Frederic S. Mishkin
ISBN #9781292094182
11th Edition
614 Questions
Homework Questions
This section emphasizes the importance of present value theory in evaluating debt instruments and calculating yields. It details how to compute the yield to maturity by equating current asset prices with the present value of future cash flows across various instruments including simple loans, fixed-payment loans, coupon bonds, and discount bonds. The material also differentiates between nominal and real interest rates using the Fisher equation, highlighting how inflation impacts the true cost of borrowing and investment returns. A key insight is that bond prices and interest rates are inversely related, and wider fluctuations in returns are observed for instruments with longer maturities.
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CONCEPT
DEFINITION
Definition: The study of how equilibrium levels of output and inflation are determined by the interaction of aggregate demand (planned spending) and aggregate supply (the economy’s capacity).
The study of how equilibrium levels of output and inflation are determined by the interaction of aggregate demand (planned spending) and aggregate supply (the economy’s capacity). •
Would $\$ 175,$ to be received in exactly one year, be worth more to you today when the interest rate is $15 \%$ or when it is $20 \% ?$
Write down the formula that is used to calculate the yield to maturity on a twenty-year $12 \%$ coupon bond with a $\$ 1,000$ face value that sells for $\$ 2,500$.
To help pay for college, you have just taken out a $\$ 1,000$ government loan that makes you pay $\$ 126$ per year for 25 years. However, you don't have to start making these payments until you graduate from college two years from now. Why is the yield to maturity necessarily less than $12 \% ?$ (This is the yield to maturity on a normal $\$ 1,000$ fixed-payment loan on which you pay $\$ 126$ per year for 25 years.)
Do bondholders fare better when the yield to maturity increases or when it decreases? Why?
A financial adviser has just given you the following advice: "Long-term bonds are a great investment because their interest rate is over $20 \%$." Is the financial adviser necessarily right?