chapter 4 money and banking
All else equal, the ________ the coupon rate on a bond, the ________ the bond's duration. a. higher; shorter b. greater; longer c. higher; longer d. lower; shorter
a
All of the following are examples of coupon bonds except a. U.S. Treasury bills. b. U.S. Treasury notes. c. U.S. Treasury bonds. d. Corporate bonds.
a
Comparing a discount bond and a coupon bond with the same maturity a. the discount bond has the greater effective maturity. b. the effective maturity cannot be calculated for a coupon bond. c. the effective maturity cannot be calculated for a discount bond. d. the coupon bond has the greater effective maturity.
a
Duration is a. the average lifetime of a debt security's stream of payments. b. the time until the next interest payment for a coupon bond. c. an asset's term to maturity. d. the time between interest payments for a coupon bond.
a
On a coupon bond, the yield to maturity a. equates the present value of all the bond's payments to its price today. b. increases when the market price of the bond increases. c. always equals the coupon rate. d. equals the coupon payment divided by the current price of the bond.
a
The ________ is calculated by multiplying the coupon rate times the par value of the bond. a. coupon payment b. maturity payment c. par value d. present value
a
Which of the following are true for discount bonds? a. The purchaser receives the face value of the bond at the maturity date. b. U.S. Treasury bonds and notes are examples of discount bonds. c. A discount bond is bought at par. d. The purchaser receives the par value at maturity plus any capital gains.
a
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 a. fixed-payment loan. b. discount bond. c. coupon bond. d. simple loan.
b
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 a. irrelevant. b. high. c. negative. d. low.
b
Which of the following is a consequence of extending the payback period of a student loan from 10 to 30 years? a. higher monthly payments b. more interest paid over the life of the loan c. lower monthly payments initially, but higher monthly payments in the future d. faster payoff of principal
b
The ________ interest rate more accurately reflects the true cost of borrowing. a. nominal b. market c. real d. discount
c
The duration of a coupon bond increases a. the higher the coupon rate on the bond. b. when interest rates increase. c. the longer is the bond's term to maturity. d. the higher the bond price.
c
An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of a. 10 percent. b. 8 percent. c. 5 percent. d. 40 percent.
c 4000/8000
A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a a. coupon bond. b. fixed-payment loan. c. discount bond. d. simple loan.
d
A fully amortized loan is another name for a. an unsecured loan. b. a simple loan. c. a commercial loan. d. a fixed-payment loan.
d
If you deposit $500 in a savings account at an annual interest rate of 5%, how much will you have in the account at the end of five years? a. $550 b. $392 c. $625 d. $638
d
Issuers of coupon bonds a. make a single payment of principal at the time the bond is issued and multiple payments of interest over the life of the bond. b .make a single payment of interest and principal. c. make multiple payments of principal, but a single payment of interest. d. make a single payment of principal when the bonds matures, but multiple payments of interest over the life of the bond.
d
The ________ is calculated by multiplying the coupon rate times the par value of the bond. a. present value b. maturity payment c. par value d. coupon payment
d
The nominal interest rate minus the expected rate of inflation a. defines the real interest rate. b. is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate. c. is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate. d. defines the discount rate.
a
The sum of the current yield and the rate of capital gain is called the a. rate of return. b. pertuity yield. c. discount yield. d. par value.
a
When the price of a coupon bond increases a. the current yield declines. b. the coupon rate declines. c. the current yield increases. d. the coupon rate increases.
a
If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is a. $650. b. $130. c. $1,300. d. $13.
a 5000 x 13%
A one-year discount bond with a par value of $5,000 sold today, at issuance, for $4,750 has a yield to maturity of a. 5.26%. b. 2.50%. c. 9.75%. d. 5.00%.
a 5000/(1+5.26%)=4750
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 a. 3 percent. b. -3 percent. c. 7 percent. d. -2 percent.
a 7-4
A coupon bond has an annual coupon of $75, a par value of $1,000, and a market price of $900. Its current yield equals a. 8.33%. b. Not enough information has been provided to calculate the current yield for this bond. c. its yield to maturity. d. 7.50%.
