1. The expected inflation rate is 2%. What nominal interest rate is necessary to earn a real return of 1.2% on an investment?
2. a. The expected inflation rate is 2.9%. What is the nominal interest rate if the real rate of interest is 1%?
b. What is the realinterest rate if the nominalrate of interest is 6.1%?
3. You want to have $500,000 in today's (real) dollars when you retire in 40 years. The expected inflation rate is 2.8% and the nominal return on your investments is 6.9%. How much money do you have to save now if you can't make any additional deposits?
4. If the bond has a face value of $1,000, how much interest does it pay per year (in $)?
Issuer – Walmart
Symbol – WMT.IM
Callable – No
Coupon – 4.875
Maturity- 7/8/2040
Rating – Aa2
Price – 114.96
Yield – 3.8
5. You currently don't have a car, but rent a car that's parked just outside your house whenever you need one. Your annual expenditure on rental cars is $2,600. You've now considering purchasing a car that would give you the same level of convenience as your current life style. The car costs $23,000 and can be sold for $5,000 after 10 years. You'd purchase the car with money from your savings account which always earns an interest rate of 6%. Assume that all cash flows occur at the end of each year (maybe because you drive much more around Thanksgiving and Christmas). What is the present value of the benefits of owning that car, i.e., saving on rental expenses and selling the car?
6. What is the price of a risk-free zero-coupon bond with 3 years to maturity and a face value of $1,000 (in $)?
Maturity Years 1 2 3 4
Spot Rate (EAR) 2.2%. 2.8%. 3.8%. 4.5%
7. You just bought a 8-year zero-coupon bond with a face value of $1,000 and a yield to maturity of 2.9% (APR with semiannual compounding).What is the amount of interest you have to declare for tax purposes in the first year of owning the bond?
8. A corporate bond has 21 years to maturity, a face value of $1,000, a coupon rate of 4.6% and pays interest semiannually. The annual market interest rate for similar bonds is 3.1%. What is the price of the bond?
9. What is the price of a Treasury note with 2 years to maturity, a $1,000 face value, and a coupon rate of 4.8%, paid semiannually (in $)?
Maturity Years 0.5 1 1.5 2
Spot Rate (EAR). 1.9%. 2.8%. 3.6%. 4.5%
10. By convention, the yield to maturity on a bond is _____.
a. expressed as a six-monthly rate
b. annualized as an effective annual rate (EAR)
c. annualized as an annual percentage rate (APR)
11. A bond has an annual coupon rate of 3.7%, a face value of $1,000, a price of $929.13, and matures in 10 years. What is the bond's YTM?