Econ Ch.4 Practice Questions

16. 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

1. What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent? A) $453.51 B) $500.00 C) $476.25 D) $550.00

A

15. 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

17. Suppose in 2014 you buy 4% coupon rate, $100 face value bond for $100 that has 2 years left till maturity. If in 2015 interest rates increase to 6%, what will be the price of your bond and what will be your rate of return if you decide to sell it? A) $98.1 and 2.1% B) $99.4 and 3.4% C) $101.6 and 7.6% D) $102 and 8%

A

21. In the bond market, the bond demanders are the ________ and the bond suppliers are the ________. A) lenders; borrowers B) lenders; advancers C) borrowers; lenders D) borrowers; advancers

A

23. Holding the expected return on bonds constant, an increase in the expected return on common stocks would ________ the demand for bonds, shifting the demand curve to the ________. A) decrease; left B) decrease; right C) increase; left D) increase; right

A

28. The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates ________ as the expected rate of inflation ________, everything else held constant. A) rise; increases B) rise; stabilizes C) fall; stabilizes D) fall; increases

A

4. If a $1000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon payment every year is A) $37.50. B) $3.75. C) $375.00. D) $13.75

A

7. The yield to maturity for a discount bond is ________ related to the current bond price. A) negatively B) positively C) not D) directly

A

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

B

20. 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

25. Everything else held constant, when stock prices become ________ volatile, the demand curve for bonds shifts to the ________ and the interest rate ________. A) more; right; rises B) more; right; falls C) less; left; falls D) less; left; does not change

B

5. 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

14. 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

2. What is a future value of $50 five years from now at 2%? A) $48.5 B) $51.3 C) $55.2 D) $58.4

C

22. During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________, everything else held constant. A) falls; right B) falls; left C) rises; right D) rises; left

C

24. Factors that decrease the demand for bonds include A) an increase in the volatility of stock prices. B) a decrease in the expected returns on stocks. C) an increase in the inflation rate. D) an increase in the riskiness of stocks.

C

3. 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

10. What yield does one year 4% coupon rate $1000 face value bond offer if it currently sells for $1050? A) 4% B) 2% C) 1% D) -1%

D

11. 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 5 percent coupon bond selling for $900 C) a 12 percent coupon bond selling for $900 D) a 5 percent coupon bond selling for $1,200

D

12. Which of the following is true about ten year $1,000 face-value 6% coupon bond that's selling for $1,050? A) Its yield to maturity and coupon rate equal to 5.7%. B) Its current yield and coupon rate equal to 6% C) Its yield to maturity is 8%. D) Its current yield is 5.7%

D

13. What is the return on a 5 percent coupon $1000 face value 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

19. 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

26. Everything else held constant, when the government has higher budget deficits A) the demand curve for bonds shifts to the left and the interest rate rises. B) the demand curve for bonds shifts to the left and the interest rate falls. C) the supply curve for bonds shifts to the right and the interest rate falls. D) the supply curve for bonds shifts to the right and the interest rate rises.

D

27. When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises

D

6. 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

8. 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

9. What is the price of $1000 face-value one year zero coupon discount bond that offers 1.5% yield? A) $992.3 B) $1001.5 C) $998.5 D) $985.2

D