for 11 years, at which time you received $20,000 for the bond. Inflation has averaged 3% per year during this 11-year period. What real annual rate of return did you earn on your inflation-adjusted I-bond? Is it really competitive?
You own a bond that has a duration of 6 years. Interest rates are currently 7%, but you believe the Fed is about to increase interest rates by 25 basis points. Your predicted price change on this bond is ________.
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A twenty-year government bond with a face value of 120$ makes annual coupon payments of 1% and offers a yield of 8% annually compounded.Suppose that one year later the bond yields at 5%.a) Is it good or bad news for bondholders? b) What return has bondholders earned over the 12-month period? Instead, suppose now that one year later the bond yields at 5.5%.c) Is it good or bad news for bondholders?d) What return has bondholders earned over the 12-month period?
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Williams Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 6.5%, payable annually, and a par value of $1,000. The 1-year interest rate is 6.5%. Next year, there is a 35% probability that interest rates will increase to 8% and a 65% probability that they will fall to 5%. If the company decides instead to make the bonds callable in one year, what coupon will be demanded by the bondholders for the bonds to sell at par? Assume that the bonds will be called if interest rates fall and that the call premium is equal to the annual coupon.
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