EC 220: Quiz 4

If a $1,000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon payment every year is A) $37.50. B) $3.75. C) $375.00. D) $13.75

A) $37.50.

What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent? A) $453.51 B) $500.00 C) $476.25 D) $550.00

A) $453.51

If you expect the inflation rate to be 12 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) -5 percent. B) -2 percent. C) 2 percent. D) 12 percent.

A) -5 percent.

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

A) 5 percent.

If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the interest rate is A) 5 percent. B) 10 percent. C) 22 percent. D) 25 percent.

A) 5 percent.

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) 8 percent.

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

Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant. A) long-term; long-term B) long-term; short-term C) short-term; long-term D) short-term; short-term

B) long-term; short-term

The ________ interest rate more accurately reflects the true cost of borrowing. A) nominal B) real C) discount D) market

B) real

If the amount payable in two years is $2,420 for a simple loan at 10 percent interest, the loan amount is A) $1,000. B) $1,210. C) $2,000. D) $2,200.

C) $2,000.

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

C) $400.

Economists consider the ________ to be the most accurate measure of interest rates. A) simple interest rate. B) current yield. C) yield to maturity. D) nominal interest rate.

C) yield to maturity.

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

C) yield to maturity.

For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is A) $10,030. B) $10,300. C) $13,000. D) $13,310.

D) $13,310.

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) 100 percent.

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

D) 25 percent

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) interest-rate changes.

When talking about a coupon bond, face value and ________ mean the same thing. A) par value B) coupon value C) amortized value D) discount value

A) par value

The interest rate on Treasury Inflation Indexed Securities can be roughly interpreted as A) the real interest rate. B) the nominal interest rate. C) the rate of inflation. D) the rate of deflation.

A) the real interest rate.

The ________ is below the coupon rate when the bond price is ________ its par value. A) yield to maturity; above B) yield to maturity; below C) discount rate; above D) discount rate; below

A) yield to maturity; above

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

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

Which of the following bonds would you prefer to be buying? 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) a $10,000 face-value security with a 10 percent coupon selling for $9,000

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) present value

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) 15 percent

A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of A) 3 percent. B) 20 percent. C) 25 percent. D) 33.3 percent.

D) 33.3 percent.

An equal increase in all bond interest rates A) increases the return to all bond maturities by an equal amount. B) decreases the return to all bond maturities by an equal amount. C) has no effect on the returns to bonds. D) decreases long-term bond returns more than short-term bond returns.

D) 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. A) coupon bond; discount B) discount bond; discount C) coupon bond; face D) discount bond; face

D) discount bond; face

The riskiness of an asset's returns due to changes in interest rates is A) exchange-rate risk. B) price risk. C) asset risk. D) interest-rate risk.

D) interest-rate risk.

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) positively; rises; rises B) negatively; falls; falls C) positively; rises; falls D) negatively; rises; falls

D) negatively; rises; falls