Question 1

What is the return on a 5 percent coupon bond that initially sells for $1000 and sells for $1200 next year?

Accepted Answer

A)  5 percent 
B)  10 percent 
C)  -5 percent 
D)  25 percent 
A)  5 percent 
B)  10 percent 
C)  -5 percent 
D)  25 percent

Question 2

Bonds whose term-to-maturity is longer than the holding period are subject to ________.

Accepted Answer

A)  interest rate risk 
B)  exchange-rate risk 
C)  inflation 
D)  deflation 
A)  interest rate risk 
B)  exchange-rate risk 
C)  inflation 
D)  deflation

Question 3

When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.

Accepted Answer

A)  nominal; lend; borrow 
B)  real; lend; borrow 
C)  real; borrow; lend 
D)  market; lend; borrow 
A)  nominal; lend; borrow 
B)  real; lend; borrow 
C)  real; borrow; lend 
D)  market; lend; borrow

Question 4

If the interest rate on a Real Return Bond is 2 percent and the interest rate on a Canada bond of similar maturity is 5 percent then the expected rate of inflation is equal to ________.

Accepted Answer

A)  -3 percent 
B)  7 percent 
C)  3 percent 
D)  2 percent 
A)  -3 percent 
B)  7 percent 
C)  3 percent 
D)  2 percent

Question 5

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 you are holding?

Accepted Answer

A)  5 percent 
B)  10 percent 
C)  15 percent 
D)  20 percent 
A)  5 percent 
B)  10 percent 
C)  15 percent 
D)  20 percent

Question 6

To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of ________.

Accepted Answer

A)  face value 
B)  par value 
C)  deflation 
D)  discounting the future 
A)  face value 
B)  par value 
C)  deflation 
D)  discounting the future

Question 7

Which of the following is true for a coupon bond?

Accepted Answer

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 positively related. 
C)  The yield to maturity is greater than the coupon rate when the bond price is above the par value. 
D)  The yield is less than the coupon rate when the bond price is below the par value. 
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 positively related. 
C)  The yield to maturity is greater than the coupon rate when the bond price is above the par value. 
D)  The yield is less than the coupon rate when the bond price is below the par value.

Question 8

A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a ________.

Accepted Answer

A)  simple loan 
B)  fixed-payment loan 
C)  coupon bond 
D)  discount bond 
A)  simple loan 
B)  fixed-payment loan 
C)  coupon bond 
D)  discount bond

Question 9

Which of the following is true of fixed payment loans?

Accepted Answer

A)  The borrower repays both the principal and interest at the maturity date. 
B)  Installment loans and mortgages are frequently of the fixed payment type. 
C)  The borrower pays interest periodically and the principal at the maturity date. 
D)  Commercial loans to businesses are often of this type. 
A)  The borrower repays both the principal and interest at the maturity date. 
B)  Installment loans and mortgages are frequently of the fixed payment type. 
C)  The borrower pays interest periodically and the principal at the maturity date. 
D)  Commercial loans to businesses are often of this type.

Question 10

Duration is ________.

Accepted Answer

A)  an asset's term to maturity 
B)  the time until the next interest payment for a coupon bond 
C)  the average lifetime of a debt security's stream of payments 
D)  the time between interest payments for a coupon bond 
A)  an asset's term to maturity 
B)  the time until the next interest payment for a coupon bond 
C)  the average lifetime of a debt security's stream of payments 
D)  the time between interest payments for a coupon bond

Question 11

If a $5000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is ________.

Accepted Answer

A)  $650 
B)  $1300 
C)  $130 
D)  $13 
A)  $650 
B)  $1300 
C)  $130 
D)  $13

Question 12

In which of the following situations would you prefer to be the borrower?

Accepted Answer

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 is 13 percent and the expected inflation rate is 15 percent. 
D)  The interest rate is 25 percent and the expected inflation rate is 50 percent. 
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 is 13 percent and the expected inflation rate is 15 percent. 
D)  The interest rate is 25 percent and the expected inflation rate is 50 percent.

Question 13

There is ________ for any bond whose time to maturity matches the holding period.

Accepted Answer

A)  no interest-rate risk 
B)  a large interest-rate risk 
C)  rate-of-return risk 
D)  yield-to-maturity risk 
A)  no interest-rate risk 
B)  a large interest-rate risk 
C)  rate-of-return risk 
D)  yield-to-maturity risk

Question 14

If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200?

Accepted Answer

A)  9 percent 
B)  10 percent 
C)  11 percent 
D)  12 percent 
A)  9 percent 
B)  10 percent 
C)  11 percent 
D)  12 percent

Question 15

If a financial institution has 50 percent of its portfolio in a bond with a five-year duration and 50 percent of its portfolio in a bond with a seven-year duration, what is the duration of the portfolio?

Accepted Answer

A)  12 years 
B)  7 years 
C)  6 years 
D)  5 years 
A)  12 years 
B)  7 years 
C)  6 years 
D)  5 years

Question 16

If a $10000 face-value discount bond maturing in one year is selling for $5000, then its yield to maturity is ________.

Accepted Answer

A)  5 percent 
B)  10 percent 
C)  50 percent 
D)  100 percent 
A)  5 percent 
B)  10 percent 
C)  50 percent 
D)  100 percent

Question 17

With an interest rate of 6 percent, the present value of $100 next year is approximately ________.

Accepted Answer

A)  $106 
B)  $100 
C)  $94 
D)  $92 
A)  $106 
B)  $100 
C)  $94 
D)  $92

Question 18

Explain why the current bond prices and interest rates are negatively related.

Accepted Answer

There are two ways to show why current b

Question 19

The riskiness of an asset's returns due to changes in interest rates is ________.

Accepted Answer

A)  exchange-rate risk 
B)  price risk 
C)  asset risk 
D)  interest-rate risk 
A)  exchange-rate risk 
B)  price risk 
C)  asset risk 
D)  interest-rate risk

Question 20

The interest rate on a consol equals the ________.

Accepted Answer

A)  price times the coupon payment 
B)  price divided by the coupon payment 
C)  coupon payment plus the price 
D)  coupon payment divided by the price 
A)  price times the coupon payment 
B)  price divided by the coupon payment 
C)  coupon payment plus the price 
D)  coupon payment divided by the price

Exam 4: The Meaning of Interest Rates

What is the return on a 5 percent coupon bond that initially sells for $1000 and sells for $1200 next year?

Bonds whose term-to-maturity is longer than the holding period are subject to ________.

When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.

If the interest rate on a Real Return Bond is 2 percent and the interest rate on a Canada bond of similar maturity is 5 percent then the expected rate of inflation is equal to ________.

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 you are holding?

To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of ________.

Which of the following is true for a coupon bond?

A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a ________.

Which of the following is true of fixed payment loans?

Duration is ________.

If a $5000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is ________.

In which of the following situations would you prefer to be the borrower?

There is ________ for any bond whose time to maturity matches the holding period.

If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200?

If a financial institution has 50 percent of its portfolio in a bond with a five-year duration and 50 percent of its portfolio in a bond with a seven-year duration, what is the duration of the portfolio?

If a $10000 face-value discount bond maturing in one year is selling for $5000, then its yield to maturity is ________.

With an interest rate of 6 percent, the present value of $100 next year is approximately ________.

Explain why the current bond prices and interest rates are negatively related.

The riskiness of an asset's returns due to changes in interest rates is ________.

The interest rate on a consol equals the ________.

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Behaviour of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory, Inflation, and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

Filters

When the interest rate is low, there are greater incentives to and fewer incentives to .