ECON 320 Chapter 6 Connect Questions Spring 2022
The time to bond maturity is called the _____. Multiple choice question. -yield to maturity -current yield -expected value -investment horizon
investment horizon
To calculate the one-year holding period return, Multiple choice question. -add the current yield to the capital gain. -multiply the price paid by the coupon rate. -add the price paid to the change in price. -divide the capital gain by the current yield.
add the current yield to the capital gain.
Interest-rate risk arises because of a mismatch between an investor's _________ and the _______ of the bond. Multiple choice question. -investment horizon; future value -investment horizon; time to maturity -risk aversion; future value -risk aversion; time to maturity
investment horizon; time to maturity
Interest-rate risk arises because of a mismatch between an investor's _________ and the _______ of the bond. Multiple choice question. -risk aversion; time to maturity -risk aversion; future value -investment horizon; future value -investment horizon; time to maturity
investment horizon; time to maturity
All else equal, when the demand for a bond increases Multiple choice question. -its price falls and its yield rises. -its price rises and its yield falls. -both its price and its yield fall. -both its price and its yield rise.
its price rises and its yield falls.
All else equal, when the demand for a bond increases Multiple choice question. -its price rises and its yield falls. -both its price and its yield fall. -both its price and its yield rise. -its price falls and its yield rises.
its price rises and its yield falls.
Consider a consol (perpetuity) that promises to pay $2 per year forever at an interest rate of 10%. What would the price of the consol be? Multiple choice question. -$0.20 -$50 -$20 -$5
$20
Consider a consol (perpetuity) that promises to pay $2 per year forever at an interest rate of 10%. What would the price of the consol be? Multiple choice question. -$5 -$50 -$20 -$0.20
$20
A one-year Treasury bill with a face value of $100 sells for $95.24. The interest paid in this case is equal to $ _____ and the rate of interest in percentage terms is equal to _____. Multiple choice question. a. $4.76; 5% b. $5; 5.2% c. $95.24; 95.24% d. $95.24; 100%
$4.76; 5%
A one-year Treasury bill with a face value of $100 sells for $95.24. The interest paid in this case is equal to $ _____ and the rate of interest in percentage terms is equal to _____. Multiple choice question. a. $5; 5.2% b. $4.76; 5% c. $95.24; 95.24% d. $95.24; 100%
$4.76; 5%
Consider a consol (perpetuity) that promises to pay $20 per year forever at an interest rate of 5%. What would the price of the consol be? Multiple choice question. -$4,000 -$400 -$4 -$40
$400
Consider a one-year Treasury bill that pays $500 at maturity and interest in the amount of 4%. Which of the following would be its price rounded to the nearest penny? Multiple choice question. -$540.80 -$480.77 -$520 -$480.00
$480.77
Consider a one-year Treasury bill that pays $500 at maturity and interest in the amount of 4%. Which of the following would be its price rounded to the nearest penny? Multiple choice question. a. $540.80 b. $480.77 c. $520 d. $480.00
$480.77 $500/(1.04)
Consider a six-month Treasury bill that pays $500 at maturity and pays interest in the amount of 4%. Which of the following would be its price rounded to the nearest penny? Multiple choice question. -$490.29 -$480.77 -$490.38 -$509.90
$490.29
Select all that apply Which of the following can be considered part of the interest rate? Multiple select question. -Compensation for risk -Expected inflation -Actual inflation -The real interest rate
-Compensation for risk -Expected inflation -The real interest rate
Select all that apply Which of the following can be considered part of the interest rate? Multiple select question. -Compensation for risk -Expected inflation -The real interest rate -Actual inflation
-Compensation for risk -Expected inflation -The real interest rate
Select all that apply Risk tends to Multiple select question. -raises the yield received by investors. -lower the price an investor is willing to pay. -reduce the expected value of a given promise. -reduces the yield received by investors.
-raises the yield received by investors. -lower the price an investor is willing to pay. -reduce the expected value of a given promise.
Select All that Apply Risk tends to Multiple select question. -reduce the expected value of a given promise. -raises the yield received by investors. -lower the price an investor is willing to pay. -reduces the yield received by investors.
