Mishkin Chapter 4 Study Questions

If the interest rate is 6%, what is the present value of $100 next year?

$94

What does the duration of a coupon bond increase?

The bond's term to maturity

How do a discount bond and a coupon bond with the same maturity compare?

The discount bond has the greater effective maturity

Ceteris paribus, what happens to the duration of a coupon bond when interest rates rise?

The duration of a coupon bond falls

What does it mean that the price of a coupon bond and the yield to maturity are negatively related?

As the yield to maturity rises, the price of the bond falls

Which of the following bonds would you prefer to be buying? - $10,000 face-value security with a 10% coupon selling for $9,000 - $10,000 face-value security with a 7% coupon selling for $10,000 - $10,000 face-value security with a 9% coupon selling for $10,000 - $10,000 face-value security with a 10% coupon selling for $10,000

$10,000 face-value security with a 10% coupon selling for $9,000

What happens to the present value of an expected future payment as interest rates increase?

Present Value Falls

When the bond price is above face value, what rate is the coupon rate greater than?

Yield to Maturity

For simple loans, how is the simple interest rate related to the yield to maturity?

Simple Interest Rate = Yield to Maturity

What credit market instrument provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment?

Simple Loan

What is the dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond?

The Bond's Coupon Rate

What is duration?

The average lifetime of a debt security's stream of payments

Ceteris paribus, how does a higher coupon rate on a bond affect the bond's duration?

The bond's duration is shorter

Assuming the same coupon rate and maturity length, what does the difference between the yield on a Treasury Inflation Indexed Security and the yield on a nonindexed Treasury security provide insight into?

The expected inflation rate

In which of the following situations would you prefer to be the borrower? - The interest rate is 9 percent and the expected inflation rate is 7 percent. - The interest rate is 4 percent and the expected inflation rate is 1 percent. - The interest rate is 13 percent and the expected inflation rate is 15 percent. - 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.

Which of the following is an example of discount bonds? - U.S. Treasury Bills - Corporate Bonds - U.S. Treasury Notes - Municipal Bonds

U.S. treasury Bills

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

25%

What happens to an asset's interest rate risk as the duration of the asset decreases?

The interest rate risk decreases

For a three year simple loan of $10,000 at 10%, what is the total amount to be repaid?

$13,310

If the amount payable in two years is $2420 for a simple loan at 10% interest, what is the loan amount?

$2,000

If the interest rate is 5%, what is the present value of a security that pays you $1, 050 next year and $1,102.50 two years from now?

$2,000 $1,050/(1 + 0.05) + $1,102.50/(1 + 0.5)2

If a $1,000 face value coupon bond has a coupon rate of 3.75%, what is the yearly coupon payment?

$37.50

What is the price of a consol paying $20 annually when the interest rate is 5%?

$400

If the interest rate is 5%, what is the present value of $500 two years from now?

$453.51

What does a discount bond do?

Pays the bondholder the face value at maturity

What is considered to be the most accurate measure of interest rates?

Yield to Maturity

If a $5,000 coupon bond has a coupon rate of 13%, what is the yearly coupon payment?

$650

How is the yield to maturity calculated for a one-year discount bond?

(New Price - Initial Price) / Initial Price

If you expect the inflation rate to be 12 percent next year and a one-year bond has a yield to maturity of 7 percent, what is the real interest rate on this bond?

-5%

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year?

-5%

If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, what is the real interest rate on this bond?

-8%

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year?

0%

What is the yield to maturity for a $5,000 face-value discount bond maturing in one year that is selling for $5,000?

0%

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? - 1 year to maturity - 5 years to maturity - 10 years to maturity - 20 years to maturity

1 Year to Maturity

If a security pays $110 next year and $121 the year after that, what is the yield to maturity if it sells for $200?

10%

What is the interest rate for a security that has a present value of $150, pays $55 in a year, and pays $133 in three years?

10%

What is the yield to maturity for a $10,000 face-value discount bond maturing in one year that is selling for $5,000?

100%

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, what is the real interest rate on this bond?

3%

What is the yield to maturity for a discount bond selling for $15,000 with a face value of $20,000 in one year?

33.3%

An $8,000 coupon bond with a $400 yearly coupon payment has what coupon rate?

