Chapter 3

D) $1/(1 + i)n

$1 received n years from now has a value today of: A) ($1 + i)/i. B) $1/(1 + i). C) ($1 + i)n/i. D) $1/(1 + i)n.

A) discounting future payments at a higher rate reduces the present value of the payments

A bond's price and its yield to maturity are inversely related because: A) discounting future payments at a higher rate reduces the present value of the payments. B) discounting future payments at a higher rate increases the present value of the payments. C) an increase in the yield to maturity will lower a bond's coupon rate and hence its price. D) a fall in a bond's price will lower its par value and hence its yield to maturity.

A) the actual real interest rate will exceed the expected real interest rate

A borrower and a lender agree on a mortgage interest rate. If inflation turns out to be less than expected: A) the actual real interest rate will exceed the expected real interest rate. B) the actual real interest rate will be less than the expected real interest rate. C) the actual nominal interest rate will be higher than expected. D) the actual nominal interest rate will be less than expected.

C) price of an asset increases

A capital gain occurs when the: A) coupon rate increases. B) current yield increases. C) price of an asset increases. D) yield to maturity increases.

B) 8.33%

A coupon bond has an annual coupon of $75, a par value of $1,000, and a market price of $900. Its current yield equals: A) 7.50%. B) 8.33%. C) its yield to maturity. D) Not enough information has been provided to calculate the current yield for this bond.

A) interest payments from the borrower to the lender periodically during the life of the loan and payment by the borrower to the lender of the face value of the loan at maturity

A coupon bond involves: A) interest payments from the borrower to the lender periodically during the life of the loan and payment by the borrower to the lender of the face value of the loan at maturity. B) interest and principal payments from the borrower to the lender periodically during the life of the loan. C) periodic payments by the borrower to the lender that include both principal and interest. D) periodic payments by the borrower to the lender that include principal, but not

B) a promise by a borrower to repay principal plus interest to a lender

A debt instrument represents: A) an ownership claim by the purchaser on the issuer. B) a promise by a borrower to repay principal plus interest to a lender. C) an attempt by a borrower in default to restore his or her credit. D) a nontaxable asset, owned primarily by large corporations.

B) payment by the borrower to the lender of the face value of the loan at maturity

A discount bond involves: A) interest payments from the borrower to the lender periodically during the life of the loan. B) payment by the borrower to the lender of the face value of the loan at maturity. C) no payment of principal by the borrower to the lender. D) payment of interest by the borrower to the lender every six months during the life of the loan

B) the borrower repays in a single payment

A discount bond resembles a simple loan in that: A) the interest on neither is taxable. B) the borrower repays in a single payment. C) both represent assets to the borrowers who issue them. D) both have par values greater than their face values.

C) 6.04%

A one-year discount bond with a par value of $1,000 sold today, at issuance, for $943 has a yield to maturity of: A) 4.30%. B) 5.70%. C) 6.04%. D) 9.43%.

C) 5.26%

A one-year discount bond with a par value of $5,000 sold today, at issuance, for $4,750 has a yield to maturity of: A) 2.50%. B) 5.00%. C) 5.26%. D) 9.75%.

C) payment of interest by the borrower to the lender only at the time the loan matures

A simple loan involves: A) interest payments from the borrower to the lender periodically during the life of the loan. B) no payment of interest by the borrower to the lender. C) payment of interest by the borrower to the lender only at the time the loan matures. D) payment only of principal by the borrower to the lender at maturity.

D) deflation

A sustained decrease in the price level is known as: A) inflation. B) disinflation. C) reflation. D) deflation.

D) is probably expecting market interest rates to decrease in the future

An speculator who buys a fifty-year corporate bond A) must be expecting to still be alive in fifty years. B) is subject to substantial reinvestment risk. C) is probably expecting market interest rates to increase in the future. D) is probably expecting market interest rates to decrease in the future.

