EC Chapter 4
11) Which of the following is generally true of bonds? A) The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period. B) A rise in interest rates is associated with a fall in bond prices, resulting in capital gains on bonds whose terms to maturity are longer than the holding periods. C) The longer a bond's maturity, the smaller is the size of the price change associated with an interest rate change. D) Prices and returns for short-term bonds are more volatile than those for longer-term bonds.
A
14) 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
16) 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
2) 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
21) By subtracting from the interest rate of a Canada coupon bond the interest rate of a similar maturity's real return bond, provides us with an insight about ________. A) the expected inflation B) the real interest rate C) the current yield D) the discounted yield
A
3) The present value of an expected future payment ________ as the interest rate increases. A) falls B) rises C) is constant D) is unaffected
A
40) 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
41) A coupon bond that has no maturity date and no repayment of principal is called a ________. A) consol B) cabinet C) Treasury bill D) Government note
A
51) The yield to maturity for a discount bond is ________ related to the current bond price. A) negatively B) positively C) not D) directly
A
7) A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a ________. A) simple loan B) fixed-payment loan C) coupon bond D) discount bond
A
8) 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
1) If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is ________. A) 5 percent B) 10 percent C) 12.5 percent D) 15 percent
B
10) A fully amortized loan is another name for ________. A) a simple loan B) a fixed-payment loan C) a commercial loan D) an unsecured loan
B
12) 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
20) Assuming the same coupon rate and maturity length, when the interest rate on a Real Return Bond is 3 percent, and the yield on a nonindexed Canada bond is 8 percent, the expected rate of inflation is ________. A) 3 percent B) 5 percent C) 8 percent D) 11 percent
B
21) A discount bond ________. A) pays the bondholder a fixed amount every period and the face value at maturity B) pays the bondholder the face value at maturity C) pays all interest and the face value at maturity D) pays the face value at maturity plus any capital gain
B
30) If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200? A) 9 percent B) 10 percent C) 11 percent D) 12 percent
B
34) The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value. A) greater; coupon; above B) greater; coupon; below C) greater; perpetuity; above D) less; perpetuity; below
B
12) A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid. A) coupon bond; discount B) discount bond; discount C) coupon bond; face D) discount bond; face
C
13) The ________ is the final amount that will be paid to the holder of a coupon bond. A) discount value B) coupon value C) face value D) present value
C
27) If the amount payable in two years is $2420 for a simple loan at 10 percent interest, the loan amount is ________. A) $1000 B) $1210 C) $2000 D) $2200
C
36) 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
7) 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
7) The nominal interest rate minus the expected rate of inflation ________. A) defines the real rate of inflation B) is a worse measure of the incentives to borrow and lend than is the nominal interest rate C) is a more accurate indicator of the tightness of credit market conditions than is the nominal interest rate D) defines the bank rate
C
20) 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
28) 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
4) In a country where prices never change, the nominal interest rate is equal to the ________. A) real exchange rate B) inflation rate C) expected inflation rate D) real interest rate
D
48) 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
6) 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 ________. A) face value B) par value C) deflation D) discounting the future
D
23) Which of the following are true for discount bonds? A) A discount bond is bought at par. B) The purchaser receives the face value of the bond at the maturity date. C) Canada bonds and notes are examples of discount bonds. D) The purchaser receives the par value at maturity plus any capital gains.
B
6) All else equal, the ________ the coupon rate on a bond, the ________ the bond's duration. A) higher; longer B) higher; shorter C) lower; shorter D) greater; longer
B
9) Which of the following is true of fixed payment loans? A) The borrower repays both the principal and interest at the maturity date. B) Installment loans and mortgages are frequently of the fixed payment type. C) The borrower pays interest periodically and the principal at the maturity date. D) Commercial loans to businesses are often of this type.