5%

Assuming the same coupon rate and maturity length, when the interest rate on a Treasury Inflation Indexed Security is 3 percent, and the yield on a nonindexed Treasury bond is 8 percent, what is the expected rate of inflation?

5%

If $22,050 is the amount payable in two years for a $20,000 simple loan made today, what is the interest rate?

5%

What is the interest rate for a perpetuity with a price of $500 and an annual interest payment of $25?

5%

Which of the following $1,000 face-value securities has the lowest yield to maturity? - 5% coupon bond selling for $1,000 - 10% coupon bond selling for $1,000 - 15% coupon bond selling for $1,000 - 15% coupon bond selling for $900

5% coupon bond selling for $1,000

Which of the following $1,000 face-value securities has the highest yield to maturity? - 5% coupon bond with a price of $600 - 5% coupon bond with a price of $800 - 5% coupon bond with a price of $1,000 - 5% coupon bond with a price of $1,200

5% coupon bond with a price of $600

If a financial institution has 50% of its portfolio in a bond with a five-year duration and 50% of its portfolio in a bond with a seven-year duration, what is the duration of the portfolio?

6 years

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. - A rise in interest rates is associated with a fall in bond prices, resulting in capital gains on bonds whose terms to maturity are longer than the holding periods. - The longer a bond's maturity, the smaller is the size of the price change associated with an interest rate change. - Prices and returns for short-term bonds are more volatile than those for longer-term bonds.

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

What type of loan is also called a fully amortized loan?

A fixed-payment loan

Why do all bonds that will not be held to maturity have interest rate risks?

Because of the change in the price of a bond as a result of interest-rate changes

What is a coupon bond that has no maturity date and no repayment of principal?

Consol

What credit market instrument pays the own a fixed coupon payment every year until the maturity date, when the face value is repaid?

Coupon Bond

What credit market instrument pays the owner a fixed coupon payment every year until the maturity date and then repays the face value?

Coupon Bond

What is calculated by multiplying the coupon rate times the par value of the bond?

Coupon Payment

What is the price of a consol?

Coupon Payment / Interest Rate

What is the interest rate of a consol?

Coupon Payment / Price

What is a bond that is bought at a price below its face value and the face value is repaid at a maturity date?

Discount Bond

Why is it not true that a lottery winner who will receive $1 million each year for 20 years will receive $20 million?

Discounting the Future

What is the interest rate adjusted for expected changes in the price level?

Ex Ante Real Interest Rate

What is the final amount that will be paid to the holder of a coupon bond?

Face Value

Which of the following is TRUE of fixed payment loans? - The borrower repays both the principal and interest at the maturity date. - Installment loans and mortgages are frequently of the fixed payment type. - The borrower pays interest periodically and the principal at the maturity date. - Commercial loans to businesses are often of this type.

Installment loans and mortgages are frequently of the fixed payment type

Interest-rate risk is the riskiness of an asset's returns due to what changes?

Interest-Rate Changes

What is the riskiness of an asset's returns due to changes in interest rates?

Interest-Rate Risk

How are the price of a coupon bond and the yield to maturity related?

Inverse Relationship

Ceteris paribus, how are prices and returns for long-term bonds different from short-term bonds?

Long-term bonds are more volatile than short-term bonds

How is the yield to maturity for a discount bond related to the current bond price?

Negative Relationship

How would an equal decrease in all bond interest rates impact 10 year and 5 year bonds?

The price of the 10 year bond increases more than the price of the 5 year bond.

Which of the following are TRUE for discount bonds? - A discount bond is bought at par. - The purchaser receives the face value of the bond at the maturity date. - U.S. Treasury bonds and notes are examples of discount bonds. - The purchaser receives the par value at maturity plus any capital gains.

The purchaser receives the face value of the bond at the maturity date

Which of the following are TRUE concerning the distinction between interest rates and returns? - The rate of return on a bond will not necessarily equal the interest rate on that bond. - The return can be expressed as the difference between the current yield and the rate of capital gains. - The rate of return will be greater than the interest rate when the price of the bond falls during the holding period. - The return can be expressed as the sum of the discount yield and the rate of capital gains.

The rate of return on a bond will not necessarily equal the interest rate on that bond

How is the present value of a fixed-payment loan calculated?

