FI 412 CH 3 REVIEW

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 e. none of the above

$650

With an interest rate of 5 percent, the present value of $100 received one year from now is approximately: a. $100 b. $105 c. $95 d. $90

$95

(I) Prices of longer-maturity bonds respond more dramatically to changes in interest rates. (II) Prices and returns for long-term bonds are less volatile than those for short-term bonds. a. (I) is true, (II) is false b. (I) is false, (II) is true c. both are true d. both are false

(I) is true, (II) is false

A yield to maturity on a consol bond that pays $100 yearly and sells for $500 is: a. 5% b. 10% c. 12.5% d. 20% e. 25%

20% (P = C/I or I = C/P... so 100/500)

The yield to maturity for a one-year, simple loan of $500 that requires an interest payment of $40 is: a. 5% b. 8% c. 12% d. 12.5%

8% (40/500)

Which of the following $1,000 face value securities has the lowest yield to maturity? a. a 5% coupon bond selling for $1,000 b. a 5% coupon bond selling for $1,100 c. a 15% coupon bond selling for $1,000 d. a 15% coupon bond selling for $900

a 5% coupon bond selling for $1,100

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 bond with one year to maturity (LT bonds = more volatile)

The Fisher equation states that: a. the nominal interest rate equals the real 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. both A and B e. both A and C

both A and B

(I) a simple loan requires the borrower to repay the principal at the maturity date along with an interest payment. (II) a discount bond is bought at a price below its face value, and the face value is repaid at the maturity date. a. (I) is true, (II) is false b. (I) is false, (II) is true c. both are true d. both are false

both are true

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

defines the real interest rate

A loan that requires the borrower to make the same payment every period until the maturity date is called a: a. simple loan b. fixed-payment loan c. discount loan d. same-payment loan e. none of the above

fixed-payment loan

The riskiness of an asset's return that results from interest rate changes is called: a. interest-rate risk b. coupon-rate risk c. reinvestment risk d. yield-to-maturity risk

interest rate risk

A discount bond: a. is also called a coupon bond b. is also called a zero-coupon bond c. is also called a fixed-payment bond d. is also called a corporate bond

is also called a zero-coupon bond (sold below face value during lifetime of bond the holders receive no payments.)

The duration of a ten-year, 10% coupon bond when the interest rate is 10% is 6.76 years. What happens to the price of the bond if the interest rate falls to 8%? a. it rises 20% b. it rises 12.3% c. it falls 20% d. it falls 12.3%

it rises 12.3% (-6.76 * 10% - 8% / 1+ 10%)

The concept of ____ is based on the 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

present value

When a bond's price falls, its yield to maturity ____ and its current yield ____. a. falls; falls b. rises; rises c. falls; rises d. rises; falls

rises; rises (Bond price and YTM = negatively related)

The return on a bond is equal to the yield to maturity when: a. the holding period is longer than the maturity of the bond b. the maturity of the bond is longer than the holding period c. the holding period and the maturity of the bond are identical d. none of the above

the holding period and the maturity of the bond are identical

In which of the following situations would you prefer to be borrowing? 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

the interest rate is 25 percent and the expected inflation rate is 50 percent. (nominal-expected = real... want to borrow at the lowest IR)

The duration of a portfolio of securities is the ____ average of the durations of the individual securities. a. geometric b. weighted c. simple d. arithmetic

weighted

For a simple loan, the simple interest rate equals the: a. real interest rate b. nominal interest rate c. current yield d. yield to maturity

yield to maturity

The interest rate that equates the present value of the cash flow received from a debt instrument with its market price today is the: a. simple interest rate b. discount rate c. yield to maturity d. real interest rate

yield to maturity