Econ 330 Chapter 4 Homework
A discount bond is also called a ________ because the owner does not receive periodic payments. A. zero-coupon bond B. municipal bond C. consol D. corporate bond
A
The nominal interest rate minus the expected rate of inflation A. defines the real interest rate. B. is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate. C. is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate. D. defines the discount rate.
A
The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________. A. negatively; rises; falls B. positively; rises; rises C. negatively; falls; falls D. positively; rises; falls
A
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. discount bond. C. fixed−payment loan. D. coupon bond.
B
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 ten years to maturity B. A bond with one year to maturity C. A bond with twenty years to maturity D. A bond with five years to maturity
B
In the United States during the late 1970s, the nominal interest rates were quite high, but the real interest rates were negative. From the Fisher equation, we can conclude that expected inflation in the United States during this period was A. irrelevant. B. high. C. negative. D. low.
B
Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant. A. short−term; short−term B. long−term; short−term C. long−term; long−term D. short−term; long−term
B
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. yield to maturity. C. real interest rate. D. simple interest rate.
B
The riskiness of an asset's returns due to changes in interest rates is A. asset risk. B. interest−rate risk. C. exchange−rate risk. D. price risk.
B
There is ________ for any bond whose time to maturity matches the holding period. A. a large interest−rate risk B. no interest−rate risk C. yield−to−maturity risk D. rate−of−return risk
B
The ________ interest rate is adjusted for expected changes in the price level. A. ex post nominal B. ex ante real C. ex ante nominal D. ex post real
B
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. discounting the future. C. par value. D. face value.
B
True or False: With a discount bond, the return on a bond is equal to the rate of capital gain. A. True: A discount bond pays fixed interest payments every year so the return is equal to the rate of capital gain. B. True: A discount bond has no coupon payments so the return on the bond is equal to the rate of capital gain. C. False: Bond returns can never equal the rate of capital gain; there must be a capital loss or gain indicated. D. There is no way to determine this without the knowing the coupon amount and interest rate.
B
Which of the following are true concerning the distinction between interest rates and returns? A. The return can be expressed as the sum of the discount yield and the rate of capital gains. 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 rate of return will be greater than the interest rate when the price of the bond falls during the holding period.
B
Which of the following are true for a coupon bond? A. The yield to maturity is greater than the coupon rate when the bond price is above the par value. B. When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. C. The price of a coupon bond and the yield to maturity are positively related. D. The yield is less than the coupon rate when the bond price is below the par value.
B
Which of the following are true of fixed payment loans? A. The borrower repays both the principal and interest at the maturity date. B. Installment loans and mortgages are frequently of the fixed payment type. C. Commercial loans to businesses are often of this type. D. The borrower pays interest periodically and the principal at the maturity date.
B
Another name for a consol is a ________ because it is a bond with no maturity date. The owner receives fixed coupon payments forever. A. municipality B. high-yield bond C. discount bond D. perpetuity
D
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; face C. discount bond; discount D. coupon bond; face
D
The ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation. A. Marshall equation B. Monetarist equation C. Keynesian equation D. Fisher equation
D
A financial adviser has just given you the following advice: "Long-term bonds are a great investment because their interest rate is over 20%." Is the financial adviser necessarily right? A. Yes. The higher the annual interest rate, the higher the annual income on bonds. B. No. When making an investment decision, you should take the yield to maturity into account, not the interest rate. C. No. If interest rates rise sharply in the future, long-term bonds may suffer a sharp fall in price, causing their return to be quite low. D. Yes. If the interest rate remains unchanged until maturity, the price of the bond will be more than its face value.
C
The interest rate on Treasury Inflation Indexed Securities can be roughly interpreted as A. the rate of inflation. B. the rate of deflation. C. the real interest rate. D. the nominal interest 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
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
