Question 1

If the annual interest rate is 5% (.05), the price of a three-month Treasury bill would be:

Accepted Answer

A)  $98.79 
B)  $95.00 
C)  $98.75 
D)  $97.59 
A)  $98.79 
B)  $95.00 
C)  $98.75 
D)  $97.59 A

Question 2

One characteristic that distinguishes holding period return from the coupon rate, the current yield, and the yield to maturity is:

Accepted Answer

A)  all of the other returns can be calculated at the time the bond is purchased, but holding period return cannot. 
B)  holding period return will always be the highest return. 
C)  holding period return will usually be less than the other returns. 
D)  only the holding period return includes the capital gain/loss. 
A)  all of the other returns can be calculated at the time the bond is purchased, but holding period return cannot. 
B)  holding period return will always be the highest return. 
C)  holding period return will usually be less than the other returns. 
D)  only the holding period return includes the capital gain/loss. A

Question 3

The market for bonds is initially described by the supply of bonds - S₀, and the demand for bonds - D₀, with the equilibrium price and quantity being P₀ and Q₀. An increase in the nation's wealth, all else constant, would cause the

Accepted Answer

A)  Bond supply curve to shift to S₁. 
B)  Bond demand curve to shift to D₁. 
C)  Bond supply curve to shift to S₂. 
D)  Bond demand curve to shift to D₂. 
A)  Bond supply curve to shift to S₁. 
B)  Bond demand curve to shift to D₁. 
C)  Bond supply curve to shift to S₂. 
D)  Bond demand curve to shift to D₂. B

Question 4

When expected inflation increases, for any given nominal interest rate the:

Accepted Answer

A)  real cost of repayment for bond issuers increases. 
B)  real return for bondholders increases. 
C)  real cost of repayment for bond issuers decreases. 
D)  bond demand curve shifts right. 
A)  real cost of repayment for bond issuers increases. 
B)  real return for bondholders increases. 
C)  real cost of repayment for bond issuers decreases. 
D)  bond demand curve shifts right.

Question 5

A consol is:

Accepted Answer

A)  another name for a zero-coupon bond. 
B)  a bond with a maturity date exceeding 10 years. 
C)  a bond that makes periodic interest payments forever. 
D)  a form of a bond that is issued quite often by the U.S. Treasury. 
A)  another name for a zero-coupon bond. 
B)  a bond with a maturity date exceeding 10 years. 
C)  a bond that makes periodic interest payments forever. 
D)  a form of a bond that is issued quite often by the U.S. Treasury.

Question 6

The size of the bond dealer's spread is mainly a function of the:

Accepted Answer

A)  purchase price of the bond. 
B)  current yield. 
C)  liquidity of the bond market. 
D)  face value of the bond. 
A)  purchase price of the bond. 
B)  current yield. 
C)  liquidity of the bond market. 
D)  face value of the bond.

Question 7

Suppose that the expected return on bonds falls relative to other assets. In the bond market this will result in:

Accepted Answer

A)  the bond supply curve shifting left. 
B)  a movement down the bond demand curve. 
C)  a shift to the left of the bond demand curve. 
D)  an increase in the price of bonds. 
A)  the bond supply curve shifting left. 
B)  a movement down the bond demand curve. 
C)  a shift to the left of the bond demand curve. 
D)  an increase in the price of bonds.

Question 8

Which of the following statements is most accurate?

Accepted Answer

A)  Yield to maturity is equal to the coupon rate if the bond is held to maturity. 
B)  Yield to maturity is the same as the coupon rate. 
C)  Yield to maturity will exceed the coupon rate if the bond is purchased for face value. 
D)  Yield to maturity is the same as the coupon rate if the bond is purchased for face value and held to maturity. 
A)  Yield to maturity is equal to the coupon rate if the bond is held to maturity. 
B)  Yield to maturity is the same as the coupon rate. 
C)  Yield to maturity will exceed the coupon rate if the bond is purchased for face value. 
D)  Yield to maturity is the same as the coupon rate if the bond is purchased for face value and held to maturity.

Question 9

The text identified the various sources of risk for bonds. Are U.S. Treasury TIPS bonds free from risk? Explain.

Accepted Answer

These bonds are free from two of the mai

Question 10

Consider a zero-coupon bond with a $1,100 payment in one year. Suppose the interest rate decreases from 10% to 8%. The price of this bond:

Accepted Answer

A)  increases from $1,000 to $1,018. 
B)  increases from $1,000 to $1,375. 
C)  decreases from $110 to $88. 
D)  decreases from $1,210 to $1,188. 
A)  increases from $1,000 to $1,018. 
B)  increases from $1,000 to $1,375. 
C)  decreases from $110 to $88. 
D)  decreases from $1,210 to $1,188.

Question 11

Default risk is the risk associated with:

Accepted Answer

A)  the bond issuer not being able to make the promised payments. 
B)  the illiquidity associated with small issues. 
C)  the effect on bond prices caused by changes in market rates of interest. 
D)  changes in the expected inflation rate. 
A)  the bond issuer not being able to make the promised payments. 
B)  the illiquidity associated with small issues. 
C)  the effect on bond prices caused by changes in market rates of interest. 
D)  changes in the expected inflation rate.

