Question 1

An increase in the nation's wealth, all other factors constant, would cause:

Accepted Answer

A)  bond prices to fall and yields to increase. 
B)  bond prices and yields to increase. 
C)  bond prices to rise and yields to decrease. 
D)  the bond supply curve to shift right. 
A)  bond prices to fall and yields to increase. 
B)  bond prices and yields to increase. 
C)  bond prices to rise and yields to decrease. 
D)  the bond supply curve to shift right.

Question 2

How can a bond mutual fund report a return of over 13% when the coupon rate of the bonds they are holding are just 7% and interest rates are falling?

Accepted Answer

The bond mutual fund is advertising its

Question 3

The bond supply curve slopes upward because:

Accepted Answer

A)  as bond prices rise people holding bonds are more tempted to hold them. 
B)  as bond prices rise yields increase. 
C)  for companies seeking financing, the higher the price of bonds the more attractive it is to sell bonds. 
D)  as bond prices rise yields decrease. 
A)  as bond prices rise people holding bonds are more tempted to hold them. 
B)  as bond prices rise yields increase. 
C)  for companies seeking financing, the higher the price of bonds the more attractive it is to sell bonds. 
D)  as bond prices rise yields decrease.

Question 4

If a consol is offering an annual coupon of $50 and the annual interest rate is 6%, the price of the consol is:

Accepted Answer

A)  $47.17 
B)  $813.00 
C)  $833.33 
D)  $8333.33 
A)  $47.17 
B)  $813.00 
C)  $833.33 
D)  $8333.33

Question 5

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

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

Question 6

The price (P) of a consol offering an annual coupon payment (C) is best expressed by:

Accepted Answer

A)  F/C 
B)  C(1 + i) 
C)  C/(1+ i) 
D)  C/i 
A)  F/C 
B)  C(1 + i) 
C)  C/(1+ i) 
D)  C/i

Question 7

The impact of a decrease in expected inflation in the bond market will have a relatively large effect on the prices of bonds prices because the bond demand curve:

Accepted Answer

A)  will shift right as will the bond supply curve. 
B)  will shift right but the bond supply curve shifts left. 
C)  and supply curves will shift left. 
D)  will shift left as the bond supply curve shifts right. 
A)  will shift right as will the bond supply curve. 
B)  will shift right but the bond supply curve shifts left. 
C)  and supply curves will shift left. 
D)  will shift left as the bond supply curve shifts right.

Question 8

A student receives a five-year loan to pay for a $2,000 used car. The lender and the student agree to an 8% interest rate on a fixed-rate loan. Expected inflation was estimated to equal 2.5%, but unexpectedly decreases to 2%. Which of the following is true?

Accepted Answer

A)  The real interest rate decreased. 
B)  The student is made worse off because her real cost of borrowing is higher. 
C)  The lender is made worst off because his real return on the car loan is lower. 
D)  Both the student and the lender benefit. 
A)  The real interest rate decreased. 
B)  The student is made worse off because her real cost of borrowing is higher. 
C)  The lender is made worst off because his real return on the car loan is lower. 
D)  Both the student and the lender benefit.

Question 9

The holding period return on a bond:

Accepted Answer

A)  can never be more than the yield to maturity. 
B)  will equal the yield to maturity if the bond is purchased for face value and sold at a lower price. 
C)  will be less than the yield to maturity if the bond is sold for more than face value. 
D)  will be less than the yield to maturity if the bond is sold for less than face value. 
A)  can never be more than the yield to maturity. 
B)  will equal the yield to maturity if the bond is purchased for face value and sold at a lower price. 
C)  will be less than the yield to maturity if the bond is sold for more than face value. 
D)  will be less than the yield to maturity if the bond is sold for less than face value.

Question 10

As general business conditions deteriorate, all other factors constant:

Accepted Answer

A)  the bond supply curve will shift left. 
B)  there will be a movement down the existing bond supply curve. 
C)  the bond demand curve shifts left. 
D)  the price of bonds will decrease. 
A)  the bond supply curve will shift left. 
B)  there will be a movement down the existing bond supply curve. 
C)  the bond demand curve shifts left. 
D)  the price of bonds will decrease.

Question 11

Suppose there is a decrease in the price at which a bondholder sells her bond. In this case, the holding period return will:

Accepted Answer

A)  increase, since yields and prices are inversely related. 
B)  decrease, since this lowers the capital gain. 
C)  be negative. 
D)  equal the coupon rate. 
A)  increase, since yields and prices are inversely related. 
B)  decrease, since this lowers the capital gain. 
C)  be negative. 
D)  equal the coupon rate.

