ECON 353 CH 4 EVEN

24) Which of the following are 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 rate of return will be greater than the interest rate when the price of the bond falls during the holding period. C) The return can be expressed as the difference between the current yield and the rate of capital gains. D) The return can be expressed as the sum of the discount yield and the rate of capital gains.

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

16) All of the following are examples of coupon bonds EXCEPT A) U.S. Treasury bills. B) U.S. Treasury bonds. C) corporate bonds. D) U.S. Treasury notes.

A) U.S. Treasury bills.

14) The ________ is calculated by multiplying the coupon rate times the par value of the bond. A) coupon payment B) face value C) maturity payment D) present value

A) coupon payment

2) 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 percent.

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

B) 5 percent.

42) In which of the following situations would you prefer to be the borrower? A) The interest rate is 4 percent and the expected inflation rate is 1 percent. B) The interest rate is 25 percent and the expected inflation rate is 50 percent. C) The interest rate is 9 percent and the expected inflation rate is 7 percent. D) The interest rate is 13 percent and the expected inflation rate is 15 percent.

B) The interest rate is 25 percent and the expected inflation rate is 50 percent.

6) 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.

22) Which of the following are generally TRUE of bonds? A) A bond's return equals the yield to maturity when the time to maturity is the same as the holding period. B) The longer a bond's maturity, the smaller is the size of the price change associated with an interest rate change. C) 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. D) Prices and returns for short-term bonds are more volatile than those for longer-term bonds.

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

8) 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) discount bond. B) fixed-payment loan. C) coupon bond. D) simple loan.

A) discount bond.

38) The nominal interest rate minus the expected rate of inflation A) defines the discount rate. B) defines the real interest rate. C) is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate. D) is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate.

B) defines the real interest rate.

50) Since the early 1950s, nominal interest rates and real interest rates in the United States A) always increase proportionally. B) do not always move in the same direction. C) are of no interest to decision makers. D) are never moving in the same direction.

B) do not always move in the same direction.

28) 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 rate B) rate of return C) current yield D) yield to maturity

B) rate of return

30) 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

48) 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) 3 percent.

32) An equal decrease in all bond interest rates A) decreases the price of a five-year bond more than the price of a ten-year bond. B) decreases the price of a ten-year bond more than the price of a five-year bond. C) increases the price of a ten-year bond more than the price of a five-year bond. D) increases the price of a five-year bond more than the price of a ten-year bond.

C) increases the price of a ten-year bond more than the price of a five-year bond.

26) Interest-rate risk is the riskiness of an asset's returns due to A) changes in the coupon rate. B) default of the borrower. C) interest-rate changes. D) changes in the asset's maturity.

C) interest-rate changes.

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

C) par value

40) Assuming the same coupon rate and maturity length, the difference between the yield on a Treasury Inflation Indexed Security and the yield on a nonindexed Treasury security provides insight into A) the real interest rate. B) the nominal exchange rate. C) the expected inflation rate. D) the nominal interest rate.

C) the expected inflation rate.

46) 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) -8 percent

18) 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 twenty years to maturity B) a bond with five years to maturity C) a bond with ten years to maturity D) a bond with one year to maturity

D) a bond with one year to maturity

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

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

36) The ________ interest rate is adjusted for expected changes in the price level. A) ex ante nominal B) ex post real C) ex post nominal D) ex ante real

D) ex ante real

20) 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) default of the borrower. B) changes in the coupon rate. C) changes in the asset's maturity date. D) interest-rate changes.

D) interest-rate changes.

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

D) negatively; rises; falls

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

D) real