ECON 2035 Chapter 4

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

$2000

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

-5%

All of the following are examples of coupon bonds except A) Corporate bonds. B) U.S. Treasury bills. C) U.S. Treasury notes. D) U.S. Treasury bonds.

US Treasury bills

Examples of discount bonds include

US treasury bills

The sum of the current yield and the rate of capital gain is called the

rate of return

The ________ interest rate more accurately reflects the true cost of borrowing.

real

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

simple loan.

The present value of a fixed-payment loan is calculated as the ________ of the present value of all cash flow payments.

sum

Duration is:

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

Comparing a discount bond and a coupon bond with the same maturity,

the discount bond has the greater effective maturity.

Economists consider the ________ to be the most accurate measure of interest rates.

yield to maturity.

If a $1000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon payment every year is

$37.50

What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent?

$453.51

If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is

$650

With an interest rate of 6 percent, the present value of $100 next year is approximately

$94

A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid.

- coupon bond - face

An asset's interest rate risk ________ as the duration of the asset ________.

- decreases - decreases

A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of

8%

The ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation.

Fisher equation

The interest rate on a consol equals the:

coupon payment divided by the price.

A discount bond:

pays the bondholder the face value at maturity.

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

yield to maturity.

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.

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

10%

If a $10,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is

100 percent.

Which of the following bonds would you prefer to be buying? A) A $10,000 face-value security with a 10 percent coupon selling for $9,000 B) A $10,000 face-value security with a 7 percent coupon selling for $10,000 C) A $10,000 face-value security with a 9 percent coupon selling for $10,000 D) A $10,000 face-value security with a 10 percent coupon selling for $10,000

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

Which of the following $1,000 face-value securities has the highest yield to maturity? A) A 5 percent coupon bond selling for $1,000 B) A 10 percent coupon bond selling for $1,000 C) A 12 percent coupon bond selling for $1,000 D) A 12 percent coupon bond selling for $1,100

A 12 percent coupon bond selling for $1,000

Which of the following $5,000 face-value securities has the highest yield to maturity? A) A 6 percent coupon bond selling for $5,000 B) A 6 percent coupon bond selling for $5,500 C) A 10 percent coupon bond selling for $5,000 D) A 12 percent coupon bond selling for $4,500

A 12 percent coupon bond selling for $4,500

Which of the following are true of fixed payment loans? A) The borrower repays both the principal and interest at the maturity date. B) Installment loans and mortgages are frequently of the fixed payment type. C) The borrower pays interest periodically and the principal at the maturity date. D) Commercial loans to businesses are often of this type.

Installment loans and mortgages are frequently of the fixed payment type.

Which of the following are true for discount bonds? A) A discount bond is bought at par. B) The purchaser receives the face value of the bond at the maturity date. C) U.S. Treasury bonds and notes are examples of discount bonds. D) 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.

A fully amortized loan is another name for:

a fixed payment loan

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

coupon bond.

The ________ is calculated by multiplying the coupon rate times the par value of the bond.

coupon payment

The yield to maturity for a perpetuity is a useful approximation for the yield to maturity on long-term coupon bonds. It is called the ________ when approximating the yield for a coupon bond.

current yield

For simple loans, the simple interest rate is ________ the yield to maturity.

equal to

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

interest-rate changes.

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, then the real interest rate on this bond is

-8%

If a $5,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is

0%

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

5%

When I purchase a 10 percent coupon bond, I calculate a yield to maturity of 8 percent. If I hold this bond to maturity, then my return on this asset is

8%

The price of a consol equals the coupon payment

divided by the interest rate

The ________ interest rate is adjusted for expected changes in the price level.

ex ante real

The ________ is the final amount that will be paid to the holder of a coupon bond.

face value

An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of

5 percent.

If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is

5 percent.

The riskiness of an asset's returns due to changes in interest rates is

interest rate risk

In Japan in 1998 and in the U.S. in 2008, interest rates were negative for a short period of time because investors found it convenient to hold six-month bills as a store of value because

the bills were denominated in large amounts and could be stored electronically.

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

the expected inflation rate

The duration of a coupon bond increases

the longer is the bond's term to maturity

The ________ is below the coupon rate when the bond price is ________ its par value.

- yield to maturity - above

There is ________ for any bond whose time to maturity matches the holding period.

no interest-rate risk

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, then the real interest rate on this bond is

-5%

For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is

$13,310

All else equal, when interest rates ________, the duration of a coupon bond ________.

- rise - falls

In which of the following situations would you prefer to be the borrower? 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.

The interest rate is 25 percent and the expected inflation rate is 50 percent.

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%

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

25%

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%

A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of

33.3 percent.

The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's

coupon rate

The interest rate on Treasury Inflation Protected Securities is a direct measure of

the real interest rate

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

ex post real interest rate

A consol paying $20 annually when the interest rate is 5 percent has a price of

$400

All else equal, the ________ the coupon rate on a bond, the ________ the bond's duration.

- higher - shorter

Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant.

- long term - short term

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

When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.

- real - borrow - lend

A $1000 face value coupon bond with a $60 coupon payment every year has a coupon rate of

6%

When talking about a coupon bond, face value and ________ mean the same thing.

par value

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

12%

Which of the following are true concerning the distinction between interest rates and returns? A) The rate of return on a bond will not necessarily equal the interest rate on that bond. B) The return can be expressed as the difference between the current yield and the rate of capital gains. C) The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1. D) 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.

An increase in the time to the promised future payment ________ the present value of the payment.

decreases

An equal increase in all bond interest rates

decreases long-term bond returns more than short-term bond returns.

The nominal interest rate minus the expected rate of inflation

defines the real interest rate.

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

discount bond.

The present value of an expected future payment ________ as the interest rate increases.

falls

A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a

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

high

An equal decrease in all bond interest rates

increases the price of a ten-year bond more than the price of a five-year bond.

The yield to maturity for a one-year discount bond equals the increase in price over the year, divided by the

initial price

The yield to maturity for a discount bond is ________ related to the current bond price.

negatively

A ________ is bought at a price below its face value, and the ________ value is repaid at the maturity date.

- discount bond - face

The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value.

- greater - coupon - below

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

0%

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

5%

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 $1,000 face-value securities has the lowest yield to maturity? A) A 5 percent coupon bond selling for $1,000 B) A 10 percent coupon bond selling for $1,000 C) A 15 percent coupon bond selling for $1,000 D) A 15 percent coupon bond selling for $900

A 5 percent coupon bond selling for $1,000

Which of the following $1,000 face-value securities has the highest yield to maturity? A) A 5 percent coupon bond with a price of $600 B) A 5 percent coupon bond with a price of $800 C) A 5 percent coupon bond with a price of $1,000 D) A 5 percent coupon bond with a price of $1,200

A 5 percent coupon bond with a price of $600

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 bond with one year to maturity

Which of the following are generally true of all bonds? A) 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. B) Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise. C) Prices and returns for short-term bonds are more volatile than those for longer term bonds. D) 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 turn out to be negative if interest rates rise.

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.

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

Which of the following are generally true of bonds? A) The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period. B) 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. C) The longer a bond's maturity, the smaller is the size of the price change associated with an interest rate change. D) Prices and returns for short-term bonds are more volatile than those for longer-term bonds.

The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period.

Which of the following are true for a coupon bond? A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. B) The price of a coupon bond and the yield to maturity are positively related. C) The yield to maturity is greater than the coupon rate when the bond price is above the par value. D) 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.

A coupon bond that has no maturity date and no repayment of principal is called a:

consol.

To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of

discounting the future

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.

present value

The ________ of a coupon bond and the yield to maturity are inversely related.

price

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