Question

Label each of the following statements true, false, or uncertain. Explain your choice carefully.

a. The present discounted value of a stream of returns can be calculated in real or nominal terms.
b. The higher the one-year interest rate, the lower the present discounted value of a payment next year.
c. Interest rates are normally expected to be constant over time.
d. Bonds are a claim to a sequence of constant payments over a number of years.
e. The yield curve normally slopes up.

Answer 1

a. The present discounted value of a stream of returns can be calculated in real or nominal terms. TRUE

This is true because the present value of returns can be calculated using nominal rates which do not account for inflation, or using real rates which will account for inflation.

b. The higher the one-year interest rate, the lower the present discounted value of a payment next year. TRUE

Higher interest rates discount payments faster because they discount by dividing the payment so a higher rate would divide the payment more and lead to a lower present value.

c. Interest rates are normally expected to be constant over time. FALSE

Interest rates change over time in response to economic conditions.

d. Bonds are a claim to a sequence of constant payments over a number of years. TRUE

As a bondholder, you are entitled to payments over the life of the bond which means that it is a claim to constant payment over a number of years.

e. The yield curve normally slopes up. TRUE

The yield curve slopes upward to represent that interest rates increase in future.