Question 1

If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is

Accepted Answer

A)  -3 percent. 
B)  -2 percent. 
C)  3 percent. 
D)  7 percent. 
A)  -3 percent. 
B)  -2 percent. 
C)  3 percent. 
D)  7 percent. C

Question 2

Which of the following $1,000 face-value securities has the highest yield to maturity?

Accepted Answer

A)  A 5 percent coupon bond selling for $1,000 
B)  A 10 percent coupon bond selling for $1,000 
C)  A 12 percent coupon bond selling for $1,000 
D)  A 12 percent coupon bond selling for $1,100 
A)  A 5 percent coupon bond selling for $1,000 
B)  A 10 percent coupon bond selling for $1,000 
C)  A 12 percent coupon bond selling for $1,000 
D)  A 12 percent coupon bond selling for $1,100 C

Question 3

A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of

Accepted Answer

A)  8 percent. 
B)  10 percent. 
C)  12 percent. 
D)  14 percent. 
A)  8 percent. 
B)  10 percent. 
C)  12 percent. 
D)  14 percent. A

Question 4

For simple loans, the simple interest rate is ________ the yield to maturity.

Accepted Answer

A)  greater than 
B)  less than 
C)  equal to 
D)  not comparable to 
A)  greater than 
B)  less than 
C)  equal to 
D)  not comparable to

Question 5

The present value of a fixed-payment loan is calculated as the ________ of the present value of all cash flow payments.

Accepted Answer

A)  sum 
B)  difference 
C)  multiple 
D)  log 
A)  sum 
B)  difference 
C)  multiple 
D)  log

Question 6

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 7

A fully amortized loan is another name for

Accepted Answer

A)  a simple loan. 
B)  a fixed-payment loan. 
C)  a commercial loan. 
D)  an unsecured loan. 
A)  a simple loan. 
B)  a fixed-payment loan. 
C)  a commercial loan. 
D)  an unsecured loan.

Question 8

The interest rate that equates the present value of payments received from a debt instrument with its value today is the

Accepted Answer

A)  simple interest rate. 
B)  current yield. 
C)  yield to maturity. 
D)  real interest rate. 
A)  simple interest rate. 
B)  current yield. 
C)  yield to maturity. 
D)  real interest rate.

Question 9

If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the interest rate is

Accepted Answer

A)  5 percent. 
B)  10 percent. 
C)  22 percent. 
D)  25 percent. 
A)  5 percent. 
B)  10 percent. 
C)  22 percent. 
D)  25 percent.

Question 10

The ________ is calculated by multiplying the coupon rate times the par value of the bond.

Accepted Answer

A)  present value 
B)  par value 
C)  coupon payment 
D)  maturity payment 
A)  present value 
B)  par value 
C)  coupon payment 
D)  maturity payment

Question 11

All of the following are examples of coupon bonds except

Accepted Answer

A)  Corporate bonds 
B)  U.S. Treasury bills 
C)  U.S. Treasury notes 
D)  U.S. Treasury bonds 
A)  Corporate bonds 
B)  U.S. Treasury bills 
C)  U.S. Treasury notes 
D)  U.S. Treasury bonds

Question 12

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 13

The nominal interest rate minus the expected rate of inflation

Accepted Answer

A)  defines the real interest rate. 
B)  is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate. 
C)  is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate. 
D)  defines the discount rate. 
A)  defines the real interest rate. 
B)  is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate. 
C)  is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate. 
D)  defines the discount rate.

Question 14

When I purchase a 10 percent coupon bond, I calculate a yield to maturity of 8 percent. If I hold this bond to maturity, then my return on this asset is

Accepted Answer

A)  10 percent. 
B)  8 percent. 
C)  12 percent. 
D)  there is not enough information to determine the return. 
A)  10 percent. 
B)  8 percent. 
C)  12 percent. 
D)  there is not enough information to determine the return.

Question 15

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 16

Which of the following $5,000 face-value securities has the highest yield to maturity?

Accepted Answer

A)  A 6 percent coupon bond selling for $5,000 
B)  A 6 percent coupon bond selling for $5,500 
C)  A 10 percent coupon bond selling for $5,000 
D)  A 12 percent coupon bond selling for $4,500 
A)  A 6 percent coupon bond selling for $5,000 
B)  A 6 percent coupon bond selling for $5,500 
C)  A 10 percent coupon bond selling for $5,000 
D)  A 12 percent coupon bond selling for $4,500

Question 17

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 18

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 19

An asset's interest rate risk ________ as the duration of the asset ________.

Accepted Answer

A)  increases; decreases 
B)  decreases; decreases 
C)  decreases; increases 
D)  remains constant; increases 
A)  increases; decreases 
B)  decreases; decreases 
C)  decreases; increases 
D)  remains constant; increases

Question 20

If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is

Accepted Answer

A)  7 percent. 
B)  22 percent. 
C)  -15 percent. 
D)  -8 percent. 
A)  7 percent. 
B)  22 percent. 
C)  -15 percent. 
D)  -8 percent.

Exam 4: Understanding Interest Rates

If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is

Which of the following $1,000 face-value securities has the highest yield to maturity?

A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of

For simple loans, the simple interest rate is ________ the yield to maturity.

The present value of a fixed-payment loan is calculated as the ________ of the present value of all cash flow payments.

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

A fully amortized loan is another name for

The interest rate that equates the present value of payments received from a debt instrument with its value today is the

If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the interest rate is

The ________ is calculated by multiplying the coupon rate times the par value of the bond.

All of the following are examples of coupon bonds except

An equal increase in all bond interest rates

The nominal interest rate minus the expected rate of inflation

When I purchase a 10 percent coupon bond, I calculate a yield to maturity of 8 percent. If I hold this bond to maturity, then my return on this asset is

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

Which of the following $5,000 face-value securities has the highest yield to maturity?

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

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

An asset's interest rate risk ________ as the duration of the asset ________.

If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond 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

Nonbank Finance

Financial Derivatives

Conflicts of Interest in the Financial Industry

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

Aggregate Demand and Supply Analysis

Monetary Policy Theory

Transmission Mechanisms of Monetary Policy

Filters

An asset's interest rate risk as the duration of the asset .