Money and Banking Chapter 4 Review
An increase in all bond interest rates
decreases long-term bond returns more than short-term bond returns
A ___ is bought at a price below its face value, and the ___ value is repaid at the maturity date
discount bond; face
The ___ interest rate is adjusted for expected changes in the price level
ex ante real
The present value of an expected future payment ___ as the interest rate increases
falls
The yield to maturity is ___ than the ___ rate when the bond price is ___ the face falue
greater, coupon, below
An equal decrease in all bond interest rates
increases the price of a ten-year bond more than the price of a 5-year bond
If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is 10 percent
is 10 percent
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 ___
negatively, rises, falls
There is ___ for any bond whose time to maturity matches the holding period
no interest - rate risk
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
rate of return
The ___ interest rate more accuratly reflects the true cost of borrowing
real
The present value of a fixed-payment loan is calculated as the ___ of the present value of all cash flow payments
sum
A discount bond is also called a ___ because the owner does not receive periodic payments
zero-coupon bond
A consol paying $20 annually when the interest rate is 5 percent has a price of A) $100. B) $200. C) $400. D) $800.
$400
The return on a 5 percent coupon bond that initially sells for $1000 and sells for $950 next year is
0 percent
If the nominal rate of interest is 2 percent and then expected inflation rate is -10 percent, the real rate of interest is
12 percent
If the amount payable in two years is $2420 for a simple loan at 10 percent interest, the loan amount is
2000 dollars
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 percent
If $22,050 is the amount payable in two years for a $20,000 simple loan made today the interest rate is?
5 percent
A $1000 face value coupon bond with a $60 coupon payment every year has a coupon rate of
6 percent
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
In which of the following situations would you prefer to be the lender? The interest rate is 25 percent and the expected inflation rate is 50 percent The interest rate is 9 percent and the expected inflation rate is 7 percent The interest rate is 13 percent and the expected inflation rate is 15 percent The interest rate is 4 percent and the expected inflation rate is 1 percent
The interest rate is 4 percent and the expected inflation rate is 1 percent
Which of the following are true concerning the distinction between interest rates and return?
The rate of return on a bond will not necessarily equal the interest rate on that bond
The interest rate on a consol equals the
coupon payment divided by the price
Which of the following $1,000 face-value securities has the highest yield to maturity?/ A 5 percent coupon bond selling for $1000 A 12 percent coupon bond selling for $1000 A 12 percent coupon bond selling for $1100 A 10 percent coupon bond selling for $1000
A 12 percent coupon bond selling for $1000
Which of the following $5000 face-value securities has the highest yield to maturity? A 6 percent coupon selling for $5000 A 10 percent coupon bond selling for $5000 A 12 percent coupon bond selling for $4500 A 6 percent coupon bond selling for $5500
A 12 percent coupon bond selling for $4500
Which of the following $1000 face-value securities has the lowest yield to maturity A 5 percent coupon bond selling for $1000 A 15 percent coupon bond selling for $900 A 15 percent coupon bond selling for $1000 A 10 percent coupon bond selling for $1000
A 5 percent coupon bond selling for $1000
The ___ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation
Fisher equation
All of the following are examples of coupon bonds except U.S. Treasury notes U.S. Treasury bonds U.S. Treasury bills Corporate bonds
U.S. Treasury bills
Examples of discount bonds include
U.S. Treasury bills
An increase in the time to the promised future payment ___ the present value of the payment
decreases
The interest rate that describes how well a lender has done in terms after the fact is called the
ex post real interest rate
The riskiness of an asset's returns due to changes in interest rates is
interest-rate risk