A) banks suffered significant capital losses as the value of their holdings of mortgage-backed securities declined

As the housing bubble began to burst in 2006-2008, investors would only buy mortgage-backed securities at high yields to compensate for higher perceived default risk. As a result: A) banks suffered significant capital losses as the value of their holdings of mortgage-backed securities declined. B) funds available for mortgages increased. C) bank profits rose as they earned higher interest on mortgages. D) the price of mortgage-backed securities tended to rise due to the higher yields.

B) $863

At an interest rate of 3%, what is the present value of $1,000 to be received five years from now? A) $850 B) $863 C) $1,159 D) $1,667

B) $7,473

At an interest rate of 6%, how much will need to be invested today to have $10,000 in 5 years? A) $5,000 B) $7,473 C) $10,000 D) $13,382

A) rising yields in secondary markets which led to a decline in the price of mortgage-backed securities

Banks who held mortgage-backed securities "took a bath" during the financial crisis of 2007-2009 due to: A) rising yields in secondary markets which led to a decline in the price of mortgage-backed securities. B) falling yields in secondary markets which led to a decline in the price of mortgage-backed securities. C) their inability to issue new mortgages. D) more rapid pre-payment of mortgages.

C) the process of earning interest on both the interest and the principal of an investment

Compounding refers to: A) the calculation of interest rates after the compounding effect of taxes has been allowed for. B) the paying back of both interest and principal during the life of a fixed-payment loan. C) the process of earning interest on both the interest and the principal of an investment. D) the increased value of an investment that arises from the payment of periodic interest.

B) credit market instruments

Debt instruments are also called A) equities. B) credit market instruments. C) prospectuses. D) units of account.

B) the longer the time until a bond matures, the greater will be the change in its price

For a specific change in the yield to maturity: A) the shorter the time until a bond matures, the greater will be the change in its price. B) the longer the time until a bond matures, the greater will be the change in its price. C) the longer the time until a bond matures, the greater will be the change in its par value. D) the shorter the time until a bond matures, the greater will be the change in its coupon rate.

C) is always equal to the specified simple interest rate

For simple loans, the yield to maturity: A) is always less than the specified simple interest rate. B) is always greater than the specified simple interest rate. C) is always equal to the specified simple interest rate. D) may be less than, greater than, or equal to the specified simple interest rate, depending on the maturity of the loan.

C) The principal is adjusted for inflation each period

How are TIPS adjusted for inflation? A) The interest rate is adjusted for inflation during each period. B) The principal is adjusted once the bond reaches maturity. C) The principal is adjusted for inflation each period. D) The interest rate is adjusted once the bond reaches maturity.

C) if the rate of capital loss exceeds the current yield

How can a bond have a negative rate of return? A) if the current yield is greater than the coupon rate B) if the current yield is less than the coupon rate C) if the rate of capital loss exceeds the current yield D) if the rate of capital gains is less than the current yield

A) seconds

How long does it take prices of securities to adjust so as to eliminate arbitrage profits? A) seconds B) hours C) days D) months

D) a fifty-year government bond

If an investor is certain that market interest rates will decline in the future, which of the following will she be most likely to purchase? A) a six-month government bill B) a two-year government note C) a ten-year government bond D) a fifty-year government bond

D) the value of the loan today equals the present value of the loan payments discounted at rate i

If i is the yield to maturity of a fixed-payment loan: A) the value of the loan today equals i times the sum of the values of all the loan payments. B) i equals the present value of the loan payments. C) the value of the loan today equals the sum of the values of the loan payments. D) the value of the loan today equals the present value of the loan payments discounted at rate i.

A) $4,632

If the annual interest rate is 8%, what would you expect to pay for a bond paying a lump sum of $10,000 in ten years? A) $4,632 B) $9,259 C) $10,000 D) $21,589

B) $8,417

If the annual interest rate is 9%, what would you expect to pay for a bond paying a lump sum of $10,000 in two years? A) $8,200 B) $8,417 C) $10,000 D) $11,881

A) there is no capital gain or loss from holding the bond until maturity

If the current price of a bond is equal to its face value: A) there is no capital gain or loss from holding the bond until maturity. B) the yield to maturity must be greater than the current yield. C) the current yield must be greater than the coupon rate. D) the coupon rate must be greater than the yield to maturity.

