Question 1

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 C

Question 2

An $8000 coupon bond with a $400 coupon payment every year has a coupon rate of ________.

Accepted Answer

A) 5 percent 
B) 8 percent 
C) 10 percent 
D) 40 percent 
A) 5 percent 
B) 8 percent 
C) 10 percent 
D) 40 percent A

Question 3

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 C

Question 4

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 5

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 6

Bonds whose term-to-maturity is longer than the holding period are subject to ________.

Accepted Answer

A) interest rate risk 
B) exchange-rate risk 
C) inflation 
D) deflation 
A) interest rate risk 
B) exchange-rate risk 
C) inflation 
D) deflation

Question 7

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 8

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

Question 9

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 10

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 11

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 12

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 13

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 14

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 15

A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value 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

Question 16

Which of the following is generally true of bonds?

Accepted Answer

A) The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period. 
B) A rise in interest rates is associated with a fall in bond prices, resulting in capital gains on bonds whose terms to maturity are longer than the holding periods. 
C) The longer a bond's maturity, the smaller is the size of the price change associated with an interest rate change. 
D) Prices and returns for short-term bonds are more volatile than those for longer-term bonds. 
A) The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period. 
B) A rise in interest rates is associated with a fall in bond prices, resulting in capital gains on bonds whose terms to maturity are longer than the holding periods. 
C) The longer a bond's maturity, the smaller is the size of the price change associated with an interest rate change. 
D) Prices and returns for short-term bonds are more volatile than those for longer-term bonds.

Question 17

What is the return on a 5 percent coupon bond that initially sells for $1000 and sells for $900 next year?

Accepted Answer

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

Question 18

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

Question 19

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 20

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

Exam 4: Understanding Interest Rates

Duration is ________.

An $8000 coupon bond with a $400 coupon payment every year has a coupon rate of ________.

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

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

Bonds whose term-to-maturity is longer than the holding period are subject to ________.

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

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

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 discount bond is ________ related to the current bond price.

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.

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

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

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

A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a ________.

Which of the following is generally true of bonds?

What is the return on a 5 percent coupon bond that initially sells for $1000 and sells for $900 next year?

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 ________.

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

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 ________.

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

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

Financial Crises in Emerging Markets

The ISLM Model

Non-Bank Finance

Filters

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