Exam 1 - Chapter 4

The yield to maturity on a 10-year coupon bond (with face value = $1,000 and annual coupon rate = 3.25%) is 2.42%. This implies: I. the price of this bond is $1,000. II. the price of this bond is greater than $1,000. III. he price of this bond is less than $1,000. IV. the buyer of the bond will have a return of 2.42% if she sells the bond next year. V. the buyer of the bond will have a return of 3.25% if she sells the bond next year. A) II only. B) I and IV. C) II and V. D) II and IV. E) III and IV.

A) II only.

If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is A) 2.5 percent. B) 5 percent. C) 7.5 percent. D) 10 percent.

B) 5 percent.

A two-year bond with $1,000 face-value and 10% coupon rate is sold for $1,000 today. If one year later the market interest rate increases to 15%, then this bond will have a market price of ________ next year . A) $956.52 B) $1047.62 C) $869.57 D) $1043.48

A) $956.52

A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a A) simple loan. B) coupon bond. C) fixed-payment loan. D) discount bond.

B) coupon bond.

A two-year bond with $1,000 face-value and 10% coupon rate is sold for $1,000 today. If one year later the market interest rate decreases to 5%, then this bond will have a market price of ________ next year. A) $952.38 B) $956.52 C) $1047.62 D) $1043.48

C) $1047.62

A three-year bond with $1,000 face-value and 10% coupon rate is sold for $1,000 today (2011). If one year later (2012) the market interest rate decreases to 5%, then this bond will have a market price of $________ (round to the nearest integer) next year (2012). A) $918.71 B) $1092.97 C) $1047.62 D) $956.52

B) $1092.97

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 12 percent coupon bond selling for $4,500 C) a 6 percent coupon bond selling for $5,500 D) a 10 percent coupon bond selling for $5,000

B) a 12 percent coupon bond selling for $4,500

Negative yields to maturity imply that bond purchasers are better off to hold cash. Acceptance of slightly negative yields by purchasers in recent times suggest that the A) inflation rate is positive. B) convenience of storing large sums is also important to decisions. C) governments have issued too many bonds. D) decision makers are only concerned with yields.

B) convenience of storing large sums is also important to decisions.

The nominal interest rate minus the expected rate of inflation A) is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate. B) defines the real interest rate. C) defines the discount rate. D) is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate.

B) defines the real interest rate.

The interest rate that describes how well a lender has done in real terms after the fact is called the A) ex post nominal interest rate. B) ex post real interest rate. C) ex ante nominal interest rate. D) ex ante real interest rate.

B) ex post real interest rate.

Short-term bonds are subject to ________ risk because proceeds must be put into some future asset at an unknown interest rate. A) liquidity B) reinvestment C) term D) default

B) reinvestment

If a $10,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is A) 5 percent. B) 10 percent. C) 50 percent. D) 100 percent.

C) 50 percent.

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 A) 7 percent. B) 22 percent. C) -15 percent. D) -8 percent.

D) -8 percent.

Interest-rate risk is the riskiness of an asset's returns due to A) default of the borrower. B) changes in the asset's maturity. C) changes in the coupon rate. D) interest-rate changes.

D) interest-rate changes .

A discount bond is also called a ________ because the owner does not receive periodic payments. A) consol B) municipal bond C) corporate bond D) zero-coupon bond

D) zero-coupon bond

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

A) U.S. Treasury bills.

If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the interest rate is A) 5 percent. B) 10 percent. C) 22 percent. D) 25 percent.

A) 5 percent.

The present value of an expected future payment ________ as the interest rate increases. A) falls B) is constant C) rises D) is unaffected

A) falls

If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is A) 5 percent. B) 10 percent. C) 12.5 percent. D) 15 percent.

B) 10 percent.

Assuming the same coupon rate and maturity length, when the interest rate on a Treasury Inflation Indexed Security is 3 percent, and the yield on a nonindexed Treasury bond is 8 percent, the expected rate of inflation is A) 3 percent. B) 5 percent. C) 8 percent. D) 11 percent.

B) 5 percent.

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

B) A bond's return equals the yield to maturity when the time to maturity is the same as the holding period.

The ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation. A) Monetarist equation B) Fisher equation C) Marshall equation D) Keynesian equation

B) Fisher equation

The ________ interest rate is adjusted for expected changes in the price level. A) ex post nominal B) ex ante real C) ex post real D) ex ante nominal

B) ex ante real

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) 5 percent B) 10 percent C) 15 percent D) 20 percent

C) 15 percent

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) -2 percent. C) 3 percent. D) 7 percent.

C) 3 percent.