a 75/900 x 100
Simple loans and discount bonds differ from coupon bonds and fixed-payment loans in that a. interest rates on simple loans and discount bonds are generally higher than interest rates on comparable coupon bonds and fixed-payment loans. b. interest on coupon bonds and fixed-payment loans is taxable, while interest on simple loans and discount bonds is not. c. interest on simple loans and discount bonds is paid in a single payment, while issuers of coupon bonds and fixed-payment loans make multiple payments of interest and principal. d. interest on simple loans and discount bonds is taxable, while interest on coupon bonds and fixed-payment loans is not.
b
The ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation. a. Keynesian equation b. Fisher equation c. Marshall equation d. Monetarist equation
b
Unless otherwise indicated, when economists or investors refer to the interest rate on a financial asset, they are referring to the a. coupon rate. b. yield to maturity. c. current yield. d. prime rate.
b
Which of the following is NOT fixed on a coupon bond? a. coupon rate b. market price c. coupon d. par value
b
What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year? a. -5 percent b. 25 percent c. 10 percent d. 5 percent
b 1250/1+25% = 1000
What is the price of a coupon bond that has annual coupon payments of $85, a par value of $1,000, a yield to maturity of 10%, and a maturity of three years? a. $1,255.00 b. $898.84 c. $962.70 d. $211.38
b 85/(1+10%) + 85/(1+10%)^2 + 1000/(1+10%)^3 quiz says c
With an interest rate of 6 percent, the present value of $100 next year is approximately a. $106. b. $94. c. $100. d. $92.
b 100/(1+6%)^1
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 a. fixed-payment loan. b. simple loan. c. discount bond. d. coupon bond.
c
Assuming the same coupon rate and maturity length, the difference between the yield on a Treasury Inflation Protected Security and the yield on a nonindexed Treasury security provides insight into a. the nominal interest rate. b. the nominal exchange rate. c. the expected inflation rate. d. the real interest rate.
c
The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value. a. greater; coupon; above b. greater; perpetuity; above c. greater; coupon; below d. less; perpetuity; below
c
Which of the following are generally true of all bonds? a. A fall in interest rates results in capital losses for bonds whose terms to maturity are longer than the holding period. b. 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. c. Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise. d. Prices and returns for short-term bonds are more volatile than those for longer term bonds.
c
Which of the following is a consequence of extending the payback period of a student loan from 10 to 30 years? a. higher monthly payments b. lower monthly payments initially, but higher monthly payments in the future c. more interest paid over the life of the loan d. faster payoff of principal
c
Which of the following will lead to a higher interest rate on a loan? a. lower opportunity cost b. lower inflation c. increased perceived risk of default d. reduced likelihood of borrower not paying the loan
c
Suppose Matt's New Cars issues and sells a one-year discount bond for $9,259 and repays $10,000 at maturity. The interest rate on this bond would be a. 2.6%. b. 10%. c. 8%. d. 7.41%.
c (10,000-9259)/9259 x 100
If a $1000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon payment every year is a. $375.00. b. $3.75. c. $37.50. d. $13.75
c 1000 x 3.75%
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? a. 12 years b. 5 years c. 6 years d. 7 years
c between 5 and 7
In which of the following situations would you prefer to be the lender? a. The interest rate is 25 percent and the expected inflation rate is 50 percent. b. The interest rate is 9 percent and the expected inflation rate is 7 percent. c. The interest rate is 13 percent and the expected inflation rate is 15 percent. d. The interest rate is 4 percent and the expected inflation rate is 1 percent.
d
Suppose a coupon bond with a par value of $1,000 is currently priced at $950 and has a coupon of $40. Which of the following is TRUE? a. current yield < coupon rate b. Coupon rate has risen. c. Coupon rate has declined. d. current yield > coupon rate
d
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? a. 20 percent b. 5 percent c. 10 percent d. 15 percent
d
The interest rate on Treasury Inflation Protected Securities is a direct measure of a. the nominal interest rate. b. the rate of inflation. c. the rate of deflation. d. r the real interest rate.
d
For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is a. $10,300. b. $10,030. c. $13,000. d. $13,310.
d 10,000 x (1+10%)^3
What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year? a. 10 percent b. 5 percent c. -10 percent d. -5 percent
d 1000 * 5% + 900 - 1000/1000 = -5%
What is the yield to maturity of a consol with a coupon of $85 and a price of $944.44? a. Not enough information has been provided to determine the answer. b. 5.56% c 8.50% d. 9.00%
d 85/944.44 x 100