Question 1

An equal increase in all bond interest rates

Accepted Answer

A) increases the return to all bond maturities by an equal amount. 
B) decreases the return to all bond maturities by an equal amount. 
C) has no effect on the returns to bonds. 
D) decreases long-term bond returns more than short-term bond returns. 
A) increases the return to all bond maturities by an equal amount. 
B) decreases the return to all bond maturities by an equal amount. 
C) has no effect on the returns to bonds. 
D) decreases long-term bond returns more than short-term bond returns.

Question 2

Which of the following are true of fixed payment loans?

Accepted Answer

A) The borrower repays both the principal and interest at the maturity date. 
B) Installment loans and mortgages are frequently of the fixed payment type. 
C) The borrower pays interest periodically and the principal at the maturity date. 
D) Commercial loans to businesses are often of this type. 
A) The borrower repays both the principal and interest at the maturity date. 
B) Installment loans and mortgages are frequently of the fixed payment type. 
C) The borrower pays interest periodically and the principal at the maturity date. 
D) Commercial loans to businesses are often of this type.

Question 3

If a financial institution has 50% of its portfolio in a bond with a five-year duration and 50% of its portfolio in a bond with a seven-year duration,what is the duration of the portfolio?

Accepted Answer

A) 12 years 
B) 7 years 
C) 6 years 
D) 5 years 
A) 12 years 
B) 7 years 
C) 6 years 
D) 5 years

Question 4

Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity of 15 percent.If the interest rate on one-year bonds rises from 15 percent to 20 percent over the course of the year,what is the yearly return on the bond you are holding?

Accepted Answer

A) 5 percent 
B) 10 percent 
C) 15 percent 
D) 20 percent 
A) 5 percent 
B) 10 percent 
C) 15 percent 
D) 20 percent

Question 5

An increase in the time to the promised future payment ________ the present value of the payment.

Accepted Answer

A) decreases 
B) increases 
C) has no effect on 
D) is irrelevant to 
A) decreases 
B) increases 
C) has no effect on 
D) is irrelevant to

Question 6

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.

Accepted Answer

A) present value 
B) future value 
C) interest 
D) deflation 
A) present value 
B) future value 
C) interest 
D) deflation

Question 7

The ________ interest rate more accurately reflects the true cost of borrowing.

Accepted Answer

A) nominal 
B) real 
C) discount 
D) market 
A) nominal 
B) real 
C) discount 
D) market

Question 8

A discount bond

Accepted Answer

A) pays the bondholder a fixed amount every period and the face value at maturity. 
B) pays the bondholder the face value at maturity. 
C) pays all interest and the face value at maturity. 
D) pays the face value at maturity plus any capital gain. 
A) pays the bondholder a fixed amount every period and the face value at maturity. 
B) pays the bondholder the face value at maturity. 
C) pays all interest and the face value at maturity. 
D) pays the face value at maturity plus any capital gain.

Question 9

All else equal,when interest rates ________,the duration of a coupon bond ________.

Accepted Answer

A) rise; falls 
B) rise; increases 
C) falls; falls 
D) falls; does not change 
A) rise; falls 
B) rise; increases 
C) falls; falls 
D) falls; does not change

Question 10

Assuming the same coupon rate and maturity length,the difference between the yield on a Treasury Inflation Protected Security and the yield on a nonindexed Treasury security provides insight into

Accepted Answer

A) the nominal interest rate. 
B) the real interest rate. 
C) the nominal exchange rate. 
D) the expected inflation rate. 
A) the nominal interest rate. 
B) the real interest rate. 
C) the nominal exchange rate. 
D) the expected inflation rate.

Question 11

If a $5,000 face-value discount bond maturing in one year is selling for $5,000,then its yield to maturity is

Accepted Answer

A) 0 percent. 
B) 5 percent. 
C) 10 percent. 
D) 20 percent. 
A) 0 percent. 
B) 5 percent. 
C) 10 percent. 
D) 20 percent.

Question 12

In Japan in 1998 and in the U.S.in 2008,interest rates were negative for a short period of time because investors found it convenient to hold six-month bills as a store of value because

Accepted Answer

A) of the high inflation rate. 
B) these bills sold at a discount from face value. 
C) the bills were denominated in small amounts and could be stored electronically. 
D) the bills were denominated in large amounts and could be stored electronically. 
A) of the high inflation rate. 
B) these bills sold at a discount from face value. 
C) the bills were denominated in small amounts and could be stored electronically. 
D) the bills were denominated in large amounts and could be stored electronically.