-reduce the expected value of a given promise. -raises the yield received by investors. -lower the price an investor is willing to pay.
An increase in expected inflation, Multiple select question. -shifts bond supply to the right. -shifts bond demand to the right. -shifts bond demand to the left. -shifts bond supply to the left.
-shifts bond supply to the right. -shifts bond demand to the left.
Consider a one-year 10% coupon bond with a face value of $100 that sells for $95. Rounded to four decimal places, the bond's current yield equals ______. Multiple choice question. -0.1000 -0.1053 -0.0500 -0.0526
0.1053
Consider a one-year 10% coupon bond with a face value of $100 that sells for $95. Rounded to four decimal places, the bond's current yield equals ______. Multiple choice question. -0.0526 -0.0500 -0.1000 -0.1053
0.1053 10% of 100 = $10 $10/$95=0.1053
Which of the following can definitely not cause a curve to shift in the market for a bond? Multiple choice question. -A change in overall business conditions -A change in the price of the bond -A change in that bond's perceived risk as compared to other bonds -A change in government borrowing
A change in the price of the bond
Which term best describes a fixed payment loan that pays some of the principle and the interest with each regular payment? Multiple choice question. -Future present value -Expected value -Future value -Amortization
Amortization
Which of the following statements is true about fixed-payment loans? Multiple choice question. -Each payment on a fixed-payment loan pays off some principal and some interest. -Credit cards are a common type of fixed-payment loan. -The same dollar amount of each payment on a fixed-payment loan goes toward interest. -The same dollar amount of each payment on a fixed-payment loan goes toward its principal.
Each payment on a fixed-payment loan pays off some principal and some interest.
A bondholder's investment horizon may be shorter than the time to maturity of the bond. This leads to which of the following kinds of risk? Multiple choice question. -Interest-rate risk -Default risk -Systemic risk -Inflation risk
Interest-rate risk
A bondholder's investment horizon may be shorter than the time to maturity of the bond. This leads to which of the following kinds of risk? Multiple choice question. -Systemic risk -Inflation risk -Default risk -Interest-rate risk
Interest-rate risk
Which of the following is not a way securitization uses the efficiency of markets to lower the cost of borrowing? Multiple choice question. -Allowing for risk diversification -Removing systemic risk -Increasing the liquidity of assets -Making markets broader
Removing systemic risk
Which of the following is true about consols (perpetuities)? Multiple choice question. -The price of a consol is the present value of all future principal payments. -They are only issued privately, never by the government. -They are also known as zeros or zero-coupon bonds. -The borrower pays only interest, not the principal.
The borrower pays only interest, not the principal.
Which of the following is true about consols (perpetuities)? Multiple choice question. -They are only issued privately, never by the government. -The price of a consol is the present value of all future principal payments. -They are also known as zeros or zero-coupon bonds. -The borrower pays only interest, not the principal.
The borrower pays only interest, not the principal.
Which of the following happens when inflation is expected to increase in an economy? Multiple choice question. -The supply curve for bonds shifts leftward and the price of bonds falls. -The supply curve for bonds shifts rightward and the price of bonds falls. -The supply curve for bonds shifts leftward and the price of bonds rises. -The supply curve for bonds shifts rightward and the price of bonds rises.
The supply curve for bonds shifts rightward and the price of bonds falls.
Which of the following happens when inflation is expected to increase in an economy? Multiple choice question. -The supply curve for bonds shifts leftward and the price of bonds rises. -The supply curve for bonds shifts leftward and the price of bonds falls. -The supply curve for bonds shifts rightward and the price of bonds rises. -The supply curve for bonds shifts rightward and the price of bonds falls.
The supply curve for bonds shifts rightward and the price of bonds falls.
Why are governments the only borrowers of perpetuities or consols? Multiple choice question. -They are the only borrowers that can credibly promise to make payments forever. -Consols and perpetuities are only traded between governments. -No other borrower would ever seek a consol. -The statement is false. Many home loans are consols.
They are the only borrowers that can credibly promise to make payments forever.