B) the yield to maturity must be less than the coupon rate

If the current price of a bond is greater than its face value: A) an investor will receive a capital gain by holding the bond until maturity. B) the yield to maturity must be less than the coupon rate. C) the coupon rate must be less than the current yield. D) the coupon rate must be equal to the current yield.

A) an investor will receive a capital gain by holding the bond until maturity

If the current price of a bond is less than its face value: A) an investor will receive a capital gain by holding the bond until maturity. B) the yield to maturity must be less than the current yield. C) the coupon rate must be greater than the current yield. D) the coupon rate must be equal to the current yield.

D) 2%

If the real interest rate is -1.4% and the nominal interest rate is 0.6%, expected inflation equals: A) -2%. B) -0.8%. C) 0.8%. D) 2%.

D) 4%

If the real interest rate is 2% and expected inflation is 2%, the nominal interest rate is: A) 0%. B) 1%. C) 2%. D) 4%.

D) $11,910

If you deposit $10,000 in a savings account at an annual interest rate of 6%, how much will you have in the account at the end of three years? A) $8,396 B) $10,600 C) $11,800 D) $11,910

D) $638

If you deposit $500 in a savings account at an annual interest rate of 5%, how much will you have in the account at the end of five years? A) $392 B) $550 C) $625 D) $638

C) the interest rate on other similar bonds must have risen

If, while you are holding a coupon bond, its market price falls, you can be sure that: A) the coupon payment you are receiving must have been reduced. B) the interest rate on other similar bonds must have fallen. C) the interest rate on other similar bonds must have risen. D) the par value of the bond must have declined.

B) the market price of your bond will rise

If, while you are holding a coupon bond, the interest rates on other similar bonds fall, you can be sure that: A) the coupon payments on your bond will fall. B) the market price of your bond will rise. C) the market price of your bond will fall. D) the par value of your bond will rise.

A) will always be greater than the yield on a discount basis

In comparing the yield to maturity on a Treasury bill with the yield on a discount basis on the same bill, we can say that the yield to maturity: A) will always be greater than the yield on a discount basis. B) will always be less than the yield on a discount basis. C) will always be equal to the yield on a discount basis, provided the holding period is the same as the number of years to maturity. D) rises whenever the yield on a discount basis falls.

B) fluctuations in the price of a financial asset in response to changes in market interest rates

Interest-rate risk can best be characterized as the risk that: A) you could have earned a higher interest rate if you waited to purchase a bond. B) fluctuations in the price of a financial asset in response to changes in market interest rates. C) you could have gotten a lower interest rate if you waited to lock in a mortgage. D) short-term interest rates may exceed long-term interest rates.

A) make a single payment of principal when the bonds matures, but multiple payments of interest over the life of the bond

Issuers of coupon bonds: A) make a single payment of principal when the bonds matures, but multiple payments of interest over the life of the bond. B) make a single payment of interest and principal. C) make multiple payments of principal, but a single payment of interest. D) make a single payment of principal at the time the bond is issued and multiple payments of interest over the life of the bond.

A) expected inflation is positive

Nominal interest rates are higher than real interest rates as long as: A) expected inflation is positive. B) the government taxes interest income. C) inflation is expected to decline in the future. D) long-term interest rates are higher than short-term interest rates.

B) equates the present value of all the bond's payments to its price today

On a coupon bond, the yield to maturity: A) always equals the coupon rate. B) equates the present value of all the bond's payments to its price today. C) increases when the market price of the bond increases. D) equals the coupon payment divided by the current price of the bond.

D) interest on simple loans and discount bonds is paid in a single payment, while issuers of coupon bonds and fixed-payment loans make multiple payments of interest and principal

Simple loans and discount bonds differ from coupon bonds and fixed-payment loans in that A) interest on simple loans and discount bonds is taxable, while interest on coupon bonds and fixed-payment loans is not. B) interest on coupon bonds and fixed-payment loans is taxable, while interest on simple loans and discount bonds is not. C) interest rates on simple loans and discount bonds are generally higher than interest rates on comparable coupon bonds and fixed-payment loans. D) interest on simple loans and discount bonds is paid in a single payment, while issuers of coupon bonds and fixed-payment loans make multiple payments of interest and principal.

