Econ 353 Midterm 3

A consol paying $20 annually when the interest rate is 5 percent has a price of A) $400. B) $100. C) $200. D) $800.

a

All bonds that will not be held to maturity have interest rate risk which occurs because of the change in the price of the bond as a result of A) interest-rate changes. B) changes in the coupon rate. C) default of the borrower. D) changes in the asset's maturity date.

a

During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________, everything else held constant. A) rises; right B) falls; right C) falls; left D) rises; left

a

Everything else held constant, if market interest rates are expected to fall in the future, the demand for long-term bonds will ________. As a result, equilibrium prices of long term bonds will _______. A) rise; rise B) rise; fall C) fall; rise D) fall; rise

a

Everything else held constant, if market interest rates are expected to rise in the future, the demand for US T-bills will ________ and demand for US T- bonds will _______. A) rise; fall B) rise; rise C) fall; rise D) fall; rise

a

Given your knowledge about the risk characteristics of a 6-month negotiable CD and a 6-month non- negotiable CD, which of the following statements is correct? A) The holder of a 6-month negotiable CD should expect a positive risk premium over a 6-month non- negotiable CD. B) The holder of a 6-month non-negotiable CD should expect a positive risk premium over a 6-month negotiable CD. C) Both A and B are wrong.

a

If brokerage commissions on bond sales decrease, then, other things equal, the demand for bonds will ________ and the demand for real estate will ________. A) increase; decrease B) increase; increase C) decrease; decrease D) decrease; increase

a

If housing prices are expected to increase next year, then, other things equal, the demand for houses will ________ and that of Treasury bills will ________. A) increase; decrease B) increase; increase C) decrease; decrease D) decrease; increase

a

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 one year to maturity B) a bond with five years to maturity C) a bond with ten years to maturity D) a bond with twenty years to maturity

a

If wealth increases, the demand for stocks ________ and that of long-term bonds ________, everything else held constant. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

a

In the bond market, the bond demanders are the ________ and the bond suppliers are the ________. A) lenders; borrowers B) lenders; advancers C) borrowers; lenders D) borrowers; advancers

a

Junk bonds, bonds with a low bond rating, are also known as A) high-yield bonds. B) investment grade bonds. C) high quality bonds. D) zero-coupon bonds.

a

The current yield and the yield to maturity A) are equal for consols. B) are equal for all bonds. C) are equal if the market price of the bond is greater than its face value. D) are equal if the market price of the bond is less than its face value.

a

The supply curve for bonds has the usual upward slope, indicating that as the price ________, ceteris paribus, the ________ increases. A) rises; quantity supplied B) falls; supply C) falls; quantity supplied D) rises; supply

a

When the price of a bond is above the equilibrium price, there is an excess ________ bonds and price will ________. A) supply of; fall B) demand for; rise C) demand for; fall D) supply of; rise

a

Which of the following bonds would you prefer to be buying, assuming that your relevant rate of return is the yield to maturity itself? A) a $10,000 face-value security with a 10 percent coupon selling for $9,000 B) a $10,000 face-value security with a 7 percent coupon selling for $10,000 C) a $10,000 face-value security with a 9 percent coupon selling for $10,000 D) a $10,000 face-value security with a 10 percent coupon selling for $10,000

a

Which of the following is more likely to have happened to the YTM-spread between a Baa and a 10- year U.S. Treasury note, after the sub-prime mortgage market collapse. A) The spread increased. B) The spread decreased. C) The spread was not affected and stayed the same.

a

Which of the following is more likely to have happened to the spread, (price of a 10-year T-note - price of a Baa bond), after the sub-prime mortgage market collapse. A) The spread increased. B) The spread decreased. C) The spread was not affected and stayed the same.

a

Which of the following long-term bonds is expected to have the highest interest rate? A) corporate Baa bonds B) U.S. Treasury bonds C) corporate Aaa bonds D) municipal bonds

a

You are investing today, in a 4-year coupon bond which pays a coupon rate of 6% and has a face value of 1000. The market interest rate today is 6% also. You plan to sell of the bond after a year. Your one period rate of return is, A) 0.846% approx B) 4.512% approx. C) - 2% approx. D) 2% approx.

a

f the expected path of 1-year interest rates over the next five years is 2 percent, 4 percent, 1 percent, 4 percent, and 3 percent, the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of A) one year. B) two years. C) three years. D) four years.

