Money and Banking Test #2

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

$94

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

3%

Which of the following are generally true of bonds?

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

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 bond with one year to maturity

The _____ is the final amount that will be paid to the holder of the coupon.

face value

The yield to maturity is _________ than the ________ rate when the bond price is ________ its face value.

greater; coupon; below

In the United States during the late 1970s, the nominal interest rates were quite high, but the real interest rates were negative. From the Fischer equation, we can conclude that expected inflation in the United States during this period was

high

The sum of the current yield and the rate of capital gain is called the

rate of return

When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.

real; borrow; lend

Expected changes in the price level are accounted for when calculating the _________ interest rate.

ex ante real