Question 1

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. D

Question 2

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 rates are headed in the future. If you think interest rates will be going up,you should not follow your uncle's advice because you would then have to discount your bond if you needed to sell it before the maturity date. Long-term bonds have a greater interest-rate risk.

Question 3

A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as 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. B

Question 4

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 5

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 6

To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of

Accepted Answer

A)  face value. 
B)  par value. 
C)  deflation. 
D)  discounting the future. 
A)  face value. 
B)  par value. 
C)  deflation. 
D)  discounting the future.

Question 7

Assuming the same coupon rate and maturity length,when the interest rate on a Treasury Inflation Protected Security is 3 percent,and the yield on a nonindexed Treasury bond is 8 percent,the expected rate of inflation is

Accepted Answer

A)  3 percent. 
B)  5 percent. 
C)  8 percent. 
D)  11 percent. 
A)  3 percent. 
B)  5 percent. 
C)  8 percent. 
D)  11 percent.

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

Duration is

Accepted Answer

A)  an asset's term to maturity. 
B)  the time until the next interest payment for a coupon bond. 
C)  the average lifetime of a debt security's stream of payments. 
D)  the time between interest payments for a coupon bond. 
A)  an asset's term to maturity. 
B)  the time until the next interest payment for a coupon bond. 
C)  the average lifetime of a debt security's stream of payments. 
D)  the time between interest payments for a coupon bond.

Question 10

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 11

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 12

What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent?

Accepted Answer

A)  $453.51 
B)  $550.00 
C)  $476.25 
A)  $453.51 
B)  $550.00 
C)  $476.25

Question 13

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 14

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

Question 15

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

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 16

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 17

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 18

The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's

Accepted Answer

A)  coupon rate. 
B)  maturity rate. 
C)  face value rate. 
D)  payment rate. 
A)  coupon rate. 
B)  maturity rate. 
C)  face value rate. 
D)  payment rate.

Question 19

All else equal,the ________ the coupon rate on a bond,the ________ the bond's duration.

Accepted Answer

A)  higher; longer 
B)  higher; shorter 
C)  lower; shorter 
D)  greater; longer 
A)  higher; longer 
B)  higher; shorter 
C)  lower; shorter 
D)  greater; longer

Question 20

Which of the following are 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)  U.S. Treasury 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)  U.S. Treasury bonds and notes are examples of discount bonds. 
D)  The purchaser receives the par value at maturity plus any capital gains.

Exam 4: Understanding Interest Rates

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

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

A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a

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 are true of fixed payment loans?

To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of

Assuming the same coupon rate and maturity length,when the interest rate on a Treasury Inflation Protected Security is 3 percent,and the yield on a nonindexed Treasury bond is 8 percent,the expected rate of inflation is

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

Duration is

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

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

What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent?

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

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

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

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

A fully amortized loan is another name for

The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's

All else equal,the ________ the coupon rate on a bond,the ________ the bond's duration.

Which of the following are true for discount bonds?

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,the the coupon rate on a bond,the the bond's duration.