Econ 303 Test 2

Which of the following bonds are considered to be risk free

Nothing is risk free just because they are not susceptible to default risk they still will be susceptible to market risk

If the expected gains on stocks rise while the expected returns on bonds do not change then

The equilibrium interest rate will rise

For a specific change in market interest rates

The longer the time until a bond matures the greater will be the change on its price

Holding everything constant

The more liquid is asset A relative to alternative assets the greater will be the demand for asset A

Interest-rate risk can best be characterized as the risk that

The price of a financial asset will fluctuate in response to changes in market interest rates

when the price of a bond is _____ the equilibrium price there is an excess demand for bonds and price will _____

below; rise

According to liquidity premium theory a yield curve that is flat means that

bond purchasers expect interest rates to fall in the future

Which of the following best expresses the equation for holding period return?

current yield + capital gain

A higher market interest rate:

decrease the present value of future money

For a coupon bond, the yield to maturity

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

Everything else held constant when stock prices become less volatile the demand curve for bonds shifts to the ______ and the interest rate _______

left; rises

the present value of an expected future payment _____ as the interest rate decreases

rises

The future value of $100 that earns 10% annually for n years is best expressed by which of the following?

100(1.1)^n

With an interest rate of 8 percent the future value of 100 in one year is approximately (rounded to the nearest dollar)

108

Suppose you are holding a 3% coupon bond maturing in five years with a yield to maturity of 12% if the current market interest rate on comparable five-year instruments is 7% what is expected yearly rate of return on your bond

12% Yield to maturity refers to the total annual return that a bond gives if it is held until maturity. The yield to maturity is dependent on the market interest rate.

Suppose you are holding a 5% coupon bond maturing in three years with a yield to maturity of 15% if market interest rates on three year instruments rise from 15% to 20% what is the yearly return on your bond

15%

If a bond has 10 years to go to maturity a par value of 5,000 is paying a coupon payment of 300 annually and costs 6,000 today the current yield is which of the following

3%

If the market interest rate is 20 percent what is the value of a security that pays you 1200 the first year 1440 the second year and 1728 the third year with no additional payments after the third year

3000

If the market interest rate is 20% what is value of a security that pays you 1200 the first year 1440 the second year and 1728 the third year with no additional payments after the third year

3000

If the market interest rate is 20 percent what is the value of a security that pays you 1200 the first year 1440 the second and 1728 the third year with no additional payments after the third year?

3000 1200/(1+.2)+1440/(1+.2)^2+1728/(1+.2)^3

If 1-year interest rates for the next five years are expected to be 4, 2, 5, 4, and 5 percent and the 5 year term premium is 1 percent than the 5 year bond rate will be

5 percent

If the expected path of one year interest rates over the next five years is 4 percent 7 percent 8 percent and 6 percent then the expectations theory predicts that today's interest rate on the five-year bond is

6 percent

Which of the following options would you choose to have if the rate of discount is 18 percent? $500 in one year $750 in two years $1000 in four years $1500 in ten years

750 in two years 750/(1.18)^2

Which of the following would you prefer to be selling (assume n = 25) A 10000 par value with 10% coupon rate selling for 10000 A 10000 par value with 9% coupon rate selling for 10000 A 10000 par value with 7% coupon rate selling for 10000 A 10000 par value with 10% coupon rate selling for 9000

A $10,000 par value security with a 7% coupon rate selling for 10000

Which of the following would you prefer to be buying (n is 10 for all instruments) a 10000 par value security with 10% coupon rate selling for 10000 A 10000 par value with a 7% coupon rate selling for 10000 A 20000 par value with a 9% coupon rate selling for 20000 A 20000 par value with a 10% coupon rate selling for 19000

A $20,000 par value security with a 10% coupon rate selling for $19,000

Which of the following would you prefer to be selling (n is 25) A $15,000 par value security with a 10.5% coupon rate selling for $16,000. A $10,000 par value security with a 10% coupon rate selling for $10,000. A $15,000 par value security with a 9% coupon rate selling for $16,000. A $10,000 par value security with a 7% coupon rate selling for $10,000.

A 10,000 par value security with a 7% coupon rate selling for 10,000

Which of the following would you prefer to be buying based on yield to maturity (assume n=25) A $10,000 par value security with a 9% coupon rate selling for $9,000. A $25,000 par value security with a 7% coupon rate selling for $25,500. A $20,000 par value security with a 9% coupon rate selling for $20,500. A $15,000 par value security with a 7% coupon rate selling for $15,700.

A 10,000 par value security with a 9% coupon rate selling for 9,000

which of the following 1000 face value securities has the highest yield to maturity (assume n=5) 5% coupon bond at 1200 5% coupon bond at 1000 5% coupon bond at 800 5% coupon bond at 600

A 5% coupon bond with a price of 600

if you have a very low tolerance for risk which of the following bonds would you be least likely to hold in your portfolio

A corporate bond with a rating of Baa

in the bond supply bond demand model which of the following would lead to a reduction in interest rates a cutback in feral entitlement expenditures an announcement of a surge in the money supply an increase in business confidence an increase in the public's propensity to consume rather than save

A cutback in federal entitlement expenditures

If a lender believes that market interest rates will be rising in the near future which of the following will she be most likely to purchase today

A six-month government bill

One reason corporate bonds are not as liquid as government bonds because

Fewer corporate bonds for any one corporation are traded making them more costly to sell

Which of the following statements is true If the yield to maturity on coupon bond exceeds the coupon rate the price of the bond is below face value If the yield to maturity on coupon bond exceeds the coupon rate the price of the bond is above face value If the yield to maturity on coupon bond exceeds the coupon rate the price of the bond is equal to face value

