Quiz 2 MBFM

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

(𝑃 = 𝐶𝑖 = 8000 = 400𝑖 => 𝑖 = 4008000 = 5%) A) 5 percent.

If a security pays $110 next year and $121 the year after that, what is its yield to maturityif it sells for $100? A) 9 percent B) 10 percent C) 11 percent D) 12 percent

100𝑥(1 + 𝑟) = 110 => 𝑟 = .10 B) 10 percent

In the figure above, a factor that could cause the demand for bonds to decrease (shift to the left) is A) an increase in the expected return on bonds relative to other assets. B) a decrease in the expected return on bonds relative to other assets. C) an increase in wealth. D) a reduction in the riskiness of bonds relative to other assets.

B) a decrease in the expected return on bonds relative to other assets.

If the expected path of one-year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's interest rate on the five-year bond is A) 4 percent. B) 5 percent. C) 6 percent. D) 7 percent

C) 6 percent.

In the figure above, one factor NOT responsible for the decline in the demand for money is A) a decline the price level. B) a decline in income. C) an increase in income. D) a decline in the expected inflation rate

C) an increase in income

According to the segmented markets theory of the term structure A) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds. B) buyers of bonds do not prefer bonds of one maturity over another. C) interest rates on bonds of different maturities do not move together over time. D) buyers require an additional incentive to hold long-term bonds.

C) interest rates on bonds of different maturities do not move together over time.

For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is A) $10,030. B) $10,300 .C) $13,000. D) $13,310

D) $13,310

In the figure above, a factor that could cause the supply of bonds to shift to the right is A) a decrease in government budget deficits. B) a decrease in expected inflation. C) a recession. D) a business cycle expansion.

D) a business cycle expansion.

The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is A) interest rate risk. B) inflation risk. C) liquidity risk. D) default risk.

D) default risk.

If the probability of a bond default increases because corporations begin to suffer large losses, then the default risk on corporate bonds will ________ and the expected return on these bonds will ________, everything else held constant. A) decrease; increase B) decrease; decrease C) increase; increase D) increase; decrease

D) increase; decrease

If the interest rate on a bond is below the equilibrium interest rate, there is an excess ________ of bonds and the bond price will ________. A) demand; rise B) demand; fall C) supply; rise D) supply; fall

D) supply; fall

If yield curves, on average, were flat, what would this say about the liquidity (term) premium is in the term structure? Would you be more or less willing to accept the expectations theory?

If yield curves on average were flat, this would suggest that the risk premium on long-term relative to short-term bonds would equal zero and we would be more willing to accept the expectations hypothesis.

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.

PV=C/((1+r)^2)=>20,000=22,050/((1+r)^2)=>22,050/20,000=(1+r)^2=>r=5% A) 5 percent.

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

i=(F-P)/P=(1000-600)/600=400/600≈.66 A) a 5 percent coupon bond with a price of $600

In the market for money, when the price level falls, the ________ curve for nominal money ________, and interest rates ________, everything else held constant. A) demand; decreases; fall B) demand; increases; rise C) supply; increases; rise D) supply; decreases; fall

A) demand; decreases; fall

According to the liquidity premium theory of the term structure A) because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time. B) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. C) because of the positive term premium, the yield curve will not be observed to be downward sloping. D) the interest rate for each maturity bond is determined by supply and demand for that maturity bond.

B) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium.