Ch 4

20) 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

19) 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

Q9 An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of

A) 5 percent.

9. As the price of a bond _________ and the expected return _________, bonds become more attractive to investors and the quantity demanded rises.

(a) falls; rises

Q3.When the interest rate on a bond is _________ the equilibrium interest rate, there is excess _________ in the bond market and the interest rate will _________.

(a) more than; demand; fall

Q9. In his liquidity preference framework, Keynes assumed that money has a zero rate of return; thus, when interest rates _________ the expected return on money falls relative to the expected return on bonds, causing the demand for money to _________.

(a) rise; fall

8.If market interest rates rise:

(a)long-term bondholders will experience capital losses as they sell bonds

10.When the price of a bond is _________ the equilibrium price, there is an excess supply of bonds and the price will _________.

(b) above; fall

Q4. In a recession when income and wealth are falling, the demand for bonds _________ and the demand curve shifts to the _________.

(b) falls; left

Q6 . An increase in the expected rate of inflation will _________ the expected return on bonds relative to that on _________ assets, and shift the _________ curve to the left.

(b) reduce; real; demand

6. If a $10,000 face value discount bond maturing in one year is selling for $9,000, then its yield to maturity is

(c) 11 percent.

3. The current yield on a $6,000, 10 percent coupon bond selling for $5,000 is

(c) 12 percent.

2. (I) The coupon rate is the rate of interest that the issuer of the bond must pay. (II) The coupon rate is usually fixed for the duration of the bond and does not fluctuate with market interest rates

(c) Both are true.

Q5. Higher expected interest rates in the future _________ the demand for long-term bonds and shift the demand curve to the _________.

(c) decrease; left

Q7. During a recession, the supply of bonds _________ and the supply curve shifts to the _________.

(c) decreases, left

7.The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100 one year later is

(d) 15 percent.

1. The _________ value of a bond is the amount that the issuer must pay at maturity.

(d) face value

Q8. When the federal government's budget deficit increases, the _________ curve for bonds shifts to the _________.

(d) supply; right

8) If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is

A) $650.

12) Examples of discount bonds include

A) U.S. Treasury bills.

15) 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.

7) 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.

3) An increase in the time to the promised future payment ________ the present value of the payment.

A) decreases

2) The present value of an expected future payment ________ as the interest rate increases.

A) falls

6) When talking about a coupon bond, face value and ________ mean the same thing.

A) par value

1) 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

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

A) rate of return.

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

B) greater; coupon; below

24) Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant.

B) long-term; short-term

18) Which of the following $1,000 face-value securities has the highest yield to maturity?

C) A 12 percent coupon bond selling for $1,000

4) A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid.

C) coupon bond; face

5) The ________ is the final amount that will be paid to the holder of a coupon bond.

C) face value

21) 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.

C) rate of return

13) The interest rate that equates the present value of payments received from a debt instrument with its value today is the

C) yield to maturity.

14) Economists consider the ________ to be the most accurate measure of interest rates.

C) yield to maturity.

23) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?

D) 25 percent

10) 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

D) discount bond.

11) A ________ is bought at a price below its face value, and the ________ value is repaid at the maturity date.

D) discount bond; face

16) 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 ________.

D) negatively; rises; falls

4. There is a bond with a face value of $1000, and we are given the following expression: $975.30 =[$75/(1+r)^1]+[$75/(1+r)^2] +[$75/(1+r)^3]+[$1075/(1+r)^4]

In the above expression, r is the YTM. We can say that r<7.5% Answer is: FALSE

5) Look at the following expression: ...... We can say that in the above case, the bond is selling at a discount

TRUE