Econ 330 Chapter 4
Calculate the present value of $1,400 discount bond with 3 years to maturity if the yield to maturity is 8%.
1111.37
How much would you pay for a perpetual bond that pays an annual coupon of $50 per year and yields on competing instruments are 20%?
250
How much would you pay for a perpetual bond that pays an annual coupon of $50 per year and yields on competing instruments are 10%?
500
Which of the following statements is true? A. Only a coupon bond can have a negative nominal interest rate. .B. Both a coupon bond and a perpetuity can have a negative nominal interest rate. .C. Only a perpetuity can have a negative nominal interest rate. D. Neither a coupon bond nor a perpetuity can have a negative nominal interest rate.
A
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. face value rate. C. payment rate. D. maturity rate.
A - coupon rate
An equal decrease in all bond interest rates A. decreases the price of a tenminus−year bond more than the price of a fiveminus−year bond. B. increases the price of a tenminus−year bond more than the price of a fiveminus−year bond. C. increases the price of a fiveminus−year bond more than the price of a tenminus−year bond. D. decreases the price of a fiveminus−year bond more than the price of a tenminus−year bond.
B
An equal increase in all bond interest rates A. increases the return to all bond maturities by an equal amount. B. decreases longminus−term bond returns more than shortminus−term bond returns. C. has no effect on the returns to bonds. D. decreases the return to all bond maturities by an equal amount.
B
A $1000 face value coupon bond with a $60 coupon payment every year has a coupon rate of A. 10 percent. B. 6 percent. C. .6 percent. D. 5 percent.
B
Examples of discount bonds include A. municipal bonds. B. U.S. Treasury bills. C. U.S. Treasury notes. D. corporate bonds.
B
Retired persons often have much of their wealth placed in savings accounts and other interest-bearing investments, and complain whenever interest rates are low. Which of the following, if true, would be a valid complaint? A. There has not been significant growth of nominal interest rates for the last 5 years. B. Expected inflation is falling at a slower rate than nominal interest rates. C. Nominal interest rates decrease, while there is a slight increase in real interest rates. D. Expected inflation is falling at the same rate as nominal interest rates.
B
The sum of the current yield and the rate of capital gain is called the A. par value. B. rate of return. C. pertuity yield. D. discount yield.
B
Which of the following $5,000 faceminus−value securities has the highest yield to maturity? A. A 10 percent coupon bond selling for $5,000 B. A 12 percent coupon bond selling for $4,500 C. A 6 percent coupon bond selling for $5,500 D. A 6 percent coupon bond selling for $5,000
B
When talking about a coupon bond, face value and ________ mean the same thing. A. coupon value B. par value C. discount value D. amortized value
B- par value
A coupon bond that has no maturity date and no repayment of principal is called a A. cabinet. B. Treasury bill. C. consol. D. Treasury note.
C
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. discount bond; face D. coupon bond; face
C
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 five years to maturity C. A bond with one year to maturity D. A bond with ten years to maturity
C
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 oneminus−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
C
The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is A. minus−10 percent. B. minus−5 percent. C. 0 percent. D. 5 percent.
C
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
C
When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________. A. real; lend; borrow B. nominal; lend; borrow C. real; borrow; lend D. market; lend; borrow
C
Which of the following are true concerning the distinction between interest rates and returns? A. The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1. B. The rate of return on a bond will not necessarily equal the interest rate on that bond. C. The return can be expressed as the difference between the current yield and the rate of capital gains. D. The return can be expressed as the sum of the discount yield and the rate of capital gains.
C
All of the following are examples of coupon bonds except A. U.S. Treasury bills B. Corporate bonds C. U.S. Treasury notes D. U.S. Treasury bonds
A
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. $13. D. $130.
A
If you expect the inflation rate to be 12 percent next year and a oneminus−year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A. minus−5 percent. B. minus−2 percent. C. 2 percent. D. 12 percent.
A
The interest rate on Treasury Inflation Protected Securities is a direct measure of A. the real interest rate. B. the nominal interest rate. C. the rate of deflation. D. the rate of inflation.
A
The interest rate on a consol equals the A. coupon payment divided by the price. B. price times the coupon payment. C. coupon payment plus the price. D. price divided by the coupon payment.
A
The interest rate that equates the present value of payments received from a debt instrument with its value today is the A. yield to maturity. B. current yield. C. simple interest rate. D. real interest rate.
A
The present value of a fixedminus−payment loan is calculated as the ________ of the present value of all cash flow payments. A. sum B. multiple C. difference D. log
A
The price of a consol equals the coupon payment A. divided by the interest rate. B. times the interest rate. C. plus the interest rate. D. minus the interest rate.
A
The yield to maturity for a oneminus−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.
A
Which of the following $1,000 faceminus−value securities has the highest yield to maturity? A. A 5 percent coupon bond with a price of $800 B. A 5 percent coupon bond with a price of $1,200 C. A 5 percent coupon bond with a price of $1,000 D. A 5 percent coupon bond with a price of $600
D
Which of the following $1,000 faceminus−value securities has the lowest yield to maturity? A. A 15 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 $900 D. A 5 percent coupon bond selling for $1,000
D
The ________ is calculated by multiplying the coupon rate times the par value of the bond. A. present value B. par value C. maturity payment D. coupon payment
D - coupon payment
A discount bond will have a negative nominal interest rate when the: A. bond is sold long before its maturity date. B. current bond yield is smaller than its yield to maturity. C. sum of the annual coupon payments and the face value of the bond is higher than its current price. D. current bond price is greater than its face value.
D
If a $10,000 faceminus−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
If you expect the inflation rate to be 15 percent next year and a oneminus−year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A. 7 percent. B. 22 percent. C. minus−15 percent. D. minus−8 percent.
D
The nominal interest rate minus the expected rate of inflation A. is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate. B. defines the discount rate. C. is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate. D. defines the real interest rate.
D
The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value. A. less; perpetuity; below B. greater; perpetuity; above C. greater; coupon; above D. greater; coupon; below
D
The ________ interest rate more accurately reflects the true cost of borrowing. A. nominal B. discount C. market D. real
D
The ________ is below the coupon rate when the bond price is ________ its par value. A. discount rate; below B. yield to maturity; below C. discount rate; above D. yield to maturity; above
D
Assuming the same coupon rate and maturity length, the difference between the yield on a Treasury Inflation Protected Security and the yield on a nonindexed Treasury security provides insight into?
The expected inflation rate