Chapter 4

Question 1

What is another name for a bond and interest rate?

Answer 1

Bonds are known as fixed income securities

The yield to maturity is a measure of the interest rate on the bond, although the interest rate is often not explicitly laid out. Will use terms interest rate and yield interchangeably

Question 2

How is the value of asset determined

Answer 2

The classical theory of asset prices is that the price of an asset is equal to the present discounted value of all future cashflows

The price of a bond (or any asset) is just the present discounted value of cashflows

Question 3

What is the key issue with asset pricing? Give a basic gist of how it is dealt with

Answer 3

Key issue in asset pricing: how do you determine which yield to use to discount cash flows and hence price an asset?

Basic gist: the riskier an asset, the higher the required return you demand to hold it, and therefore the more you discount future cashflows

Question 4

What is the most important way to calculate interest rates?

Answer 4

the most important is the yield to maturity
- It is the interest rate that equates the present value of all cash flow payments received from a debt instrument with its value today (the current price)

Question 5

Four Types of Credit Market Instruments

Answer 5

1. Simple Loan
   - One payment at the maturity date
2. Fixed Payment Loan
   - Multiple fixed payments at pre-specified dates
3. Coupon Bond
   - A bond that pays fixed amounts (the coupons) at fixed dates, plus a final payment (the face value) at maturity
4. Discount Bond
   - A bond that pays zero coupons, only a final payment at maturity

Question 6

When a coupon bond has the same price as the face value what does that indiciate?

Answer 6

When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate

Question 7

Slide 20

Question 8

What is the nominal interest rate?

Answer 8

The interest rate it is the dollar or nominal interest rate, because it determines the change over time in the nominal value of assets held as bonds.

Question 9

What is ante real interest rate and post real interest rate?

Answer 9

ante real interest rate is adjusted for expected changes in the price level

post real interest rate is adjusted for actual changes in the price level

Question 9

What is a real interest rate?

Answer 9

The interest rate it is the dollar or nominal interest rate, because it determines the change over time in the nominal value of assets held as bonds.

Question 10

Slide 40

Question 11

Slides 42-43
Indexed Bonds