Question 1

The total rate of return is equal to

Accepted Answer

A) the coupon rate plus the rate of capital gains. 
B) the coupon rate plus the current yield. 
C) the current yield plus the rate of capital gains. 
D) the coupon rate multiplied by the rate of capital gains. 
A) the coupon rate plus the rate of capital gains. 
B) the coupon rate plus the current yield. 
C) the current yield plus the rate of capital gains. 
D) the coupon rate multiplied by the rate of capital gains.

Question 2

A coupon bond has a coupon of $75, a par value of $1000, and a market price of $900. Its current yield equals

Accepted Answer

A) 7.50% 
B) 8.33% 
C) its yield to maturity. 
D) Not enough information has been provided to calculate the current yield for this bond. 
A) 7.50% 
B) 8.33% 
C) its yield to maturity. 
D) Not enough information has been provided to calculate the current yield for this bond.

Question 3

The key difficulty in answering the question: "Would you be better off financing your new home with a 15-year mortgage at 9% or by borrowing for five years at 8% and refinancing thereafter?" is that

Accepted Answer

A) housing prices are very erratic. 
B) the tax deductibility of mortgage interest payments has changed over time. 
C) dollars paid in different periods are not in the same units. 
D) 15-year mortgages are fixed-payment loans while 5-year mortgages are simple loans. 
A) housing prices are very erratic. 
B) the tax deductibility of mortgage interest payments has changed over time. 
C) dollars paid in different periods are not in the same units. 
D) 15-year mortgages are fixed-payment loans while 5-year mortgages are simple loans.

Question 4

Which of the following is fixed on a coupon bond?

Accepted Answer

A) Coupon rate 
B) Current yield 
C) Market price 
D) Yield to maturity 
A) Coupon rate 
B) Current yield 
C) Market price 
D) Yield to maturity

Question 5

Investors who attempt to reduce their risk of fluctuating market interest rates by holding only short-term instruments

Accepted Answer

A) will succeed as long as the short-term instruments are Treasury bills. 
B) will fail because short-term instruments are affected more by fluctuations in market interest rates than are long-term instruments. 
C) will expose themselves to reinvestment risk. 
D) will incur large capital gains. 
A) will succeed as long as the short-term instruments are Treasury bills. 
B) will fail because short-term instruments are affected more by fluctuations in market interest rates than are long-term instruments. 
C) will expose themselves to reinvestment risk. 
D) will incur large capital gains.

Question 6

For a specific change in the yield to maturity

Accepted Answer

A) the shorter the time until a bond matures, the greater will be the change in its price. 
B) the longer the time until a bond matures, the greater will be the change in its price. 
C) the longer the time until a bond matures, the greater will be the change in its par value. 
D) the shorter the time until a bond matures, the greater will be the change in its coupon rate. 
A) the shorter the time until a bond matures, the greater will be the change in its price. 
B) the longer the time until a bond matures, the greater will be the change in its price. 
C) the longer the time until a bond matures, the greater will be the change in its par value. 
D) the shorter the time until a bond matures, the greater will be the change in its coupon rate.

Question 7

Compounding refers to

Accepted Answer

A) the calculation of interest rates after the compounding effect of taxes has been allowed for. 
B) the paying back of both interest and principal during the life of a fixed payment loan. 
C) the process of earning interest on both the interest and the principal of an investment. 
D) the increased value of an investment that arises from the payment of periodic interest. 
A) the calculation of interest rates after the compounding effect of taxes has been allowed for. 
B) the paying back of both interest and principal during the life of a fixed payment loan. 
C) the process of earning interest on both the interest and the principal of an investment. 
D) the increased value of an investment that arises from the payment of periodic interest.

Question 8

If the current price of a bond is equal to its face value,

Accepted Answer

A) there is no capital gain or loss from holding the bond until maturity. 
B) the yield to maturity must be greater than the current yield. 
C) the current yield must be greater than the coupon rate. 
D) the coupon rate must be greater than the yield to maturity. 
A) there is no capital gain or loss from holding the bond until maturity. 
B) the yield to maturity must be greater than the current yield. 
C) the current yield must be greater than the coupon rate. 
D) the coupon rate must be greater than the yield to maturity.

Question 9

If an investor is certain that market interest rates will decline in the future, which of the following will she be most likely to purchase?

Accepted Answer

A) A six-month Treasury bill 
B) A two-year Treasury note 
C) A thirty-year Treasury bond 
D) A fifty-year Tennessee Valley Authority bond 
A) A six-month Treasury bill 
B) A two-year Treasury note 
C) A thirty-year Treasury bond 
D) A fifty-year Tennessee Valley Authority bond

Question 10

If the interest rate is 8%, what would you expect to pay for a discount bond paying $10,000 in ten years?

Accepted Answer

A) $4632 
B) $9259 
C) $10,000 
D) $21,589 
A) $4632 
B) $9259 
C) $10,000 
D) $21,589

Question 11

The bid price for a bond is

Accepted Answer

A) the minimum price that you are allowed to bid for a bond that is being auctioned by the government. 
B) the maximum price that you are allowed to bid for a bond that is being auctioned by the government. 
C) the price that you will receive from a securities dealer if you sell the bond. 
D) the price that you must pay a securities dealer to purchase a bond. 
A) the minimum price that you are allowed to bid for a bond that is being auctioned by the government. 
B) the maximum price that you are allowed to bid for a bond that is being auctioned by the government. 
C) the price that you will receive from a securities dealer if you sell the bond. 
D) the price that you must pay a securities dealer to purchase a bond.