B
19) A bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a ________. A) simple loan B) fixed-payment loan C) coupon bond D) discount bond
D
19) Assuming the same coupon rate and maturity length, the difference between the yield on a Real Return Bond and the yield on a Canada bond provides insight into ________. A) the nominal interest rate B) the real interest rate C) the nominal exchange rate D) the expected inflation rate
D
37) 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
4) 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
50) 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
17) 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
17) There is ________ for any bond whose time to maturity matches the holding period. A) no interest-rate risk B) a large interest-rate risk C) rate-of-return risk D) yield-to-maturity risk
A
2) Which of the following is true concerning the distinction between interest rates and returns? A) The rate of return on a bond will not necessarily equal the interest rate on that bond. B) The return can be expressed as the difference between the current yield and the rate of capital gains. C) The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1. D) The return can be expressed as the sum of the discount yield and the rate of capital gains.
A
22) Examples of discount bonds include ________. A) Treasury bills B) corporate bonds C) coupon bonds D) municipal bonds
A
3) The sum of the current yield and the rate of capital gain is called the ________. A) rate of return B) discount yield C) perpetuity yield D) par value
A
31) The present value of a fixed-payment loan is calculated as the ________ of the present value of all cash flow payments. A) sum B) difference C) multiple D) log
A
32) Which of the following is 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
5) The ________ states that the real interest rate equals the nominal interest rate minus the expected rate of inflation. A) Fisher equation B) Keynesian equation C) Monetarist equation D) Marshall equation
A
1) The ________ interest rate is adjusted for expected changes in the price level. A) ex ante real B) ex post real C) ex post nominal D) ex ante nominal
A
10) The ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation. A) Fisher equation B) Keynesian equation C) Monetarist equation D) Marshall equation
A
15) 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
15) Interest-rate risk is the riskiness of an asset's returns due to ________. A) interest-rate changes B) changes in the coupon rate C) default of the borrower D) changes in the asset's maturity
A
14) 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
23) If the interest rate on a Real Return Bond is 5 percent and the interest rate on a Canada bond of similar maturity is 2 percent then the expected rate of inflation is equal to ________. A) -3 percent B) 7 percent C) 3 percent D) 2 percent
A
12) Which of the following is 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
18) All of the following are examples of coupon bonds except ________. A) Corporate bonds B) Treasury bills C) Zero coupon bonds D) Government bonds
B
6) The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is ________. A) -10 percent B) -5 percent C) 0 percent D) 5 percent
C
2) Comparing a discount bond and a coupon bond with the same maturity, ________. A) the coupon bond has the greater effective maturity B) the discount bond has the greater effective maturity C) the effective maturity cannot be calculated for a coupon bond D) the effective maturity cannot be calculated for a discount bond
B
2) The ________ interest rate more accurately reflects the true cost of borrowing. A) nominal B) real C) discount D) market
B
45) 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
6) The Fisher equation states that ________. A) the real interest rate equals the nominal interest rate plus the expected rate of inflation B) the real interest rate equals the nominal interest rate less the expected rate of inflation C) the nominal interest rate equals the real interest rate less the expected rate of inflation D) the nominal interest rate equals the real interest rate plus the expected rate of inflation
B
7) An asset's interest rate risk ________ as the duration of the asset ________. A) increases; decreases B) decreases; decreases C) decreases; increases D) remains constant; increases
B
8) A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a ________. A) simple loan B) fixed-payment loan C) coupon bond D) discount bond
B
1) Duration is ________. A) an asset's term to maturity B) the time until the next interest payment for a coupon bond C) the average lifetime of a debt security's stream of payments D) the time between interest payments for a coupon bond
C
1) 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. A) yield to maturity B) current yield C) rate of return D) yield rate
C
11) A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a ________. A) simple loan B) fixed-payment loan C) coupon bond D) discount bond
C
16) When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________. A) nominal; lend; borrow B) real; lend; borrow C) real; borrow; lend D) market; lend; borrow
C
17) 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 ________. A) -3 percent B) -2 percent C) 3 percent D) 7 percent
C
