Question 1

The expected real interest rate approximately equals

Accepted Answer

A) the nominal interest rate minus the tax rate. 
B) the nominal interest rate minus the expected rate of inflation. 
C) the nominal interest rate plus the expected rate of inflation. 
D) the yield to maturity on a coupon bond held to maturity. 
A) the nominal interest rate minus the tax rate. 
B) the nominal interest rate minus the expected rate of inflation. 
C) the nominal interest rate plus the expected rate of inflation. 
D) the yield to maturity on a coupon bond held to maturity. B

Question 2

How can a bond have a negative rate of return?

Accepted Answer

A) if the current yield is greater than the coupon rate 
B) if the current yield is less than the coupon rate 
C) if the rate of capital loss exceeds the current yield 
D) if the rate of capital gains is less than the current yield 
A) if the current yield is greater than the coupon rate 
B) if the current yield is less than the coupon rate 
C) if the rate of capital loss exceeds the current yield 
D) if the rate of capital gains is less than the current yield C

Question 3

Explain the process by which prices of securities adjust so as to eliminate arbitrage profits.

Accepted Answer

In competing to buy securities where earning arbitrage profits is possible, traders force prices up to the level where arbitrage profits can no longer be earned.

Question 4

If the real interest rate is -1.4% and the nominal interest rate is 0.6%, expected inflation equals

Accepted Answer

A) -2% 
B) -0.8% 
C) 0)8% 
D) 2% 
A) -2% 
B) -0.8% 
C) 0)8% 
D) 2%

Question 5

A coupon bond involves

Accepted Answer

A) interest payments from the borrower to the lender periodically during the life of the loan and payment by the borrower to the lender of the face value of the loan at maturity. 
B) interest and principal payments from the borrower to the lender periodically during the life of the loan. 
C) periodic payments by the borrower to the lender that include both principal and interest. 
D) periodic payments by the borrower to the lender that include principal, but not interest. 
A) interest payments from the borrower to the lender periodically during the life of the loan and payment by the borrower to the lender of the face value of the loan at maturity. 
B) interest and principal payments from the borrower to the lender periodically during the life of the loan. 
C) periodic payments by the borrower to the lender that include both principal and interest. 
D) periodic payments by the borrower to the lender that include principal, but not interest.

Question 6

In comparing the yield to maturity on a Treasury bill with the yield on a discount basis on the same bill, we can say that the yield to maturity

Accepted Answer

A) will always be greater than the yield on a discount basis. 
B) will always be less than the yield on a discount basis. 
C) will always be equal to the yield on a discount basis, provided the holding period is the same as the number of years to maturity. 
D) rises whenever the yield on a discount basis falls. 
A) will always be greater than the yield on a discount basis. 
B) will always be less than the yield on a discount basis. 
C) will always be equal to the yield on a discount basis, provided the holding period is the same as the number of years to maturity. 
D) rises whenever the yield on a discount basis falls.

Question 7

Which of the following is NOT fixed on a coupon bond?

Accepted Answer

A) coupon 
B) coupon rate 
C) market price 
D) par value 
A) coupon 
B) coupon rate 
C) market price 
D) par value

Question 8

A discount bond resembles a simple loan in that

Accepted Answer

A) the interest on neither is taxable. 
B) the borrower repays in a single payment. 
C) both represent assets to the borrowers who issue them. 
D) both have par values greater than their face values. 
A) the interest on neither is taxable. 
B) the borrower repays in a single payment. 
C) both represent assets to the borrowers who issue them. 
D) both have par values greater than their face values.

Question 9

The most common type of simple loan is a(an)

Accepted Answer

A) automobile loan from a bank. 
B) mortgage loan from a bank. 
C) commercial loan from a bank. 
D) corporate bond. 
A) automobile loan from a bank. 
B) mortgage loan from a bank. 
C) commercial loan from a bank. 
D) corporate bond.

