ECON3303 Test 2

Which of the following represents the equation that would be used to determine the yield to maturity of a corporate bond with a face value of $1,000, price of $1,100, coupon rate of 5%, and maturity in three years?

$1,100 = $500/(1 + i) + $500/(1 + i)2 + 1,500/(1 + i)3

$1 received n years from now has a value today of

$1/(1 + i)n.

Suppose Matt's New Cars issues a bond in which they'll need to pay $10,000 in one year, which includes 4% interest. How much will they receive for the bond?

$9615

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

100%

What is the rate of return on a bond with a coupon of $55 that was purchased for $900 and sold one year later for $950?

11.67%

What is the rate of return on a bond with a coupon of $38 payable in one year that was purchased for $950 and sold one year later for $931?

2%

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

5%

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

5%

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

5.26%

Suppose a one-year discount bond offers to pay $1000 in one year and currently sells for $950. Given this information, we know that the interest rate on the bond is

5.3%

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

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

decreases; decreases

When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant.

decreases; increases; rises

When the price level falls, the ________ curve for nominal money ________, and interest rates ________, everything else held constant.

demand; decreases; fall

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

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

equal to

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.

Everything else held constant, when stock prices become ________ volatile, the demand curve for bonds shifts to the ________ and the interest rate ________.

more; right; falls

Which of the following is a component of money?

none of the above

Which of the following will occur when the central bank pursues expansionary monetary policy?

none of the above

A simple loan involves

payment of interest by the borrower to the lender only at the time the loan matures.

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

A capital gain occurs when the

price of an asset increases.

The two most important factors that cause the money demand curve to shift are

real GDP and the price level.

An increase in the expected rate of inflation will ________ the expected return on bonds relative to the that on ________ assets, everything else held constant.

reduce; real

If there is an excess demand for money, individuals ________ bonds, causing interest rates to ________.

sell; rise

In the Keynesian liquidity preference framework, an increase in the interest rate causes the demand curve for money to ________, everything else held constant.

stay where it is

When the government has a surplus, as occurred in the late 1990s, the ________ curve of bonds shifts to the ________, everything else held constant.

supply; left

The bond supply curve slopes up because

the borrower is willing and able to offer more bonds when the price of the bond is high. interest rates rise as bond prices rise.

You would be more willing to buy AT&T bonds (holding everything else constant) if

the brokerage commissions on bond sales become cheaper.

The rate of return is equal to

the current yield plus the rate of capital gain or loss.

An increase in the corporate profits tax is likely to cause

the equilibrium interest rate to fall and the equilibrium price of bonds to rise.

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 opportunity cost of holding money is

the interest rate.

If the Fed wants to permanently lower interest rates, then it should raise the rate of money growth if

the liquidity effect is larger than the other effects.

Compounding refers to

the process of earning interest on both the interest and the principal of an investment.

During a period of economic expansion, when expected profitability is high

the supply curve of bonds shifts to the right.

If i is the yield to maturity of a fixed-payment loan

the value of the loan today equals the present value of the loan payments discounted at rate i.

If the current price of a bond is greater than its face value

the yield to maturity must be less than the coupon rate.

In comparing the yield to maturity on a Treasury bill with the yield on a discount basis on the same bill, we can say that the yield to maturity

will always be greater than the yield on a discount basis.

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

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

How are TIPS adjusted for inflation?

The principal is adjusted for inflation each period.

Examples of discount bonds include

U.S. Treasury bills.

The supply curve for bonds would decline due to

an decrease in expected inflation.

Factors that can cause the supply curve for bonds to shift to the right include

an expansion in overall economic activity.

In the figure above, a factor that could cause the demand for bonds to shift to the right is

expectations of lower interest rates in the future.

Interest-rate risk can best be characterized as the risk that

fluctuations in the price of a financial asset in response to changes in market interest rates.

During most of the time in recent decades, the government sector

has run large deficits.

According to the Fisher effect, an increase in expected inflation results in

higher nominal interest rates.

A business cycle expansion increases income, causing money demand to ________ and interest rates to ________, everything else held constant.

increase; increase

Which of the following is NOT a likely impact on the bond market if corporations become convinced that a robust economic recovery is underway?

increased demand for bonds

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.

If bond investors think they lack enough details to evaluate the likelihood of defaults on certain bonds, this will result in higher

information costs.

Though Treasury bonds may have little default risk, what type of risk exists when current interest rates are low?

interest-rate risk

A speculator who buys a fifty-year corporate bond

is probably expecting market interest rates to decrease in the future.

When the interest rate changes,

it is because either the demand or the supply curve has shifted.

The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the

liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.

When nominal interest rates fall on financial assets such as U.S. Treasury bills, the amount of interest that households and firms

lose by holding money decreases.

In Keynes's liquidity preference framework, individuals are assumed to hold their wealth in two forms:

money and bonds.