a

A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium. A) positive; lower B) positive; raise C) negative; raise D) negative; lower

b

A movement along the bond demand or supply curve occurs when ________ changes. A) income B) bond price C) wealth D) expected return

b

An equal decrease in all bond interest rates A) increases the price of a five-year bond more than the price of a ten-year bond. B) increases the price of a ten-year bond more than the price of a five-year bond. C) decreases the price of a five-year bond more than the price of a ten-year bond. D) decreases the price of a ten-year bond more than the price of a five-year bond.

b

Everything else held constant, an increase in expected inflation, lowers the expected return on ________ compared to ________ assets. A) nominal bonds; financial B) nominal bonds; real C) stocks; debt D) real estate; real

b

Everything else held constant, if the default risk on ABC bonds increase relative to the default risk on CBS bonds, the demand curve for ABC bonds shifts to the ________ and the equilibrium price of ABC bonds ________. A) right; falls B) left; falls C) right; rises D) left; rises

b

Everything else held constant, if the expected return on ABC stock rises from 5 to 10 percent and the expected return on CBS stock is unchanged, then the expected return of holding CBS stock ________relative to ABC stock and the demand for CBS stock ________. A) rises; rises B) falls; falls C) rises; falls D) falls; rises

b

Given your knowledge about the risk characteristics of a 15-day repurchase agreement and a 15-day commercial paper, which of the following statements is correct? A) The holder of a 15-day repurchase agreement should expect a positive risk premium over a 15-day commercial paper. B) The holder of a 15-day commercial paper should expect a positive risk premium over a 15-day repurchase agreement. C) Both A and B are wrong.

b

I purchase a 10 percent coupon bond. Based on my purchase price, I calculate a yield to maturity of 8 percent. If I hold this bond to maturity, then my return on this asset is A) 10 percent. B) 8 percent. C) 12 percent. D) there is not enough information to determine the return.

b

If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is A) 2.5 percent. B) 5 percent. C) 7.5 percent. D) 10 percent.

b

If the expected path of one-year interest rates over the next five years is 4 percent (today, date t), 5 percent (at date t+1), 7 percent (at date t+2), 8 percent (at date t+3), and 6 percent (at date t+4), then the expectations theory predicts that today's interest rate on a three-year bond is A) 8 percent approx. B) 5.33 percent approx. C) 9.2 percent approx. D) 7.15 percent approx.

b

If the price of bonds is set ________ the equilibrium price, the quantity of bonds demanded exceeds the quantity of bonds supplied, a condition called excess ________. A) above; demand B) below; demand C) above; supply D) below; supply

b

In the figure above, the price of bonds would fall from P2 to P1 if A) there is a business cycle recession. B) there is a business cycle expansion. C) inflation is expected to increase in the future. D) inflation is expected to decrease in the future.

b

In which of the following situations would you prefer to be the lender? A) The interest rate is 9 percent and the expected inflation rate is 7 percent. B) The interest rate is 4 percent and the expected inflation rate is 1 percent. C) The interest rate is 13 percent and the expected inflation rate is 15 percent. D) The interest rate is 25 percent and the expected inflation rate is 50 percent.

b

Refer to the loan in Q4. If the yield to maturity on the loan is 10% instead, then the loan value is A) $185 approx. B) $173.55 C) $210 approx. D) none of the above.

b

The demand for Picasso paintings rises (holding everything else equal) when A) stocks become easier to sell, that is more liquid. B) Treasury securities become riskier. C) people expect a boom in real estate prices. D) people expect gold prices to rise.

b

When the expected inflation rate increases, the real cost of borrowing ________ and bond supply ________, everything else held constant. A) increases; increases B) decreases; increases C) increases; decreases D) decreases; decreases

b

Which of the following are generally TRUE of all bonds? A) The longer a bond's maturity, the greater is the rate of return that occurs as a result of the increase in the interest rate. B) Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise. C) Prices and returns for short-term bonds are more volatile than those for longer term bonds. D) A fall in interest rates results in capital losses for bonds whose terms to maturity are longer than the holding period.

b

Which of the following statements is most accurate about a 30-year fixed rate mortgage? A) The YTM on it should be less than the YTM on a 15-year fixed rate mortgage. B) The YTM on it should be greater than the YTM on a 15-year fixed rate mortgage. C) The YTM on it should be less than what you would pay on your credit card debts. D) Both A and C are true E) None of the above is true.

b

You have two investment options: (I) Invest in a sequence of two, 1-year bonds at respectively 4% and 6% interest rate per year (II) Invest in a 2-year bond with a 5.5% YTM. You are interested only in the return from the two options and do not have specific preference for a bond of a certain maturity. A) (I) is better than (II) B) (II) is better than (I) C) (I) and (II) are equal D) None of the above is true. (I) and (II) cannot be compared.

