Question 1

An equal increase in all bond interest rates ________.

Accepted Answer

A)  increases the return to all bond maturities by an equal amount 
B)  decreases the return to all bond maturities by an equal amount 
C)  has no effect on the returns to bonds 
D)  decreases long-term bond returns more than short-term bond returns 
A)  increases the return to all bond maturities by an equal amount 
B)  decreases the return to all bond maturities by an equal amount 
C)  has no effect on the returns to bonds 
D)  decreases long-term bond returns more than short-term bond returns

Question 2

A coupon bond that has no maturity date and no repayment of principal is called a ________.

Accepted Answer

A)  consol 
B)  cabinet 
C)  Treasury bill 
D)  Government note 
A)  consol 
B)  cabinet 
C)  Treasury bill 
D)  Government note

Question 3

Which of the following is true for a coupon bond?

Accepted Answer

A)  When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. 
B)  The price of a coupon bond and the yield to maturity are positively related. 
C)  The yield to maturity is greater than the coupon rate when the bond price is above the par value. 
D)  The yield is less than the coupon rate when the bond price is below the par value. 
A)  When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. 
B)  The price of a coupon bond and the yield to maturity are positively related. 
C)  The yield to maturity is greater than the coupon rate when the bond price is above the par value. 
D)  The yield is less than the coupon rate when the bond price is below the par value.

Question 4

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

Question 5

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 6

Which of the following is 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

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 8

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

Accepted Answer

A)  0 percent 
B)  5 percent 
C)  10 percent 
D)  20 percent 
A)  0 percent 
B)  5 percent 
C)  10 percent 
D)  20 percent

Question 9

The ________ states that the real interest rate equals the nominal interest rate minus 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 10

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 11

If the amount payable in two years is $2420 for a simple loan at 10 percent interest,the loan amount is ________.

Accepted Answer

A)  $1000 
B)  $1210 
C)  $2000 
D)  $2200 
A)  $1000 
B)  $1210 
C)  $2000 
D)  $2200

Question 12

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 13

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 14

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 15

Assuming the same coupon rate and maturity length,when the interest rate on a Real Return Bond is 3 percent,and the yield on a nonindexed Canada 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 16

Which of the following bonds would you prefer to be buying?

Accepted Answer

A)  A $10,000 face-value security with a 10 percent coupon selling for $9,000 
B)  A $10,000 face-value security with a 7 percent coupon selling for $10,000 
C)  A $10,000 face-value security with a 9 percent coupon selling for $10,000 
D)  A $10,000 face-value security with a 10 percent coupon selling for $10,000 
A)  A $10,000 face-value security with a 10 percent coupon selling for $9,000 
B)  A $10,000 face-value security with a 7 percent coupon selling for $10,000 
C)  A $10,000 face-value security with a 9 percent coupon selling for $10,000 
D)  A $10,000 face-value security with a 10 percent coupon selling for $10,000

Question 17

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 18

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 19

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 20

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

Exam 4: Understanding Interest Rates

An equal increase in all bond interest rates ________.

A coupon bond that has no maturity date and no repayment of principal is called a ________.

Which of the following is true for a coupon bond?

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

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

Which of the following is generally true of all bonds?

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

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

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

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

If the amount payable in two years is $2420 for a simple loan at 10 percent interest,the loan amount is ________.

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 ________.

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

A fully amortized loan is another name for ________.

Assuming the same coupon rate and maturity length,when the interest rate on a Real Return Bond is 3 percent,and the yield on a nonindexed Canada bond is 8 percent,the expected rate of inflation is ________.

Which of the following bonds would you prefer to be buying?

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

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 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.

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 ________.

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

Financial Crises

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Nonbank Finance

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

The ISLM Model

Filters

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

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 .