James buys a two-year bond with $1,000 face-value and 10% coupon rate for $1,000 today. If one year later the market interest rate increases to 15% and Adam sells the bond, then his rate of return on this investment is ________% (negative if it is a loss). A) 0 B) 4.3 C) 5.7 D) -4.3

C) 5.7

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 13 percent and the expected inflation rate is 15 percent. C) The interest rate is 4 percent and the expected inflation rate is 1 percent. D) The interest rate is 9 percent and the expected inflation rate is 7 percent.

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

The interest rate on a consol equals the A) coupon payment plus the price. B) price divided by the coupon payment. C) coupon payment divided by the price. D) price times the coupon payment.

C) coupon payment divided by the price.

If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is A) 2 percent. B) 8 percent. C) 10 percent. D) 12 percent.

D) 12 percent.

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) 5 percent

An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of A) 40 percent. B) 8 percent. C) 10 percent. D) 5 percent.

D) 5 percent.

The ________ interest rate more accurately reflects the true cost of borrowing. A) nominal B) market C) discount D) real

D) real

When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________. A) market; lend; borrow B) real; lend; borrow C) nominal; lend; borrow D) real; borrow; lend

D) real; borrow; lend

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 A) -5 percent. B) -2 percent. C) 2 percent. D) 12 percent.

A) -5 percent.

If a $5,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is A) 0 percent. B) 5 percent. C) 10 percent. D) 20 percent.

A) 0 percent.

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year? A) 25 percent B) -5 percent C) 10 percent D) 5 percent

A) 25 percent

A $1,000 face value coupon bond with a $60 coupon payment every year has a coupon rate of A) 6 percent. B) 5 percent. C) 10 percent. D) .6 percent.

A) 6 percent.

A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of A) 8 percent. B) 10 percent. C) 12 percent. D) 14 percent.

A) 8 percent.

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

A) Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise.

An equal increase in all bond interest rates A) decreases long-term bond returns more than short-term bond returns. B) has no effect on the returns to bonds. C) increases the return to all bond maturities by an equal amount. D) decreases the return to all bond maturities by an equal amount.

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

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) high. B) irrelevant. C) low. D) negative.

A) high.

All bonds that will not be held to maturity have interest rate risk which occurs because of the change in the price of the bond as a result of A) interest-rate changes. B) default of the borrower C) changes in the coupon rate. D) changes in the asset's maturity date

A) interest-rate changes.

In which of the following situations would you prefer to be the borrower? A) The interest rate is 13 percent and the expected inflation rate is 15 percent. B) The interest rate is 25 percent and the expected inflation rate is 50 percent. C) The interest rate is 9 percent and the expected inflation rate is 7 percent. D) The interest rate is 4 percent and the expected inflation rate is 1 percent.

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

The yield to maturity on a 10-year treasury note (with face value = $100 and annual coupon rate = 2.625%) is 3.37%. The market price of this bond must be ________ $100. A) equal to B) less than C) greater than D) close to

B) less than

A discount bond A) pays the face value at maturity plus any capital gain. B) pays the bondholder the face value at maturity. C) pays the bondholder a fixed amount every period and the face value at maturity. D) pays all interest and the face value at maturity.

B) pays the bondholder the face value at maturity.

Assuming the same coupon rate and maturity length, the difference between the yield on a Treasury Inflation Indexed Security and the yield on a nonindexed Treasury security provides insight into A) the nominal exchange rate. B) the expected inflation rate. C) the nominal interest rate. D) the real interest rate.

B) the expected inflation rate.

Since the early 1950s, nominal interest rates and real interest rates in the United States A) always increase proportionally. B) are never moving in the same direction. C) do not always move in the same direction. D) are of no interest to decision makers.

C) do not always move in the same direction.

Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant. A) short-term; long-term B) long-term; long-term C) long-term; short-term D) short-term; short-term

C) long-term; short-term

The interest rate on Treasury Inflation Indexed Securities can be roughly interpreted as A) the nominal interest rate. B) the rate of deflation. C) the real interest rate. D) the rate of inflation.

C) the real interest rate.

20) The yield to maturity on a 10-year coupon bond (with face value = $1,000 and annual coupon rate = 3.25%) is 2.42%. This implies: I. the bond is traded on the market for $1000 II. the buyer's return for holding the bond for 10 years will be 3.25% III. the buyer's return for holding the bond for 10 years will be 2.42% IV. the buyer of the bond will have a return of 2.42% if she sells the bond next year V. the buyer of the bond will have a return of 3.25% if she sells the bond next year A) II and IV. B) II only. C) I and IV. D) III and IV. E) III only.

E) III only.