Question 1

A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of

Accepted Answer

A)  3 percent. 
B)  20 percent. 
C)  25 percent. 
D)  33.3 percent. 
A)  3 percent. 
B)  20 percent. 
C)  25 percent. 
D)  33.3 percent.

Question 2

A bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a

Accepted Answer

A)  simple loan. 
B)  fixed-payment loan. 
C)  coupon bond. 
D)  discount bond. 
A)  simple loan. 
B)  fixed-payment loan. 
C)  coupon bond. 
D)  discount bond.

Question 3

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 4

Which of the following are generally true of bonds?

Accepted Answer

A)  The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period. 
B)  A rise in interest rates is associated with a fall in bond prices, resulting in capital gains on bonds whose terms to maturity are longer than the holding periods. 
C)  The longer a bond's maturity, the smaller is the size of the price change associated with an interest rate change. 
D)  Prices and returns for short-term bonds are more volatile than those for longer-term bonds. 
A)  The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period. 
B)  A rise in interest rates is associated with a fall in bond prices, resulting in capital gains on bonds whose terms to maturity are longer than the holding periods. 
C)  The longer a bond's maturity, the smaller is the size of the price change associated with an interest rate change. 
D)  Prices and returns for short-term bonds are more volatile than those for longer-term bonds.

Question 5

If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200?

Accepted Answer

A)  9 percent 
B)  10 percent 
C)  11 percent 
D)  12 percent 
A)  9 percent 
B)  10 percent 
C)  11 percent 
D)  12 percent

Question 6

Which of the following are generally true of all bonds?

Accepted Answer

A)  The longer a bond's maturity, the greater is the rate of return that occurs as a result of the increase in the interest rate. 
B)  Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise. 
C)  Prices and returns for short-term bonds are more volatile than those for longer term bonds. 
D)  A fall in interest rates results in capital losses for bonds whose terms to maturity are longer than the holding period. 
A)  The longer a bond's maturity, the greater is the rate of return that occurs as a result of the increase in the interest rate. 
B)  Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise. 
C)  Prices and returns for short-term bonds are more volatile than those for longer term bonds. 
D)  A fall in interest rates results in capital losses for bonds whose terms to maturity are longer than the holding period.

Question 7

In the United States during the late 1970s, the nominal interest rates were quite high, but the real interest rates were negative. From the Fisher equation, we can conclude that expected inflation in the United States during this period was

Accepted Answer

A)  irrelevant 
B)  low 
C)  negative 
D)  high 
A)  irrelevant 
B)  low 
C)  negative 
D)  high

Question 8

For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is

Accepted Answer

A)  $10,030. 
B)  $10,300. 
C)  $13,000. 
D)  $13,310. 
A)  $10,030. 
B)  $10,300. 
C)  $13,000. 
D)  $13,310.

Question 9

If a $10,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is

Accepted Answer

A)  5 percent. 
B)  10 percent. 
C)  50 percent. 
D)  100 percent. 
A)  5 percent. 
B)  10 percent. 
C)  50 percent. 
D)  100 percent.

Question 10

If the interest rate is 5%, what is the present value of a security that pays you $1,050 next year and $1,102.50 two years from now? If this security sold for $2200, is the yield to maturity greater or less than 5%? Why?

Accepted Answer

PV = $1,050/(1. +.05) + $1,102

Question 11

If you expect the inflation rate to be 12 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)  -5 percent. 
B)  -2 percent. 
C)  2 percent. 
D)  12 percent. 
A)  -5 percent. 
B)  -2 percent. 
C)  2 percent. 
D)  12 percent.

Question 12

The present value of an expected future payment ________ as the interest rate increases.

Accepted Answer

A)  falls 
B)  rises 
C)  is constant 
D)  is unaffected 
A)  falls 
B)  rises 
C)  is constant 
D)  is unaffected

Question 13

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year?

Accepted Answer

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

Question 14

The interest rate that describes how well a lender has done in real terms after the fact is called the

Accepted Answer

A)  ex post real interest rate. 
B)  ex ante real interest rate. 
C)  ex post nominal interest rate. 
D)  ex ante nominal interest rate. 
A)  ex post real interest rate. 
B)  ex ante real interest rate. 
C)  ex post nominal interest rate. 
D)  ex ante nominal interest rate.

Question 15

The riskiness of an asset's returns due to changes in interest rates is

Accepted Answer

A)  exchange-rate risk. 
B)  price risk. 
C)  asset risk. 
D)  interest-rate risk. 
A)  exchange-rate risk. 
B)  price risk. 
C)  asset risk. 
D)  interest-rate risk.

Question 16

The ________ is below the coupon rate when the bond price is ________ its par value.

Accepted Answer

A)  yield to maturity; above 
B)  yield to maturity; below 
C)  discount rate; above 
D)  discount rate; below 
A)  yield to maturity; above 
B)  yield to maturity; below 
C)  discount rate; above 
D)  discount rate; below

Question 17

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 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 yield to maturity for a discount bond is ________ related to the current bond price.

Accepted Answer

A)  negatively 
B)  positively 
C)  not 
D)  directly 
A)  negatively 
B)  positively 
C)  not 
D)  directly

Question 20

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.

Exam 4: Understanding Interest Rates

A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of

A bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a

A discount bond

Which of the following are generally true of bonds?

If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200?

Which of the following are generally true of all bonds?

In the United States during the late 1970s, the nominal interest rates were quite high, but the real interest rates were negative. From the Fisher equation, we can conclude that expected inflation in the United States during this period was

For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is

If a $10,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is

If the interest rate is 5%, what is the present value of a security that pays you $1,050 next year and $1,102.50 two years from now? If this security sold for $2200, is the yield to maturity greater or less than 5%? Why?

If you expect the inflation rate to be 12 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

The present value of an expected future payment ________ as the interest rate increases.

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year?

The interest rate that describes how well a lender has done in real terms after the fact is called the

The riskiness of an asset's returns due to changes in interest rates is

The ________ is below the coupon rate when the bond price is ________ its par value.

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

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

The yield to maturity for a discount bond is ________ related to the current bond price.

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

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

The is below the coupon rate when the bond price is its par value.