Deck 4: The Meaning of Interest Rates

Question 1

A ________ pays the owner a fixed coupon payment every year until the maturity date,when the ________ value is repaid.

A)coupon bond;discount
B)discount bond;discount
C)coupon bond;face
D)discount bond;face

Answer 1

coupon bond;face

Question 2

An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of

A)5 percent.
B)8 percent.
C)10 percent.
D)40 percent.

Answer 2

5 percent.

Question 3

To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of

A)face value.
B)par value.
C)deflation.
D)discounting the future.

Answer 3

discounting the future.

Question 4

A fully amortized loan is another name for

A)a simple loan.
B)a fixed-payment loan.
C)a commercial loan.
D)an unsecured loan.

Question 5

Which of the following are TRUE of fixed payment loans?

A)The borrower repays both the principal and interest at the maturity date.
B)Installment loans and mortgages are frequently of the fixed payment type.
C)The borrower pays interest periodically and the principal at the maturity date.
D)Commercial loans to businesses are often of this type.

Question 6

A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a

A)simple loan.
B)fixed-payment loan.
C)coupon bond.
D)discount bond.

Question 7

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.

A)present value
B)future value
C)interest
D)deflation

Question 8

A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a

A)simple loan.
B)fixed-payment loan.
C)coupon bond.
D)discount bond.

Question 9

The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's

A)coupon rate.
B)maturity rate.
C)face value rate.
D)payment rate.

Question 10

When talking about a coupon bond,face value and ________ mean the same thing.

A)par value
B)coupon value
C)amortized value
D)discount value

Question 11

What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent?

A)$453.51
B)$500.00
C)$476.25
D)$550.00

Question 12

If a $1,000 face value coupon bond has a coupon rate of 3.75 percent,then the coupon payment every year is

A)$37.50.
B)$3.75.
C)$375.00.
D)$13.75

Question 13

The ________ is the final amount that will be paid to the holder of a coupon bond.

A)discount value
B)coupon value
C)face value
D)present value

Question 14

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

A)$650.
B)$1,300.
C)$130.
D)$13.

Question 15

An increase in the time to the promised future payment ________ the present value of the payment.

A)decreases
B)increases
C)has no effect on
D)is irrelevant to

Question 16

With an interest rate of 6 percent,the present value of $100 to be received next year is approximately

A)$106.
B)$100.
C)$94.
D)$92.

Question 17

The present value of an expected future payment ________ as the interest rate increases.

A)falls
B)rises
C)is constant
D)is unaffected

Question 18

If a security pays $55 in one year and $133 in three years,its present value is $150 if the interest rate is

A)5 percent.
B)10 percent.
C)12.5 percent.
D)15 percent.

Question 19

The ________ is calculated by multiplying the coupon rate times the par value of the bond.

A)present value
B)face value
C)coupon payment
D)maturity payment

Question 20

A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a

A)simple loan.
B)fixed-payment loan.
C)coupon bond.
D)discount bond.

Question 21

The ________ is below the coupon rate when the bond price is ________ its par value.

A)yield to maturity;above
B)yield to maturity;below
C)discount rate;above
D)discount rate;below

Question 22

If a security pays $110 next year and $121 the year after that,what is its yield to maturity if it sells for $200?

A)9 percent
B)10 percent
C)11 percent
D)12 percent

Question 23

If $22,050 is the amount payable in two years for a $20,000 simple loan made today,the interest rate is

A)5 percent.
B)10 percent.
C)22 percent.
D)25 percent.

Question 24

Which of the following are TRUE for a coupon bond?

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)The yield is less than the coupon rate when the bond price is below the par value.

Question 25

For simple loans,the simple interest rate is ________ the yield to maturity.

A)greater than
B)less than
C)equal to
D)not comparable to

Question 26

The ________ of a coupon bond and the yield to maturity are inversely related.

A)price
B)par value
C)maturity date
D)term

Question 27

A $1,000 face value coupon bond with a $60 coupon payment every year has a coupon rate of

A)6 percent
B)5 percent.
C)6 percent.
D)10 percent.

Question 28

A discount bond

A)pays the bondholder a fixed amount every period and the face value at maturity.
B)pays the bondholder the face value at maturity.
C)pays all interest and the face value at maturity.
D)pays the face value at maturity plus any capital gain.

Question 29

A bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a

A)simple loan.
B)fixed-payment loan.
C)coupon bond.
D)discount bond.

Question 30

Which of the following are TRUE for discount bonds?

