Ch 6b SmartBook
If you are holding a municipal bond that is trading at par to yield 6 percent, by how much will your aftertax yield change if your federal income tax bracket increases from 15 percent to 20 percent. Assume there are no state or local taxes.
0 percent
What does a Treasury yield curve show?
It shows the yield for different maturities of Treasury notes and bonds.
True or false: Investors require a premium for the risk that issuers other than the Treasury may not make all promised payments on the issued bonds.
T
True or false: The government sells Treasury notes and bonds to the public every month.
T
True or false: Zero coupon bond calculations use semiannual periods to be consistent with coupon bond calculations.
T
The model that precisely specifies the relationship between the nominal rate and the real rate is: R = the nominal rate r = the real rate h = the rate of inflation.
(1 + R) = (1 + r)×(1 + h)
If you are in the 20% federal income tax bracket, what is your after-tax yield on a municipal bond that is currently trading at par to yield 5%. Assume there are no state or local taxes.
5%
The relationship between nominal rates, real rates, and inflation is called ______ .
the Fisher Effect
Select all that apply What are the three components that influence the Treasury yield curve? Multiple select question. the interest rate risk premium the real rate of return the default risk premium expected future inflation
the interest rate risk premium the real rate of return expected future inflation
When long-term rates are higher than short-term rates, which of the following shapes will the term structure of interest rates usually have?
upward sloping
Why is the bond market less transparent than the stock market?
Many bond transactions are negotiated privately.
The term structure of interest rates examines the ______.
relationship between short-term and long-term interest rates
The U.S. government borrows money by issuing ______. Multiple select question. Treasury pass-through certificates Treasury notes Treasury bonds
Treasury notes Treasury bonds
Select all that apply What are some features of the OTC market for bonds? Multiple select question. Dealers are restricted geographically to be in the United States. The OTC has no designated physical location. OTC dealers are connected electronically.
The OTC has no designated physical location. OTC dealers are connected electronically.
If bonds for AT&T are quoted at 115, they can be purchased:
at 115 percent of par value plus accrued interest.
If a $1,000 face value U.S. Treasury bond is quoted at 99.5, then the bond can be purchased ______.
at 99.5 percent of face value plus any accrued interest
Select all that apply Which three of the following are common shapes for the term structure of interest rates? Multiple select question. downward sloping humped V-shaped upward sloping
downward sloping humped upward sloping
The nominal rate is found by adding the ______ and the real rate of return.
inflation
Select all that apply Which of the following may increase the yield on corporate bonds as compensation to investors but will not impact Treasury bond yields? Multiple select question. liquidity premium inflation premium interest rate risk premium default risk premium
liquidity premium default risk premium
A zero-coupon bond is a bond that ____.
makes no interest payments
Bonds issued by state and local governments are called ______.
municipal bonds
Which three components determine the shape of the term structure of interest rates? Multiple select question. real interest rate taxability premium inflation premium interest rate risk premium
real interest rate inflation premium interest rate risk premium
Select all that apply What is a real rate of return? Multiple select question. It is a rate of return that has not been adjusted for inflation. It is a percentage change in buying power. It is a rate of return that has been adjusted for inflation. It is an average rate of return on similar investments.
It is a percentage change in buying power. It is a rate of return that has been adjusted for inflation.
What is the nominal rate of return on an investment?
It is the actual percentage change in the dollar value of an investment unadjusted for inflation.
What is the inflation premium?
It is the additional return demanded by investors to compensate for expected inflation.
Which of the following is true of zero coupon bonds? Multiple choice question. No coupon payments are made on the bonds. They are worth nothing after the first year. A price cannot be calculated for the bond.
No coupon payments are made on the bonds.
What are the cash flows involved in the purchase of a 5-year zero-coupon bond that has a par value of $1,000 if the current price is $800? Assume the market rate of interest is 5 percent.
Pay $800 today and receive $1,000 at the end of 5 years
What is the equation for approximating the nominal rate of return? R = the nominal rate of interest r = the real rate of interest h = the inflation rate.
R = r + h
Which of the following are features of municipal bonds? Multiple select question. They are not subject to default risk. The interest on municipal bonds is, in some cases, exempt from state taxes in the state of issue. The interest on municipal bonds is always exempt from state taxes. The interest on municipal bonds is exempt from federal taxes. They are issued by state and local governments.
The interest on municipal bonds is, in some cases, exempt from state taxes in the state of issue. The interest on municipal bonds is exempt from federal taxes. They are issued by state and local governments.
Select all that apply The term structure of interest rates describes ______. Multiple select question. the relationship between real interest rates and inflation the pure time value of money the relationship between nominal rates of interest and inflation the relationship between rates on corporate bonds and Treasury bonds the relationship between nominal rates and time to maturity
the pure time value of money the relationship between nominal rates and time to maturity