Assignment 4

Factors that decrease the demand for bonds include: a) a decrease in the riskiness of stocks. b) a decrease in the inflation rate. c) an increase in the volatility of stock prices. d) a decrease in the expected returns on stocks.

a) a decrease in the riskiness of stocks.

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) 25 percent c) -5 percent d) 10 percent

b) 25 percent

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) discount bond. b) coupon bond. c) fixed-payment loan. d) simple loan.

b) coupon bond.

In the bond market, the bond demanders are the ________ and the bond suppliers are the ________. a) lenders; advancers b) lenders; borrowers c) borrowers; advancers d) borrowers; lenders

b) lenders; borrowers

There is ________ for any bond whose time to maturity matches the holding period. a) yield-to-maturity risk b) no interest-rate risk c) rate-of-return risk d) a large interest-rate risk

b) no interest-rate risk

The supply curve for bonds has the usual upward slope, indicating that as the price ________, ceteris paribus, the ________ increases. a) rises; supply b) rises; quantity supplied c) falls; supply d) falls; quantity supplied

b) rises; quantity supplied

The interest rate that equates the present value of payments received from a debt instrument with its value today is the: a) current yield. b) real interest rate. c) yield to maturity. d) simple interest rate.

c) yield to maturity.

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.

d) 33.3 percent.

The price of a consol equals the coupon payment: a) plus the interest rate. b) minus the interest rate. c) times the interest rate. d) divided by the interest rate.

d) divided by the interest rate.

The sum of the current yield and the rate of capital gain is called the: a) perpetuity yield. b) par value. c) discount yield. d) rate of return.

d) rate of return

A business cycle expansion increases income, causing money demand to ________ and interest rates to ________, everything else held constant. a) increase; increase b) decrease; decrease c) decrease; increase d) increase; decrease

a) increase; increase

The demand curve for bonds has the usual downward slope, indicating that at ________ prices of the bond, everything else equal, the ________ is higher. a) lower; quantity demanded b) higher; quantity demanded c) higher; demand d) lower; demand

a) lower; quantity demanded

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 twenty years to maturity b) a bond with one year to maturity c) a bond with five years to maturity d) a bond with ten years to maturity

b) a bond with one year to maturity

An increase in the interest rate a) increases the quantity of money demanded. b) decreases the quantity of money demanded. c) increases the demand for money. d) decreases the demand for money.

b) decreases the quantity of money demanded.

For simple loans, the simple interest rate is ________ the yield to maturity. a) greater than b) equal to c) less than d) not comparable to

b) equal to

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) interest b) present value c) deflation d) future value

b) present value

Everything else held constant, if interest rates are expected to fall in the future, the demand for long-term bonds today ________ and the demand curve shifts to the ________. a) rises; left b) rises; right c) falls; left d) falls; right

b) rises; right

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) coupon bond. b) simple loan. c) fixed-payment loan. d) discount bond.

b) simple loan

A consol paying $20 annually when the interest rate is 5 percent has a price of: a) $100. b) $200. c) $400. d) $800.

c) $400

With an interest rate of 6 percent, the present value of $100 next year is approximately: a) $106. b) $100. c) $94. d) $92.

c) $94.

During a recession, the supply of bonds ________ and the supply curve shifts to the ________, everything else held constant. a) decreases; right b) increases; right c) decreases; left d) increases; left

c) decreases; left

The present value of an expected future payment ________ as the interest rate increases. a) is unaffected b) is constant c) falls d) rises

c) falls

Higher government deficits ________ the supply of bonds and shift the supply curve to the ________, everything else held constant. a) decrease; left b) decrease; right c) increase; right d) increase; left

c) increase; right

Interest-rate risk is the riskiness of an asset's returns due to: a) changes in the coupon rate. b) changes in the asset's maturity. c) interest-rate changes. d) default of the borrower.

c) interest-rate changes.

In the bond market, the bond demanders are the ________ and the bond suppliers are the ________. a) lenders; advancers b) borrowers; advancers c) lenders; borrowers d) borrowers; lenders

c) lenders; borrowers

Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant. a) long-term; long-term b) short-term; long-term c) long-term; short-term d) short-term; short-term

c) long-term; short-term

In the bond market, the market equilibrium shows the market-clearing ________ and market-clearing ________. a) price; deposit b) interest rate; premium c) price; interest rate d) interest rate; deposit

c) price; interest rate

The opportunity cost of holding money is: a) the discount rate. b) the price level. c) the interest rate. d) the level of income.

c) the interest rate.

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.

d) $13,310.

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.

d) 100 percent.

A fully amortized loan is another name for: a) a simple loan. b) a commercial loan. c) an unsecured loan. d) a fixed-payment loan.

d) a fixed-payment loan.

When the inflation rate is expected to increase, the ________ for bonds falls, while the ________ curve shifts to the right, everything else held constant. a) supply; demand b) demand; demand c) supply; supply d) demand; supply

d) demand; supply

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) deflation. b) par value. c) face value. d) discounting the future.

d) discounting the future.

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) discount bond. c) coupon bond. d) fixed-payment loan.

d) fixed-payment loan.

When an economy grows out of a recession, normally the demand for bonds ________ and the supply of bonds ________, everything else held constant. a) decreases; increases b) increases; decreases c) decreases; decreases d) increases; increases

d) increases; increases