Question 1

The yield to maturity for a one-year discount bond equals

Accepted Answer

A)  the increase in price over the year, divided by the initial price. 
B)  the increase in price over the year, divided by the face value. 
C)  the increase in price over the year, divided by the interest rate. 
D)  none of the above. 
A)  the increase in price over the year, divided by the initial price. 
B)  the increase in price over the year, divided by the face value. 
C)  the increase in price over the year, divided by the interest rate. 
D)  none of the above.

Question 2

A loan that requires the borrower to make the same payment every period until the maturity date is called a

Accepted Answer

A)  simple loan. 
B)  fixed-payment loan. 
C)  discount loan. 
D)  same-payment loan. 
E)  none of the above. 
A)  simple loan. 
B)  fixed-payment loan. 
C)  discount loan. 
D)  same-payment loan. 
E)  none of the above.

Question 3

Prices for long-term bonds are more volatile than for shorter-term bonds.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A)  A 5 percent coupon bond selling for $1,000 
B)  A 7 percent coupon bond selling for $1,100 
C)  A 15 percent coupon bond selling for $1,000 
D)  A 15 percent coupon bond selling for $900 
A)  A 5 percent coupon bond selling for $1,000 
B)  A 7 percent coupon bond selling for $1,100 
C)  A 15 percent coupon bond selling for $1,000 
D)  A 15 percent coupon bond selling for $900

Question 5

A consol bond is a bond that

Accepted Answer

A)  pays interest annually and its face value at maturity. 
B)  pays interest in perpetuity and never matures. 
C)  pays no interest but pays its face value at maturity. 
D)  rises in value as its yield to maturity rises. 
A)  pays interest annually and its face value at maturity. 
B)  pays interest in perpetuity and never matures. 
C)  pays no interest but pays its face value at maturity. 
D)  rises in value as its yield to maturity rises.

Question 6

A bond's current market value is equal to the present value of the coupon payments plus the present value of the face amount.

Accepted Answer

A) True 
 B)False

Question 7

The Fisher equation states that

Accepted Answer

A)  the nominal interest rate equals the real interest rate plus the expected rate of inflation. 
B)  the real interest rate equals the nominal interest rate less the expected rate of inflation. 
C)  the nominal interest rate equals the real interest rate less the expected rate of inflation. 
D)  both A and B of the above are true. 
E)  both A and C of the above are true. 
A)  the nominal interest rate equals the real interest rate plus the expected rate of inflation. 
B)  the real interest rate equals the nominal interest rate less the expected rate of inflation. 
C)  the nominal interest rate equals the real interest rate less the expected rate of inflation. 
D)  both A and B of the above are true. 
E)  both A and C of the above are true.

Question 8

The current yield is the best measure of an investor's return from holding a bond.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following are generally true of all 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 losses on bonds whose term to maturities are longer than the holding period. 
C)  The longer a bond's maturity, the greater is the price change associated with a given interest rate change. 
D)  All of the above are true. 
E)  Only A and B of the above are true. 
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 losses on bonds whose term to maturities are longer than the holding period. 
C)  The longer a bond's maturity, the greater is the price change associated with a given interest rate change. 
D)  All of the above are true. 
E)  Only A and B of the above are true.

Question 10

If a $10,000 face value discount bond maturing in one year is selling for $8,000,then its yield to maturity is

Accepted Answer

A)  10 percent. 
B)  20 percent. 
C)  25 percent. 
D)  40 percent. 
A)  10 percent. 
B)  20 percent. 
C)  25 percent. 
D)  40 percent.

Question 11

An ex post real interest rate 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 12

The yield to maturity on a consol bond that pays $200 yearly and sells for $1000 is

Accepted Answer

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

Question 13

If you expect the inflation rate to be 5 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)  -12 percent. 
B)  -2 percent. 
C)  2 percent. 
D)  12 percent. 
A)  -12 percent. 
B)  -2 percent. 
C)  2 percent. 
D)  12 percent.

Question 14

All else being equal,the greater the interest rate the greater the duration is.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following are true concerning the distinction between interest rates and return?

Accepted Answer

A)  The rate of return on a bond will not necessarily equal the interest rate on that bond. 
B)  The return can be expressed as the sum of the current yield and the rate of capital gains. 
C)  The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1. 
D)  All of the above are true. 
E)  Only A and B of the above are true. 
A)  The rate of return on a bond will not necessarily equal the interest rate on that bond. 
B)  The return can be expressed as the sum of the current yield and the rate of capital gains. 
C)  The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1. 
D)  All of the above are true. 
E)  Only A and B of the above are true.

Question 16

Distinguish between coupon rate,yield to maturity,and current yield.

Accepted Answer

The coupon rate, yield to maturity, and

Question 17

With an interest rate of 5 percent,the present value of $100 received one year from now is approximately

Accepted Answer

A)  $100. 
B)  $105. 
C)  $95. 
D)  $90. 
A)  $100. 
B)  $105. 
C)  $95. 
D)  $90.

Question 18

What is the purpose of discounting cash flows?

Accepted Answer

The purpose of discounting cash flows is

Question 19

For a simple loan,the simple interest rate equals the

Accepted Answer

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

Question 20

The current yield is the yearly coupon payment divided by the current market price.

Accepted Answer

A) True 
 B)False

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

The yield to maturity for a one-year discount bond equals

A loan that requires the borrower to make the same payment every period until the maturity date is called a

Prices for long-term bonds are more volatile than for shorter-term bonds.

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

A consol bond is a bond that

A bond's current market value is equal to the present value of the coupon payments plus the present value of the face amount.

The Fisher equation states that

The current yield is the best measure of an investor's return from holding a bond.

Which of the following are generally true of all bonds?

If a $10,000 face value discount bond maturing in one year is selling for $8,000,then its yield to maturity is

An ex post real interest rate is adjusted for ________ changes in the price level.

The yield to maturity on a consol bond that pays $200 yearly and sells for $1000 is

If you expect the inflation rate to be 5 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

All else being equal,the greater the interest rate the greater the duration is.

Which of the following are true concerning the distinction between interest rates and return?

Distinguish between coupon rate,yield to maturity,and current yield.

With an interest rate of 5 percent,the present value of $100 received one year from now is approximately

What is the purpose of discounting cash flows?

For a simple loan,the simple interest rate equals the

The current yield is the yearly coupon payment divided by the current market price.

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

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