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

There is ________ for any bond whose time to maturity matches the holding period.

Accepted Answer

A)  no interest-rate risk 
B)  a large interest-rate risk 
C)  rate-of-return risk 
D)  yield-to-maturity risk 
A)  no interest-rate risk 
B)  a large interest-rate risk 
C)  rate-of-return risk 
D)  yield-to-maturity risk

Question 3

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.

Question 4

The ________ of a coupon bond and the yield to maturity are inversely related.

Accepted Answer

A)  price 
B)  par value 
C)  maturity date 
D)  term 
A)  price 
B)  par value 
C)  maturity date 
D)  term

Question 5

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 6

With an interest rate of 6 percent,the present value of $100 next year is approximately

Accepted Answer

A)  $106. 
B)  $100. 
C)  $94. 
D)  $92. 
A)  $106. 
B)  $100. 
C)  $94. 
D)  $92.

Question 7

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 8

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 9

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 10

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 11

A ________ is bought at a price below its face value,and the ________ value is repaid at the maturity date.

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 12

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 13

In Japan in 1998 and in the U.S.in 2008,interest rates were negative for a short period of time because investors found it convenient to hold six-month bills as a store of value because

Accepted Answer

A)  of the high inflation rate. 
B)  these bills sold at a discount from face value. 
C)  the bills were denominated in small amounts and could be stored electronically. 
D)  the bills were denominated in large amounts and could be stored electronically. 
A)  of the high inflation rate. 
B)  these bills sold at a discount from face value. 
C)  the bills were denominated in small amounts and could be stored electronically. 
D)  the bills were denominated in large amounts and could be stored electronically.

Question 14

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 15

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 16

The ________ interest rate is adjusted for expected changes in the price level.

Accepted Answer

A)  ex ante real 
B)  ex post real 
C)  ex post nominal 
D)  ex ante nominal 
A)  ex ante real 
B)  ex post real 
C)  ex post nominal 
D)  ex ante nominal

Question 17

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 18

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 19

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 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

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

There is ________ for any bond whose time to maturity matches the holding period.

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

The ________ of a coupon bond and the yield to maturity are inversely related.

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

With an interest rate of 6 percent,the present value of $100 next year is approximately

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

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

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

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

A ________ is bought at a price below its face value,and the ________ value is repaid at the maturity date.

The duration of a coupon bond increases

In Japan in 1998 and in the U.S.in 2008,interest rates were negative for a short period of time because investors found it convenient to hold six-month bills as a store of value because

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

An equal decrease in all bond interest rates

The ________ interest rate is adjusted for expected changes in the price level.

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

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

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 ________.

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

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

A is bought at a price below its face value,and the value is repaid at the maturity date.

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

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 .