Question 10

If you deposit $500 in a savings account at an annual interest rate of 5%, how much will you have in the account at the end of five years?

Accepted Answer

A) $625 
B) $392 
C) $638 
D) $550 
A) $625 
B) $392 
C) $638 
D) $550

Question 11

The bid price for a bond is

Accepted Answer

A) the minimum price that you are allowed to bid for a bond that is being auctioned by the government. 
B) the maximum price that you are allowed to bid for a bond that is being auctioned by the government. 
C) the price that you will receive from a securities dealer if you sell the bond. 
D) the price that you must pay a securities dealer to purchase a bond. 
A) the minimum price that you are allowed to bid for a bond that is being auctioned by the government. 
B) the maximum price that you are allowed to bid for a bond that is being auctioned by the government. 
C) the price that you will receive from a securities dealer if you sell the bond. 
D) the price that you must pay a securities dealer to purchase a bond.

Question 12

Suppose you purchase a bond with a coupon of $50 for $1010. You sell it one year later for $900. What rate of return did you earn? Report a percentage with two decimal places.

Accepted Answer

The rate of return i

Question 13

A capital gain occurs when the

Accepted Answer

A) coupon rate increases. 
B) current yield increases. 
C) price of an asset increases. 
D) yield to maturity increases. 
A) coupon rate increases. 
B) current yield increases. 
C) price of an asset increases. 
D) yield to maturity increases.

Question 14

What is the rate of return on a bond with a coupon of $38 payable in one year that was purchased for $950 and sold one year later for $931?

Accepted Answer

A) 2% 
B) 4% 
C) 6% 
D) 19% 
A) 2% 
B) 4% 
C) 6% 
D) 19%

Question 15

A one-year discount bond with a par value of $1000 sold today, at issuance, for $943 has a yield to maturity of

Accepted Answer

A) 4)30%. 
B) 5)70%. 
C) 6)04%. 
D) 9)43%. 
A) 4)30%. 
B) 5)70%. 
C) 6)04%. 
D) 9)43%.

Question 16

At an interest rate of 3%, what is the present value of $1000 to be received five years from now?

Accepted Answer

A) $863 
B) $1,667 
C) $1,159 
D) $850 
A) $863 
B) $1,667 
C) $1,159 
D) $850

Question 17

Suppose you had $1000 and were deciding between two investments. One pays 5% a year for two years while the other pays 8% the first year and 2% the second year. Which investment would provide a higher return?

Accepted Answer

The first investment which earned 5% a y

Question 18

The key to present value calculations is that they

Accepted Answer

A) are appropriate only for funds in the same time period. 
B) provide a common unit for measuring funds at different times. 
C) provide accurate answers only in a low-inflation environment. 
D) provide accurate answers only in a high-inflation environment. 
A) are appropriate only for funds in the same time period. 
B) provide a common unit for measuring funds at different times. 
C) provide accurate answers only in a low-inflation environment. 
D) provide accurate answers only in a high-inflation environment.

Question 19

The current yield is equal to

Accepted Answer

A) the coupon divided by the market price of the bond. 
B) the yield to maturity, if the bond is a coupon bond. 
C) the coupon divided by the par value of the bond. 
D) the market price of the bond divided by its par value. 
A) the coupon divided by the market price of the bond. 
B) the yield to maturity, if the bond is a coupon bond. 
C) the coupon divided by the par value of the bond. 
D) the market price of the bond divided by its par value.

Question 20

With respect to U.S. Treasury bills,

Accepted Answer

A) the bid price is always greater than the asked price. 
B) the asked price is always greater than the bid price. 
C) the bid price is only greater than the asked price if investors expect interest rates to decline in the future. 
D) the asked price is only greater than the bid price if investors expect interest rates to decline in the future. 
A) the bid price is always greater than the asked price. 
B) the asked price is always greater than the bid price. 
C) the bid price is only greater than the asked price if investors expect interest rates to decline in the future. 
D) the asked price is only greater than the bid price if investors expect interest rates to decline in the future.