Which of the following is not true about zero-coupon bonds? Multiple choice question. -They are also called pure discount bonds. -One example of a zero-coupon bond is a US Treasury bill. -They are redeemed for a face value higher than the price originally paid. -They pay regular interest payments.
They pay regular interest payments.
When a bond's yield to maturity falls below its coupon rate, the bondholder has experienced Multiple choice question. -a current yield. -a capital gain. -a capital loss. -a yield in perpetuity.
a capital loss.
Because price and yield have _______ relationship, when the price of a bond is greater than its face value, its coupon rate will be _______ the current yield. Multiple choice question. -a direct (positive); below -a direct (positive); above -an inverse; below -an inverse; above
an inverse; above
Because price and yield have _______ relationship, when the price of a bond is greater than its face value, its coupon rate will be _______ the current yield. Multiple choice question. -a direct (positive); below -an inverse; above -a direct (positive); above -an inverse; below
an inverse; above
Current yield has ______ relationship with bond price; when the bond price rises, current yield ______. Multiple choice question. -an inverse; rises -a direct (positive); falls -a direct (positive); rises -an inverse; falls
an inverse; falls
Current yield has ______ relationship with bond price; when the bond price rises, current yield ______. Multiple choice question. -an inverse; rises -a direct (positive); rises -an inverse; falls -a direct (positive); falls
an inverse; falls
Current yield has ______ relationship with bond price; when the bond price rises, current yield ______. Multiple choice question. -an inverse; rises -an inverse; falls -a direct (positive); rises -a direct (positive); falls
an inverse; falls
Holding period return is calculated when a bond is sold ____ maturity. Multiple choice question. -after -before -at
before
Holding period return is calculated when a bond is sold ____ maturity. Multiple choice question. -at -before -after
before
In the market for bonds, when the price of bonds is above the equilibrium price Multiple choice question. -quantity demanded will be greater than quantity supplied. -bond sellers will start dropping their prices. -the market will be in equilibrium. -excess demand will exist.
bond sellers will start dropping their prices.
Multiple Choice Question In the market for bonds, when the price of bonds is above the equilibrium price Multiple choice question. -bond sellers will start dropping their prices. -quantity demanded will be greater than quantity supplied. -the market will be in equilibrium. -excess demand will exist.
bond sellers will start dropping their prices.
Expected inflation affects Multiple choice question. -only bond demand. -only bond supply. -neither bond supply nor bond demand. -both bond supply and bond demand.
both bond supply and bond demand.
Expected inflation affects Multiple choice question. -only bond supply. -neither bond supply nor bond demand. -only bond demand. -both bond supply and bond demand.
both bond supply and bond demand.
If you pay $180 for a coupon bond with a $200 face value, you will receive Multiple choice question. -interest payments and a capital loss of $20. -only interest payments. -interest payments and a capital gain of $20. -only a capital gain of $20.
interest payments and a capital gain of $20.
As the default risk of a bond rises, we expect the price of the bond to _____ and its yield to ____. Multiple choice question. -fall; fall -rise; fall -rise; rise -fall; rise
fall; rise
When the price of a bond rises, its yield ______. Therefore, when a bond's price is lower than its face value, its yield to maturity must be ______ its coupon rate. Multiple choice question. -falls; above -rises; below -falls; below -rises; above
falls; above
When the price of a bond rises, its yield ______. Therefore, when a bond's price is lower than its face value, its yield to maturity must be ______ its coupon rate. Multiple choice question. -falls; below -falls; above -rises; below -rises; above
falls; above
When the price of a bond rises, its yield ______. Therefore, when a bond's price is lower than its face value, its yield to maturity must be ______ its coupon rate. Multiple choice question. -rises; below -rises; above -falls; above -falls; below
falls; above
A loan that promises a fixed number of equal payments at regular intervals is called a ______. Multiple choice question. -fixed payment loan -credit default swap -home equity loan -fixed rate loan
fixed payment loan
There is some evidence that increased inflation is associated with ______ nominal interest rates, particularly in nations where inflation is especially _________. Multiple choice question. -lower; unstable -higher; stable -lower; stable -higher; unstable
higher; unstable
There is some evidence that increased inflation is associated with ______ nominal interest rates, particularly in nations where inflation is especially _________. Multiple choice question. -lower; unstable -lower; stable -higher; stable -higher; unstable
higher; unstable
Even if bond payments are made, increases in overall prices may reduce those payments' real value. This is referred to as ______. Multiple choice question. -interest-rate risk -idiosyncratic risk -default risk -inflation risk
inflation risk
As a bond is perceived to provide a higher return, or to be more liquid or less risky than other bonds, Multiple choice question. -both its price and its yield will fall. -both its price and its yield will rise. -its price will fall and its yield will rise. -its price will rise and its yield will fall.
