Chapter 4

Question 1

a dollar paid to you one year from now is less valuable than a dollar paid to you today.
Why? A dollar received today can be deposited in a savings account that earns interest, and in one year you will have more than a dollar.

Answer 1

Present Value

Question 2

owner is paid a fixed interest payment (coupon payment) every year until maturity when a specified final amount (face value or par value) is paid. The bond is identified by a) its face value, b) the corporation or government agency that issued it, c) maturity date, and d) coupon rate- the dollar amount of the yearly coupon payment as a percentage of the face value. (EX. U.S. Treasury bonds and notes and corporate bonds)

Answer 2

Coupon bond

Question 3

bought at a price below the face value (discount) and the face value is paid at maturity. There are no interest payments. (EX. U.S. Treasury bills, US savings bond, and long term coupon-bond)

Answer 3

Discount bond

Question 4

What is the difference between discount bond and a coupon bond?

Answer 4

discount bonds generate returns through capital appreciation, as the bond is purchased at a discount and redeemed at face value at maturity, while coupon bonds generate returns through periodic interest payments.

Question 5

For simple loans, the simple interest rate equals the yield to maturity
Yield to maturity is inversely (or negatively) related to the current bond price. So:
If the current bond price increases, the yield to maturity decreases.
If the interest rate rises, the current price of the bond falls.

Answer 5

Yield to maturity

Question 6

The stated interest rate, without considering inflation.

Answer 6

Nominal interest rate

Question 7

The interest rate adjusted for expected changes in the price level (inflation); it is a more accurate reflection of the true cost of borrowing.

Answer 7

Real interest rate