Money and Banking Chapter 4 Review

An increase in all bond interest rates

decreases long-term bond returns more than short-term bond returns

A ___ is bought at a price below its face value, and the ___ value is repaid at the maturity date

discount bond; face

The ___ interest rate is adjusted for expected changes in the price level

ex ante real

The present value of an expected future payment ___ as the interest rate increases

falls

The yield to maturity is ___ than the ___ rate when the bond price is ___ the face falue

greater, coupon, below

An equal decrease in all bond interest rates

increases the price of a ten-year bond more than the price of a 5-year bond

If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is 10 percent

is 10 percent

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 ___

negatively, rises, falls

There is ___ for any bond whose time to maturity matches the holding period

no interest - rate risk

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

rate of return

The ___ interest rate more accuratly reflects the true cost of borrowing

real

The present value of a fixed-payment loan is calculated as the ___ of the present value of all cash flow payments

sum

A discount bond is also called a ___ because the owner does not receive periodic payments

zero-coupon bond

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

$400

The return on a 5 percent coupon bond that initially sells for $1000 and sells for $950 next year is

0 percent

If the nominal rate of interest is 2 percent and then expected inflation rate is -10 percent, the real rate of interest is

12 percent

If the amount payable in two years is $2420 for a simple loan at 10 percent interest, the loan amount is

2000 dollars

If you expect the inflation rate to be 4 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

3 percent

If $22,050 is the amount payable in two years for a $20,000 simple loan made today the interest rate is?

5 percent

A $1000 face value coupon bond with a $60 coupon payment every year has a coupon rate of

6 percent

Which of the following are generally true of bonds?

A bond's return equals the yield to maturity when the time to maturity is the same as the holding period

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

The interest rate is 4 percent and the expected inflation rate is 1 percent

Which of the following are true concerning the distinction between interest rates and return?

The rate of return on a bond will not necessarily equal the interest rate on that bond

The interest rate on a consol equals the

coupon payment divided by the price

Which of the following $1,000 face-value securities has the highest yield to maturity?/ A 5 percent coupon bond selling for $1000 A 12 percent coupon bond selling for $1000 A 12 percent coupon bond selling for $1100 A 10 percent coupon bond selling for $1000

A 12 percent coupon bond selling for $1000

Which of the following $5000 face-value securities has the highest yield to maturity? A 6 percent coupon selling for $5000 A 10 percent coupon bond selling for $5000 A 12 percent coupon bond selling for $4500 A 6 percent coupon bond selling for $5500

A 12 percent coupon bond selling for $4500

Which of the following $1000 face-value securities has the lowest yield to maturity A 5 percent coupon bond selling for $1000 A 15 percent coupon bond selling for $900 A 15 percent coupon bond selling for $1000 A 10 percent coupon bond selling for $1000

A 5 percent coupon bond selling for $1000

The ___ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation

Fisher equation

All of the following are examples of coupon bonds except U.S. Treasury notes U.S. Treasury bonds U.S. Treasury bills Corporate bonds

U.S. Treasury bills

Examples of discount bonds include

U.S. Treasury bills

An increase in the time to the promised future payment ___ the present value of the payment

decreases

The interest rate that describes how well a lender has done in terms after the fact is called the

ex post real interest rate

The riskiness of an asset's returns due to changes in interest rates is

interest-rate risk