Question 1

Could the holding period return ever be less than the yield to maturity? Explain.

Accepted Answer

This is possible under the condition tha

Question 2

If the U.S. government's borrowing needs increase, all other factors constant the:

Accepted Answer

A)  demand for bonds will decrease. 
B)  price of bonds will increase. 
C)  supply of bonds will increase. 
D)  yields on bonds will decrease. 
A)  demand for bonds will decrease. 
B)  price of bonds will increase. 
C)  supply of bonds will increase. 
D)  yields on bonds will decrease.

Question 3

Which bond will have a higher yield to maturity, a $1,000 face value bond, with a 5.0% coupon rate that sells for $900; or a $1,000 face value bond, with a $50 annual coupon that sells for $1,050? Explain your choice.

Accepted Answer

The bond that is selling for $900 will.

Question 4

If a bond's purchase price equals the face value the:

Accepted Answer

A)  coupon rate equals the current yield, which is less than the yield to maturity. 
B)  current yield equals the yield to maturity, which exceeds the coupon rate. 
C)  coupon rate equals the yield to maturity, which equals the current yield. 
D)  coupon rate does not equal the current yield, which does not equal the yield to maturity. 
A)  coupon rate equals the current yield, which is less than the yield to maturity. 
B)  current yield equals the yield to maturity, which exceeds the coupon rate. 
C)  coupon rate equals the yield to maturity, which equals the current yield. 
D)  coupon rate does not equal the current yield, which does not equal the yield to maturity.

Question 5

An increase in expected inflation for any given nominal interest rate will cause the:

Accepted Answer

A)  bond supply curve to shift to the left. 
B)  bond demand curve to shift to the right. 
C)  price of bonds to decrease. 
D)  price of bonds to increase. 
A)  bond supply curve to shift to the left. 
B)  bond demand curve to shift to the right. 
C)  price of bonds to decrease. 
D)  price of bonds to increase.

Question 6

Which of the following best expresses the formula for determining the price of a U.S. Treasury bill that matures n periods from now per $100 of face value when the interest rate is i? ?

Accepted Answer

A)  $100/(1 + i)ⁿ 
B)  $100(1 + i) 
C)  $100/(1 + i) 
D)  1 + $100/(1 + i)ⁿ 
A)  $100/(1 + i)ⁿ 
B)  $100(1 + i) 
C)  $100/(1 + i) 
D)  1 + $100/(1 + i)ⁿ

Question 7

A pure discount bond is also known as a:

Accepted Answer

A)  consol. 
B)  fixed payment loan. 
C)  coupon bond. 
D)  zero-coupon bond. 
A)  consol. 
B)  fixed payment loan. 
C)  coupon bond. 
D)  zero-coupon bond.

Question 8

Fly-By-Night Inc. issues $100 face value, zero-coupon, one-year bonds. The current return on one-year, zero-coupon U.S. government bonds is 3.5%. If the Fly-By-Night bonds are selling for $92.00, what is the risk premium for these bonds?

Accepted Answer

A)  8.7% 
B)  1.5% 
C)  5.2% 
D)  8.0% 
A)  8.7% 
B)  1.5% 
C)  5.2% 
D)  8.0%

Question 9

Which of the following makes fixed payments indefinitely?

Accepted Answer

A)  Amortized loan 
B)  Consol 
C)  Coupon bond 
D)  Zero-coupon bond 
A)  Amortized loan 
B)  Consol 
C)  Coupon bond 
D)  Zero-coupon bond

Question 10

Which of the following best expresses the equation for holding period return?

Accepted Answer

A)  Current yield + coupon rate 
B)  Yield to maturity - current yield 
C)  Current yield + capital gain 
D)  Coupon rate + capital gain 
A)  Current yield + coupon rate 
B)  Yield to maturity - current yield 
C)  Current yield + capital gain 
D)  Coupon rate + capital gain

Question 11

Which of the following is not a reason why the yield to maturity can differ from the current yield?

Accepted Answer

A)  Because the yield to maturity considers the capital gain/loss. 
B)  Because the current yield focuses only on the coupon payment and the purchase price. 
C)  Because most bonds are not purchased for face value. 
D)  Because the current yield moves in the opposite direction from price. 
A)  Because the yield to maturity considers the capital gain/loss. 
B)  Because the current yield focuses only on the coupon payment and the purchase price. 
C)  Because most bonds are not purchased for face value. 
D)  Because the current yield moves in the opposite direction from price.

Question 12

A decrease in expected inflation for any given nominal interest rate will cause:

Accepted Answer

A)  bond prices to increase and interest rates to decrease. 
B)  bond prices to decrease and interest rates to increase. 
C)  the bond demand curve to shift to the left. 
D)  the bond supply curve to shift to the left. 
A)  bond prices to increase and interest rates to decrease. 
B)  bond prices to decrease and interest rates to increase. 
C)  the bond demand curve to shift to the left. 
D)  the bond supply curve to shift to the left.