C) $1,070

Suppose First National Bank makes a one-year simple loan of $1,000 at 7% interest to Harry's Restaurant. At the end of one year Harry's Restaurant will pay First National A) $934.58. B) $1,007. C) $1,070. D) $1,700.

B) $9,615

Suppose Matt's New Cars issues a bond in which they'll need to pay $10,000 in one year, which includes 4% interest. How much will they receive for the bond? A) $9,600 B) $9,615 C) $10,000 D) $10,400

C) 8%

Suppose Matt's New Cars issues and sells a one-year discount bond for $9,259 and repays $10,000 at maturity. The interest rate on this bond would be A) 2.6%. B) 7.41%. C) 8%. D) 10%.

A) current yield > coupon rate

Suppose a coupon bond with a par value of $1,000 is currently priced at $950 and has a coupon of $40. Which of the following is TRUE? A) current yield > coupon rate B) current yield < coupon rate C) Coupon rate has risen. D) Coupon rate has declined.

B) 4%

Suppose you have a fixed-rate mortgage with a nominal interest rate of 6% and the expected annual inflation rate over the life of the mortgage is 2%. What is the expected real interest rate? A) 3% B) 4% C) 8% D) 12%

A) principal

The amount of funds the borrower receives from the lender with a simple loan is called the A) principal. B) equity. C) claim. D) collateral.

C) the price that you will receive from a securities dealer if you sell the bond

The bid price for a bond is: A) the minimum price that you are allowed to bid for a bond that is being auctioned by the government. B) the maximum price that you are allowed to bid for a bond that is being auctioned by the government. C) the price that you will receive from a securities dealer if you sell the bond. D) the price that you must pay a securities dealer to purchase a bond

A) annual coupon payment divided by the face value of the bond

The coupon rate is the: A) annual coupon payment divided by the face value of the bond. B) annual coupon payment divided by the market value of the bond. C) difference between the face value of the bond and its par value. D) coupon paid every 6 months divided by par value.

A) the coupon divided by the market price of the bond

The current yield is equal to: A) the coupon divided by the market price of the bond. B) the yield to maturity, if the bond is a coupon bond. C) the coupon divided by the par value of the bond. D) the market price of the bond divided by its par value.

B) the nominal interest rate minus the expected rate of inflation

The expected real interest rate approximately equals: A) the nominal interest rate minus the tax rate. B) the nominal interest rate minus the expected rate of inflation. C) the nominal interest rate plus the expected rate of inflation. D) the yield to maturity on a coupon bond held to maturity.

B) provide a common unit for measuring funds at different times.

The key to present value calculations is that they: A) are appropriate only for funds in the same time period. B) provide a common unit for measuring funds at different times. C) provide accurate answers only in a low-inflation environment. D) provide accurate answers only in a high-inflation environment.

C) commercial loan from a bank

The most common type of simple loan is a(an) A) automobile loan from a bank. B) mortgage loan from a bank. C) commercial loan from a bank. D) corporate bond.

C) present value of all future payments

The price of a financial asset equals the: A) future value of all payments. B) sum of all payments. C) present value of all future payments. D) difference between the future value and present value of all payments.

C) sum of the current yield and the actual rate of capital gain or loss

The rate of return is equal to the: A) sum of the coupon rate and the current yield. B) yield to maturity. C) sum of the current yield and the actual rate of capital gain or loss. D) sum of the current yield and the expected rate of capital gain

C) the current yield plus the rate of capital gains

The rate of return is equal to: A) the coupon rate plus the rate of capital gains. B) the coupon rate plus the current yield. C) the current yield plus the rate of capital gains. D) the coupon rate multiplied by the rate of capital gains

D) P(1 + i)

The total payment to a lender for a one-period simple loan is A) (P + i)n. B) P + i. C) i(1 + i). D) P(1 + i).

