Chapter 3

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

$200.

If a $1000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon payment every year is $13.75 $3.75. $37.50. $375.00.

$37.50.

With an interest rate of 6 percent, the present value of $100 next year is approximately $106. $100. $94. $92.

$94.

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 12 percent. 10 percent. 8 percent. there is not enough information to determine the return.

8 percent.

When talking about a coupon bond, face value and ________ mean the same thing. coupon value amortized value par value discount value

par value

Economists consider the ________ to be the most accurate measure of interest rates. yield to maturity. real interest rate. current yield. simple interest rate.

yield to maturity.

The interest rate that equates the present value of payments received from a debt instrument with its value today is the current yield. real interest rate. yield to maturity. simple interest rate.

yield to maturity.

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 deflation. discounting the future. par value. face value.

Discounting the future.

Which of the following are TRUE for a coupon bond? The yield is less than the coupon rate when the bond price is below the par value. When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. The price of a coupon bond and the yield to maturity are positively related. The yield to maturity is greater than the coupon rate when the bond price is above the par value.

When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.

The yield to maturity for a discount bond is ________ related to the current bond price. positively directly negatively not

negatively

There is ________ for any bond whose time to maturity matches the holding period. yield-to-maturity risk a large interest-rate risk rate-of-return risk no interest-rate risk

no interest-rate risk

Factors that can cause the supply curve for bonds to shift to the right include a decrease in government deficits. an expansion in overall economic activity. a business cycle recession. a decrease in expected inflation.

a decrease in expected inflation.

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

decreases; increases

For simple loans, the simple interest rate is ________ the yield to maturity. not comparable to equal to less than greater than

equal to

A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a simple loan. coupon bond. discount bond. fixed-payment loan.

fixed-payment loan.

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

greater; coupon; above

The yield to maturity for a one-year discount bond equals the increase in price over the year, divided by the interest rate. coupon rate. initial price. face value.

initial price.

Which of the following are generally TRUE of all bonds? A fall in interest rates results in capital losses for bonds whose terms to maturity are longer than the holding period. Prices and returns for short-term bonds are more volatile than those for longer term bonds. Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise. 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.

Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise.

A discount bond pays the face value at maturity plus any capital gain. pays all interest and the face value at maturity. pays the bondholder the face value at maturity. pays the bondholder a fixed amount every period and the face value at maturity.

pays the bondholder the face value at maturity.

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. present value future value deflation interest

present value