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Assignments # 5, week 5
Chapter 8 Question # 1, 2, 7, 8, and 9.
1. Bond Investment Decision Based on your forecast of interest rates, would you recommend that investors purchase bonds today? Explain.
2. How Interest Rates Affect Bond Prices Explain the impact of a decline in interest rates on:
a. An investor’s required rate of return.
b. The present value of existing bonds.
c. The prices of existing bonds.
7. Coupon Rates If a bond’s coupon rate were above its required rate of return, would its price be above or
below its par value? Explain.
8. Bond Price Sensitivity Is the price of a longterm bond more or less sensitive to a change in interest
rates than to the price of a short-term security? Why?
9. Required Return on Bonds Why does the required rate of return for a particular bond change
over time?
Assignment 6
Chapter 9 Question #s 2, 3, 4, 10, 11, 12, 16, 22.
2. Mortgage Rates and Risk What is the general relationship between mortgage rates and long-term
government security rates? Explain how mortgage lenders can be affected by interest rate movements.
Also explain how they can insulate against interest rate movements.
3. ARMs How does the initial rate on adjustable-rate mortgages (ARMs) differ from the rate on fixed-rate
mortgages? Why? Explain how caps on ARMs can affect a financial institution’s exposure to interest
rate risk.
4. Mortgage Maturities Why is the 15-year mortgage attractive to homeowners? Is the interest rate
risk to the financial institution higher for a 15-year or a 30-year mortgage? Why?
10. Exposure to Interest Rate Movements Mortgage lenders with fixed-rate mortgages should
benefit when interest rates decline, yet research has shown that this favorable impact is dampened.
By what?
11. Mortgage Valuation Describe the factors that affect mortgage prices.
12. Selling Mortgages Explain why some financial institutions prefer to sell the mortgages they originate.
16. Mortgage-Backed Securities Describe how mortgage-backed securities (MBS) are…