Question 1

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. B

Question 2

Consider the factors that affect bond demand and bond supply.Describe how the following are likely to change during a period of robust economic growth: wealth, default risk, and general business conditions.For each, state how the factor is likely to change, and discuss the implications for bond demand/supply, bond price, and yield.Bond prices tend to decrease during periods of high economic growth.What does this reveal about which of these factors is important?

Accepted Answer

(i) Wealth affects bond demand and is likely to increase during an economic expansion.Households experience an increase in the value of their total assets (including stocks, for example).This leads to an increase in bond demand, increase in bond price, and decrease in yield.
(ii) Default risk affects bond demand.The risk of default is likely to decrease during an economic expansion because borrowers are more likely to honor their debts.This leads to an increase in bond demand, increase in bond price, and decrease in yield.
(iii) General business conditions affect bond supply.These improve during economic booms.This leads to an increase in bond supply, decrease in bond price, and increase in yield.
If bond prices tend to decrease during periods of robust growth, this tells us that the improvement in general business conditions has a larger effect on the bond market than changes in wealth or default risk.

Question 3

Use the example of a consol to show how bond prices and yields are inversely related.

Accepted Answer

A consol is a bond that pays a fixed payment forever but does not mature.In calculating the price of a consol we use the formula Price = Coupon/interest rate.This simple formula shows the inverse relationship between price and interest rate since price is on the left and interest rate is in the denominator on the right.

Question 4

Many people are worried that, with the growing number of people that will retire in the U.S.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 5

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 6

Explain why holding period return, as an economic measure, does not have the same significance as current yield or yield to maturity.

Accepted Answer

One of the things economists do is try t

Question 7

In considering the holding period return, the longer the term of the bond the:

Accepted Answer

A) less important is the capital gain and the more important in the current yield. 
B) less important is the coupon rate and the more important is the current yield. 
C) less important is the capital gain. 
D) more important is the capital gain. 
A) less important is the capital gain and the more important in the current yield. 
B) less important is the coupon rate and the more important is the current yield. 
C) less important is the capital gain. 
D) more important is the capital gain.

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

When the price of a bond equals the face value the:

Accepted Answer

A) yield to maturity will be above the coupon rate. 
B) yield to maturity will be below the coupon rate. 
C) current yield is equal to the coupon rate. 
D) yield to maturity is greater than the current yield. 
A) yield to maturity will be above the coupon rate. 
B) yield to maturity will be below the coupon rate. 
C) current yield is equal to the coupon rate. 
D) yield to maturity is greater than the current yield.

Question 10

Most home mortgages are good examples of:

Accepted Answer

A) consols. 
B) zero-coupon bonds. 
C) coupon bonds. 
D) fixed-payment loans. 
A) consols. 
B) zero-coupon bonds. 
C) coupon bonds. 
D) fixed-payment loans.

Question 11

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 12

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.

Question 13

If the quantity of bonds demanded exceeds the quantity of bonds supplied, bond prices:

Accepted Answer

A) would rise and yields would fall. 
B) would fall and yields would increase. 
C) will rise and yields will remain constant. 
D) will rise and yields would increase. 
A) would rise and yields would fall. 
B) would fall and yields would increase. 
C) will rise and yields will remain constant. 
D) will rise and yields would increase.

Question 14

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 15

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 16

The U.S.Treasury issues bonds where the return is indexed to the consumer price index.We should expect that these bonds, relative to other U.S.Treasury bonds, will have:

Accepted Answer

A) lower price and lower return due to the decreased risk. 
B) lower price and a lower fixed return since the demand for them should be higher. 
C) higher price and higher fixed return since we always seem to have some inflation. 
D) higher price and lower return due to the decreased risk from inflation in holding these bonds. 
A) lower price and lower return due to the decreased risk. 
B) lower price and a lower fixed return since the demand for them should be higher. 
C) higher price and higher fixed return since we always seem to have some inflation. 
D) higher price and lower return due to the decreased risk from inflation in holding these bonds.

Question 17

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

Question 18

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 19

The bid price for a bond quote is:

Accepted Answer

A) the price at which the bond dealer is willing to sell the bond. 
B) the price at which the bond dealer is willing to purchase the bond. 
C) fixed over the life of a bond. 
D) determined solely by the time left to maturity. 
A) the price at which the bond dealer is willing to sell the bond. 
B) the price at which the bond dealer is willing to purchase the bond. 
C) fixed over the life of a bond. 
D) determined solely by the time left to maturity.

Question 20

In calculating the current yield for a bond the:

Accepted Answer

A) coupon payment is ignored. 
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 is ignored. 
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.

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

When a loan is amortized, it means the:

Use the example of a consol to show how bond prices and yields are inversely related.

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

Explain why holding period return, as an economic measure, does not have the same significance as current yield or yield to maturity.

In considering the holding period return, the longer the term of the bond the:

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?

When the price of a bond equals the face value the:

Most home mortgages are good examples of:

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?

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

If the quantity of bonds demanded exceeds the quantity of bonds supplied, bond prices:

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

As general business conditions deteriorate, all other factors constant:

The U.S.Treasury issues bonds where the return is indexed to the consumer price index.We should expect that these bonds, relative to other U.S.Treasury bonds, will have:

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

The holding period return on a bond:

The bid price for a bond quote is:

In calculating the current yield for a bond 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

Filters