its price will rise and its yield will fall.
As a bond is perceived to provide a higher return, or to be more liquid or less risky than other bonds, Multiple choice question. -both its price and its yield will rise. -its price will rise and its yield will fall. -both its price and its yield will fall. -its price will fall and its yield will rise.
its price will rise and its yield will fall.
Consider a coupon bond with a face value of $500. If its price is currently $525, then Multiple choice question. -its yield to maturity must be above its coupon rate, because price and yield have a direct (positive) relationship. -its yield to maturity must be below its coupon rate, because price and yield have a direct (positive) relationship. -its yield to maturity must be below its coupon rate, because price and yield have an inverse relationship. -its yield to maturity must be above its coupon rate, because price and yield have an inverse relationship.
its yield to maturity must be below its coupon rate, because price and yield have an inverse relationship.
Consider a coupon bond with a face value of $500. If its price is currently $525, then Multiple choice question. -its yield to maturity must be above its coupon rate, because price and yield have an inverse relationship. -its yield to maturity must be below its coupon rate, because price and yield have an inverse relationship. -its yield to maturity must be above its coupon rate, because price and yield have a direct (positive) relationship. -its yield to maturity must be below its coupon rate, because price and yield have a direct (positive) relationship.
its yield to maturity must be below its coupon rate, because price and yield have an inverse relationship.
All else equal, the price of a one-year Treasury bill will be ______ than that of a six-month Treasury bill; in other words. the ______ the time to maturity, the more we are willing to pay. Multiple choice question. -lower; longer -higher; longer -higher; shorter -iower; shorter
lower; shorter
All else equal, the price of a one-year Treasury bill will be ______ than that of a six-month Treasury bill; in other words. the ______ the time to maturity, the more we are willing to pay. Multiple choice question. -lower; longer -higher; shorter -higher; longer -lower; shorter
lower; shorter
In the market for bonds, when the price of bonds is below the equilibrium price Multiple choice question. -excess supply will exist. -the supply curve for bonds will shift to the right. -quantity demanded will be greater than quantity supplied. -bond sellers will lower their prices to move the market back toward equilibrium.
quantity demanded will be greater than quantity supplied.
In the market for bonds, when the price of bonds is below the equilibrium price Multiple choice question. -quantity demanded will be greater than quantity supplied. -bond sellers will lower their prices to move the market back toward equilibrium. -the supply curve for bonds will shift to the right. -excess supply will exist.
quantity demanded will be greater than quantity supplied.
In the market for bonds, when the price of bonds is below the equilibrium price Multiple choice question. -quantity demanded will be greater than quantity supplied. -excess supply will exist. -the supply curve for bonds will shift to the right. -bond sellers will lower their prices to move the market back toward equilibrium.
quantity demanded will be greater than quantity supplied.