b

A 2-year, $100 face value T-note pays 8% annually and has a market price of $101. The current yield on the bond is A) 7% approx. B) 9% approx. C) 7.92% approx. D) 8% approx.

c

A fall in energy prices increase business profitability. Everything else held constant, this should cause the ________ of bonds to ________ and the equilibrium interest rates to ______. A) supply; increase; fall B) demand; increase; rise C) supply; increase; rise D) demand; increase; fall

c

A plot of the interest rates on default-free government bonds with different terms to maturity is called A) a risk-structure curve. B) a default-free curve. C) a yield curve. D) an interest-rate curve.

c

During a recession, the supply of bonds ________ and the supply curve shifts to the ________, everything else held constant. A) increases; left B) increases; right C) decreases; left D) decreases; right

c

Everything else held constant, if market interest rates are expected to fall in the future, the demand for long-term bonds will ________ and demand for short term bonds will _______. A) rise; rise B) fall; rise C) rise; fall D) fall; fall

c

Everything else held constant, if the default risk on ABC bonds increase relative to the default risk on CBS bonds, the demand curve for CBS bonds shifts to the ________ and the equilibrium interest rate on CBS bonds ________. A) right; rises B) left; falls C) right; falls D) left; rises

c

Higher government deficits ________ the supply of bonds and shift the supply curve to the ________, everything else held constant. A) increase; left B) decrease; left C) increase; right D) decrease; right

c

Holding all other factors constant, the quantity demanded of an asset is A) negatively related to wealth. B) negatively related to its expected return relative to alternative assets. C) negatively related to the risk of its returns relative to alternative assets. D) negatively related to its liquidity relative to alternative assets.

c

If the expected path of one-year interest rates over the next five years is 4 percent (today, date t), 5 percent (at date t+1), 7 percent (at date t+2), 8 percent (at date t+3), and 6 percent (at date t+4), then the expectations theory predicts that today's interest rate on the five-year bond is A) 4 percent. B) 5 percent. C) 6 percent. D) 7 percent.

c

In the bond market, the market equilibrium shows the market-clearing ________ and the market- clearing ________. A) price; deposit B) interest rate; deposit C) price; interest rate D) interest rate; premium

c

In the figure above, a factor that could cause the demand for bonds to shift to the right is A) an increase in the riskiness of bonds relative to other assets. B) an increase in the expected rate of inflation. C) expectations of lower interest rates in the future. D) a decrease in wealth.

c

In the figure above, a factor that could cause the supply of bonds to increase (shift to the right) is A) a decrease in government budget deficits. B) a decrease in expected inflation. C) expectations of more profitable investment opportunities. D) a business cycle recession.

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 one-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 demand curve for bonds has the usual downward slope, indicating that at ________ prices of the bond, everything else equal, the ________ is higher. A) higher; demand B) higher; quantity demanded C) lower; quantity demanded D) lower; demand

c

The yearly payment on a 2-year fixed payment loan is $100. If the yield to maturity on the loan is 5%, what is the loan value? A) $200 approx. B) $190 approx. C) $185.94 approx. D) $180.53 approx.

c

The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value. A) greater; coupon; above B) greater; perpetuity; above C) greater; coupon; below D) less; perpetuity; below

c

What is the one period rate of return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year? A) -10 percent. B) -5 percent. C) 0 percent. D) 5 percent.

c

You are comparing asset A with alternatives. In each case assume that everything else about A and the alternatives are the same, except the factor mentioned. Which of the following is true? A) If asset A's risk rises relative to that of alternative assets, the demand will increase for asset A. B) The lower the expected return to asset A relative to alternative assets, the greater will be the demand for asset A. C) The more liquid is asset A relative to alternative assets, the greater will be the demand for asset A. D) If wealth increases, demand for asset A increases and demand for alternative assets decreases.

