CHAPTER Pick five Canada bonds from the bond page of the newspaper, and calculate the current yield Note when the current yield is a good approximation of the yield to maturity *10 You are offered two bonds, a one-year Canada bond with a yield to maturity of 9% and a one-year treasury bill with a yield on a discount basis of 8.9% Which would you rather own? 11 If mortgage rates rise from 5% to 10% but the expected rate of increase in housing prices rises from 2% to 9%, are people more or less likely to buy houses? *12 Interest rates were lower in the mid-1980s than they were in the late 1970s, yet many economists have commented that real interest rates were actually much higher in the mid-1980s than in the late 1970s Does this make sense? Do you think that these economists are right? 13 You borrowed $1000 on January and must repay a total amount of $1060 exactly a year later a What is the interest paid? b What is the interest rate? *14 Consider a perpetuity that has a coupon of $100 per year a What is the price of the perpetuity if the yield to maturity is 5%? b If the yield to maturity doubles, what will happen to the price? *15 Suppose that the interest rate is 5% Which of the following statements are true and which are false? a $57 today is equivalent to $61 one year from now Understanding Interest Rates 81 b $5000 today is equivalent to $5250 one year from now c $37.80 one year from now is equivalent to $36 today CANSIM Questions 16 Get the quarterly data from 1953 to 2009 on the three-month T-bill rate (CANSIM series V122541) and the total consumer price index (series V41690973) from the Textbook Resources area of the MyEconLab a Calculate the (actual) annual inflation rate, using the formula pt * + 100 + (Pt ,1 - Pt ) /Pt b Plot the nominal interest rate, it, and the inflation rate, pt c Assume that the expected inflation rate is the same as the actual inflation rate (a restrictive assumption!) and calculate the real interest rate, ir d Plot the nominal and real interest rates on a graph e What is the relationship between the nominal interest rate, i, and the real interest rate, ir, over this period? 17 Get the monthly data from 1991 to 2009 for the interest rate on long-term Canada Real Return Bonds (CANSIM series V122553) from the Textbook Resources area of the MyEconLab a Plot this real interest rate, ir b Has the real interest rate been rising or falling over the sample period? c What is the mean real interest rate over the sample period? What is its standard deviation (the standard deviation is the square root of the variance)? WEB EXERCISES Investigate the data on interest rates available from the Bank of Canada at www.bankofcanada.ca Answer the following questions a What is the difference in the interest rates on 10year and 2-year bonds? b What is the difference in the interest rate on long-term government of Canada bonds and Real Return Bonds? c What is the difference in the interest rate on long-term Government of Canada bonds and corporate bonds? Figure 4-1 (page 78) shows the estimated real and nominal rates for three-month U.S treasury bills Go to www.martincapital.com/main/charts.html and click on the relevant link under Charts of Interest Rates and Yields a Compare the three-month real rate to the longterm real rate Which is greater? b Compare the short-term nominal rate to the longterm nominal rate Which appears most volatile? Be sure to visit the MyEconLab website at www.myeconlab.com.This online homework and tutorial system puts you in control of your own learning with study and practice tools directly correlated to this chapter content On the MyEconLab website you will find the following appendix and mini-case for this chapter: Appendix 4.1: Measuring Interest Rate Risk: Duration Mini-Case 4.1: Interest Rates, BondYields, and Duration