Question 1

If a $5000 face-value discount bond maturing in one year is selling for $5000, 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 2

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 3

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 4

A relative has just won a state lottery paying $20 million in installments of $1 million per year for twenty years. Your relative states that she is $20 million richer. Is she correct? Create a simple example for two years to illustrate your position.

Accepted Answer

The relative is incorrect. The discounte

Question 5

A discount bond selling for $15000 with a face value of $20000 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 6

When talking about a coupon bond, face value and ________ mean the same thing.

Accepted Answer

A) par value 
B) coupon value 
C) amortized value 
D) discount value 
A) par value 
B) coupon value 
C) amortized value 
D) discount value

Question 7

A discount bond ________.

Accepted Answer

A) pays the bondholder a fixed amount every period and the face value at maturity 
B) pays the bondholder the face value at maturity 
C) pays all interest and the face value at maturity 
D) pays the face value at maturity plus any capital gain 
A) pays the bondholder a fixed amount every period and the face value at maturity 
B) pays the bondholder the face value at maturity 
C) pays all interest and the face value at maturity 
D) pays the face value at maturity plus any capital gain

Question 8

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 9

Explain the Fisher equation. Construct a numerical example demonstrating that, depending on the expected rate of inflation, a lower nominal rate may still reflect a higher real cost of borrowing. Explain your example thoroughly.

Accepted Answer

The answer should list the equation that

Question 10

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 11

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 12

Which of the following is true concerning the distinction between interest rates and returns?

Accepted Answer

A) The rate of return on a bond will not necessarily equal the interest rate on that bond. 
B) The return can be expressed as the difference between the current yield and the rate of capital gains. 
C) The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1. 
D) The return can be expressed as the sum of the discount yield and the rate of capital gains. 
A) The rate of return on a bond will not necessarily equal the interest rate on that bond. 
B) The return can be expressed as the difference between the current yield and the rate of capital gains. 
C) The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1. 
D) The return can be expressed as the sum of the discount yield and the rate of capital gains.

Question 13

Which of the following is 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 14

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 15

If $22050 is the amount payable in two years for a $20000 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 16

The interest rate on a consol equals the ________.

Accepted Answer

A) price times the coupon payment 
B) price divided by the coupon payment 
C) coupon payment plus the price 
D) coupon payment divided by the price 
A) price times the coupon payment 
B) price divided by the coupon payment 
C) coupon payment plus the price 
D) coupon payment divided by the price

Question 17

The present value of a fixed-payment loan is calculated as the ________ of the present value of all cash flow payments.

Accepted Answer

A) sum 
B) difference 
C) multiple 
D) log 
A) sum 
B) difference 
C) multiple 
D) log

Question 18

For a 3-year simple loan of $10000 at 10 percent, the amount to be repaid is ________.

Accepted Answer

A) $10030 
B) $10300 
C) $13000 
D) $13310 
A) $10030 
B) $10300 
C) $13000 
D) $13310

Question 19

What is the return on a 5 percent coupon bond that initially sells for $1000 and sells for $1200 next year?

Accepted Answer

A) 5 percent 
B) 10 percent 
C) -5 percent 
D) 25 percent 
A) 5 percent 
B) 10 percent 
C) -5 percent 
D) 25 percent

Question 20

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

Accepted Answer

A) -3 percent 
B) 7 percent 
C) 3 percent 
D) 2 percent 
A) -3 percent 
B) 7 percent 
C) 3 percent 
D) 2 percent

Exam 4: Understanding Interest Rates

If a $5000 face-value discount bond maturing in one year is selling for $5000, then its yield to maturity is ________.

The duration of a coupon bond increases ________.

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

A relative has just won a state lottery paying $20 million in installments of $1 million per year for twenty years. Your relative states that she is $20 million richer. Is she correct? Create a simple example for two years to illustrate your position.

A discount bond selling for $15000 with a face value of $20000 in one year has a yield to maturity of ________.

When talking about a coupon bond, face value and ________ mean the same thing.

A discount bond ________.

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

Explain the Fisher equation. Construct a numerical example demonstrating that, depending on the expected rate of inflation, a lower nominal rate may still reflect a higher real cost of borrowing. Explain your example thoroughly.

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

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

Which of the following is true concerning the distinction between interest rates and returns?

Which of the following is true of fixed payment loans?

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

If $22050 is the amount payable in two years for a $20000 simple loan made today, the interest rate is ________.

The interest rate on a consol equals the ________.

The present value of a fixed-payment loan is calculated as the ________ of the present value of all cash flow payments.

For a 3-year simple loan of $10000 at 10 percent, the amount to be repaid is ________.

What is the return on a 5 percent coupon bond that initially sells for $1000 and sells for $1200 next year?

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

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

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