A) the interest rate at which the present value of an asset's returns is equal to its price today

The yield to maturity is equal to: A) the interest rate at which the present value of an asset's returns is equal to its price today. B) the face value or par value of a coupon bond. C) any payments received from an asset at the date the asset matures. D) interest rate on the asset minus any taxes owed on the interest received.

A) (FV- P)/P

The yield to maturity on a new one-year discount bond equals: A) (FV- P)/P. B) (D - FV)/P. C) (FV - P)/FV. D) (P - FV)/FV.

C) interest-rate risk

Though Treasury bonds may have little default risk, what type of risk exists when current interest rates are low? A) price risk B) refinancing risk C) interest-rate risk D) present value risk

D) are subject to fluctuations in their market prices and are therefore risky investments

U.S. Treasury bonds: A) carry no risk of default and are therefore not risky investments. B) have constant yields to maturity and are therefore not risky investments. C) have constant coupon rates and are therefore not risky investments. D) are subject to fluctuations in their market prices and are therefore risky investments

C) yield to maturity

Unless otherwise indicated, when economists or investors refer to the interest rate on a financial asset, they are referring to the: A) current yield. B) coupon rate. C) yield to maturity. D) prime rate.

B) $1,046.49

What is the price of a coupon bond that has annual coupon payments of $75, a par value of $1,000, a yield to maturity of 5%, and a maturity of two years? A) $1,043.08 B) $1,046.49 C) $1,000.00 D) $1,150.00

C) $962.70

What is the price of a coupon bond that has annual coupon payments of $85, a par value of $1,000, a yield to maturity of 10%, and a maturity of three years? A) $211.38 B) $898.84 C) $962.70 D) $1,255.00

A) 2%

What is the rate of return on a bond with a coupon of $38 payable in one year that was purchased for $950 and sold one year later for $931? A) 2% B) 4% C) 6% D) 19%

C) 11.67%

What is the rate of return on a bond with a coupon of $55 that was purchased for $900 and sold one year later for $950? A) 5.56% B) 6.11% C) 11.67% D) 12.43%

C) 10.00%

What is the yield on a discount basis for a U.S. Treasury bill that has a face value of $10,000, has a price of $9,500, and will mature in 180 days? A) 5.00% B) 5.25% C) 10.00% D) 10.67%

C) 9.00%

What is the yield to maturity of a consol with a coupon of $85 and a price of $944.44? A) 5.56% B) 8.50% C) 9.00% D) Not enough information has been provided to determine the answer.

B) 6%

What is the yield to maturity on a simple loan that requires payment of $500 plus $30 in interest one year from now? A) 5.3% B) 6% C) 6.38% D) Not enough information has been provided to determine the answer.

C) the current yield declines

When the price of a coupon bond increases: A) the coupon rate declines. B) the coupon rate increases. C) the current yield declines. D) the current yield increases.

C) borrowers with fixed-rate mortgages

Which group is hurt by inflation being less than expected? A) holders of TIPS B) lenders of fixed-rate mortgages C) borrowers with fixed-rate mortgages D) all of the above

A) fixed-payment loan

Which of the following involves payment of part of the face value or principal prior to maturity? A) fixed-payment loan B) coupon bond C) discount bond D) simple loan

C) a U.S. Treasury note

Which of the following is NOT a discount bond? A) a U.S. savings bond B) a U.S. Treasury bill C) a U.S. Treasury note D) a zero-coupon bond

C) a U.S. Treasury note

Which of the following is NOT a fixed payment loan? A) a home mortgage B) a car loan C) a U.S. Treasury note D) a student loan

D) corporate bond

Which of the following is NOT a fixed-payment loan? A) mortgage B) car loan C) student loan D) corporate bond

C) market price

Which of the following is NOT fixed on a coupon bond? A) coupon B) coupon rate C) market price D) par value

C) The borrower is left with a substantial unpaid principal at the maturity of the loan

Which of the following is NOT true of a fixed payment loan? A) The borrower is required to make regular periodic payments to the lender. B) The payments made by the borrower include both interest and principal. C) The borrower is left with a substantial unpaid principal at the maturity of the loan. D) A home mortgage is an example of fixed payment loan.

