1. Do bondholders fare better when the yield to maturity increases or when it
decreases? Why?
2. Under what conditions will a discount bond have a negative nominal
interest rate? Is it possible for a coupon bond or a perpetuity to have a
negative nominal interest rate?
3. 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?
4. Which $1,000 bond has the higher yield to maturity, a twenty-year bond
selling for $800 with a current yield of 15% or a one-year bond selling for
$800 with a current yield of 5%?
5. Interest rates were lower in the mid-1980s than 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?