Question 1

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

Accepted Answer

The coupon rate, yield to maturity, and

Question 2

The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100 one year later is

Accepted Answer

A) 5 percent. 
B) 10 percent. 
C) 14 percent. 
D) 15 percent. 
A) 5 percent. 
B) 10 percent. 
C) 14 percent. 
D) 15 percent.

Question 3

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 4

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

Accepted Answer

A) True 
 B)False

Question 5

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 one year later?

Accepted Answer

A) 5 percent 
B) 10 percent 
C) -5 percent 
D) 25 percent 
E) None of the above 
A) 5 percent 
B) 10 percent 
C) -5 percent 
D) 25 percent 
E) None of the above

Question 6

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 7

The duration of a ten-year, 10 percent coupon bond when the interest rate is 10 percent is 6.76 years. What happens to the price of the bond if the interest rate falls to 8 percent?

Accepted Answer

A) It rises 20 percent. 
B) It rises 12.3 percent. 
C) It falls 20 percent. 
D) It falls 12.3 percent. 
A) It rises 20 percent. 
B) It rises 12.3 percent. 
C) It falls 20 percent. 
D) It falls 12.3 percent.

Question 8

If you expect the inflation rate to be 15 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) 7 percent. 
B) 22 percent. 
C) -15 percent. 
D) -8 percent. 
E) none of the above. 
A) 7 percent. 
B) 22 percent. 
C) -15 percent. 
D) -8 percent. 
E) none of the above.

Question 9

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 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 negatively 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 10

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 11

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 12

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

Accepted Answer

A) True 
 B)False

Question 13

What is the distinction between the nominal interest rate and the real interest rate? Which is a better indicator of incentives to borrow and lend? Why?

Accepted Answer

The nominal interest rate is the interes

Question 14

The change in the bond's price relative to the initial purchase price is

Accepted Answer

A) the current yield. 
B) coupon payment. 
C) yield to maturity. 
D) rate of capital gain. 
A) the current yield. 
B) coupon payment. 
C) yield to maturity. 
D) rate of capital gain.

Question 15

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

Accepted Answer

A) True 
 B)False

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

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

The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100 one year later 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

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

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 one year later?

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?

The duration of a ten-year, 10 percent coupon bond when the interest rate is 10 percent is 6.76 years. What happens to the price of the bond if the interest rate falls to 8 percent?

If you expect the inflation rate to be 15 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

Which of the following are true for a coupon bond?

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

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

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

What is the distinction between the nominal interest rate and the real interest rate? Which is a better indicator of incentives to borrow and lend? Why?

The change in the bond's price relative to the initial purchase price is

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

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