B) more interest paid over the life of the loan

Which of the following is a consequence of extending the payback period of a student loan from 10 to 30 years? A) higher monthly payments B) more interest paid over the life of the loan C) faster payoff of principal D) lower monthly payments initially, but higher monthly payments in the future

C) a U.S. Treasury note or bond

Which of the following is a coupon bond? A) a U.S. savings bond B) a U.S. Treasury bill C) a U.S. Treasury note or bond D) a zero-coupon bond

A) a home mortgage

Which of the following is a fixed payment loan? A) a home mortgage B) a U.S. Treasury bill C) a U.S. Treasury note D) a zero-coupon bond

A) coupon rate

Which of the following is fixed on a coupon bond? A) coupon rate B) current yield C) market price D) yield to maturity

B) r = i - πe

Which of the following is the correct expression for the approximate expected real interest rate? A) r = i + πe B) r = i - πe C) r = i/πe D) r = iπe

D) $1,100 = $500/(1 + i) + $500/(1 + i)2 + 1,500/(1 + i)3

Which of the following represents the equation that would be used to determine the yield to maturity of a corporate bond with a face value of $1,000, price of $1,100, coupon rate of 5%, and maturity in three years? A) $1,100 = $1,500/(1 + i)3 B) $1,100 = $500/(1 + i) + $500/(1 + i)2 + 1,000/(1 + i)3 C) $1,100 = $500/(1 + i) + $500/(1 + i)2 + 500/(1 + i)3 D) $1,100 = $500/(1 + i) + $500/(1 + i)2 + 1,500/(1 + i)3

A) $1,400 = $500/(1 + i) + $500/(1 + i)2 + $500/(1 + i)3

Which of the following represents the equation that would be used to determine the yield to maturity of a three-year fixed payment loan of $1,400 which has payments of $500 per year? A) $1,400 = $500/(1 + i) + $500/(1 + i)2 + $500/(1 + i)3 B) $1,400 = $500/(1 + i)3 C) i = (1,400-500)/1,400 D) $1,400 = $500/(1 + i) + $500/(1 + i)2 + $500(1 + i)3 + 1,400/(1 + i)3

C) The total rate of return may never be negative

Which of the following statements about the rate of return is NOT correct? A) The total rate of return may be greater or less than the current yield. B) The total rate of return may be greater or less than the rate of capital gain. C) The total rate of return may never be negative. D) The total rate of return is greater than the coupon, holding everything else constant.

A) those with flawed credit histories

Which of the following types of mortgage loans became more common during the housing boom of the early-to-mid 2000s? A) those with flawed credit histories B) thirty-year, fixed-rate mortgages C) prime mortgages D) those with down payments of at least 20%

C) increased perceived risk of default

Which of the following will lead to a higher interest rate on a loan? A) lower inflation B) lower opportunity cost C) increased perceived risk of default D) reduced likelihood of borrower not paying the loan

C) increased default risk

Which of the following will result in a decrease in the price of an existing corporate bond? A) lower expectations of inflation B) new bonds issued at a lower interest rate C) increased default risk D) all of the above

B) TIPS

Which type of bond would you purchase if you expected higher rates of inflation during the life of the bond? A) Treasury bond B) TIPS C) corporate bond D) municipal bond

B) It doesn't account for capital gains or losses

Why isn't the current yield a good indicator of holding a bond? A) It doesn't account for the yield to maturity. B) It doesn't account for capital gains or losses. C) It doesn't account for the coupon. D) It assumes that the current price equals its par value

D) concern about the high default risk of alternative investments

Why may investors buy a Treasury bill with a negative real interest rate? A) fear of rising inflation B) concern about high yields on other bonds C) fear of default by the U.S. government D) concern about the high default risk of alternative investments

B) the asked price is always greater than the bid price

With respect to U.S. Treasury bills: A) the bid price is always greater than the asked price. B) the asked price is always greater than the bid price. C) the bid price is only greater than the asked price if investors expect interest rates to decline in the future. D) the asked price is only greater than the bid price if investors expect interest rates to decline in the future.