Question 1

In which of the following situations would you prefer to be making a loan?

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. B

Question 2

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. C

Question 3

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 C

Question 4

Why are long-term bonds more risky than short-term bonds?

Accepted Answer

Long-term bonds are generally considered

Question 5

The return on a 10 percent coupon bond that initially sells for $1,000 and sells for $900 one year later is

Accepted Answer

A) -10 percent. 
B) -5 percent. 
C) 0 percent. 
D) 5 percent. 
A) -10 percent. 
B) -5 percent. 
C) 0 percent. 
D) 5 percent.

Question 6

The interest rate that is adjusted for actual changes in the price level is called the

Accepted Answer

A) ex post real interest rate. 
B) expected interest rate. 
C) ex ante real interest rate. 
D) none of the above. 
A) ex post real interest rate. 
B) expected interest rate. 
C) ex ante real interest rate. 
D) none of the above.

Question 7

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 negatively related. 
C) The yield to maturity is greater than the coupon rate when the bond price is below 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 negatively related. 
C) The yield to maturity is greater than the coupon rate when the bond price is below the par value. 
D) All of the above are true. 
E) Only A and B of the above are true.

Question 8

Why may a bond's rate of return differ from its yield to maturity?

Accepted Answer

The answer of Why may a bond's rate of return...

Question 9

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 10

With an interest rate of 10 percent, the present value of a security that pays $1,100 next year and $1,460 four years from now is approximately

Accepted Answer

A) $1,000. 
B) $2,000. 
C) $2,560. 
D) $3,000. 
A) $1,000. 
B) $2,000. 
C) $2,560. 
D) $3,000.

Question 11

A long-term bond's price is less affected by interest rate movements than a short-term bond's price.

Accepted Answer

A) True 
 B)False

Question 12

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

Question 13

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 14

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 15

What is interest-rate risk and how is it measured?

Accepted Answer

The answer of What is interest-rate risk and how is...

Question 16

(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 17

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.

Question 18

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 19

(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 20

Unless a bond defaults, an investor cannot lose money investing in bonds.

Accepted Answer

A) True 
 B)False

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

In which of the following situations would you prefer to be making a loan?

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

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?

Why are long-term bonds more risky than short-term bonds?

The return on a 10 percent coupon bond that initially sells for $1,000 and sells for $900 one year later is

The interest rate that is adjusted for actual changes in the price level is called the

Which of the following are true for a coupon bond?

Why may a bond's rate of return differ from its yield to maturity?

For a simple loan, the simple interest rate equals the

With an interest rate of 10 percent, the present value of a security that pays $1,100 next year and $1,460 four years from now is approximately

A long-term bond's price is less affected by interest rate movements than a short-term bond's price.

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

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

Which of the following are generally true of all bonds?

What is interest-rate risk and how is it measured?

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

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 ________.

(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.

Unless a bond defaults, an investor cannot lose money investing in bonds.

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 Why Are They so Damaging to the Economy

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

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 .