Question 12

A $1,000 face value bond, with an annual coupon of $40, one year to maturity and a purchase price of $980 has a:

Accepted Answer

A)  current yield that equals 4.00%. 
B)  coupon rate that equals 4.08%. 
C)  current yield that equals 4.08% and a yield to maturity that equals 6.12%. 
D)  A current yield that equals 4.08% and a yield to maturity that equals 4.0%. 
A)  current yield that equals 4.00%. 
B)  coupon rate that equals 4.08%. 
C)  current yield that equals 4.08% and a yield to maturity that equals 6.12%. 
D)  A current yield that equals 4.08% and a yield to maturity that equals 4.0%.

Question 13

As general business conditions improve, we would witness the following in the bond market:

Accepted Answer

A)  the bond demand curve shifting left. 
B)  the bond supply curve shifting left. 
C)  bond prices decreasing. 
D)  bond prices increasing. 
A)  the bond demand curve shifting left. 
B)  the bond supply curve shifting left. 
C)  bond prices decreasing. 
D)  bond prices increasing.

Question 14

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

Accepted Answer

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

Question 15

Use our model of the bond market (supply and demand) to explain what happens if the U.S. economy continues to grow at robust rates.

Accepted Answer

Growth in the economy should result in g

Question 16

Notice the following model of a bond market. In each situation given, explain what happens to the bond price and yield and why.
   
a) Expected inflation increases
b) The return on bonds rises relative to other assets c) The federal government deficit increases

Accepted Answer

a) If expected inflation increases the d

Question 17

In the late 1990s, the U.S. government ran a surplus for the first time in decades. It
instituted a buyback program, whereby the Treasury bought outstanding government bonds. How would this program affect the bond market price, yield, and quantity of bonds? How might it affect the liquidity of government bonds?

Accepted Answer

The buyback of government bond

Question 18

If interest rates are expected to fall, bond prices will:

Accepted Answer

A)  fall as the demand for bonds decreases. 
B)  remain constant until interest rates actually change. 
C)  fall as people fear capital losses in the future. 
D)  increase due to the demand for bonds increasing. 
A)  fall as the demand for bonds decreases. 
B)  remain constant until interest rates actually change. 
C)  fall as people fear capital losses in the future. 
D)  increase due to the demand for bonds increasing.

Question 19

Many people are worried that, with the growing number of people that will retire in the US over the next 40 years, the federal government will need to borrow large amounts of money to finance the Social Security System. If we assume that Social Security taxes and the current eligibility age remain constant, explain the likely impact this will have on bond markets.

Accepted Answer

If the Social Security Administration (S

Question 20

The price of a coupon bond can best be described as the:

Accepted Answer

A)  present value of the face value. 
B)  future value of the coupon payments. 
C)  future value of the coupon payments and the face value. 
D)  present value of the face value plus the present value of the coupon payments. 
A)  present value of the face value. 
B)  future value of the coupon payments. 
C)  future value of the coupon payments and the face value. 
D)  present value of the face value plus the present value of the coupon payments.

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

An increase in the nation's wealth, all other factors constant, would cause:

How can a bond mutual fund report a return of over 13% when the coupon rate of the bonds they are holding are just 7% and interest rates are falling?

The bond supply curve slopes upward because:

If a consol is offering an annual coupon of $50 and the annual interest rate is 6%, the price of the consol 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. Suppose that the expected return on bonds falls relative to other assets. In the bond market this will result in:

The price (P) of a consol offering an annual coupon payment (C) is best expressed by:

The impact of a decrease in expected inflation in the bond market will have a relatively large effect on the prices of bonds prices because the bond demand curve:

A student receives a five-year loan to pay for a $2,000 used car. The lender and the student agree to an 8% interest rate on a fixed-rate loan. Expected inflation was estimated to equal 2.5%, but unexpectedly decreases to 2%. Which of the following is true?

The holding period return on a bond:

As general business conditions deteriorate, all other factors constant:

Suppose there is a decrease in the price at which a bondholder sells her bond. In this case, the holding period return will:

A $1,000 face value bond, with an annual coupon of $40, one year to maturity and a purchase price of $980 has a:

As general business conditions improve, we would witness the following in the bond market:

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

Use our model of the bond market (supply and demand) to explain what happens if the U.S. economy continues to grow at robust rates.

Notice the following model of a bond market. In each situation given, explain what happens to the bond price and yield and why. a) Expected inflation increases b) The return on bonds rises relative to other assets c) The federal government deficit increases

If interest rates are expected to fall, bond prices will:

The price of a coupon bond can best be described as the:

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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