Question 1

The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________.

Accepted Answer

A)  positively; rises; rises 
B)  negatively; falls; falls 
C)  positively; rises; falls 
D)  negatively; rises; falls 
A)  positively; rises; rises 
B)  negatively; falls; falls 
C)  positively; rises; falls 
D)  negatively; rises; falls

Question 2

The ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation.

Accepted Answer

A)  Fisher equation 
B)  Keynesian equation 
C)  Monetarist equation 
D)  Marshall equation 
A)  Fisher equation 
B)  Keynesian equation 
C)  Monetarist equation 
D)  Marshall equation

Question 3

Examples of discount bonds include

Accepted Answer

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

Question 4

A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid.

Accepted Answer

A)  coupon bond; discount 
B)  discount bond; discount 
C)  coupon bond; face 
D)  discount bond; face 
A)  coupon bond; discount 
B)  discount bond; discount 
C)  coupon bond; face 
D)  discount bond; face

Question 5

In which of the following situations would you prefer to be the borrower?

Accepted Answer

A)  The interest rate is 9 percent and the expected inflation rate is 7 percent. 
B)  The interest rate is 4 percent and the expected inflation rate is 1 percent. 
C)  The interest rate is 13 percent and the expected inflation rate is 15 percent. 
D)  The interest rate is 25 percent and the expected inflation rate is 50 percent. 
A)  The interest rate is 9 percent and the expected inflation rate is 7 percent. 
B)  The interest rate is 4 percent and the expected inflation rate is 1 percent. 
C)  The interest rate is 13 percent and the expected inflation rate is 15 percent. 
D)  The interest rate is 25 percent and the expected inflation rate is 50 percent.

Question 6

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

Accepted Answer

A)  A 5 percent coupon bond with a price of $600 
B)  A 5 percent coupon bond with a price of $800 
C)  A 5 percent coupon bond with a price of $1,000 
D)  A 5 percent coupon bond with a price of $1,200 
A)  A 5 percent coupon bond with a price of $600 
B)  A 5 percent coupon bond with a price of $800 
C)  A 5 percent coupon bond with a price of $1,000 
D)  A 5 percent coupon bond with a price of $1,200

Question 7

The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value.

Accepted Answer

A)  greater; coupon; above 
B)  greater; coupon; below 
C)  greater; perpetuity; above 
D)  less; perpetuity; below 
A)  greater; coupon; above 
B)  greater; coupon; below 
C)  greater; perpetuity; above 
D)  less; perpetuity; below

Question 8

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.

Question 9

Which of the following $1,000 face-value securities has the lowest 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 15 percent coupon bond selling for $1,000 
D)  A 15 percent coupon bond selling for $900 
A)  A 5 percent coupon bond selling for $1,000 
B)  A 10 percent coupon bond selling for $1,000 
C)  A 15 percent coupon bond selling for $1,000 
D)  A 15 percent coupon bond selling for $900

Question 10

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?

Accepted Answer

A)  5 percent 
B)  10 percent 
C)  -5 percent 
D)  25 percent 
A)  5 percent 
B)  10 percent 
C)  -5 percent 
D)  25 percent

Question 11

If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is

Accepted Answer

A)  $650. 
B)  $1,300. 
C)  $130. 
D)  $13. 
A)  $650. 
B)  $1,300. 
C)  $130. 
D)  $13.

Question 12

When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.

Accepted Answer

A)  nominal; lend; borrow 
B)  real; lend; borrow 
C)  real; borrow; lend 
D)  market; lend; borrow 
A)  nominal; lend; borrow 
B)  real; lend; borrow 
C)  real; borrow; lend 
D)  market; lend; borrow

Question 13

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 14

The ________ is defined as the payments to the owner plus the change in a security's value expressed as a fraction of the security's purchase price.

Accepted Answer

A)  yield to maturity 
B)  current yield 
C)  rate of return 
D)  yield rate 
A)  yield to maturity 
B)  current yield 
C)  rate of return 
D)  yield rate

Question 15

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 16

If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is

Accepted Answer

A)  5 percent. 
B)  10 percent. 
C)  12.5 percent. 
D)  15 percent. 
A)  5 percent. 
B)  10 percent. 
C)  12.5 percent. 
D)  15 percent.

Question 17

If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is

Accepted Answer

A)  2.5 percent. 
B)  5 percent. 
C)  7.5 percent. 
D)  10 percent. 
A)  2.5 percent. 
B)  5 percent. 
C)  7.5 percent. 
D)  10 percent.

Question 18

The yield to maturity for a perpetuity is a useful approximation for the yield to maturity on long-term coupon bonds. It is called the ________ when approximating the yield for a coupon bond.

Accepted Answer

A)  current yield 
B)  discount yield 
C)  future yield 
D)  star yield 
A)  current yield 
B)  discount yield 
C)  future yield 
D)  star yield

Question 19

Which of the following are true concerning the distinction between interest rates and returns?

Accepted Answer

A)  The rate of return on a bond will not necessarily equal the interest rate on that bond. 
B)  The return can be expressed as the difference between the current yield and the rate of capital gains. 
C)  The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1. 
D)  The return can be expressed as the sum of the discount yield and the rate of capital gains. 
A)  The rate of return on a bond will not necessarily equal the interest rate on that bond. 
B)  The return can be expressed as the difference between the current yield and the rate of capital gains. 
C)  The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1. 
D)  The return can be expressed as the sum of the discount yield and the rate of capital gains.

Question 20

The sum of the current yield and the rate of capital gain is called the

Accepted Answer

A)  rate of return. 
B)  discount yield. 
C)  pertuity yield. 
D)  par value. 
A)  rate of return. 
B)  discount yield. 
C)  pertuity yield. 
D)  par value.

Exam 4: Understanding Interest Rates

The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________.

The ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation.

Examples of discount bonds include

A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid.

In which of the following situations would you prefer to be the borrower?

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

The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value.

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

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

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?

If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is

When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.

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

The ________ is defined as the payments to the owner plus the change in a security's value expressed as a fraction of the security's purchase price.

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

If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is

If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is

The yield to maturity for a perpetuity is a useful approximation for the yield to maturity on long-term coupon bonds. It is called the ________ when approximating the yield for a coupon bond.

Which of the following are true concerning the distinction between interest rates and returns?

The sum of the current yield and the rate of capital gain is called the

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 price of a coupon bond and the yield to maturity are related; that is, as the yield to maturity , the price of the bond .

A pays the owner a fixed coupon payment every year until the maturity date, when the value is repaid.

The yield to maturity is than the rate when the bond price is its face value.

When the interest rate is low, there are greater incentives to and fewer incentives to .