A)A discount bond is bought at par.
B)The purchaser receives the face value of the bond at the maturity date.
C)U)S. Treasury bonds and notes are examples of discount bonds.
D)The purchaser receives the par value at maturity plus any capital gains.

Question 31

The interest rate that equates the present value of payments received from a debt instrument with its value today is the

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

Question 32

Examples of discount bonds include

A)U)S. Treasury bills.
B)corporate bonds.
C)U)S. Treasury notes.
D)municipal bonds.

Question 33

For a 3-year simple loan of $10,000 at 10 percent,the amount to be repaid is

A)$10,030.
B)$10,300.
C)$13,000.
D)$13,310.

Question 34

A ________ is bought at a price below its face value,and the ________ value is repaid at the maturity date.

A)coupon bond;discount
B)discount bond;discount
C)coupon bond;face
D)discount bond;face

Question 35

The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value.

A)greater;coupon;above
B)greater;coupon;below
C)greater;perpetuity;above
D)less;perpetuity;below

Question 36

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

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

Question 37

If the amount payable in two years is $2,420 for a simple loan at 10 percent interest,the loan amount is

A)$1,000.
B)$1,210.
C)$2,000.
D)$2,200.

Question 38

The price of a coupon bond and the yield to maturity are ________ related;that is,as the yield to maturity ________,the price of the bond ________.

A)positively;rises;rises
B)negatively;falls;falls
C)positively;rises;falls
D)negatively;rises;falls

Question 39

The present value of a fixed-payment loan is calculated as the ________ of the present value of all cash flow payments.

A)sum
B)difference
C)multiple
D)log

Question 40

All of the following are examples of coupon bonds EXCEPT

A)corporate bonds.
B)U)S. Treasury bills.
C)U)S. Treasury notes.
D)U)S. Treasury bonds.

Question 41

A coupon bond that has no maturity date and no repayment of principal is called a

A)consol.
B)cabinet.
C)Treasury bill.
D)Treasury note.

Question 42

A consol paying $20 annually when the interest rate is 5 percent has a price of

A)$100.
B)$200.
C)$400.
D)$800.

Question 43

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

A)a 5 percent coupon bond with a price of $600
B)a 5 percent coupon bond with a price of $800
C)a 5 percent coupon bond with a price of $1,000
D)a 5 percent coupon bond with a price of $1,200

Question 44

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

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

Question 45

Negative yields to maturity imply that bond purchasers are better off to hold cash. Acceptance of slightly negative yields by purchasers in recent times suggest that the

A)convenience of storing large sums is also important to decisions.
B)inflation rate is positive.
C)governments have issued too many bonds.
D)decision makers are only concerned with yields.

Question 46

Another name for a consol is a ________ because it is a bond with no maturity date. The owner receives fixed coupon payments forever.

A)perpetuity
B)discount bond
C)municipality
D)high-yield bond

Question 47

The yield to maturity for a discount bond is ________ related to the current bond price.

A)negatively
B)positively
C)not
D)directly

Question 48

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

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 49

Which of the following bonds would you prefer to be buying?

A)a $10,000 face-value security with a 10 percent coupon selling for $9,000
B)a $10,000 face-value security with a 7 percent coupon selling for $10,000
C)a $10,000 face-value security with a 9 percent coupon selling for $10,000
D)a $10,000 face-value security with a 10 percent coupon selling for $10,000

Question 50

The yield to maturity for a one-year discount bond equals the increase in price over the year,divided by the

A)initial price.
B)face value.
C)interest rate.
D)coupon rate.

Question 51

A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of

A)3 percent.
B)20 percent.
C)25 percent.
D)33.3 percent.

Question 52

The interest rate on a consol equals the

A)price times the coupon payment.
B)price divided by the coupon payment.
C)coupon payment plus the price.
D)coupon payment divided by the price.

Question 53

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

A)0 percent.
B)5 percent.
C)10 percent.
D)20 percent.

Question 54

A discount bond is also called a ________ because the owner does not receive periodic payments.

A)zero-coupon bond
B)municipal bond
C)corporate bond
D)consol

Question 55

If a $10,000 face-value discount bond maturing in one year is selling for $5,000,then its yield to maturity is

A)5 percent.
B)10 percent.
C)50 percent.
D)100 percent.

Question 56

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

A)a 5 percent coupon bond selling for $1,000
B)a 10 percent coupon bond selling for $1,000
C)a 15 percent coupon bond selling for $1,000
D)a 15 percent coupon bond selling for $900

Question 57

Which of the following $5,000 face-value securities has the highest yield to maturity?

