Exam 2 Ch. 4-6

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

D)

Which of the following $1,000 face value securities has the highest yield to maturity? A) A 5 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 $1,000 D) A 15 percent coupon bond selling for $900

D)

With an interest rate of 10 percent, the present value of a security that pays $1,100 next year and $1,460 four years from now is A) $1,000. B) $2,560. C) $3,000. D) $2,000.

D)

With an interest rate of 8 percent, the present value of $100 received one year from now is approximately A) $108. B) $100. C) $96. D) $93.

D)

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

B)

The interest rate that financial economists consider to be the most accurate measure is the A) current yield. B) yield to maturity. C) yield on a discount basis. D) coupon rate.

B)

The yield to maturity of a one-year, simple loan of $500 that requires an interest payment of $40 is A) 5 percent. B) 8 percent. C) 12 percent. D) 12.5 percent.

B)

When stock prices become more volatile, the demand curve for bonds shifts to the _____ and the interest rate _____. A) right; rises B) right; falls C) left; falls D) left; rises

B)

The yield to maturity on a consol bond that pays $200 yearly and sells for $1000 is A) 5 percent. B) 10 percent. C) 20 percent. D) 25 percent.

C)

An increase in the liquidity of bonds results in a _____ in demand for bonds and the demand curve shifts to the _____. A) rise; right B) rise; left C) fall; right D) fall; left

A

A $10,000, 8 percent coupon bond that sells for $10,000 has a yield to maturity of A) 8 percent. B) 10 percent. C) 12 percent. D) 14 percent.

A)

An $8,000 coupon bond with a $400 annual coupon payment has a coupon rate of A) 5 percent. B) 8 percent. C) 10 percent. D) 40 percent.

A)

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 _____. A) decrease; left B) decrease; right C) increase; left D) increase; right

A)

A loan that requires the borrower to make the same payment every period until the maturity date is called a A) simple loan. B) fixed-payment loan. C) discount loan. D) same-payment loan. E) none of the above.

B)

Deflation causes the demand for bonds to ________, the supply of bonds to ______, and bond prices to_______. A) increase; increase; increase B) increase; decrease; increase C) decrease; increase; increase D) decrease; decrease; increase

B)

If an investor's holding period is longer than the term to maturity of a bond, the investor is exposed to A) interest-rate risk. B) reinvestment risk. C) bond-market risk. D) yield-to-maturity risk.

B)

If fluctuations in interest rates become larger, then, other things equal, the demand for stocks _____ and the demand for long-term bonds _____. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

B)

A coupon bond pays the owner of the bond A) the same amount every month until maturity date. B) the face value of the bond plus an interest payment once the maturity date has been reached. C) a fixed interest payment every period and repays the face value at the maturity date. D) the face value at the maturity date.

C)

Which of the following $1,000 face value securities has the highest yield to maturity? A) A 5 percent coupon bond selling for $1,000 B) A 10 percent coupon bond selling for $1,000 C) A 12 percent coupon bond selling for $1,000 D) A 12 percent coupon bond selling for $1,100

C)

With an interest rate of 5 percent, the present value of $100 received one year from now is approximately A) $100. B) $105. C) $95. D) $90.

C)

A credit market instrument that pays the owner the face value of the security at the maturity date and nothing prior to then is called a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond.

D)

A decrease in wealth A) increases the demand for stocks. B) increases the demand for bonds. C) increases the demand for housing. D) reduces the demand for housing.

D)

As the price of a bond falls and the expected return _____, bonds become _____ attractive to investors. A) falls; less B) falls; more C) rises; less D) rises; more

D)

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) $130. D) $13.

A)

If interest rates are expected to fall in the future, the demand for long-term bonds today _____ and the demand curve shifts to the _____. A) rises; right B) rises; left C) falls; right D) falls; left

A)

If the expected return on NBC stock rises from 5 to 10 percent and the expected return on CBS stock rises from 12 to 18 percent, then the expected return of holding CBS stock _____ relative to NBC stock and the demand for CBS stock _____. A) rises; rises B) rises; falls C) falls; rises D) falls; falls

A)

If wealth increases, the demand for stocks _____ and that of long-term bonds _____. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

A)

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)

The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates _____ as the expected rate of inflation _____. A) rise; increases B) rise; stabilizes C) rise; decreases D) fall; increases

A)

The nearer the bond's price is to the bond's par value and the longer the maturity of the bond the more closely _____ approximates _____ A) current yield; yield to maturity. B) current yield; coupon rate. C) yield to maturity; current yield. D) yield to maturity; coupon rate.

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 riskiness of an asset's return that results from interest rate changes has been given the special name of A) interest-rate risk. B) liquidity risk. C) bond-market risk. D) yield-to-maturity risk.

A)

The yield on a discount basis of a 180-day $1,000 Treasury bill selling for $950 is A) 10 percent. B) 20 percent. C) 25 percent. D) 40 percent.

A)

The yield to maturity for a one-year discount bond equals A) the increase in price over the year, divided by the initial price. B) the increase in price over the year, divided by the face value. C) the increase in price over the year, divided by the interest rate. D) none of the above.

A)

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) demand; fall C) supply; fall D) supply; rise

B)

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

B)

During a recession, the supply of bonds _______ and the supply curve shifts to the _______. A) increases; left B) increases; right C) decreases; left D) decreases; right

C)

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

C)

For a consol, the current yield is an _____ of the yield to maturity. A) underestimate B) overestimate C) exact measure D) approximate measure

C)

Higher expected interest rates in the future ____ the demand for long-term bonds today and shift the demand curve to the _____. A) increase; left B) increase; right C) decrease; left D) decrease; right

C)

If a $10,000 face value discount bond maturing in one year is selling for $8,000, then its yield to maturity is A) 10 percent. B) 20 percent. C) 25 percent. D) 40 percent.

C)

If you expect the inflation rate to be 5 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A) -12 percent. B) -2 percent. C) 2 percent. D) 12 percent.

C)

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

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 current yield on a $6,000, 10 percent coupon bond selling for $5,000 is A) 5 percent. B) 10 percent. C) 12 percent. D) 15 percent.

C)

The interest rate that equates the present value of payments received from a debt instrument with its market price today is the A) simple interest rate. B) discount rate. C) yield to maturity. D) real interest rate.

C)

For a simple loan, the simple interest rate equals the A) real interest rate. B) nominal interest rate. C) current yield. D) yield to maturity

D)

If a $10,000 face 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 interest rates are expected to rise in the future, the demand for long-term bonds _____ and the demand curve shifts to the _____. A) rises; right B) rises; left C) falls; right D) falls; left

D)

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) rises; falls C) falls; rises D) falls; falls

D)

If you expect the inflation rate to be 15 percent next year and a one-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) -15 percent. D) -8 percent.

D)

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

D)

The yield to maturity on a consol bond that pays $100 yearly and sells for $500 is A) 5 percent. B) 10 percent. C) 12.5 percent. D) 20 percent.

D)

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 one year later? A) 5 percent B) 10 percent C) -5 percent D) 25 percent

D)

When the expected inflation rate increases, the demand for bonds _____, the supply of bonds _____, and the interest rate ______. 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 below the equilibrium interest rate, in the bond market there is excess _____ and the interest rate will _____. A) demand; rise B) demand; fall C) supply; fall D) supply; rise

D)