If the yield to maturity on coupon bond exceeds the coupon rate the price of the bond is below face value

An increase in the liquidity of corporate bonds will _____ the price of corporate bonds and _____ the yield of treasury bonds everything else held constant

Increase; increase

A higher interest rate

Reduces the present value of future money

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 ____

Rises; right

In the bond market, the initial seller is considered to be

The borrower

you would be more willing to buy AT&T bonds (holding everything else constant) if

The brokerage commissions on bonds sales become cheaper

If a saver pays 10,250 for a bond with a face value of 10,000 and annual coupon payments it follows that

The coupon rate is greater than the current yield

If an individual pays $1,025 for a coupon bond with a face value of 1000 and annual coupon payments it follows that

The coupon rate is greater than the current yield

The risk structure of interest rates is

The relationship among interest rates of different bonds with the same maturity

The term structure of interest rates

The relationship among interest rates on bonds with different maturities

The price of a discount bond will be higher if

The time to maturity is shorter

If interest rates unexpectedly fall sharply which should you prefer to be holding--a 20-year treasury bond or a treasury bill

Treasury bond

which of the following securities has the lowest interest rate

US treasury bonds

The supply curve for bonds would be shifted to the right by

a decrease in the corporate tax on profits

In keynes's liquidity preference framework if there is excess demand for money there is

an excess supply of bonds

Everything else held constant an increase in expected inflation lowers the expected return on _____ compared to ______ assets

bonds; real

A decrease in the riskiness of corporate bonds will ______ the yield on corporate bonds and ______ the yield on treasury securities everything else held constant

decrease; increase

An increase in interest rates can be cause by a ______ in the demand for bonds or a ______ in the supply of bonds

decrease; increase

Everything else held constant if the federal government were to guarantee today it will pay creditors if a corporation goes bankrupt in the future the interest rate on corporate bonds will _____ and the interest rate on treasury securities will _______

decrease; increase

If fluctuations in the stock market prices become more stable then other things equal the demand for long-term bonds should ______ and the yield on long-term bonds should ______

decrease; increase

In the market for money a decline in the expected inflation rate causes the demand for money to _____ and the demand curve to shift to the _____ everything else held constant

decrease; left

holding the expected return on bonds constant an increase in the expected return on common stocks would _____ the demand for bonds shifting the demand curve to the _______

decrease; left

If fluctuations in interest rates become smaller then other things equal the demand for stocks ______ and the demand for long term bonds _______

decreases; increases

During a recession the supply of bonds _____ and the supply curve shifts to the ______ everything else held constant

decreases; left

if stock prices are expected to climb next year everything else held constant the ______ curve for bonds shifts _______ and the interest rate _______

demand; left; rises

if the interest rate on a bond is above the equilibrium interest rate there is an excess _____ for bonds and the bond price will ______

demand; rise

Everything else held constant if the expected return on RST stock declines from from 12 to 9 percent and the expected return on XYZ stock declines from 8 to 7 percent then the expected return of holding RST stock _____ relative to XYZ stock and demand for XYZ stock ______

falls; rises

The coronavirus pandemic

increase the Baa-Aaa spread

If interest rates are expected to increase then other things equal the demand for houses will ______ and that of treasury bonds will _____

increase; decrease

If the fluctuations in interest rates become more volatile then other things equal the demand for stocks _____ and the demand for long-term bonds _____

increase; decrease

Deflation causes the demand for bonds to _____ the supply of bonds to _______ and bond prices to ______ everything else held constant

increase; decrease; increase

In the history of the united states interest rates usually rise during expansions this is because during expansions usually bond suppliers _____ their supply of bonds ______ than bond demanders _____ their demand for bonds

increase; more; increase

An increase in the expected inflation rate causes the supply of bonds to ________ and the supply curve to shift to the ________, everything else held constant.

increase; right

higher government deficits _____ the supply of bonds and shifts the supply curve to the ______ everything else held constant

increase; right

The interest rate falls when either the demand for bonds ______ or the supply of bonds _______

increases; decreases

if wealth increases the demand for stocks _______ and that of long-term bonds ______ everything else held constant

increases; increases

According to the expectations theory of the term structure

interest rates on bonds of different maturities move together over time

If the expected path of 1 year interest rates over the next five years is 1 percent 2 percent 3 percent 4 percent and 5 percent the liquidity premium theory predicts that the bond with the highest interest rate today

is the one with a maturity of five years

when the growth rate of the money supply is increased interest rates will fall immediately if the liquidity effect is ______ than the other money supply effects and there is ______ adjustment of expected inflation

larger; slow

Other things being equal an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the _____ and the demand curve for the treasury bonds to the _____

left; right

In the bond market the bond demanders are the _____ and the bond suppliers are the ______

lenders; borrowers

A ______ yield to maturity implies a(n) ________ bond price

lower; higher

An increase in the riskiness of corporate bonds will ______ the price of the corporate bonds and ______ the price of treasury bonds everything else held constant

reduce; increase

According to the liquidity premium theory of the term structure a steeply upward sloping yield curve indicates that short-term interest rates are expected to

rise in the future

The supply curve for bonds has the usual upward slope indicating that as the price _____ ceteris paribus the _____ increases

rises; quantity supplied

In the market for money when real income _____ the demand curve for money shifts to the _______ and the interest rate ______ everything else held constant

rises; right; rises

The spread between the interest rates on bonds with default risk and default-free bonds is called the

risk premium

When the price of a bond is above the equilibrium price there is an excess ______ bonds and interest rates will _____

supply of; rise

Municipal bonds have default risk yet their interest rates are usually lower than the rates on default free treasury bonds this suggests that

the benefit from the tax exempt status of municipal bonds exceeds their default risk