Question 1

A consol paying $20 annually when the interest rate is 5 percent has a price of ________.

Accepted Answer

A) $100 
B) $200 
C) $400 
D) $800 
A) $100 
B) $200 
C) $400 
D) $800

Question 2

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 3

Prices and returns for ________ bonds are more volatile than those for ________ bonds.

Accepted Answer

A) long-term; long-term 
B) long-term; short-term 
C) short-term; long-term 
D) short-term; short-term 
A) long-term; long-term 
B) long-term; short-term 
C) short-term; long-term 
D) short-term; short-term

Question 4

If the interest rate on a Real Return Bond is 2 percent and the interest rate on a Canada bond of similar maturity is 5 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

Question 5

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 6

Assuming the same coupon rate and maturity length, the difference between the yield on a Real Return Bond and the yield on a Canada bond provides insight into ________.

Accepted Answer

A) the nominal interest rate 
B) the real interest rate 
C) the nominal exchange rate 
D) the expected inflation rate 
A) the nominal interest rate 
B) the real interest rate 
C) the nominal exchange rate 
D) the expected inflation rate

Question 7

The yield to maturity for a one-year discount bond equals the increase in price over the year, divided by the ________.

Accepted Answer

A) initial price 
B) face value 
C) interest rate 
D) coupon rate 
A) initial price 
B) face value 
C) interest rate 
D) coupon rate

Question 8

How is current yield defined? How can it be used to determine yield to maturity for long-term bonds?

Accepted Answer

The current yield is the is the yield to

Question 9

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 10

Explain why the current bond prices and interest rates are negatively related.

Accepted Answer

There are two ways to show why current b

Question 11

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 12

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 13

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 14

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 15

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 16

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 discount 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 discount rate

Question 17

If the interest rate is 5 percent, what is the present value of a security that pays you $1050 next year and $1102.50 two years from now? If this security sold for $2200, is the yield to maturity greater or less than 5 percent? Why?

Accepted Answer

PV = $1050/(1 + .05) + $1102.5

Question 18

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 19

All of the following are examples of coupon bonds except ________.

Accepted Answer

A) Corporate bonds 
B) Treasury bills 
C) Zero coupon bonds 
D) Government bonds 
A) Corporate bonds 
B) Treasury bills 
C) Zero coupon bonds 
D) Government bonds

Question 20

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

Exam 4: Understanding Interest Rates

A consol paying $20 annually when the interest rate is 5 percent has a price of ________.

An equal decrease in all bond interest rates ________.

Prices and returns for ________ bonds are more volatile than those for ________ bonds.

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

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

Assuming the same coupon rate and maturity length, the difference between the yield on a Real Return Bond and the yield on a Canada bond provides insight into ________.

The yield to maturity for a one-year discount bond equals the increase in price over the year, divided by the ________.

How is current yield defined? How can it be used to determine yield to maturity for long-term bonds?

Which of the following is true for a coupon bond?

Explain why the current bond prices and interest rates are negatively related.

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 ________.

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

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 ________.

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

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

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

If the interest rate is 5 percent, what is the present value of a security that pays you $1050 next year and $1102.50 two years from now? If this security sold for $2200, is the yield to maturity greater or less than 5 percent? Why?

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

All of the following are examples of coupon bonds except ________.

If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is ________.

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

Prices and returns for bonds are more volatile than those for bonds.

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

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

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