Question 1

If you expect the inflation rate to be 4 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) -3 percent. 
B) -2 percent. 
C) 3 percent. 
D) 7 percent. 
A) -3 percent. 
B) -2 percent. 
C) 3 percent. 
D) 7 percent.

Question 2

The ________ interest rate more accurately reflects the true cost of borrowing.

Accepted Answer

A) nominal 
B) real 
C) discount 
D) market 
A) nominal 
B) real 
C) discount 
D) market

Question 3

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 4

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 5

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 6

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 7

The riskiness of an asset's returns due to changes in interest rates is

Accepted Answer

A) exchange-rate risk. 
B) price risk. 
C) asset risk. 
D) interest-rate risk. 
A) exchange-rate risk. 
B) price risk. 
C) asset risk. 
D) interest-rate risk.

Question 8

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

Question 9

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 10

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 11

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 12

Which of the following are 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 13

Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity of 15 percent.If the interest rate on one-year bonds rises from 15 percent to 20 percent over the course of the year,what is the yearly return on the bond you are holding?

Accepted Answer

A) 5 percent 
B) 10 percent 
C) 15 percent 
D) 20 percent 
A) 5 percent 
B) 10 percent 
C) 15 percent 
D) 20 percent

Question 14

For a 3-year simple loan of $10,000 at 10 percent,the amount to be repaid is

Accepted Answer

A) $10,030. 
B) $10,300. 
C) $13,000. 
D) $13,310. 
A) $10,030. 
B) $10,300. 
C) $13,000. 
D) $13,310.

Question 15

All of the following are examples of coupon bonds except

Accepted Answer

A) Corporate bonds 
B) U.S.Treasury bills 
C) U.S.Treasury notes 
D) U.S.Treasury bonds 
A) Corporate bonds 
B) U.S.Treasury bills 
C) U.S.Treasury notes 
D) U.S.Treasury bonds

Question 16

If a $10,000 face-value discount bond maturing in one year is selling for $5,000,then its yield to maturity is

Accepted Answer

A) 5 percent. 
B) 10 percent. 
C) 50 percent. 
D) 100 percent. 
A) 5 percent. 
B) 10 percent. 
C) 50 percent. 
D) 100 percent.

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 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 18

Which of the following are 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 19

Economists consider the ________ to be the most accurate measure of interest rates.

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.

Question 20

Which of the following are 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.

Exam 4: Understanding Interest Rates

If you expect the inflation rate to be 4 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

The ________ interest rate more accurately reflects the true cost of borrowing.

An equal increase in all bond interest rates

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

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

A fully amortized loan is another name for

The riskiness of an asset's returns due to changes in interest rates is

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

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

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

Which of the following are generally true of bonds?

Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity of 15 percent.If the interest rate on one-year bonds rises from 15 percent to 20 percent over the course of the year,what is the yearly return on the bond you are holding?

For a 3-year simple loan of $10,000 at 10 percent,the amount to be repaid is

All of the following are examples of coupon bonds except

If a $10,000 face-value discount bond maturing in one year is selling for $5,000,then its yield to maturity is

The nominal interest rate minus the expected rate of inflation

Which of the following are true of fixed payment loans?

Economists consider the ________ to be the most accurate measure of interest rates.

Which of the following are true for a coupon bond?

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

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