Question 1

The difference in the prices of a zero-coupon bond and a coupon bond with the same face value and maturity date is simply:

Accepted Answer

A) zero, since they are the same. 
B) the present value of the final payment. 
C) the present value of the coupon payments. 
D) the future value of the coupon payments. 
A) zero, since they are the same. 
B) the present value of the final payment. 
C) the present value of the coupon payments. 
D) the future value of the coupon payments.

Question 2

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 3

Notice the following model of a bond market.In each situation given, explain what happens to the bond price and yield and why.

Accepted Answer

@#IMG-DLM& a) Expected inflation increases
b) The

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

Compute the change in the price of a five-year (until maturity) $1,000 face value zero-coupon bond that currently yields 7% when expected inflation increases from 3% to 4%.

Accepted Answer

The bond currently will sell for $712.99

Question 6

In mid-2004 there was speculation that the Federal Reserve would be raising interest rates before the end of the year.How would this news affect the bond market and why?

Accepted Answer

The speculated increase in interest rate

Question 7

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 8

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 9

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.

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

If the purchase price of a bond exceeds the face value, the yield to maturity:

Accepted Answer

A) is greater than the coupon rate because the capital gain is positive. 
B) will equal the current yield. 
C) will be less than the coupon rate because the capital gain will be negative. 
D) will be greater than the current yield. 
A) is greater than the coupon rate because the capital gain is positive. 
B) will equal the current yield. 
C) will be less than the coupon rate because the capital gain will be negative. 
D) will be greater than the current yield.

Question 12

Bond prices and yields:

Accepted Answer

A) move together in the same direction. 
B) do not change if the coupon is fixed. 
C) move together inversely. 
D) are independent of each other. 
A) move together in the same direction. 
B) do not change if the coupon is fixed. 
C) move together inversely. 
D) are independent of each other.

Question 13

The current yield of a bond:

Accepted Answer

A) is another term for the coupon rate. 
B) is another term for the yield to maturity. 
C) equals zero for a zero-coupon bond since these bonds have no coupon payments. 
D) is the difference between its future value and its present value. 
A) is another term for the coupon rate. 
B) is another term for the yield to maturity. 
C) equals zero for a zero-coupon bond since these bonds have no coupon payments. 
D) is the difference between its future value and its present value.

Question 14

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 15

The return on bonds rises relative to other assets, in the bond market this will result in:

Accepted Answer

A) the price of bonds falling and the yields increasing. 
B) a rightward shift in the bond supply curve. 
C) a shift to the left of the bond demand curve. 
D) an increase in bond prices. 
A) the price of bonds falling and the yields increasing. 
B) a rightward shift in the bond supply curve. 
C) a shift to the left of the bond demand curve. 
D) an increase in bond prices.

Question 16

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

Accepted Answer

A) the real return to bondholders to decrease. 
B) a movement down the bond demand curve, but no change in the bond demand curve. 
C) the bond demand curve to shift right. 
D) the price of bonds to increase. 
A) the real return to bondholders to decrease. 
B) a movement down the bond demand curve, but no change in the bond demand curve. 
C) the bond demand curve to shift right. 
D) the price of bonds to increase.

Question 17

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 18

Suppose a family member approaches you to borrow $2,000 for the down payment on an automobile.You have the cash available in a savings account that currently earns 5% annual interest.You and the family member consider the following repayment options:
(i) Borrower repays $259 each year over the next ten years.
(ii) Borrower repays $300 each year over the next five years, plus a lump-sum payment of $895 in the fifth year.
(iii) Borrower repays you $2,100 at the end of one year.
For each of the options above, show that the present values of each option are approximately equal.Then, relate each of the options above to the four types of bonds, indicating which option is equivalent to which type of bond.Explain why.

Accepted Answer

The present values are calculated as fol

Question 19

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

Question 20

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.

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

The difference in the prices of a zero-coupon bond and a coupon bond with the same face value and maturity date is simply:

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

Notice the following model of a bond market.In each situation given, explain what happens to the bond price and yield and why.

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

Compute the change in the price of a five-year (until maturity) $1,000 face value zero-coupon bond that currently yields 7% when expected inflation increases from 3% to 4%.

In mid-2004 there was speculation that the Federal Reserve would be raising interest rates before the end of the year.How would this news affect the bond market and why?

A zero-coupon bond refers to a bond which:

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

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

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

If the purchase price of a bond exceeds the face value, the yield to maturity:

Bond prices and yields:

The current yield of a bond:

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

The return on bonds rises relative to other assets, in the bond market this will result in:

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

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.

Which of the following statements is most accurate?

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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