Assignment:
1. You are considering purchasing a consol that promises annual payments of $4.
a. If the current interest rate is 5 percent, what is the price of the consol?
b. You are concerned that the interest rate may rise to 6 percent. Compute the percentage change in the price of the consol and the percentage change in the interest rate. Compare them.
c. Your investment horizon is one year. You purchase the consol when the interest rate is 5 percent and sell it a year later, following a rise in
2. As you read the business news, you come across an advertisement for a bond mutual fund-a fund that pools the investments from a large number of people and then purchases bonds, giving the individuals "shares" in the fund. The company claims its fund has had a return of 131⁄2 percent over the last year. But you remember that interest rates have been pretty low-5 percent at most. A quick check of the numbers in the business section you're holding tells you that your recollection is correct. Explain the logic behind the mutual fund's claim in the advertisement.
3. Given the data in the accompanying table, would you say that this economy is heading for a boom or for a recession? Explain your choice.
|
|
3 Month Treasury Bill
|
10- Year Treasury Bond
|
Baa Corporate 10- Year Bond
|
|
January
|
1.00%
|
3.0%
|
7.0%
|
|
February
|
1.05%
|
3.5
|
7.2
|
|
March
|
1.10%
|
4.0
|
7.5
|
|
April
|
1.20%
|
4.3
|
7.7
|
|
aMay
|
1.25%0
|
4.5
|
7.8
|
4. What are the advantages of holding stock in a company versus holding bonds is- sued by the same company?