22) If the interest rate on a Real Return Bond is 2 percent and the interest rate on a Canada bond of similar maturity is 5 percent then the expected rate of inflation is equal to ________. A) -3 percent B) 7 percent C) 3 percent D) 2 percent
C
24) 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
10) 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
11) If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is ________. A) 2 percent B) 8 percent C) 10 percent D) 12 percent
D
14) 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
35) 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
15) The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's ________. A) coupon rate B) maturity rate C) face value rate D) payment rate
A
16) Bonds whose term-to-maturity is longer than the holding period are subject to ________. A) interest rate risk B) exchange-rate risk C) inflation D) deflation
A
18) The interest rate on Real Return Bonds is a direct measure of ________. A) the real interest rate B) the nominal interest rate C) the rate of inflation D) the rate of deflation
A
38) Which of the following $1,000 face-value securities has the highest yield to maturity? A) A 5 percent coupon bond with a price of $600 B) A 5 percent coupon bond with a price of $800 C) A 5 percent coupon bond with a price of $1,000 D) A 5 percent coupon bond with a price of $1,200
A
39) Which of the following $1,000 face-value securities has the lowest 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
A
4) An increase in the time to the promised future payment ________ the present value of the payment. A) decreases B) increases C) has no effect on D) is irrelevant to
A
24) If the interest rate on a Real Return Bond is 2 percent and the interest rate on a Canada bond of similar maturity is 5 percent then ________ is equal to 3 percent. A) the expected rate of inflation B) the yield to maturity C) current yield D) expected interest rate
A
29) 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
3) 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
4) The duration of a coupon bond increases ________. A) the longer is the bond's term to maturity B) when interest rates increase C) the higher the coupon rate on the bond D) the higher the bond price
A
46) The yield to maturity for a perpetuity is a useful approximation for the yield to maturity on long-term coupon bonds. It is called the ________ when approximating the yield for a coupon bond. A) current yield B) discount yield C) future yield D) star yield
A
47) The yield to maturity for a one-year discount bond equals the increase in price over the year, divided by the ________. A) initial price B) face value C) interest rate D) coupon rate
A
49) If a $5,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is ________. A) 0 percent B) 5 percent C) 10 percent D) 20 percent
A
5) All else equal, when interest rates ________, the duration of a coupon bond ________. A) rise; falls B) rise; increases C) falls; falls D) falls; does not change
A
8) 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 bank rate
A
9) The interest rate that describes how well a lender has done in real terms after the fact is called the ________. A) ex post real interest rate B) ex ante real interest rate C) ex post nominal interest rate D) ex ante nominal interest rate
A
13) Prices and returns for ________ bonds are more volatile than those for ________ bonds. A) long-term; long-term B) long-term; short-term C) short-term; long-term D) short-term; short-term
B
9) 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
25) Economists consider the ________ to be the most accurate measure of interest rates. A) simple interest rate B) current yield C) yield to maturity D) real interest rate
C
26) For simple loans, the simple interest rate is ________ the yield to maturity. A) greater than B) less than C) equal to D) not comparable to
C
3) If a financial institution has 50 percent of its portfolio in a bond with a five-year duration and 50 percent of its portfolio in a bond with a seven-year duration, what is the duration of the portfolio? A) 12 years B) 7 years C) 6 years D) 5 years
C
44) 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
5) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year? A) 5 percent B) 10 percent C) -5 percent D) -10 percent
C
5) With an interest rate of 6 percent, the present value of $100 next year is approximately ________. A) $106 B) $100 C) $94 D) $92
C
13) 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
33) 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
42) The price of a consol equals the coupon payment ________. A) times the interest rate B) plus the interest rate C) minus the interest rate D) divided by the interest rate
D
43) The interest rate on a consol equals the ________. A) price times the coupon payment B) price divided by the coupon payment C) coupon payment plus the price D) coupon payment divided by the price
D
52) In Japan in 1998 and in the U.S. in 2008, interest rates were negative for a short period of time because investors found it convenient to hold six-month bills as a store of value because ________. A) of the high inflation rate B) these bills sold at a discount from face value C) the bills were denominated in small amounts and could be stored electronically D) the bills were denominated in large amounts and could be stored electronically
D
