Chapter 4 - The Economics of Money, Banking, and Financial Markets

Four Types of Credit Market Instruments

1. simple loan 2. fixed payment loan 3. coupon bond 4. discount bond

12) Examples of discount bonds include A) U.S. Treasury bills. B) corporate bonds. C) U.S. Treasury notes. D) municipal bonds.

A) U.S. Treasury bills.

21) 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

A) a 5 percent coupon bond with a price of $600

7) 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.

A) coupon rate

2) The present value of an expected future payment ________ as the interest rate increases. A) falls B) rises C) is constant D) is unaffected

A) falls

1) 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

A) present value

17) 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

A) sum

19) 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

A) yield to maturity; above

18) 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

B) greater; coupon; below

6) 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

C) coupon bond; face

8) 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

C) coupon payment

14) 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

C) equal to

24) When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________. A) nominal; lend; borrow B) real; lend; borrow C) real; borrow; lend D) market; lend; borrow

C) real; borrow; lend

13) 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.

C) yield to maturity.

11) 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.

D) discount bond

The price of a coupon bond and the yield to maturity are positively related. TRUE or FALSE

FALSE - negatively related

Current bond prices and interest rates are negatively related. TRUE or FALSE

TRUE

Even if a bond has a substantial initial interest rate, its return can be negative if interest rates rise. TRUE or FALSE

TRUE

For simple loans, the simple interest rate equals the yield to maturity. TRUE or FALSE

TRUE

Prices and returns for long-term bonds are more volatile than those for short-term bonds. TRUE or FALSE

TRUE

Rise in interest rates means that the price of the bond someone is holding falls and he or she may experience a capital loss. TRUE or FALSE

TRUE

The most distant a bonds maturity, the lower the rate of return the occurs as a result of an increase in the rate. TRUE or FALSE

TRUE

When the coupon is priced at its face value, the yield to maturity equals the coupon rate. TRUE or FALSE

TRUE

When the yield to maturity decreases the price of the bond increases. TRUE or FALSE

TRUE

When the yield to maturity increases the price of the bond falls. TRUE o FALSE

TRUE

Example of discount bond

Treasury bills, U.S. savings bonds, and long-term zero coupon bonds

Example of coupon bonds

U.S. Treasury bonds and notes and corpoate bonds

consol or perpetuity

a bond with no maturity date that does not repay principal but pays fixed coupon payments forever

Present value

a dollar paid to you one year from now is less valuable than a dollar paid to you today

Example of fixed payment loan

installment loans such auto loans, and mortgages loans

Real interest rate

is adjusted for changes in price level so it more accurately reflects the cost of borrowing

Nominal interest rate

makes no allowance for inflation

How well a person does financially by holding a bond or any other security over a particular time period is accurately measured by the securities ________

rate of return

Example of simple loan

shot term commercial loans to business

Yield to maturity

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

When the real interest rate is low

there are greater incentives to borrow and fewer incentives to lend