QUESTION 15 Questions 15 & 16 Caleb opens The Wall street Journal and finds that

Question

QUESTION 15

Questions 15 & 16

Caleb opens The Wall street Journal and finds that the 30-year Treasury bond has a yield-to-maturity of 7.5%. He tells Vincent that this is an example of a nominal interest rate. After that he was reading the U.S. Treasury Bond Quotations table below and calculated the previous day’s asked price and the current yield to be $979.35 and 4.084%, respectively. Rate Maturity Mo/Yr Bid Price Asked Price Change Asked Yield 4 June 09 n 97:29 97:30 -1 4.92 Caleb’s calculation on the U.S. Treasury Bond Quotations table is most likely correct with respect to:

A. Previous day’s asked price. B. Current yield C. Test the adequacy of cash flows generated through earnings for purposes of meeting debt and lease obligations

QUESTION 16 Is Caleb correct with respect to his comment on the 30-year Treasury bond that has yield-to-maturity of 7.5%?

A. No, this is an example of a real interest rate. B. Yes C. No, this is an example of an inflation rate.

Explanation / Answer

15. Treasury bond quotation are correct with respect to current yield as the rate of US treasury bond is nominal interest rate and if we remove Inflation rate we get the current yield.

26. Caleb's comment is right as it is the nominal interest rate which is real interest rate + Inflation rate.

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