FIN 4313 Chapter Notes - Chapter 5: Nominal Yield, Interest Rate Risk, Reinvestment Risk

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erinlouse51

1 Oct 2018

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Chapter 5: bond prices and interest rate risk. The time value of money: time value of money- a dollar today is worth more than a dollar received at some future date. Bond price formula: pb= c/(cid:894)(cid:1005)+i(cid:895)^(cid:1005) + c/(cid:894)(cid:1005)+i(cid:895)^(cid:1006) + . + c+f/(cid:894)(cid:1005)+i(cid:895)^(cid:374: discount bond= ytm > coupon, par bond= ytm = coupon, premium bond= ytm < coupon. Find the pv first, then use it to find i/y. Important bond pricing relationships: as the yt(cid:373) rises, a (cid:271)o(cid:374)d"s (cid:373)arket pri(cid:272)e de(cid:272)li(cid:374)es. Chapter 5: bond prices and interest rate risk: as the yt(cid:373) de(cid:272)li(cid:374)es, a (cid:271)o(cid:374)d"s (cid:373)arket pri(cid:272)e rises, bond price volatility- percent change in bond prices for a given change in interest rates. Market interest rates are inversely related to bond prices. Interest rate risk- the risk related to (cid:272)ha(cid:374)ges i(cid:374) i(cid:374)terest rates that (cid:272)ause a (cid:271)o(cid:374)d"s total return to differ from the promised yield or yield-to-maturity.

Related Questions

Calculate the following Time Value of Money problems a) If I am to receive $10,000 in 5 years and given a 5% rate of return, what would be present value of this amount b) If I put $7,000 in the bank at 3% interest for 10 years , what is the future value of that amount c) If I deposit $1,000 a year into an account for 10 years at 2%, what is the future Value of that account d) what is the present value of $1,000 a year deposited for 10 years at 4% interest. ---these questions were answered.

a. Present value of this amount = 10,000/1.05⁵ = 7,835.26

b. future value of the amount = 7,000 * 1.03¹⁰ = 9,407.41

c. N = 10, PV = 0, rate = 2%, PMT = 1000

use FV function in Excel

Future value = 10,949.72

d. PMT = 1000, FV = 0, rate = 4%, N = 10

use PV function in Excel

present value = 8,110.90

A maximum of 4 subsections can be answered, please raise new request for more answers

I need help with the questions below:

1. Please explain what is a callable bond .

2. Why would a firm call a bond and what are the major risks of conducting business outside of your domestic environment.

3. Why would you consider conducting business internationally

4. What are the major risks of conducting business outisde of your domestic environment

QUESTION 1 The time value of money refers to the issue of: A. what the value of the stream of future cash flows is today. B. why a dollar received tomorrow is worth more than a dollar received today. C. what the time required to double an amount of money. D. why people prefer to consume things at some time in the future rather than today.

QUESTION 2 The process of converting an amount given at the present time into a future value is called: A. annualizing. B. discounting. C. compounding. D. capital budgeting. 2 points

QUESTION 3 Juan Vinson is planning to buy a house in five years. He is looking to invest $25,000 today in an index mutual fund that will provide him a return of 12 percent annually. How much will he have at the end of five years? (Round to the nearest dollar.) A. $45,000 B. $28,000 C. $44,059 D. $28,530 2 points

QUESTION 4 Which of the following statements is true with respect to the present value of a future amount? A. The higher the discount rate, the higher the present value of a single sum for a given time period. B. The relation between present value and time is exponential. C. The greater the time period, the higher the present value of a single sum for a given interest rate. D. The lower the discount rate, the lower the present value of a single sum for a given time period. 2 points

QUESTION 5 Which of the following statements is true of the rule of 72? A. It can be used to determine the amount of time it takes to double an investment. B. It is fairly accurate for interest rates between 25 and 50 percent. C. It states that the time to double your money (TDM) approximately equals 72/i, where i represents the years it takes to double your investment. D. It can be used to estimate approximate compound interest earned for a period of 72 days. 2 points

QUESTION 6 The present value of future cash flows are computed by multiplying future value with the: A. discounting factor. B. compound factor. C. interest rate. D. number of periods. 2 points

QUESTION 7 The present value of multiple cash flows is: A. greater than the sum of the cash flows. B. equal to the sum of all the cash flows. C. less than the sum of the cash flows. D. higher or lower than the cash flows depending on the interest rate. 2 points

QUESTION 8 Cash flows associated with annuities are considered to be: A. an uneven cash flow stream. B. a constant cash flow stream. C. a mix of constant and uneven cash flow streams. D. a cash flow stream with decreasing trend. 2 points

QUESTION 9 The annuity transformation method is used to transform: A. a present value annuity to a future value annuity. B. a present value annuity to an annuity due. C. an ordinary annuity to an annuity due. D. a perpetuity to an annuity. 2 points

QUESTION 10 The true cost of borrowing is the: A. annual percentage rate. B. effective annual rate. C. quoted interest rate. D. periodic rate.

The yield to maturity on a bond is __________________ .

	a.	below the coupon rate when the bond sells at a discount, and above the coupon rate when the bond sells at a premium.
	b.	the discount rate that will set the present value of the future cash payments of interest and principal equal to the bond price.
	c.	based on the assumption that any payments received are reinvested at the coupon rate.
	d.	none of the above.

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FIN 4313 Chapter Notes - Chapter 5: Nominal Yield, Interest Rate Risk, Reinvestment Risk

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