Question 1

For simple loans, the yield to maturity

Accepted Answer

A) is always less than the specified simple interest rate. 
B) is always greater than the specified simple interest rate. 
C) is always equal to the specified simple interest rate. 
D) may be less than, greater than, or equal to the specified simple interest rate, depending on the maturity of the loan. 
A) is always less than the specified simple interest rate. 
B) is always greater than the specified simple interest rate. 
C) is always equal to the specified simple interest rate. 
D) may be less than, greater than, or equal to the specified simple interest rate, depending on the maturity of the loan.

Question 2

Which of the following is NOT a discount bond?

Accepted Answer

A) A U.S. savings bond 
B) A U.S. Treasury bill 
C) A U.S. Treasury note 
D) A zero-coupon bond 
A) A U.S. savings bond 
B) A U.S. Treasury bill 
C) A U.S. Treasury note 
D) A zero-coupon bond

Question 3

If, while you are holding a coupon bond, its market price falls, you can be sure that

Accepted Answer

A) the coupon payment you are receiving must have been reduced. 
B) the interest rate on other similar bonds must have fallen. 
C) the interest rate on other similar bonds must have risen. 
D) the par value of the bond must have declined. 
A) the coupon payment you are receiving must have been reduced. 
B) the interest rate on other similar bonds must have fallen. 
C) the interest rate on other similar bonds must have risen. 
D) the par value of the bond must have declined.

Question 4

Which of the following is a fixed payment loan?

Accepted Answer

A) A home mortgage 
B) A U.S. Treasury bill 
C) A U.S. Treasury note 
D) A zero-coupon bond 
A) A home mortgage 
B) A U.S. Treasury bill 
C) A U.S. Treasury note 
D) A zero-coupon bond

Question 5

Which of the following is the correct expression for the expected real interest rate?

Accepted Answer

A) r = i +   
B) r = i -   
C) r = i/   
D) r =   
A) r = i +   
B) r = i -   
C) r = i/   
D) r =

Question 6

The total payment to a lender for a simple loan is

Accepted Answer

A) P. 
B) P + i. 
C) i(1 + i). 
D) P(1 + i). 
A) P. 
B) P + i. 
C) i(1 + i). 
D) P(1 + i).

Question 7

Suppose Matt's New Cars issues a discount bond with a face value of $10,000 payable in one year with an interest rate of 4%. How much will Acme receive for the bond?

Accepted Answer

A) $9600 
B) $9615 
C) $14,000 
D) $10,400 
A) $9600 
B) $9615 
C) $14,000 
D) $10,400

Question 8

When a bond is listed as having two maturity dates,

Accepted Answer

A) the bond is callable and may be redeemed by the issuer on the first maturity date. 
B) half of the par value of the bond will be paid on the first date and the other half on the second date. 
C) interest payments on the bond begin on the first date and end on the second date. 
D) the purchaser may insist on being paid the par value of the bond on the first maturity date. 
A) the bond is callable and may be redeemed by the issuer on the first maturity date. 
B) half of the par value of the bond will be paid on the first date and the other half on the second date. 
C) interest payments on the bond begin on the first date and end on the second date. 
D) the purchaser may insist on being paid the par value of the bond on the first maturity date.

Question 9

Suppose that the inflation rate is currently 8% and that most investors believe that inflation will remain at this level indefinitely. You are convinced, however, that the inflation will decline to 5% or less. Should you buy a 10-year Treasury bond or a 10-year TIPS?

Accepted Answer

You should buy the 10-year Treasury bond

Question 10

If, while you are holding a coupon bond, the interest rates on other similar bonds fall, you can be sure that

Accepted Answer

A) the coupon payments on your bond will fall. 
B) the market price of your bond will rise. 
C) the market price of your bond will fall. 
D) the par value of your bond will rise. 
A) the coupon payments on your bond will fall. 
B) the market price of your bond will rise. 
C) the market price of your bond will fall. 
D) the par value of your bond will rise.

Question 11

Simple loans and discount bonds differ from coupon bonds and fixed-payment loans in that

Accepted Answer

A) interest on simple loans and discount bonds is taxable, while interest on coupon bonds and fixed-payment loans is not. 
B) interest on coupon bonds and fixed-payment loans is taxable, while interest on simple loans and discount bonds is not. 
C) interest rates on simple loans and discount bonds are generally higher than interest rates on comparable coupon bonds and fixed-payment loans. 
D) interest on simple loans and discount bonds is paid in a single payment, while issuers of coupon bonds and fixed-payment loans make multiple payments of interest and principal. 
A) interest on simple loans and discount bonds is taxable, while interest on coupon bonds and fixed-payment loans is not. 
B) interest on coupon bonds and fixed-payment loans is taxable, while interest on simple loans and discount bonds is not. 
C) interest rates on simple loans and discount bonds are generally higher than interest rates on comparable coupon bonds and fixed-payment loans. 
D) interest on simple loans and discount bonds is paid in a single payment, while issuers of coupon bonds and fixed-payment loans make multiple payments of interest and principal.

Question 12

Nominal interest rates are higher than real interest rates as long as

Accepted Answer

A) expected inflation is positive. 
B) the government taxes interest income. 
C) inflation is expected to decline in the future. 
D) long-term interest rates are higher than short-term interest rates. 
A) expected inflation is positive. 
B) the government taxes interest income. 
C) inflation is expected to decline in the future. 
D) long-term interest rates are higher than short-term interest rates.