Question 13

Interest-rate risk is the riskiness of an asset's returns due to

Accepted Answer

A) interest-rate changes. 
B) changes in the coupon rate. 
C) default of the borrower. 
D) changes in the asset's maturity. 
A) interest-rate changes. 
B) changes in the coupon rate. 
C) default of the borrower. 
D) changes in the asset's maturity.

Question 14

A consol paying $20 annually when the interest rate is 5 percent has a price of

Accepted Answer

A) $100. 
B) $200. 
C) $400. 
D) $800. 
A) $100. 
B) $200. 
C) $400. 
D) $800.

Question 15

If the amount payable in two years is $2420 for a simple loan at 10 percent interest,the loan amount is

Accepted Answer

A) $1000. 
B) $1210. 
C) $2000. 
D) $2200. 
A) $1000. 
B) $1210. 
C) $2000. 
D) $2200.

Question 16

The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is

Accepted Answer

A) -10 percent. 
B) -5 percent. 
C) 0 percent. 
D) 5 percent. 
A) -10 percent. 
B) -5 percent. 
C) 0 percent. 
D) 5 percent.

Question 17

The interest rate on Treasury Inflation Protected Securities is a direct measure of

Accepted Answer

A) the real interest rate. 
B) the nominal interest rate. 
C) the rate of inflation. 
D) the rate of deflation. 
A) the real interest rate. 
B) the nominal interest rate. 
C) the rate of inflation. 
D) the rate of deflation.

Question 18

Your favorite uncle advises you to purchase long-term bonds because their interest rate is 10%.Should you follow his advice?

Accepted Answer

It depends on where you think interest r

Question 19

The ________ is the final amount that will be paid to the holder of a coupon bond.

Accepted Answer

A) discount value 
B) coupon value 
C) face value 
D) present value 
A) discount value 
B) coupon value 
C) face value 
D) present value

Question 20

If the nominal rate of interest is 2 percent,and the expected inflation rate is -10 percent,the real rate of interest is

Accepted Answer

A) 2 percent. 
B) 8 percent. 
C) 10 percent. 
D) 12 percent. 
A) 2 percent. 
B) 8 percent. 
C) 10 percent. 
D) 12 percent.

Exam 4: Understanding Interest Rates

An equal increase in all bond interest rates

Which of the following are true of fixed payment loans?

If a financial institution has 50% of its portfolio in a bond with a five-year duration and 50% of its portfolio in a bond with a seven-year duration,what is the duration of the portfolio?

Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity of 15 percent.If the interest rate on one-year bonds rises from 15 percent to 20 percent over the course of the year,what is the yearly return on the bond you are holding?

An increase in the time to the promised future payment ________ the present value of the payment.

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.

The ________ interest rate more accurately reflects the true cost of borrowing.

A discount bond

All else equal,when interest rates ________,the duration of a coupon bond ________.

Assuming the same coupon rate and maturity length,the difference between the yield on a Treasury Inflation Protected Security and the yield on a nonindexed Treasury security provides insight into

If a $5,000 face-value discount bond maturing in one year is selling for $5,000,then its yield to maturity is

In Japan in 1998 and in the U.S.in 2008,interest rates were negative for a short period of time because investors found it convenient to hold six-month bills as a store of value because

Interest-rate risk is the riskiness of an asset's returns due to

A consol paying $20 annually when the interest rate is 5 percent has a price of

If the amount payable in two years is $2420 for a simple loan at 10 percent interest,the loan amount is

The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is

The interest rate on Treasury Inflation Protected Securities is a direct measure of

Your favorite uncle advises you to purchase long-term bonds because their interest rate is 10%.Should you follow his advice?

The ________ is the final amount that will be paid to the holder of a coupon bond.

If the nominal rate of interest is 2 percent,and the expected inflation rate is -10 percent,the real rate of interest is

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Behavior of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Financial Crises

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Central Banks and the Federal Reserve System

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory,inflation and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

The ISLM Model

Filters

All else equal,when interest rates ,the duration of a coupon bond .