The sum of the present value of all cash flow payments

When the real interest rate is low, what are the incentives for borrowing and lending?

There are greater incentives to borrow and fewer incentives to lend

For any bond whose time to maturity matched the holding period, what is true of the risk?

There is no interest-rate risk

How can the interest rate on Treasury Inflation Indexed Securities be roughly interpreted?

Real Interest Rate

What interest rate more accurately reflects the true cost of borrowing?

Real Interest Rate

If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, what is the real rate of interest?

12%

Which of the following $1,000 face-value securities has the highest yield to maturity? - 5% coupon bond selling for $1,000 - 10% coupon bond selling for $1,000 - 12% coupon bond selling for $1,000 - 12% coupon bond selling for $1,100

12% coupon bond selling for $1,000

Which of the following $5,000 face-value securities has the highest yield to maturity? - 6% coupon bond selling for $5,000 - 6% coupon bond selling for $5,500 - 10% coupon bond selling for $5,000 - 12% coupon bond selling for $4,500

12% coupon bond selling for $4,500

Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity of 15 percent. If the interest rate on one-year bonds rises from 15 percent to 20 percent over the course of the year, what is the yearly return on the bond you are holding?

15%

A $1,000 coupon bond with a $60 yearly coupon payment has what coupon rate?

6%

I purchase a 10 percent coupon bond. Based on my purchase price, I calculate a yield to maturity of 8 percent. If I hold this bond to maturity, what is my return on this asset?

8%

What is the yield to maturity for an 8% coupon bond worth $10,000 that sells for $10,000?

8%

What is the sum of the current yield and the rate of capital gain?

Rate of Return

When the bond price is below face value, what rate is the yield to maturity greater than?

Coupon Rate

What is the yield to maturity called when approximating the yield for a coupon bond?

Current Yield

Which of the following are generally TRUE of all bonds? - The longer a bond's maturity, the greater is the rate of return that occurs as a result of the increase in the interest rate. - Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise. - Prices and returns for short-term bonds are more volatile than those for longer term bonds. - A fall in interest rates results in capital losses for bonds whose terms to maturity are longer than the holding period.

Even though a bond has a substantial initial interest rate, its return can be negative if interest rates rise

What is the interest rate that describes how well a lender has done in real terms after the fact?

Ex Post Real Interest Rate

What states that the nominal interest rate equals the real interest rate plus the expected rate of inflation?

Fisher Equation

What credit market instrument requires the borrower to make the same payment every period until the maturity date?

Fixed-Payment Loan

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

High

What is the real interest rate?

Nominal Interest Rate - Expected Rate of Inflation

When talking about a coupon bond, what is another term for face value?

Par Value

Because it has no maturity date, another name for a consol is what?

Perpetuity

What is the common-sense idea that a dollar paid in the future is less valuable than a dollar today?

Present Value

What happens to the present value of a payment as the time to the promised future payment increases?

Present Value Decreases

What is the payment to the owner plus the change in the security's value expressed as a fraction of the security's purchase price?

Rate of Return

In which of the following situations would you prefer to be the lender? - The interest rate is 9 percent and the expected inflation rate is 7 percent. - The interest rate is 4 percent and the expected inflation rate is 1 percent. - The interest rate is 13 percent and the expected inflation rate is 15 percent. - The interest rate is 25 percent and the expected inflation rate is 50 percent.

The interest rate is 4 percent and the expected inflation rate is 1 percent

How does an equal increase in all bond interest rates impact long-term and short-term bond returns?

The long-term bond returns decrease more than short-term bond returns

Which of the following is NOT an example of coupon bonds? - Corporate bonds. - U.S. Treasury bills. - U.S. Treasury notes. - U.S. Treasury bonds.

U.S. Treasury Bills

Which of the following are TRUE for a coupon bond? - When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. - The price of a coupon bond and the yield to maturity are positively related. - The yield to maturity is greater than the coupon rate when the bond price is above the par value. - The yield is less than the coupon rate when the bond price is below the par value.

When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate

What is the interest rate that equates the present value of payments received from a debt instrument with its value today?

Yield to Maturity

Because the owner does not receive periodic payments, a discount bond is also called what?

Zero-Coupon Bond