Chapter 7 Interest Rates and Bond Valuation

Loan amount received = $15,000(1 − .03)
Loan amount received = $14,550

Loan repayment amount = $15,000(1.067)
Loan repayment amount = $16,005

$16,005 = $14,550(1 + r)1
r = .1000, or 10.00%
191) D
GPPV = $10,000/(.06 − .04)
GPPV = $500,000
192) A
GPPV4 = $10,000/(.07 − .03)
GPPV4 = $250,000

PV = $250,000/1.074
PV = $190,724

Student name:
1) An investment had a nominal return of 11.8 percent last year. The inflation rate was 4.6
percent. What was the real return on the investment?
1)


A) 16.94%
B) 6.44%
C) 11.69%
D) 6.88%
E) 7.65%

,Question Details
AACSB : Analytical Thinking
Topic : Fisher effect
Difficulty : 1 Basic
Section : 7.6 Inflation and Interest Rates
Learning Objective : 07-04 Outline the impact of inflation on interest rates.
Bloom's : Understand
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible




2) An investment had a nominal return of 11.5 percent last year. If the real return on the
investment was only 8.1 percent, what was the inflation rate for the year?
2)


A) 3.49%
B) 3.15%
C) 3.05%
D) 20.53%
E) 11.79%



Question Details
AACSB : Analytical Thinking
Topic : Fisher effect
Difficulty : 1 Basic
Section : 7.6 Inflation and Interest Rates
Learning Objective : 07-04 Outline the impact of inflation on interest rates.
Bloom's : Understand
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible




3) The inflation rate over the past year was 2.8 percent. If an investment had a real return of
6.5 percent, what was the nominal return on the investment?
3)

, A) 10.01%
B) 3.47%
C) 10.54%
D) 9.48%
E) 3.60%



Question Details
AACSB : Analytical Thinking
Topic : Fisher effect
Difficulty : 1 Basic
Section : 7.6 Inflation and Interest Rates
Learning Objective : 07-04 Outline the impact of inflation on interest rates.
Bloom's : Understand
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible




4) A bond that pays interest annually yields a rate of return of 5.25 percent. The inflation
rate for the same period is 2 percent. What is the real rate of return on this bond?
4)


A) 7.25%
B) 2.63%
C) 1.03%
D) 2.00%
E) 3.19%



Question Details
AACSB : Analytical Thinking
Topic : Fisher effect
Difficulty : 1 Basic
Section : 7.6 Inflation and Interest Rates
Learning Objective : 07-04 Outline the impact of inflation on interest rates.
Bloom's : Understand
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible

, 5) Wine and Roses, Incorporated, offers a bond with a coupon of 8.5 percent with
semiannual payments and a yield to maturity of 9.20 percent. The bonds mature in 6 years. What
is the market price of a $1,000 face value bond?
5)


A) $1,385.33
B) $1,353.60
C) $1,019.94
D) $1,582.93
E) $968.27



Question Details
AACSB : Analytical Thinking
Difficulty : 1 Basic
Topic : Bond valuation
Learning Objective : 07-02 Explain bond values and yields and why they fluctuate.
Learning Objective : 07-04 Outline the impact of inflation on interest rates.
Bloom's : Understand
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible




6) Gugenheim, Incorporated, has a bond outstanding with a coupon rate of 5.8 percent and
annual payments. The yield to maturity is 7 percent and the bond matures in 14 years. What is
the market price if the bond has a par value of $2,000?
6)


A) $1,825.91
B) $1,795.22
C) $1,790.11
D) $1,792.86
E) $1,788.00