Question 13

If the U.S. government's borrowing needs decrease, all other factors constant the:

Accepted Answer

A)  supply of bonds will increase. 
B)  demand for bonds will decrease. 
C)  price of bonds will decrease. 
D)  price of bonds will increase. 
A)  supply of bonds will increase. 
B)  demand for bonds will decrease. 
C)  price of bonds will decrease. 
D)  price of bonds will increase.

Question 14

A decrease in the nation's wealth, all other factors constant, would cause:

Accepted Answer

A)  the bond demand curve to shift left. 
B)  bond prices to rise. 
C)  interest rates to decrease. 
D)  the bond supply curve to shift left. 
A)  the bond demand curve to shift left. 
B)  bond prices to rise. 
C)  interest rates to decrease. 
D)  the bond supply curve to shift left.

Question 15

U.S. government bonds that provide for bondholders to receive a fixed rate of interest plus the change in the consumer price index were designed to remove:

Accepted Answer

A)  default risk. 
B)  liquidity risk. 
C)  inflation risk. 
D)  interest-rate risk. 
A)  default risk. 
B)  liquidity risk. 
C)  inflation risk. 
D)  interest-rate risk.

Question 16

As bond prices increase:

Accepted Answer

A)  the quantity of bonds supplied increases. 
B)  the quantity of bonds supplied decreases. 
C)  the quantity of bonds demanded increases. 
D)  yields increase. 
A)  the quantity of bonds supplied increases. 
B)  the quantity of bonds supplied decreases. 
C)  the quantity of bonds demanded increases. 
D)  yields increase.

Question 17

When a loan is amortized, it means the:

Accepted Answer

A)  borrower is in default. 
B)  principal and interest are paid off by the borrower over the life of the loan. 
C)  interest is due entirely at the maturity date. 
D)  principal in never repaid, only interest. 
A)  borrower is in default. 
B)  principal and interest are paid off by the borrower over the life of the loan. 
C)  interest is due entirely at the maturity date. 
D)  principal in never repaid, only interest.

Question 18

The relationship between the price and the interest rate for a zero coupon bond is best described as:

Accepted Answer

A)  volatile. 
B)  fluctuating. 
C)  inverse. 
D)  non-existent. 
A)  volatile. 
B)  fluctuating. 
C)  inverse. 
D)  non-existent.

Question 19

Interest-rate risk would not matter to which of the following bondholders?

Accepted Answer

A)  A holder of a U.S. government bond. 
B)  A holder of a U.S. government bond indexed for inflation. 
C)  A holder of a U.S. government bond who plans on selling it in one year. 
D)  A holder of a U.S. government bond that plans on holding it until it matures. 
A)  A holder of a U.S. government bond. 
B)  A holder of a U.S. government bond indexed for inflation. 
C)  A holder of a U.S. government bond who plans on selling it in one year. 
D)  A holder of a U.S. government bond that plans on holding it until it matures.

Question 20

At the time the government of Bulgrovia issued new bonds, they issued them at a price that reflected the risk-free rate because investors had no concerns regarding default risk, so did not require a risk premium. That risk-free rate was 4%. These bonds currently have one year to maturity and you notice the yield is 20%. Can you calculate the probability that the Bulgrovian government will default?

Accepted Answer

The simple answer is no. A risk-premium

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

Could the holding period return ever be less than the yield to maturity? Explain.

If the U.S. government's borrowing needs increase, all other factors constant the:

Which bond will have a higher yield to maturity, a $1,000 face value bond, with a 5.0% coupon rate that sells for $900; or a $1,000 face value bond, with a $50 annual coupon that sells for $1,050? Explain your choice.

If a bond's purchase price equals the face value the:

An increase in expected inflation for any given nominal interest rate will cause the:

Which of the following best expresses the formula for determining the price of a U.S. Treasury bill that matures n periods from now per $100 of face value when the interest rate is i? ?

A pure discount bond is also known as a:

Fly-By-Night Inc. issues $100 face value, zero-coupon, one-year bonds. The current return on one-year, zero-coupon U.S. government bonds is 3.5%. If the Fly-By-Night bonds are selling for $92.00, what is the risk premium for these bonds?

Which of the following makes fixed payments indefinitely?

Which of the following best expresses the equation for holding period return?

Which of the following is not a reason why the yield to maturity can differ from the current yield?

A decrease in expected inflation for any given nominal interest rate will cause:

If the U.S. government's borrowing needs decrease, all other factors constant the:

A decrease in the nation's wealth, all other factors constant, would cause:

U.S. government bonds that provide for bondholders to receive a fixed rate of interest plus the change in the consumer price index were designed to remove:

As bond prices increase:

When a loan is amortized, it means the:

The relationship between the price and the interest rate for a zero coupon bond is best described as:

Interest-rate risk would not matter to which of the following bondholders?

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

Filters