Question

1. A discount bond with a $8,505 face value. If the current price of the bond is $8,100, then the yield to maturity equals:

   4.7% or 4.7% or 4.9% or 5.0%

2. Coronavirus (COVID-19) may shift the bond demand to the right.

   True or False
3. Given a 15%-Coupon-Rate Bond Maturing in Four Years (Face Value = $3,000). If the yield to maturity is 15%, then the bond price is $3,000.

True or False

4. Income Effect shows that a higher level of income causes the demand for money at each interest rate to increase and the demand curve to shift to the right

True or False

Answer 1

1. Option (d) is the correct answer

            Given,

                                    Face value    = $8505

                                   Current price = $8100

Assuming 1 year as the time period,

Yield to maturity = {[{Face value/current price}] 1/time period} – 1

                         Thus, Yield to maturity = (8505/8100) – 1

                                                               = 0.05 ie 5%

2) The statement is false.

During the Covid-19 crisis, most of the economies are expected to be affected badly which will result in recessionary effects. Due to these recessionary effects, the bond prices are expected to fall and hence the bond demand would be shifted to the left denoting a decline in the demand for bonds.

3) The given statement is false

Given,

                         Coupon rate = 15% = 0.15

                        Time period = 4 years

                          Face value = $3000

                 Yield to maturity = 15% = 0.15

We know that

                             Yield to maturity = {[{Face value/current price}] 1/time period} – 1

Thus, substituting, 0.15 = [{[3000/x}]1/4] – 1

                               1.15 = [3000/x]1/4

         Raising to the power of 4 on both sides, (1.15)4 = 3000/x

                                                                            Ie; 1.75 = 3000/x

Thus, x ie; The current bond price = 3000/1.75

                                                        = 1714

4) The statement is true.

Income effect defines that with rise in the income, the demand also would rise. The demand curve depicts the demand of a commodity with price levels in the market, Thus, with rising income levels, the demand would rise even if the price levels are high. This means that the demand curve will shift to the right.