Exam 4: Understanding Interest Rates

If a perpetuity has a price of $500 and an annual interest payment of $25,the interest rate is ________.

The ________ interest rate more accurately reflects the true cost of borrowing.

If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent,then the real interest rate on this bond is ________.

A friend tells you that he can purchase a 10 percent coupon bond at face value.Your friend states that 10 percent is a "high" rate of interest.You know that the current rate of inflation is 8 percent,and you expect inflation to increase.What advice should you give to your friend about this bond?

An equal decrease in all bond interest rates ________.

The interest rate that describes how well a lender has done in real terms after the fact is called the ________.

The ________ is defined as the payments to the owner plus the change in a security's value expressed as a fraction of the security's purchase price.

The Fisher equation states that ________.

The yield to maturity for a discount bond is ________ related to the current bond price.

If the interest rate on a Real Return Bond is 2 percent and the interest rate on a Canada bond of similar maturity is 5 percent then the expected rate of inflation is equal to ________.

If the nominal rate of interest is 2 percent,and the expected inflation rate is -10 percent,the real rate of interest is ________.

Prices and returns for ________ bonds are more volatile than those for ________ bonds.

Explain the Fisher equation.Construct a numerical example demonstrating that,depending on the expected rate of inflation,a lower nominal rate may still reflect a higher real cost of borrowing.Explain your example thoroughly.

In a country where prices never change,the nominal interest rate is equal to the ________.

Duration is ________.

Assuming the same coupon rate and maturity length,the difference between the yield on a Real Return Bond and the yield on a Canada bond provides insight into ________.

The nominal interest rate minus the expected rate of inflation ________.

If $22,050 is the amount payable in two years for a $20,000 simple loan made today,the interest rate is ________.

A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a ________.

The duration of a coupon bond increases ________.