7

The two-year interest rate is 10% and the expected annual inflation rate is 5%.

a.What is the expected real interest rate?(Do not round intermediate calculations.Enter your answer as a percent rounded to 2 decimal places.)

Expected real interest rate%

b-1.If the expected rate of inflation suddenly rises to 7%, what does Fisher's theory say about how the real interest rate will change?

Real rate does not changeReal rate increasesReal rate decreases

b-2.If the expected rate of inflation suddenly rises to 7%, what will be the new nominal rate?(Do not round intermediate calculations.Enter your answer as a percent rounded to 2 decimal places.)

Nominal rate%

8

A 10-year U.S. Treasury bond with a face value of $1,000 pays a coupon of 5.5% (2.75% of face value every six months). The reported yield to maturity is 5.2% (a six-month discount rate of 5.2/2 = 2.6%).(Do not round intermediate calculations.Round your answers to 2 decimal places.)

a.What is the present value of the bond?

Present value$

b.If the yield to maturity changes to 1%, what will be the present value?

Present value$

c.If the yield to maturity changes to 8%, what will be the present value?

Present value$

d.If the yield to maturity changes to 15%, what will be the present value?

Present value$

9.

A bond's credit rating provides a guide to its price. Assume Aaa bonds yield 3.4% and Baa bonds yield 4.4%. Assume a 10% five-year bond with annual coupons and a face value of $1,000.(Do not round intermediate calculations. Round your answers to 2 decimal places.)

a.What is the bond's price if it is rated as Aaa?

Bond price$

b.What is the bond's price if it is rated as Baa?

Bond price$

10.

In February 2015 Treasury 4 3/8s of 2040 offered a semiannually compounded yield to maturity of 2.88%. Recognizing that coupons are paid semiannually, calculate the bond's price. Assume face value is $1,000.(Do not round intermediate calculations. Round your answer to 2 decimal places.)

Bond price$

11.

a.The ten-year bond yields 5.1% and has a coupon of 7.1%. If this yield to maturity remains unchanged, what will be its price one year hence? Assume annual coupon payments and a face value of $100.(Do not round intermediate calculations. Round your answer to 2 decimal places.)

Price$

b.What is the total return to an investor who held the bond over this year?(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Total return%

12.

A 21-year U.S. Treasury bond with a face value of $1,000 pays a coupon of 5.75% (2.875% of face value every six months). The reported yield to maturity is 5.4% (a six-month discount rate of 5.4/2 = 2.7%).(Do not round intermediate calculations.Round your answers to 2 decimal places.)

a.What is the present value of the bond?

Present value$

b.If the yield to maturity changes to 1%, what will be the present value?

Present value$

c.If the yield to maturity changes to 8%, what will be the present value?

Present value$

d.If the yield to maturity changes to 15%, what will be the present value?

Present value$

13

A bond's credit rating provides a guide to its price. Assume Aaa bonds yield 3.9% and Baa bonds yield 4.9%. Assume a 10% five-year bond with annual coupons and a face value of $1,000.(Do not round intermediate calculations. Round your answers to 2 decimal places.)

a.What is the bond's price if it is rated as Aaa?

Bond price$

b.What is the bond's price if it is rated as Baa?

Bond price$