Question 13

If i is the yield to maturity of a fixed-payment loan,

Accepted Answer

A) the value of the loan today equals i times the sum of the values of all the loan payments. 
B) i equals the present value of the loan payments. 
C) the value of the loan today equals the sum of the values of the loan payments. 
D) the value of the loan today equals the present value of the loan payments discounted at rate i. 
A) the value of the loan today equals i times the sum of the values of all the loan payments. 
B) i equals the present value of the loan payments. 
C) the value of the loan today equals the sum of the values of the loan payments. 
D) the value of the loan today equals the present value of the loan payments discounted at rate i.

Question 14

Treasury STRIPS came into existence because

Accepted Answer

A) investors demanded a tax-free long-term bond. 
B) the Treasury wished to shift from long-term borrowing to short-term borrowing. 
C) high inflation rates led to an increased demand for high-yield bonds. 
D) investors demanded long-term discount bonds. 
A) investors demanded a tax-free long-term bond. 
B) the Treasury wished to shift from long-term borrowing to short-term borrowing. 
C) high inflation rates led to an increased demand for high-yield bonds. 
D) investors demanded long-term discount bonds.

Question 15

If the interest rate is 9%, what would you expect to pay for a discount bond paying $10,000 in two years?

Accepted Answer

A) $8417 
B) $8200 
C) $10,000 
D) $11,881 
A) $8417 
B) $8200 
C) $10,000 
D) $11,881

Question 16

When you place your funds in a savings account at a bank, those funds are

Accepted Answer

A) an asset to you and a liability to the bank. 
B) a liability to you and an asset to the bank. 
C) an asset both to you and the bank. 
D) a liability both to you and bank. 
A) an asset to you and a liability to the bank. 
B) a liability to you and an asset to the bank. 
C) an asset both to you and the bank. 
D) a liability both to you and bank.

Question 17

The yield to maturity is equal to

Accepted Answer

A) the interest rate at which the present value of an asset's returns is equal to its value today. 
B) the face value or par value of a coupon bond. 
C) any payments received from an asset at the date the asset matures. 
D) interest rate on the asset minus any taxes owed on the interest received. 
A) the interest rate at which the present value of an asset's returns is equal to its value today. 
B) the face value or par value of a coupon bond. 
C) any payments received from an asset at the date the asset matures. 
D) interest rate on the asset minus any taxes owed on the interest received.

Question 18

If investors are willing to pay more than the par value for a bond, you can be sure that

Accepted Answer

A) the tax rate on the bond must be very low. 
B) the coupon rate on the bond must be higher than on other similar bonds. 
C) the coupon rate on the bond must be lower than on other similar bonds. 
D) the par value for the bond must be very low. 
A) the tax rate on the bond must be very low. 
B) the coupon rate on the bond must be higher than on other similar bonds. 
C) the coupon rate on the bond must be lower than on other similar bonds. 
D) the par value for the bond must be very low.

Question 19

Which of the following statements about the total rate of return is NOT correct?

Accepted Answer

A) The total rate of return may be greater or less than the current yield. 
B) The total rate of return may be greater or less than the rate of capital gain. 
C) The total rate of return may never be negative. 
D) The total rate of return is greater than the coupon, holding everything else constant. 
A) The total rate of return may be greater or less than the current yield. 
B) The total rate of return may be greater or less than the rate of capital gain. 
C) The total rate of return may never be negative. 
D) The total rate of return is greater than the coupon, holding everything else constant.

Question 20

Debt instruments are also called

Accepted Answer

A) equities. 
B) credit market instruments. 
C) prospectuses. 
D) units of account. 
A) equities. 
B) credit market instruments. 
C) prospectuses. 
D) units of account.

Exam 4: Interest Rates and Rates of Return

For simple loans, the yield to maturity

Which of the following is NOT a discount bond?

If, while you are holding a coupon bond, its market price falls, you can be sure that

Which of the following is a fixed payment loan?

Which of the following is the correct expression for the expected real interest rate?

The total payment to a lender for a simple loan is

Suppose Matt's New Cars issues a discount bond with a face value of $10,000 payable in one year with an interest rate of 4%. How much will Acme receive for the bond?

When a bond is listed as having two maturity dates,

Suppose that the inflation rate is currently 8% and that most investors believe that inflation will remain at this level indefinitely. You are convinced, however, that the inflation will decline to 5% or less. Should you buy a 10-year Treasury bond or a 10-year TIPS?

If, while you are holding a coupon bond, the interest rates on other similar bonds fall, you can be sure that

Simple loans and discount bonds differ from coupon bonds and fixed-payment loans in that

Nominal interest rates are higher than real interest rates as long as

If i is the yield to maturity of a fixed-payment loan,

Treasury STRIPS came into existence because

If the interest rate is 9%, what would you expect to pay for a discount bond paying $10,000 in two years?

When you place your funds in a savings account at a bank, those funds are

The yield to maturity is equal to

If investors are willing to pay more than the par value for a bond, you can be sure that

Which of the following statements about the total rate of return is NOT correct?

Debt instruments are also called

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

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