Question 1

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 2

A credit market instrument that pays the owner the face value of the security at the maturity date and nothing prior to then is called 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 3

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 4

The riskiness of an asset's return that results from interest rate changes is called

Accepted Answer

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

Question 5

The yield to maturity of a one-year, simple loan of $500 that requires an interest payment of $40 is

Accepted Answer

A) 5 percent. 
B) 8 percent. 
C) 12 percent. 
D) 12.5 percent. 
A) 5 percent. 
B) 8 percent. 
C) 12 percent. 
D) 12.5 percent.

Question 6

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 7

Interest-rate risk is the uncertainty that an investor faces because the interest rate at which a bond's future coupon payments can be invested is unknown.

Accepted Answer

A) True 
 B)False

Question 8

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 9

Describe the cash flows received from owning a coupon bond.

Accepted Answer

The answer of Describe the cash flows received from owning...

Question 10

With an interest rate of 8 percent, the present value of $100 received one year from now is approximately

Accepted Answer

A) $93. 
B) $96. 
C) $100. 
D) $108. 
A) $93. 
B) $96. 
C) $100. 
D) $108.

Question 11

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 12

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 13

A discount bond

Accepted Answer

A) is also called a coupon bond. 
B) is also called a zero-coupon bond. 
C) is also called a fixed-payment bond. 
D) is also called a corporate bond. 
A) is also called a coupon bond. 
B) is also called a zero-coupon bond. 
C) is also called a fixed-payment bond. 
D) is also called a corporate bond.

Question 14

When the lender provides the borrower with an amount of funds that must be repaid to the lender at the maturity date, along with an additional payment for the interest, it is called a ________.

Accepted Answer

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

Question 15

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

Accepted Answer

Treasury Inflation-Protected Securities

Question 16

The current yield goes up as the price of a bond falls.

Accepted Answer

A) True 
 B)False

Question 17

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 18

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 19

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

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 20

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

Accepted Answer

A) True 
 B)False

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

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

A credit market instrument that pays the owner the face value of the security at the maturity date and nothing prior to then is called a

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

The riskiness of an asset's return that results from interest rate changes is called

The yield to maturity of a one-year, simple loan of $500 that requires an interest payment of $40 is

A consol bond is a bond that

Interest-rate risk is the uncertainty that an investor faces because the interest rate at which a bond's future coupon payments can be invested is unknown.

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

Describe the cash flows received from owning a coupon bond.

With an interest rate of 8 percent, the present value of $100 received one year from now is approximately

Which of the following are true for a coupon bond?

Reinvestment risk is the risk that

A discount bond

When the lender provides the borrower with an amount of funds that must be repaid to the lender at the maturity date, along with an additional payment for the interest, it is called a ________.

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

The current yield goes up as the price of a bond falls.

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

The nominal interest rate minus the expected rate of inflation

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

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

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

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