Question 1

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 2

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 3

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 bank 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 bank rate

Question 4

An equal decrease in all bond interest rates ________.

Accepted Answer

A)  increases the price of a five-year bond more than the price of a ten-year bond 
B)  increases the price of a ten-year bond more than the price of a five-year bond 
C)  decreases the price of a five-year bond more than the price of a ten-year bond 
D)  decreases the price of a ten-year bond more than the price of a five-year bond 
A)  increases the price of a five-year bond more than the price of a ten-year bond 
B)  increases the price of a ten-year bond more than the price of a five-year bond 
C)  decreases the price of a five-year bond more than the price of a ten-year bond 
D)  decreases the price of a ten-year bond more than the price of a five-year bond

Question 5

If the interest rate on a Real Return Bond is 2 percent and the interest rate on a Canada bond of similar maturity is 5 percent then ________ is equal to 3 percent.

Accepted Answer

A)  the expected rate of inflation 
B)  the yield to maturity 
C)  current yield 
D)  expected interest rate 
A)  the expected rate of inflation 
B)  the yield to maturity 
C)  current yield 
D)  expected interest rate

Question 6

The interest rate on Real Return Bonds 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 7

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 8

Would it make sense to buy a house when mortgage rates are 14 percent and expected inflation is 15 percent? Explain your answer.

Accepted Answer

Even though the nominal rate f

Question 9

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 10

A friend tells you that he can purchase a 10 percent coupon bond at face value. Your friend states that 10 percent is a "high" rate of interest. You know that the current rate of inflation is 8 percent, and you expect inflation to increase. What advice should you give to your friend about this bond?

Accepted Answer

The high nominal rate is reduced to a mu

Question 11

If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding?

Accepted Answer

A)  A bond with one year to maturity 
B)  A bond with five years to maturity 
C)  A bond with ten years to maturity 
D)  A bond with twenty years to maturity 
A)  A bond with one year to maturity 
B)  A bond with five years to maturity 
C)  A bond with ten years to maturity 
D)  A bond with twenty years to maturity

Question 12

In a country where prices never change, the nominal interest rate is equal to the ________.

Accepted Answer

A)  real exchange rate 
B)  inflation rate 
C)  expected inflation rate 
D)  real interest rate 
A)  real exchange rate 
B)  inflation rate 
C)  expected inflation rate 
D)  real interest rate

Question 13

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 14

The duration of a coupon bond increases ________.

Accepted Answer

A)  the longer is the bond's term to maturity 
B)  when interest rates increase 
C)  the higher the coupon rate on the bond 
D)  the higher the bond price 
A)  the longer is the bond's term to maturity 
B)  when interest rates increase 
C)  the higher the coupon rate on the bond 
D)  the higher the bond price

Question 15

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 16

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 17

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 18

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 19

The nominal interest rate minus the expected rate of inflation ________.

Accepted Answer

A)  defines the real rate of inflation 
B)  is a worse measure of the incentives to borrow and lend than is the nominal interest rate 
C)  is a more accurate indicator of the tightness of credit market conditions than is the nominal interest rate 
D)  defines the bank rate 
A)  defines the real rate of inflation 
B)  is a worse measure of the incentives to borrow and lend than is the nominal interest rate 
C)  is a more accurate indicator of the tightness of credit market conditions than is the nominal interest rate 
D)  defines the bank rate

Question 20

Which of the following is true for discount bonds?

Accepted Answer

A)  A discount bond is bought at par. 
B)  The purchaser receives the face value of the bond at the maturity date. 
C)  Canada bonds and notes are examples of discount bonds. 
D)  The purchaser receives the par value at maturity plus any capital gains. 
A)  A discount bond is bought at par. 
B)  The purchaser receives the face value of the bond at the maturity date. 
C)  Canada bonds and notes are examples of discount bonds. 
D)  The purchaser receives the par value at maturity plus any capital gains.

Exam 4: The Meaning of Interest Rates

A fully amortized loan is another name for ________.

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 nominal interest rate minus the expected rate of inflation ________.

An equal decrease in all bond interest rates ________.

If the interest rate on a Real Return Bond is 2 percent and the interest rate on a Canada bond of similar maturity is 5 percent then ________ is equal to 3 percent.

The interest rate on Real Return Bonds is a direct measure of ________.

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

Would it make sense to buy a house when mortgage rates are 14 percent and expected inflation is 15 percent? Explain your answer.

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

If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding?

In a country where prices never change, the nominal interest rate is equal to the ________.

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

The duration of a coupon bond increases ________.

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

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

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

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 nominal interest rate minus the expected rate of inflation ________.

Which of the following is true for discount bonds?

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Behaviour 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

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

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

Filters

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

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