1) (I) A simple loan requires the borrower to repay the principal at the maturity date along with an interest payment.
(II) A discount bond is bought at a price below its face value, and the face value is repaid at the maturity date.
A) (I) is true, (II)
C
2) Which of the following are true of coupon bonds?
A) The owner of a coupon bond receives a fixed interest payment every year until the maturity date, when the face or par value is repaid.
B) U.S. Treasury bonds and notes are examples of coupon bonds.
C)
D
3) Which of the following are generally true of all bonds?
A) The longer a bond's maturity, the lower is the rate of return that occurs as a result of the increase in the interest rate.
B) Even though a bond has a substantial initial interest rate, its re
D
4) (I) A discount bond requires the borrower to repay the principal at the maturity date plus an interest payment.
(II) A coupon bond pays the lender a fixed interest payment every year until the maturity date, when a specified final amount (face or par v
B
5) Dollars received in the future are worth ________ than dollars received today. The process of calculating what dollars received in the future are worth today is called ________.
A) more; discounting
B) less; discounting
C) more; inflating
D) less; infl
B
6) The interest rate that equates the present value of the cash flow received from a debt instrument with its market price today is the
A) simple interest rate.
B) discount rate.
C) yield to maturity.
D) real interest rate.
C
7) The interest rate that financial economists consider to be the most accurate measure is the
A) current yield.
B) yield to maturity.
C) yield on a discount basis.
D) coupon rate.
B
8) Financial economists consider the ________ to be the most accurate measure of interest rates.
A) simple interest rate
B) discount rate
C) yield to maturity
D) real interest rate
C
9) For simple loans, the simple interest rate is ________ the yield to maturity.
A) greater than
B) less than
C) equal to
D) not comparable to
C
10) The yield to maturity of a one-year, simple loan of $500 that requires an interest payment of $40 is
A) 5 percent.
B) 8 percent.
C) 12 percent.
D) 12.5 percent.
B
11) A $1,000, 8 percent coupon bond that sells for $1,000 has a yield to maturity of
A) 8 percent.
B) 10 percent.
C) 12 percent.
D) 14 percent.
A
12) Which of the following $1,000 face value securities has the highest yield to maturity?
A) A 5 percent coupon bond selling for $1,000
B) A 10 percent coupon bond selling for $1,000
C) A 12 percent coupon bond selling for $1,000
D) A 12 percent coupon b
C
13) Which of the following $1,000 face value securities has the highest yield to maturity?
A) A 5 percent coupon bond selling for $1,000
B) A 10 percent coupon bond selling for $1,000
C) A 15 percent coupon bond selling for $1,000
D) A 15 percent coupon b
D
14) Which of the following are true for a coupon bond?
A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.
B) The price of a coupon bond and the yield to maturity are negatively related.
C) The yield to matur
D
15) Which of the following are true for a coupon bond?
A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.
B) The price of a coupon bond and the yield to maturity are negatively related.
C) The yield to matur
E
16) A consol bond is a bond that
A) pays interest annually and its face value at maturity.
B) pays interest in perpetuity and never matures.
C) pays no interest but pays its face value at maturity.
D) rises in value as its yield to maturity rises.
B
17) The yield to maturity on a consol bond that pays $100 yearly and sells for $500 is
A) 5 percent.
B) 10 percent.
C) 12.5 percent.
D) 20 percent.
E) 25 percent.
D
18) A frequently used approximation for the yield to maturity on a long-term bond is the
A) coupon rate.
B) current yield.
C) cash flow interest rate.
D) real interest rate.
B
19) The current yield on a coupon bond is the bond's ________ divided by its ________.
A) annual coupon payment; price
B) annual coupon payment; face value
C) annual return; price
D) annual return; face value
A
20) When a bond's price falls, its yield to maturity ________ and its current yield ________.
A) falls; falls
B) rises; rises
C) falls; rises
D) rises; falls
B
21) If a $1,000 face value discount bond maturing in one year is selling for $800, then its yield to maturity is
A) 10 percent.
B) 20 percent.
C) 25 percent.
D) 40 percent.
C
22) The Fisher equation states that
A) the nominal interest rate equals the real interest rate plus the expected rate of inflation.
B) the real interest rate equals the nominal interest rate less the expected rate of inflation.
C) the nominal interest rat
D
23) If you expect the inflation rate to be 5 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) -12 percent.
B) -2 percent.
C) 2 percent.
D) 12 percent.
C
24) The nominal interest rate minus the expected rate of inflation
A) defines the real interest rate.
B) is a better measure of the incentives to borrow and lend than the nominal interest rate.
C) is a more accurate indicator of the tightness of credit ma
D
25) In which of the following situations would you prefer to be making a loan?
A) The interest rate is 9 percent and the expected inflation rate is 7 percent.
B) The interest rate is 4 percent and the expected inflation rate is 1 percent.
C) The interest
B
26) In which of the following situations would you prefer to be borrowing?
A) The interest rate is 9 percent and the expected inflation rate is 7 percent.
B) The interest rate is 4 percent and the expected inflation rate is 1 percent.
C) The interest rate
D
27) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 one year later?
A) 5 percent
B) 10 percent
C) -5 percent
D) -10 percent
E) None of the above
C
28) The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100 one year later is
A) 5 percent.
B) 10 percent.
C) 14 percent.
D) 15 percent.
D
29) Which of the following are generally true of all bonds?
A) The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period.
B) A rise in interest rates is associated with a fall in bond p
D
30) Which of the following are true concerning the distinction between interest rates and return?
A) The rate of return on a bond will not necessarily equal the interest rate on that bond.
B) The return can be expressed as the sum of the current yield and
E
31) If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding?
A) A bond with one year to maturity
B) A bond with five years to maturity
C) A bond with ten years to maturity
D
A
32) 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
C
33) (I) Prices of longer-maturity bonds respond more dramatically to changes in interest rates.
(II) Prices and returns for long-term bonds are less volatile than those for short-term bonds.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both
A
34) The riskiness of an asset's return that results from interest rate changes is called
A) interest-rate risk.
B) coupon-rate risk.
C) reinvestment risk.
D) yield-to-maturity risk.
A
35) Reinvestment risk is the risk that
A) a bond's value may fall in the future.
B) a bond's future coupon payments may have to be invested at a rate lower than the bond's yield to maturity.
C) an investor's holding period will be short and equal in lengt
B
36) (I) The weighted average lifetime of a debt security's stream of payments is called duration.
(II) The duration of a portfolio is the weighted average of the durations of the individual securities, with the weights reflecting the proportion of the por
C
37) The duration of a ten-year, 10 percent coupon bond when the interest rate is 10 percent is 6.76 years. What happens to the price of the bond if the interest rate falls to 8 percent?
A) It rises 20 percent.
B) It rises 12.3 percent.
C) It falls 20 perc
B
38) The change in the bond's price relative to the initial purchase price is
A) the current yield.
B) coupon payment.
C) yield to maturity.
D) rate of capital gain.
D
39) The return on a bond is equal to the yield to maturity when
A) the holding period is longer than the maturity of the bond.
B) the maturity of the bond is longer than the holding period.
C) the holding period and the maturity of the bond are identical.
C
40) Bonds whose term to maturity is shorter than the holding period are also subject to
A) default.
B) reinvestment risk.
C) both of the above.
D) none of the above.
B
41) A ________ is a type of loan that has the same cash flow payment every year throughout the life of the loan.
A) discount loan
B) simple loan
C) fixed-payment loan
D) interest-free loan
C