The expected real interest rate approximately equals

How can a bond have a negative rate of return?

Explain the process by which prices of securities adjust so as to eliminate arbitrage profits.

If the real interest rate is -1.4% and the nominal interest rate is 0.6%, expected inflation equals

A coupon bond involves

In comparing the yield to maturity on a Treasury bill with the yield on a discount basis on the same bill, we can say that the yield to maturity

Which of the following is NOT fixed on a coupon bond?

A discount bond resembles a simple loan in that

The most common type of simple loan is a(an)

If you deposit $500 in a savings account at an annual interest rate of 5%, how much will you have in the account at the end of five years?

The bid price for a bond is

Suppose you purchase a bond with a coupon of $50 for $1010. You sell it one year later for $900. What rate of return did you earn? Report a percentage with two decimal places.

A capital gain occurs when the

What is the rate of return on a bond with a coupon of $38 payable in one year that was purchased for $950 and sold one year later for $931?

A one-year discount bond with a par value of $1000 sold today, at issuance, for $943 has a yield to maturity of

At an interest rate of 3%, what is the present value of $1000 to be received five years from now?

Suppose you had $1000 and were deciding between two investments. One pays 5% a year for two years while the other pays 8% the first year and 2% the second year. Which investment would provide a higher return?

The key to present value calculations is that they

The current yield is equal to

With respect to U.S. Treasury bills,

Introducing Money and the Financial System

Money and the Payments System

Determining Interest Rates

The Risk Structure and Term Structure of Interest Rates

The Stock Market, Information, and Financial Market Efficiency

Derivatives and Derivative Markets

The Market for Foreign Exchange

Transactions Costs, Asymmetric Information, and the Structure of the Financial System

The Economics of Banking

Investment Banks, Mutual Funds, Hedge Funds, and the Shadow Banking System

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I: The Aggregate Demand and Aggregate Supply Model

Monetary Theory II: The IS-MP Model

Filters

Exam 3: Interest Rates and Rates of Return

The expected real interest rate approximately equals

How can a bond have a negative rate of return?

Explain the process by which prices of securities adjust so as to eliminate arbitrage profits.

If the real interest rate is -1.4% and the nominal interest rate is 0.6%, expected inflation equals

A coupon bond involves

In comparing the yield to maturity on a Treasury bill with the yield on a discount basis on the same bill, we can say that the yield to maturity

Which of the following is NOT fixed on a coupon bond?

A discount bond resembles a simple loan in that

The most common type of simple loan is a(an)

If you deposit $500 in a savings account at an annual interest rate of 5%, how much will you have in the account at the end of five years?

The bid price for a bond is

Suppose you purchase a bond with a coupon of $50 for $1010. You sell it one year later for $900. What rate of return did you earn? Report a percentage with two decimal places.

A capital gain occurs when the

What is the rate of return on a bond with a coupon of $38 payable in one year that was purchased for $950 and sold one year later for $931?

A one-year discount bond with a par value of $1000 sold today, at issuance, for $943 has a yield to maturity of

At an interest rate of 3%, what is the present value of $1000 to be received five years from now?

Suppose you had $1000 and were deciding between two investments. One pays 5% a year for two years while the other pays 8% the first year and 2% the second year. Which investment would provide a higher return?

The key to present value calculations is that they

The current yield is equal to

With respect to U.S. Treasury bills,

Introducing Money and the Financial System

Money and the Payments System

Determining Interest Rates

The Risk Structure and Term Structure of Interest Rates

The Stock Market, Information, and Financial Market Efficiency

Derivatives and Derivative Markets

The Market for Foreign Exchange

Transactions Costs, Asymmetric Information, and the Structure of the Financial System

The Economics of Banking

Investment Banks, Mutual Funds, Hedge Funds, and the Shadow Banking System

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I: The Aggregate Demand and Aggregate Supply Model

Monetary Theory II: The IS-MP Model

Filters