Question 1

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 B

Question 2

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. D

Question 3

The interest rate that equates the present value of payments received from a debt instrument with its value today is the

Accepted Answer

A) simple interest rate. 
B) current yield. 
C) yield to maturity. 
D) real interest rate. 
A) simple interest rate. 
B) current yield. 
C) yield to maturity. 
D) real interest rate. C

Question 4

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 5

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 6

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 7

If the interest rate is 5%,what is the present value of a security that pays you $1,050 next year and $1,102.50 two years from now? If this security sold for $2200,is the yield to maturity greater or less than 5%? Why?

Accepted Answer

PV = $1,050/(1.+.05)+ $1,102.5

Question 8

A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment 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

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 10

Interest-rate risk is the riskiness of an asset's returns due to

Accepted Answer

A) interest-rate changes. 
B) changes in the coupon rate. 
C) default of the borrower. 
D) changes in the asset's maturity. 
A) interest-rate changes. 
B) changes in the coupon rate. 
C) default of the borrower. 
D) changes in the asset's maturity.

Question 11

Assuming the same coupon rate and maturity length,when the interest rate on a Treasury Inflation Protected Security is 3 percent,and the yield on a nonindexed Treasury 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 12

Which of the following $5,000 face-value securities has the highest to maturity?

Accepted Answer

A) A 6 percent coupon bond selling for $5,000 
B) A 6 percent coupon bond selling for $5,500 
C) A 10 percent coupon bond selling for $5,000 
D) A 12 percent coupon bond selling for $4,500 
A) A 6 percent coupon bond selling for $5,000 
B) A 6 percent coupon bond selling for $5,500 
C) A 10 percent coupon bond selling for $5,000 
D) A 12 percent coupon bond selling for $4,500

Question 13

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

Accepted Answer

Even though the nominal rate f

Question 14

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.

Question 15

The ________ is defined as the payments to the owner plus the change in a security's value expressed as a fraction of the security's purchase price.

Accepted Answer

A) yield to maturity 
B) current yield 
C) rate of return 
D) yield rate 
A) yield to maturity 
B) current yield 
C) rate of return 
D) yield rate

Question 16

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 17

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 18

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

Accepted Answer

A) A 5 percent coupon bond with a price of $600 
B) A 5 percent coupon bond with a price of $800 
C) A 5 percent coupon bond with a price of $1,000 
D) A 5 percent coupon bond with a price of $1,200 
A) A 5 percent coupon bond with a price of $600 
B) A 5 percent coupon bond with a price of $800 
C) A 5 percent coupon bond with a price of $1,000 
D) A 5 percent coupon bond with a price of $1,200

Question 19

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.

Question 20

Which of the following $1,000 face-value securities has the highest 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 12 percent coupon bond selling for $1,000 
D) A 12 percent coupon bond selling for $1,100 
A) A 5 percent coupon bond selling for $1,000 
B) A 10 percent coupon bond selling for $1,000 
C) A 12 percent coupon bond selling for $1,000 
D) A 12 percent coupon bond selling for $1,100

Exam 4: Understanding Interest Rates

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

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

The interest rate that equates the present value of payments received from a debt instrument with its value today is the

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

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

A discount bond

If the interest rate is 5%,what is the present value of a security that pays you $1,050 next year and $1,102.50 two years from now? If this security sold for $2200,is the yield to maturity greater or less than 5%? Why?

A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a

The interest rate on a consol equals the

Interest-rate risk is the riskiness of an asset's returns due to

Assuming the same coupon rate and maturity length,when the interest rate on a Treasury Inflation Protected Security is 3 percent,and the yield on a nonindexed Treasury bond is 8 percent,the expected rate of inflation is

Which of the following $5,000 face-value securities has the highest to maturity?

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

Duration is

The ________ is defined as the payments to the owner plus the change in a security's value expressed as a fraction of the security's purchase price.

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

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

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

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

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

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 and the Subprime Meltdown

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 for Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

The Demand for Money

The Islm Model

Monetary and Fiscal Policy in the ISLM Model

Aggregate Demand and Supply Analysis

Transmission Mechanisms of Monetary Policy: The Evidence

Money and Inflation

Rational Expectations: Implications for Policy

Filters

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