Question

Nominal interest rate represents the growth factor of purchasing power.

True

False

As the maturity of the loan increases, the interest rate quoted on that loan increases because of the increase in maturity premium.

True

False

Which of the following is correct for the company's bond price when the default risk of that company increases (when the future prospect of the company becomes poor)?

		YTM increases therefore the price of the bond increases
		YTM decreases therefore the price of the bond decreases
		YTM decreases therefore the price of the bond increases
		YTM increases therefore the price of the bond decreases

Which of the following is correct for the relationship between bond prices and interest rates?

		Bond prices and interest rates are directly related. This means that when interest rates go up, the bond prices go up as well,
		Bond prices and interest rates are not related at all.
		Bond prices and interest rates are inversely related. This means that when interest rates go up, bond prices go down.
		None

Answer 1

1. The given statement is FALSE because real interest rate is always considered by investor for representing the growth factor of purchasing power as it accounts for inflation deduction.

2. The given statement is TRUE because when the maturity of the loan increase, the interest rate quoted on the loan increase because increase in maturity premium.

3. Yield to maturity of the bond will increase, the bond prices will decrease in case of the default rates going up for the bonds.

So, the correct answer is option (d)YTM increases therefore the price of the bond decreases.

4. There will always be an inverse relationship between bond prices and interest rates.

Correct answer is option ( C)Bond prices and interest rates are inversely related. This means that when interest rates go up, bond prices go down.