Finance 3100 chapter 5 review questions
D
If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be: a- upward-sloping. b- flat. c- humped. d- downward-sloping. e- double-humped.
B
If your nominal rate of return is 8.40% and your real rate of return is 3.20%, what is the inflation rate? a- 4.89% b- 5.04% c- 5.18% d- 5.38%
A
You invest $15,000 today, compounded monthly, with an annual interest rate of 8.25%. What amount of interest will you earn in one year? a- $1,285.38 b- $1,295.38 c- $1,298.98 d- $1,723.23
A
A real rate of return is defined as a rate that has been adjusted for which one of the following? A. Inflation B. Interest rate risk C. Taxes D. Liquidity E. Default risk
A
Nominal interest rates are roughly speaking the sum of two major components. These components are ________. a- the real interest rate and expected inflation b- the risk-free rate and expected inflation c- the real interest rate and default premium d- the real interest rate and the T-bill rate
E
An upward-sloping term structure of interest rates indicates: a- the real rate of return is lower for short-term bonds than for long-term bonds. b- there is an indirect relationship between real interest rates and time to maturity. c- there is an indirect relationship between nominal interest rates and time to maturity. d- the nominal rate is declining as the real rate rises as the time to maturity increases. e- the nominal rate is increasing even though the real rate is constant as the time to maturity increases.
D
Atlanta Markets has a semi-annual bond outstanding with a 9 percent annual coupon rate and a 9.57 percent yield to maturity. If the current rate of inflation is 2.3 percent, what is the real rate of return on this bond? a- 6.62 percent b- 6.89 percent c- 7.02 percent d- 7.11 percent
C
Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk? a- Taxability risk premium b- Default risk premium c- Interest rate risk premium d- Real rate of return e- Bond premium
B
Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis. a- annual b- semi-annual c- quarterly d- monthly e- daily
C
The Fisher Effect tells us that the true nominal rate is actually made up of three components. These three components are ________. a- the nominal rate, the real rate, and the inflation rate b- the real rate, the inflation rate, and the product of the real rate and the nominal rate c- the real rate, the inflation rate, and the product of the real rate and inflation d- the real rate and the product of the real rate and inflation
C
The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities. a-face value b- market price c- maturity d- coupon rate e- issue date
E
The term structure of interest rates represents the relationship between which of the following? A. Nominal rates on risk-free and risky bonds B. Real rates on risk-free and risky bonds C. Nominal and real rates on default-free, pure discount bonds D. Market and coupon rates on default-free, pure discount bonds E. Nominal rates on Treasury Securities and time to maturity
C
Which of the below is NOT a major component of the term structure of interest rates? a- interest rate risk premium b- Inflation premium c- default risk premium d- real interest rate
D
Which of the following statements is TRUE if you increase your monthly payment above the required loan payment? a- The extra portion of the payment does not go to the principal. b- You can significantly increase the number of payments needed to pay off the loan. c- The extra portion of the payment increases the principal. d- You can significantly reduce the number of payments needed to pay off the loan.
D
Which of the statements below is FALSE? a- If you invest money for a short period and buy a six-month CD, you will not receive as high an interest rate as if you bought a CD with a longer maturity period. b- The difference in rates as the borrowing time or investment horizon increases is due to the maturity premium of the investments. c- The maturity premium represents that portion of the yield that compensates the investor for the additional waiting time or the lender for the additional time it takes to receive repayment in full. d- The longer the loan, the greater the risk of nonpayment and the lower the interest rate the lender demands.
C
Which of the statements below is FALSE? a- Reducing principal at a faster pace reduces the overall interest paid on a loan. b- The more frequent the payment, the lower the total interest expense over the life of the loan, even though the effective rate of the loan is higher. c- Reducing principal at a faster pace increases the overall interest paid on a loan. d- Monthly interest on a loan is equal to the beginning balance times the periodic interest rate.
A
Which one of the following bonds is most apt to have the smallest or no liquidity premium? a- Treasury bill b- Corporate bond issued by a new firm c- Municipal bond issued by the State of New York d- Municipal bond issued by a rural city in Alaska e- Corporate bond issued by General Motors (GM)
D
Which one of the following premiums is paid on a corporate bond due to its tax status? a- Interest rate risk premium b- Inflation premium c- Liquidity premium d- Taxability premium e- Default risk premium
C
Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value? a- Interest rate risk premium b- Inflation premium c- Liquidity premium d- Taxability premium e- Default risk premium
B
Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond? a- nominal rate b- real rate c- risk-free rate d- current rate
E
Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected? a- Interest rate risk premium b- Inflation premium c- Liquidity premium d- Taxability premium e- Default risk premium
C
You have a 30 year fixed rate mortgage at an annual rate of 6.5 percent. Knowing that your mortgage payments are monthly, compute the effective annual rate (EAR) that you're are being charged on your mortgage. a- 5.99 percent b- 6.5 percent c- 6.70 percent d- 7.08 percent
