Question 1

Reinvestment risk is the risk that

Accepted Answer

A)  a bond's value may fall in the future. 
B)  a bond's future coupon payments may have to be invested at a rate lower than the bond's yield to maturity. 
C)  an investor's holding period will be short and equal in length to the maturity of the bonds he or she holds. 
D)  a bond's issuer may fail to make the future coupon payments and the investor will have no cash to reinvest. 
A)  a bond's value may fall in the future. 
B)  a bond's future coupon payments may have to be invested at a rate lower than the bond's yield to maturity. 
C)  an investor's holding period will be short and equal in length to the maturity of the bonds he or she holds. 
D)  a bond's issuer may fail to make the future coupon payments and the investor will have no cash to reinvest.

Question 2

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)  All of the above are true. 
E)  Only A and B of the above are true. 
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)  All of the above are true. 
E)  Only A and B of the above are true.

Question 3

Discounting the future is the procedure used to find the future value of a dollar received today.

Accepted Answer

A) True 
 B)False

Question 4

Bonds with a maturity that is longer than the holding period have no interest-rate risk.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

The return on a bond is equal to the yield to maturity when

Accepted Answer

A)  the holding period is longer than the maturity of the bond. 
B)  the maturity of the bond is longer than the holding period. 
C)  the holding period and the maturity of the bond are identical. 
D)  none of the above. 
A)  the holding period is longer than the maturity of the bond. 
B)  the maturity of the bond is longer than the holding period. 
C)  the holding period and the maturity of the bond are identical. 
D)  none of the above.

Question 7

Bonds whose term to maturity is shorter than the holding period are also subject to

Accepted Answer

A)  default. 
B)  reinvestment risk. 
C)  both of the above. 
D)  none of the above. 
A)  default. 
B)  reinvestment risk. 
C)  both of the above. 
D)  none of the above.

Question 8

The nominal interest rate minus the expected rate of inflation

Accepted Answer

A)  defines the real interest rate. 
B)  is a better measure of the incentives to borrow and lend than the nominal interest rate. 
C)  is a more accurate indicator of the tightness of credit market conditions than the nominal interest rate. 
D)  all of the above. 
E)  only A and B of the above. 
A)  defines the real interest rate. 
B)  is a better measure of the incentives to borrow and lend than the nominal interest rate. 
C)  is a more accurate indicator of the tightness of credit market conditions than the nominal interest rate. 
D)  all of the above. 
E)  only A and B of the above.

Question 9

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

Question 10

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

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 11

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 12

The current yield on a coupon bond is the bond's ________ divided by its ________.

Accepted Answer

A)  annual coupon payment; price 
B)  annual coupon payment; face value 
C)  annual return; price 
D)  annual return; face value 
A)  annual coupon payment; price 
B)  annual coupon payment; face value 
C)  annual return; price 
D)  annual return; face value

Question 13

Which of the following are generally true of all bonds?

Accepted Answer

A)  The longer a bond's maturity, the lower is the rate of return that occurs as a result of the increase in the interest rate. 
B)  Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise. 
C)  Prices and returns for long-term bonds are more volatile than those for shorter-term bonds. 
D)  All of the above are true. 
E)  Only A and B of the above are true. 
A)  The longer a bond's maturity, the lower is the rate of return that occurs as a result of the increase in the interest rate. 
B)  Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise. 
C)  Prices and returns for long-term bonds are more volatile than those for shorter-term bonds. 
D)  All of the above are true. 
E)  Only A and B of the above are true.

Question 14

Changes in interest rates make investments in long-term bonds risky.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following are true of coupon bonds?

Accepted Answer

A)  The owner of a coupon bond receives a fixed interest payment every year until the maturity date, when the face or par value is repaid. 
B)  U.S. Treasury bonds and notes are examples of coupon bonds. 
C)  Corporate bonds are examples of coupon bonds. 
D)  All of the above. 
E)  Only A and B of the above. 
A)  The owner of a coupon bond receives a fixed interest payment every year until the maturity date, when the face or par value is repaid. 
B)  U.S. Treasury bonds and notes are examples of coupon bonds. 
C)  Corporate bonds are examples of coupon bonds. 
D)  All of the above. 
E)  Only A and B of the above.

Question 16

If the interest rates on all bonds rise from 5 to 6 percent over the course of the year,which bond would you prefer to have been holding?

Accepted Answer

A)  A bond with one year to maturity 
B)  A bond with five years to maturity 
C)  A bond with ten years to maturity 
D)  A bond with twenty years to maturity 
A)  A bond with one year to maturity 
B)  A bond with five years to maturity 
C)  A bond with ten years to maturity 
D)  A bond with twenty years to maturity

Question 17

If a $10,000 face value discount bond maturing in one year is selling for $9,000,then its yield to maturity is approximately

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 18

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

Accepted Answer

A)  8 percent. 
B)  10 percent. 
C)  12 percent. 
D)  14 percent. 
A)  8 percent. 
B)  10 percent. 
C)  12 percent. 
D)  14 percent.

Question 19

If an investor's holding period is longer than the term to maturity of a bond,he or she is exposed to

Accepted Answer

A)  interest-rate risk. 
B)  reinvestment risk. 
C)  bond-market risk. 
D)  yield-to-maturity risk. 
A)  interest-rate risk. 
B)  reinvestment risk. 
C)  bond-market risk. 
D)  yield-to-maturity risk.

Question 20

A ________ is a type of loan that has the same cash flow payment every year throughout the life of the loan.

Accepted Answer

A)  discount loan 
B)  simple loan 
C)  fixed-payment loan 
D)  interest-free loan 
A)  discount loan 
B)  simple loan 
C)  fixed-payment loan 
D)  interest-free loan

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

Reinvestment risk is the risk that

Which of the following are true for a coupon bond?

Discounting the future is the procedure used to find the future value of a dollar received today.

Bonds with a maturity that is longer than the holding period have no interest-rate risk.

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

The return on a bond is equal to the yield to maturity when

Bonds whose term to maturity is shorter than the holding period are also subject to

The nominal interest rate minus the expected rate of inflation

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

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

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?

The current yield on a coupon bond is the bond's ________ divided by its ________.

Which of the following are generally true of all bonds?

Changes in interest rates make investments in long-term bonds risky.

Which of the following are true of coupon bonds?

If the interest rates on all bonds rise from 5 to 6 percent over the course of the year,which bond would you prefer to have been holding?

If a $10,000 face value discount bond maturing in one year is selling for $9,000,then its yield to maturity is approximately

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

If an investor's holding period is longer than the term to maturity of a bond,he or she is exposed to

A ________ is a type of loan that has the same cash flow payment every year throughout the life of the loan.

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

The current yield on a coupon bond is the bond's divided by its .