Question 1

With an interest rate of 6 percent,the present value of $100 received one year from now is approximately

Accepted Answer

A)  $106. 
B)  $100. 
C)  $94. 
D)  $92. 
A)  $106. 
B)  $100. 
C)  $94. 
D)  $92.

Question 2

Dollars received in the future are worth ________ than dollars received today.The process of calculating what dollars received in the future are worth today is called ________.

Accepted Answer

A)  more; discounting 
B)  less; discounting 
C)  more; inflating 
D)  less; inflating 
A)  more; discounting 
B)  less; discounting 
C)  more; inflating 
D)  less; inflating

Question 3

The real interest rate is actually the ex ante real interest rate because it is adjusted for ________ changes in the price level.

Accepted Answer

A)  actual 
B)  expected 
C)  nominal 
D)  real 
A)  actual 
B)  expected 
C)  nominal 
D)  real

Question 4

(I)A simple loan requires the borrower to repay the principal at the maturity date along with an interest payment.
(II)A discount bond is bought at a price below its face value,and the face value is repaid at the maturity date.

Accepted Answer

A)  (I) is true, (II) false. 
B)  (I) is false, (II) true. 
C)  Both are true. 
D)  Both are false. 
A)  (I) is true, (II) false. 
B)  (I) is false, (II) true. 
C)  Both are true. 
D)  Both are false.

Question 5

If a $5,000 coupon bond has a coupon rate of 13 percent,then the coupon payment every year is

Accepted Answer

A)  $650. 
B)  $1,300. 
C)  $130. 
D)  $13. 
E)  None of the above. 
A)  $650. 
B)  $1,300. 
C)  $130. 
D)  $13. 
E)  None of the above.

Question 6

The real interest rate is equal to the nominal rate minus inflation.

Accepted Answer

A) True 
 B)False

Question 7

(I)Prices of longer-maturity bonds respond more dramatically to changes in interest rates. (II)Prices and returns for long-term bonds are less volatile than those for short-term bonds.

Accepted Answer

A)  (I) is true, (II) false. 
B)  (I) is false, (II) true. 
C)  Both are true. 
D)  Both are false. 
A)  (I) is true, (II) false. 
B)  (I) is false, (II) true. 
C)  Both are true. 
D)  Both are false.

Question 8

A bond's future payments are called its

Accepted Answer

A)  cash flows. 
B)  maturity values. 
C)  discounted present values. 
D)  yields to maturity. 
A)  cash flows. 
B)  maturity values. 
C)  discounted present values. 
D)  yields to maturity.

Question 9

An indexed bond is a bonds whose interest and/or principal payments are adjusted for changes in the price level.

Accepted Answer

A) True 
 B)False

Question 10

A frequently used approximation for the yield to maturity on a long-term bond is the

Accepted Answer

A)  coupon rate. 
B)  current yield. 
C)  cash flow interest rate. 
D)  real interest rate. 
A)  coupon rate. 
B)  current yield. 
C)  cash flow interest rate. 
D)  real interest rate.

Question 11

Describe how Treasury Inflation Protection Securities (TIPS)work and how they help policymakers estimate expected inflation.

Accepted Answer

Treasury Inflation-Protected Securities

Question 12

How does reinvestment risk differ from interest-rate risk?

Accepted Answer

When interest rate rises after the issue

Question 13

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 14

A $10,000,8 percent coupon bond that sells for $10,100 has a yield to maturity ________.

Accepted Answer

A)  equal to 8 percent 
B)  greater than 8 percent 
C)  less than 8 perfect 
D)  that cannot be calculated 
A)  equal to 8 percent 
B)  greater than 8 percent 
C)  less than 8 perfect 
D)  that cannot be calculated

Question 15

The yield to maturity on a consol bond that pays $100 yearly and sells for $500 is

Accepted Answer

A)  5 percent. 
B)  10 percent. 
C)  12.5 percent. 
D)  20 percent. 
E)  25 percent. 
A)  5 percent. 
B)  10 percent. 
C)  12.5 percent. 
D)  20 percent. 
E)  25 percent.

Question 16

The interest rate that equates the present value of the cash flow received from a debt instrument with its market price today is the

Accepted Answer

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

Question 17

When a bond's price falls,its yield to maturity ________ and its current yield ________.

Accepted Answer

A)  falls; falls 
B)  rises; rises 
C)  falls; rises 
D)  rises; falls 
A)  falls; falls 
B)  rises; rises 
C)  falls; rises 
D)  rises; falls

Question 18

Increasing duration implies that interest-rate risk has increased.

Accepted Answer

A) True 
 B)False

Question 19

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 20

If a $5,000 face value discount bond maturing in one year is selling for $5,000,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.

Exam 3: What Do Interest Rates Mean and What Is Their Role in Valuation?

With an interest rate of 6 percent,the present value of $100 received one year from now is approximately

Dollars received in the future are worth ________ than dollars received today.The process of calculating what dollars received in the future are worth today is called ________.

The real interest rate is actually the ex ante real interest rate because it is adjusted for ________ changes in the price level.

(I)A simple loan requires the borrower to repay the principal at the maturity date along with an interest payment. (II)A discount bond is bought at a price below its face value,and the face value is repaid at the maturity date.

If a $5,000 coupon bond has a coupon rate of 13 percent,then the coupon payment every year is

The real interest rate is equal to the nominal rate minus inflation.

(I)Prices of longer-maturity bonds respond more dramatically to changes in interest rates. (II)Prices and returns for long-term bonds are less volatile than those for short-term bonds.

A bond's future payments are called its

An indexed bond is a bonds whose interest and/or principal payments are adjusted for changes in the price level.

A frequently used approximation for the yield to maturity on a long-term bond is the

Describe how Treasury Inflation Protection Securities (TIPS)work and how they help policymakers estimate expected inflation.

How does reinvestment risk differ from interest-rate risk?

The nominal interest rate minus the expected rate of inflation

A $10,000,8 percent coupon bond that sells for $10,100 has a yield to maturity ________.

The yield to maturity on a consol bond that pays $100 yearly and sells for $500 is

The interest rate that equates the present value of the cash flow received from a debt instrument with its market price today is the

When a bond's price falls,its yield to maturity ________ and its current yield ________.

Increasing duration implies that interest-rate risk has increased.

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

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

Why Study Financial Markets and Institutions?

Overview of the Financial System

Why Do Interest Rates Change?

How Do Risk and Term Structure Affect Interest Rates?

Are Financial Markets Efficient?

Why Do Financial Institutions Exist?

Why Do Financial Crises Occur and

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging with Financial Derivatives

Financial Crises In Emerging Market Economies

Savings Associations and Credit Unions

Finance Companies

Filters

Dollars received in the future are worth than dollars received today.The process of calculating what dollars received in the future are worth today is called .

When a bond's price falls,its yield to maturity and its current yield .