Exam 6: Financial Concepts and Interest Rates

The Pine family borrows $1500 for a year at an 11 percent simple interest rate but the loan is to be repaid in 12 equal monthly installments. What is the loan's APR? Please check the APR table at the back of this book and try to confirm your estimate of the loan's true APR.

In your opinion are the coupon rate and the current yield good measures of the rate of return on a bond or other financial instrument? Why or why not?

When a bank customer borrows, the bank gives her the APR. When she deposits funds, she is given the APY.

Interest rates are often called the most important "price" within the financial system. Why do you think this is so?

The principal value of money invested at compound interest equals the sum of the principal plus all accumulated interest over the life of the investment divided by the compounding factor.

The information provided in Price Quotations on Corporate Bonds includes

The annualized holding period yield (h) is simply the rate of discount equalizing the market price of the debt security worth all annual payments between the time the asset was purchased and the time it is sold.

For a debt security that pays interest semiannually the yield-to-maturity formula needs to be modified with both the figure for annual interest income and the yield multiplied by 2.

The interest rate is the price charged to a borrower for the loan of money.

Most consumers give primary weight to the quoted APR on a loan and only secondary weight to the size of loan installment payments in deciding how much, when and where to borrow.

When a U.S. Treasury note or corporate bond is purchased, the buyer is usually aware of

Home buyers pay more in principal than they do in interest over the life of their mortgage loan.

If the yield to maturity and coupon rate are the same, then the bond price will be equal to the par value of the bond.

Using the yield-approximation formula discussed in your text, determine the average annual yield on a bond whose current price is $800, par value is $1,000, coupon rate is 15 percent and whose term to maturity is 5 years. Your answer is (to the nearest percent):

Using descriptions below, identify each of the key terms or concepts that were discussed in the chapter entitled "Measuring and Calculating Interest Rates and Financial Asset Prices": a. Rate of return on a savings account that depository institutions must report to their customers. b. Earning interest on interest income. c. Interest rate attached to a consumer loan that U.S. laws stipulates, must be reported to the borrowing customer before he or she agrees to a loan. d. Interest is charged only for the period that loanable funds (credit) are actually available.

The current yield reflects the terminal (selling or redemption) price of a security.

Investment rate of return is also referred to as the coupon-equivalent or bond-equivalent.

The discount rate (DR) is always less than the investment rate (IR).

The ratio of the annual income (dividends or interest) generated by a security to its current market value is the:

The revenue stream associated with a bond normally consists of