An increase in wealth shifts the demand curve for bonds _______, causing the price of bonds to ________. Multiple choice question. -leftward; increase -leftward; decrease -rightward; decrease -rightward; increase
rightward; increase
An increase in wealth shifts the demand curve for bonds _______, causing the price of bonds to ________. Multiple choice question. -leftward; increase -leftward; decrease -rightward; increase -rightward; decrease
rightward; increase
When financial institutions pool assets that generate payment streams and turn them into tradeable bonds, this is called ______. Multiple choice question. -spreading risk -securitization -hedging -insurance
securitization
In the equation for the price of a coupon bond, to the right of the equal sign, there are two parts. The first part represents ______, while the part on the far right represents ______. Multiple choice question. -the interest; the value of the promise to repay the principal at maturity -the value of the promise to repay the principal at maturity; the rate of inflation -the risk premium; the risk-free interest rate -the risk-free interest rate; the risk premium
the interest; the value of the promise to repay the principal at maturity
In the equation for the price of a coupon bond, to the right of the equal sign, there are two parts. The first part represents ______, while the part on the far right represents ______. Multiple choice question. -the risk premium; the risk-free interest rate -the value of the promise to repay the principal at maturity; the rate of inflation -the interest; the value of the promise to repay the principal at maturity -the risk-free interest rate; the risk premium
the interest; the value of the promise to repay the principal at maturity
In the equation for the price of a coupon bond, to the right of the equal sign, there are two parts. The first part represents ______, while the part on the far right represents ______. Multiple choice question. -the risk-free interest rate; the risk premium -the value of the promise to repay the principal at maturity; the rate of inflation -the interest; the value of the promise to repay the principal at maturity -the risk premium; the risk-free interest rate
the interest; the value of the promise to repay the principal at maturity
We can value a coupon bond using Multiple choice question. -amortization. -the present value formula. -the expected value formula. -consols and perpetuities.
the present value formula.
We can value a coupon bond using Multiple choice question. -consols and perpetuities. -the present value formula. -amortization. -the expected value formula.
the present value formula.
When the government wants to spend more relative to the taxes it brings in, Multiple choice question. -both the price of bonds and their yield fall. -the price of bonds falls and their yield rises. -the price of bonds rises and their yield falls. -both the price of bonds and their yield rise.
the price of bonds falls and their yield rises.
When general business conditions decline, Multiple choice question. -the price of bonds increases and their yield falls. -the price of bonds decreases and their yield rises. -both the price of bonds and their yield fall. -both the price of bonds and their yield rise.
the price of bonds increases and their yield falls.
If interest rates are expected to be higher in the future than they are today, we would now expect Multiple choice question. -both the price and the yield of bonds to rise. -the price of bonds to rise and their yield to fall. -both the price and the yield of bonds to fall. -the price of bonds to fall and their yield to rise.
the price of bonds to fall and their yield to rise.
Current yield measures Multiple choice question. -the amount a borrower pays for borrowing, including fees paid to brokers or dealers. -the amount of risk on a corporate bond. -the difference between the yearly coupon payment on a bond and its price. -the proceeds a bondholder receives for lending.
the proceeds a bondholder receives for lending.
Current yield measures Multiple choice question. -the proceeds a bondholder receives for lending. -the amount of risk on a corporate bond. -the difference between the yearly coupon payment on a bond and its price. -the amount a borrower pays for borrowing, including fees paid to brokers or dealers.
the proceeds a bondholder receives for lending.
When the price of the bond is below the face value, Multiple choice question. -the return exceeds the coupon rate. -the coupon rate and the return are equal. -the return is less than the coupon rate.
the return exceeds the coupon rate.
The investment horizon describes the Multiple choice question. -current yield. -expected value. -time to a bond's maturity. -return on yield to maturity.
time to a bond's maturity.
The investment horizon describes the Multiple choice question. -expected value. -return on yield to maturity. -time to a bond's maturity. -current yield.
time to a bond's maturity.
Interest-rate risk increases as the bond's __________ increases. Multiple choice question. -coupon rate -time to maturity -default risk -future value
time to maturity
The yield bondholders receive if they hold the bond until maturity is called ______. Multiple choice question. -future yield -yield to maturity -yield to measure -final yield
yield to maturity
The most useful measure of the return on holding a bond is _____, which can be defined as the interest rate that _____. Multiple choice question. -yield to maturity; bondholders receive if they sell the bond for exactly the price they paid for it -the coupon rate; bondholders receive if they sell the bond for exactly the price they paid for it -yield to maturity; bondholders receive if they hold the bond until the final principal payment is made -the coupon rate; bondholders receive if they hold the bond until the final principal payment is made
yield to maturity; bondholders receive if they hold the bond until the final principal payment is made