A)a 6 percent coupon bond selling for $5,000
B)a 6 percent coupon bond selling for $5,500
C)a 10 percent coupon bond selling for $5,000
D)a 12 percent coupon bond selling for $4,500

Question 58

The price of a consol equals the coupon payment

A)times the interest rate.
B)plus the interest rate.
C)minus the interest rate.
D)divided by the interest rate.

Question 59

The yield to maturity for a perpetuity is a useful approximation for the yield to maturity on long-term coupon bonds. It is called the ________ when approximating the yield for a coupon bond.

A)current yield
B)discount yield
C)future yield
D)star yield

Question 60

If a perpetuity has a price of $500 and an annual interest payment of $25,the interest rate is

A)2)5 percent.
B)5 percent.
C)7)5 percent.
D)10 percent.

Question 61

The ________ is defined as the payments to the owner plus the change in a security's value expressed as a fraction of the security's purchase price.

A)yield to maturity
B)current yield
C)rate of return
D)yield rate

Question 62

There is ________ for any bond whose time to maturity matches the holding period.

A)no interest-rate risk
B)a large interest-rate risk
C)rate-of-return risk
D)yield-to-maturity risk

Question 63

Short-term bonds are subject to ________ risk because proceeds must be put into some future asset at an unknown interest rate.

A)reinvestment
B)term
C)liquidity
D)default

Question 64

The sum of the current yield and the rate of capital gain is called the

A)rate of return.
B)discount yield.
C)perpetuity yield.
D)par value.

Question 65

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

A)5 percent
B)10 percent
C)-5 percent
D)25 percent

Question 66

An equal increase in all bond interest rates

A)increases the return to all bond maturities by an equal amount.
B)decreases the return to all bond maturities by an equal amount.
C)has no effect on the returns to bonds.
D)decreases long-term bond returns more than short-term bond returns.

Question 67

Which of the following are generally TRUE of bonds?

A)A bond's return equals the yield to maturity when the 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 gains on bonds whose terms to maturity are longer than the holding periods.
C)The longer a bond's maturity,the smaller is the size of the price change associated with an interest rate change.
D)Prices and returns for short-term bonds are more volatile than those for longer-term bonds.

Question 68

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year?

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

Question 69

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?

A)5 percent
B)10 percent
C)15 percent
D)20 percent

Question 70

Interest-rate risk is the riskiness of an asset's returns due to

A)interest-rate changes.
B)changes in the coupon rate.
C)default of the borrower.
D)changes in the asset's maturity.

Question 71

I purchase a 10 percent coupon bond. Based on my purchase price,I calculate a yield to maturity of 8 percent. If I hold this bond to maturity,then my return on this asset is

A)10 percent.
B)8 percent.
C)12 percent.
D)there is not enough information to determine the return.

Question 72

The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is

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

Question 73

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?

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 74

Which of the following are TRUE concerning the distinction between interest rates and returns?

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 difference between 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 during the holding period.
D)The return can be expressed as the sum of the discount yield and the rate of capital gains.

Question 75

Which of the following are generally TRUE of all bonds?

A)The longer a bond's maturity,the greater 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 short-term bonds are more volatile than those for longer term bonds.
D)A fall in interest rates results in capital losses for bonds whose terms to maturity are longer than the holding period.

Question 76

Prices and returns for ________ bonds are more volatile than those for ________ bonds,everything else held constant.

A)long-term;long-term
B)long-term;short-term
C)short-term;long-term
D)short-term;short-term

Question 77

All bonds that will not be held to maturity have interest rate risk which occurs because of the change in the price of the bond as a result of

A)interest-rate changes.
B)changes in the coupon rate.
C)default of the borrower.
D)changes in the asset's maturity date.

Question 78

The riskiness of an asset's returns due to changes in interest rates is

A)exchange-rate risk.
B)price risk.
C)asset risk.
D)interest-rate risk.

Question 79

An equal decrease in all bond interest rates

A)increases the price of a five-year bond more than the price of a ten-year bond.
B)increases the price of a ten-year bond more than the price of a five-year bond.
C)decreases the price of a five-year bond more than the price of a ten-year bond.
D)decreases the price of a ten-year bond more than the price of a five-year bond.

Question 80

If the interest rate is 5%,what is the present value of a security that pays you $1,050 next year and $1,102.50 two years from now? If this security sold for $2,200,is the yield to maturity greater or less than 5%? Why?