c

You are investing today, in a 4-year coupon bond which pays a coupon rate of 6% and has a face value of 1000. The market interest rate today is 6% also. You plan to sell of the bond after a year. Suppose the market interest rate next year is 8%. Then the market price of the bond next year is, A) 985.12 approx B) 1080 C) 948.46 approx. D) 1000

c

A 2-year, $100 face value T-note pays 8% annually. If the yield to maturity on the bond is 8%, what is its market price? A) $108 B) $116 C) $95 D) $100

d

According to the expectations theory of the term structure A) when the yield curve is steeply upward sloping, short-term interest rates are expected to remain relatively stable in the future. B) when the yield curve is downward sloping, short-term interest rates are expected to remain relatively stable in the future. C) investors have strong preferences for short-term relative to long-term bonds, explaining why yield curves typically slope upward. D) yield curves should be equally likely to slope downward as slope upward

d

Differences in ________ explain why interest rates on Treasury securities are not all the same. A) risk B) liquidity C) tax characteristics D) time to maturity

d

Everything else held constant, an increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds, and ________ the demand for U.S. government bonds. A) increasing; increasing B) decreasing; increasing C) decreasing; decreasing D) increasing; decreasing

d

Everything else held constant, if the average wealth level of households go down, the demand for bonds ________. As a result, equilibrium bond prices ________ and equilibrium interest rates _______. A) increase; fall; rise B) decrease; rise; fall C) decrease; fall; fall D) decreases; fall; rise

d

Everything else held constant, if the bid-ask spread on 10 year T-notes become narrower relative to the bid-ask spread on 30 year T-bonds, the demand curve for 30 year T-bonds shifts to the ________ and the equilibrium interest rates on 30 year T-bonds ________. A) right; rise B) right; fall C) left; fall D) left; rise

d

Everything else held constant, if the expected return on U.S. Treasury bonds falls from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected return of corporate bonds ________ relative to U.S. Treasury bonds and the demand for corporate bonds ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls

d

Everything else held constant, when stock prices become less volatile, the demand curve for bonds shifts to the ________ and the equilibrium interest rates ________. A) right; rise B) right; fall C) left; fall D) left; rise

d

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 A) 2 percent. B) 3 percent. C) 4 percent. D) 5 percent.

d

If gold becomes acceptable as a medium of exchange, the demand for gold will ________ and the demand for bonds will ________, everything else held constant. A) decrease; decrease B) decrease; increase C) increase; increase D) increase; decrease

d

If stock prices are expected to drop next year, then, other things equal, the demand for stocks will ________ and that of Treasury bills will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

d

If the interest rate on a bond is below the equilibrium interest rate, there is an excess ________ for bonds and the bond price will ________. A) demand; rise B) demand; fall C) supply; rise D) supply; fall

d

In which of the following situations would you prefer to be the borrower? A) The interest rate is 9 percent and the expected inflation rate is 7 percent. B) The interest rate is 4 percent and the expected inflation rate is 1 percent. C) The interest rate is 13 percent and the expected inflation rate is 15 percent. D) The interest rate is 25 percent and the expected inflation rate is 50 percent.

d

Of the four factors that influence asset demand, which factor will cause the demand for all assets to increase when it increases, everything else held constant? A) expected returns B) risk C) liquidity D) wealth

d

The demand for silver decreases, other things equal, when A) the market for silver becomes more liquid. B) wealth grows rapidly. C) stock prices are expected to fall D) the gold market is expected to boom, that is gold prices are expected to rise.

d

When the expected inflation rate increases, the demand for nominal bonds ________, the supply of nominal bonds ________, and the equilibrium interest rate on nominal bonds ________, everything else held constant. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises

d

When the interest rate on a bond is above the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________. A) demand; rise B) supply; fall C) supply; rise D) demand; fall

d

Which of the following $5,000 face-value securities has the highest yield to maturity? A) a 6 percent coupon bond selling for $5,000 B) a 6 percent coupon bond selling for $5,500 C) a 10 percent coupon bond selling for $5,000 D) a 12 percent coupon bond selling for $4,500

d

Which of the following long-term bonds is expected to have the lowest interest rate? A) corporate Baa bonds B) U.S. Treasury bonds C) corporate Aaa bonds D) municipal bonds

d

You are investing today, in a 4-year coupon bond which pays a coupon rate of 6% and has a face value of 1000. The market interest rate today is 6% also. You plan to sell of the bond after a year. Suppose that the market interest rate next year is 4%. Then the market price of the bond next year is, A) 985.12 approx. B) 1113.20 approx. C) 1000 D) 1055.50 approx.

d

You are investing today, in a 4-year coupon bond which pays a coupon rate of 6% and has a face value of 1000. The market interest rate today is 6% also. You plan to sell of the bond after a year. Your one period rate of return is, A) 0.846% approx.. B) 2% approx.. C) -2% approx. D) 11.50%

d

According to the segmented markets theory of the term structure A) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds. B) buyers of bonds do not prefer bonds of one maturity over another. C) interest rates on bonds of different maturities do not move together over time. D) buyers prefer bonds with a maturity that matches their desired holding period. E) both C and D are true.

e