Question 1

Which of the following is true of interest-rate risk?

Accepted Answer

A) It is the risk that the coupon rate for a bond will change, affecting current bondholders' coupon payments 
B) It refers to the probability that a borrower will default on debt obligations 
C) It is the risk that the face value of a bond will change before maturity 
D) Individuals owning long-term bonds are exposed to greater interest-rate risk 
A) It is the risk that the coupon rate for a bond will change, affecting current bondholders' coupon payments 
B) It refers to the probability that a borrower will default on debt obligations 
C) It is the risk that the face value of a bond will change before maturity 
D) Individuals owning long-term bonds are exposed to greater interest-rate risk

Question 2

The text identified the various sources of risk for bonds.Are U.S.Treasury TIPS bonds free from risk? Explain.

Accepted Answer

These bonds are free from two of the mai

Question 3

If a one-year zero-coupon bond has a face value of $100, is purchased for $94, and is held to maturity:

Accepted Answer

A) The holding period return will exceed the yield to maturity 
B) The yield to maturity will exceed the holding period return 
C) The yield to maturity will be 6.38% 
D) The holding period return will be 6.38% 
A) The holding period return will exceed the yield to maturity 
B) The yield to maturity will exceed the holding period return 
C) The yield to maturity will be 6.38% 
D) The holding period return will be 6.38%

Question 4

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 you $100 each year indefinitely.
(ii) Borrower repays $259 each year over the next ten years.
(iii) Borrower repays $300 each year over the next five years, plus a lump-sum payment of $895 in the fifth year.
(iv) 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 5

If the annual interest rate is 5% (.05), the price of a one-year Treasury bill per $100 of face value would be:

Accepted Answer

A) $95.00 
B) $97.50 
C) $95.24 
D) $96.10 
A) $95.00 
B) $97.50 
C) $95.24 
D) $96.10

Question 6

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 7

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 8

Which bond should sell for the higher price and why? (i) A basic U.S.Treasury bond, with a $10,000 face value and 20 years to maturity (ii) a U.S.Treasury TIPS bond with the same maturity and face value.

Accepted Answer

The TIPS bond should sell for the higher

Question 9

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 10

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 11

Suppose that the interest rate on a conventional 30-year mortgage is currently 8%.You receive a call from a mortgage broker who offers you a 30-year adjustable rate mortgage at 2% that is adjusted once each year.Evaluate each mortgage in terms of the following: risk that the monthly payment will change over the next 30 years and interest-rate risk.

Accepted Answer

The fixed-rate mortgage protects the bor

Question 12

In calculating the current yield for a bond:

Accepted Answer

A) The coupon payment and purchase price is all that is needed 
B) The present value of the capital gain/loss is ignored 
C) The present value of the final payment is the only important consideration 
D) The present value of the coupon payments is the only important consideration 
A) The coupon payment and purchase price is all that is needed 
B) The present value of the capital gain/loss is ignored 
C) The present value of the final payment is the only important consideration 
D) The present value of the coupon payments is the only important consideration

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

When expected inflation increases, for any given nominal interest rate:

Accepted Answer

A) The cost of borrowing increases and the desire to borrow decreases 
B) The real interest rate increases 
C) The bond supply curve shifts to the left 
D) The cost of borrowing decreases and the desire to borrow increases 
A) The cost of borrowing increases and the desire to borrow decreases 
B) The real interest rate increases 
C) The bond supply curve shifts to the left 
D) The cost of borrowing decreases and the desire to borrow increases

Question 15

Explain the relationship between coupon rate (or coupon yield) and current yield.

Accepted Answer

The coupon rate is simply the annual cou

Question 16

The yield on a discount basis for a $100 Treasury bill that sells for $98.50 and matures in 90 days is:

Accepted Answer

A) 1.50% 
B) 4.80% 
C) 6.00% 
D) 4.94% 
A) 1.50% 
B) 4.80% 
C) 6.00% 
D) 4.94%

Question 17

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 18

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

Accepted Answer

A) $97.50 
B) $97.59 
C) $95.25 
D) $95.00 
A) $97.50 
B) $97.59 
C) $95.25 
D) $95.00

Question 19

Consider a zero-coupon bond with a $1,100 payment in one year.Suppose the interest rate decreases from 10% to 8%.The price of this bond:

Accepted Answer

A) Increases from $1,000 to $1,018 
B) Increases from $1,000 to $1,375 
C) Decreases from $110 to $88 
D) Decreases from $1,210 to $1,188 
A) Increases from $1,000 to $1,018 
B) Increases from $1,000 to $1,375 
C) Decreases from $110 to $88 
D) Decreases from $1,210 to $1,188

Question 20

The holding period return has relevance because:

Accepted Answer

A) Most bonds are held by the original purchaser until maturity 
B) Most bonds are held by the original purchaser until they mature 
C) Bonds are frequently traded 
D) Current yields are not that important to bondholders 
A) Most bonds are held by the original purchaser until maturity 
B) Most bonds are held by the original purchaser until they mature 
C) Bonds are frequently traded 
D) Current yields are not that important to bondholders

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

Which of the following is true of interest-rate risk?

The text identified the various sources of risk for bonds.Are U.S.Treasury TIPS bonds free from risk? Explain.

If a one-year zero-coupon bond has a face value of $100, is purchased for $94, and is held to maturity:

If the annual interest rate is 5% (.05), the price of a one-year Treasury bill per $100 of face value would be:

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

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?

Which bond should sell for the higher price and why? (i) A basic U.S.Treasury bond, with a $10,000 face value and 20 years to maturity (ii) a U.S.Treasury TIPS bond with the same maturity and face value.

The current yield of a bond:

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

In calculating the current yield for a bond:

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

When expected inflation increases, for any given nominal interest rate:

Explain the relationship between coupon rate (or coupon yield) and current yield.

The yield on a discount basis for a $100 Treasury bill that sells for $98.50 and matures in 90 days is:

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

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

Consider a zero-coupon bond with a $1,100 payment in one year.Suppose the interest rate decreases from 10% to 8%.The price of this bond:

The holding period return has relevance because:

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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