Homework 3 Chapter 8

1. Discuss and elaborate the decision of investing in bond market based on the forecast of interest rate. What will you do if you expect long-term interest rate to increase in the near future? When will you prefer to invest in if you expect that the spread between corporate and government bonds to widen?

2. A bond with a $1,000 par value has a 4 percent annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 3.5 percent. What should the current price be?

3. A bond with a 3 percent quarterly coupon rate has a yield to maturity of 4 percent. The bond has a par value of $1,000 and matures in 20 years. Based on this information, what is a fair price for this bond?

4. A zero-coupon bond with a par value of $2,000 matures in 9 years. At what price would this bond provide a yield to maturity that matches the current market rate of 3.25 percent?

5. What are the factors that affect the risk free rate?

6. What does duration measure? How is duration different from maturity of a bond?

Chapter 9

1. Please describe collateralized mortgage obligations.

2. Discuss the relationship between the life of the mortgage and the fixed term payment.

3. An increase in either the risk-free rate or the risk premium on a fixed-rate mortgage results in a higher required rate of return when investing in the mortgage and therefore causes mortgage prices to decrease.

a. True b. False 4. Strong economic growth tends to reduce the probability that the issuer of a mortgage will default on its debt payments and therefore tends to decrease mortgage prices.

a. True b. False 5. Borrowers who have a lower level of income relative to the periodic loan payments are more likely to default on their mortgages. a. True b. False