Question 12

You win your state lottery. The lottery officials offer you the option of taking your winnings in one lump-sum payment, or fixed annual payments for the next 20 years. The sum of the 20 annual payments is larger than the lump-sum payment. Before deciding, what are the key factors you will want to consider that could influence your decision?

Accepted Answer

Although this is certainly a pleasant de

Question 13

If the annual interest rate is 5% (.05), the price of a six-month Treasury bill would be:

Accepted Answer

A)  $97.50 
B)  $97.59 
C)  $95.25 
D)  $95.00 
A)  $97.50 
B)  $97.59 
C)  $95.25 
D)  $95.00

Question 14

Calculate the monthly payment for a 30-year mortgage, where the amount borrowed is
$100,000 and the annual interest rate is 6.0%.

Accepted Answer

If we use 360 months for the 30 years an

Question 15

A zero-coupon bond refers to a bond which:

Accepted Answer

A)  does not pay any coupon payments because the issuer is in default. 
B)  promises a single future payment. 
C)  pays coupons only once a year. 
D)  pays coupons only if the bond price is above face value. 
A)  does not pay any coupon payments because the issuer is in default. 
B)  promises a single future payment. 
C)  pays coupons only once a year. 
D)  pays coupons only if the bond price is above face value.

Question 16

If the U.S. government's borrowing needs increase, in the bond market this would be seen as:

Accepted Answer

A)  the bond demand curve shifting right. 
B)  a movement up the bond supply curve. 
C)  the bond demand curve shifting left. 
D)  the bond supply curve shifting right. 
A)  the bond demand curve shifting right. 
B)  a movement up the bond supply curve. 
C)  the bond demand curve shifting left. 
D)  the bond supply curve shifting right.

Question 17

In calculating the current yield for a bond the:

Accepted Answer

A)  coupon payment and purchase price is all that is needed. 
B)  present value of the capital gain/loss is ignored. 
C)  present value of the final payment is the only important consideration. 
D)  present value of the coupon payments is the only important consideration. 
A)  coupon payment and purchase price is all that is needed. 
B)  present value of the capital gain/loss is ignored. 
C)  present value of the final payment is the only important consideration. 
D)  present value of the coupon payments is the only important consideration.

Question 18

Suppose that the return on assets other than bonds falls. In the bond market this will result in a(n):

Accepted Answer

A)  movement down the bond demand curve. 
B)  shift to the left of the bond demand curve. 
C)  increase in the price of bonds. 
D)  shift to the left of the bond supply curve. 
A)  movement down the bond demand curve. 
B)  shift to the left of the bond demand curve. 
C)  increase in the price of bonds. 
D)  shift to the left of the bond supply curve.

Question 19

Once you buy a coupon bond, which of the following can change?

Accepted Answer

A)  Coupon rate 
B)  Coupon payment 
C)  Face value 
D)  Yield to maturity 
A)  Coupon rate 
B)  Coupon payment 
C)  Face value 
D)  Yield to maturity

Question 20

If you were going to issue bonds, would you prefer to be in a country where the average inflation rate is 3% inflation but fluctuates wildly, or in a country with a higher, 4% expected inflation rate that is stable (meaning it's always 4%). Explain.

Accepted Answer

Even though the 4% expected rate is high

Exam 6: Bonds, Bond Prices, and the Determination of Interest Rates

If the annual interest rate is 5% (.05), the price of a three-month Treasury bill would be:

One characteristic that distinguishes holding period return from the coupon rate, the current yield, and the yield to maturity is:

The market for bonds is initially described by the supply of bonds - S₀, and the demand for bonds - D₀, with the equilibrium price and quantity being P₀ and Q₀. An increase in the nation's wealth, all else constant, would cause the

When expected inflation increases, for any given nominal interest rate the:

A consol is:

The size of the bond dealer's spread is mainly a function of the:

Suppose that the expected return on bonds falls relative to other assets. In the bond market this will result in:

Which of the following statements is most accurate?

The text identified the various sources of risk for bonds. Are U.S. Treasury TIPS bonds free from risk? Explain.

Consider a zero-coupon bond with a $1,100 payment in one year. Suppose the interest rate decreases from 10% to 8%. The price of this bond:

Default risk is the risk associated with:

If the annual interest rate is 5% (.05), the price of a six-month Treasury bill would be:

Calculate the monthly payment for a 30-year mortgage, where the amount borrowed is $100,000 and the annual interest rate is 6.0%.

A zero-coupon bond refers to a bond which:

If the U.S. government's borrowing needs increase, in the bond market this would be seen as:

In calculating the current yield for a bond the:

Suppose that the return on assets other than bonds falls. In the bond market this will result in a(n):

Once you buy a coupon bond, which of the following can change?

If you were going to issue bonds, would you prefer to be in a country where the average inflation rate is 3% inflation but fluctuates wildly, or in a country with a higher, 4% expected inflation rate that is stable (meaning it's always 4%). Explain.

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value and Interest Rates

Understanding Risk

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange Rate Policy and the Central Bank

Money Growth, Money Demand and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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