Question 12

If the current price of a bond is less than its face value,

Accepted Answer

A) an investor will receive a capital gain by holding the bond until maturity. 
B) the yield to maturity must be less than the current yield. 
C) the coupon rate must be greater than the current yield. 
D) the coupon rate must be equal to the current yield. 
A) an investor will receive a capital gain by holding the bond until maturity. 
B) the yield to maturity must be less than the current yield. 
C) the coupon rate must be greater than the current yield. 
D) the coupon rate must be equal to the current yield.

Question 13

The current yield is equal to

Accepted Answer

A) the coupon divided by the market price of the bond. 
B) the yield to maturity, if the bond is a coupon bond. 
C) the coupon divided by the par value of the bond. 
D) the market price of the bond divided by its par value. 
A) the coupon divided by the market price of the bond. 
B) the yield to maturity, if the bond is a coupon bond. 
C) the coupon divided by the par value of the bond. 
D) the market price of the bond divided by its par value.

Question 14

A one-year discount bond with a par value of $5000 sold today, at issuance, for $4750 has a yield to maturity of

Accepted Answer

A) 5.00%. 
B) 5.26%. 
C) 2.50%. 
D) 9.75%. 
A) 5.00%. 
B) 5.26%. 
C) 2.50%. 
D) 9.75%.

Question 15

If the current price of a bond is greater than its face value

Accepted Answer

A) an investor will receive a capital gain by holding the bond until maturity. 
B) the yield to maturity must be less than the coupon rate. 
C) the coupon rate must be less than the current yield. 
D) the coupon rate must be equal to the current yield. 
A) an investor will receive a capital gain by holding the bond until maturity. 
B) the yield to maturity must be less than the coupon rate. 
C) the coupon rate must be less than the current yield. 
D) the coupon rate must be equal to the current yield.

Question 16

With respect to U.S. Treasury bills,

Accepted Answer

A) the bid price is always greater than the asked price. 
B) the asked price is always greater than the bid price. 
C) the bid price is only greater than the asked price if investors expect interest rates to decline in the future. 
D) the asked price is only greater than the bid price if investors expect interest rates to decline in the future. 
A) the bid price is always greater than the asked price. 
B) the asked price is always greater than the bid price. 
C) the bid price is only greater than the asked price if investors expect interest rates to decline in the future. 
D) the asked price is only greater than the bid price if investors expect interest rates to decline in the future.

Question 17

A discount bond involves

Accepted Answer

A) interest payments from the borrower to the lender periodically during the life of the loan. 
B) payment by the borrower to the lender of the face value of the loan at maturity. 
C) no payment of principal by the borrower to the lender. 
D) payment of interest by the borrower to the lender every six months during the life of the loan. 
A) interest payments from the borrower to the lender periodically during the life of the loan. 
B) payment by the borrower to the lender of the face value of the loan at maturity. 
C) no payment of principal by the borrower to the lender. 
D) payment of interest by the borrower to the lender every six months during the life of the loan.

Question 18

A coupon bond involves

Accepted Answer

A) interest payments from the borrower to the lender periodically during the life of the loan and payment by the borrower to the lender of the face value of the loan at maturity. 
B) interest payments from the borrower to the lender periodically during the life of the loan, but no payment by the borrower to the lender of the face value of the loan at maturity. 
C) periodic payments by the borrower to the lender that include both principal and interest. 
D) periodic payments by the borrower to the lender that include principal, but not interest. 
A) interest payments from the borrower to the lender periodically during the life of the loan and payment by the borrower to the lender of the face value of the loan at maturity. 
B) interest payments from the borrower to the lender periodically during the life of the loan, but no payment by the borrower to the lender of the face value of the loan at maturity. 
C) periodic payments by the borrower to the lender that include both principal and interest. 
D) periodic payments by the borrower to the lender that include principal, but not interest.

Question 19

The expected real interest rate equals

Accepted Answer

A) the nominal interest rate minus the tax rate. 
B) the nominal interest rate minus the expected rate of inflation. 
C) the nominal interest rate plus the expected rate of inflation. 
D) the yield to maturity on a coupon bond held to maturity. 
A) the nominal interest rate minus the tax rate. 
B) the nominal interest rate minus the expected rate of inflation. 
C) the nominal interest rate plus the expected rate of inflation. 
D) the yield to maturity on a coupon bond held to maturity.

Question 20

The total rate of return is equal to the

Accepted Answer

A) sum of the coupon rate and the current yield. 
B) yield to maturity. 
C) sum of the current yield and the actual rate of capital gain. 
D) sum of the current yield and the expected rate of capital gain. 
A) sum of the coupon rate and the current yield. 
B) yield to maturity. 
C) sum of the current yield and the actual rate of capital gain. 
D) sum of the current yield and the expected rate of capital gain.

Exam 4: Interest Rates and Rates of Return

The total rate of return is equal to

A coupon bond has a coupon of $75, a par value of $1000, and a market price of $900. Its current yield equals

The key difficulty in answering the question: "Would you be better off financing your new home with a 15-year mortgage at 9% or by borrowing for five years at 8% and refinancing thereafter?" is that

Which of the following is fixed on a coupon bond?

Investors who attempt to reduce their risk of fluctuating market interest rates by holding only short-term instruments

For a specific change in the yield to maturity

Compounding refers to

If the current price of a bond is equal to its face value,

If an investor is certain that market interest rates will decline in the future, which of the following will she be most likely to purchase?

If the interest rate is 8%, what would you expect to pay for a discount bond paying $10,000 in ten years?

The bid price for a bond is

If the current price of a bond is less than its face value,

The current yield is equal to

A one-year discount bond with a par value of $5000 sold today, at issuance, for $4750 has a yield to maturity of

If the current price of a bond is greater than its face value

With respect to U.S. Treasury bills,

A discount bond involves

A coupon bond involves

The expected real interest rate equals

The total rate of return is equal to the

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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