Question

​Source: Tommy Stubbington and Ben​ Edwards,

open double quote“U.K.

to Repay First World War

​Bonds,close double quote”

Wall Street

Journal​,

October​ 31, 2014.

A few years ago the British government was considering​ retiring, or buying back from​ investors, some outstanding consols that had annual coupons of

pound£3535.

A consol​ is:

A.

a coupon bond that pays a fixed coupon rate and does not mature.

B.

a coupon bond that pays a fixed coupon rate and has a fixed maturity date.

C.

a coupon bond that pays a variable coupon rate and does not mature.

D.

a coupon bond that pays a variable coupon and has a fixed maturity date.

If the yield to maturity on other​ long-term British government bonds was

2.52.5​%,

the price the British government is likely to offer investors is

​£nothing.

​(Enter your response to a nearest​ dollar.)

​[Related to the Making the Connection

LOADING...

​] A student looking at the timeline for a student loan on page 60 of the text makes the following​ observation:

The text states that the interest rate on the loan is​ 9%, but this calculation is obviously wrong. Each monthly payment is

$ 127$127​,

so the student will be paying back

$ 127 times 12 equals $ 1 comma 524$127×12=$1,524

per year.​ Therefore, because

the principal of the loan is

$ 10 comma 000$10,000​,

the interest rate must be

StartFraction $ 1 comma 524 Over $ 10 comma 000 EndFraction equals 0.1524 or 15.24 %$1,524$10,000=0.1524 or 15.24%.

The above student statement​ is:

A.

incorrect because the stated rate on the loan is​ 9% which means that even though the loan is made with monthly​ payments, the borrower is still effectively only charged​ 9% a year.

B.

correct because even though the stated interest rate is​ 9%, payments are made monthly which means it is compounded more times so the effective rate should work out to​ 15.24%

C.

incorrect because part of each payment is to principal and to interest.​ Therefore, only a portion of the payment goes to​ interest, so the full amount should not be included when computing the rate of interest paid.

D.correct because as the student​ states, there is a payment of

$ 1 comma 524$1,524

per year that works out to​ 15.24%.

Suppose that you just bought a​ four-year

​$1 comma 0001,000

coupon bond with a coupon rate of

5.25.2​%

when the market interest rate is

5.25.2​%.

One year​ later, the market interest rate falls to

3.23.2​%.

The rate of return earned on the bond during the year was

nothing​%.

​(Round your response to two decimal​ places.)

Answer 1