Question 1

Changes in interest rates make investments in long-term bonds risky.

Accepted Answer

A) True 
 B)False

Question 2

Reinvestment risk is the risk that

Accepted Answer

A) a bond's value may fall in the future. 
B) a bond's future coupon payments may have to be invested at a rate lower than the bond's yield to maturity. 
C) an investor's holding period will be short and equal in length to the maturity of the bonds he or she holds. 
D) a bond's issuer may fail to make the future coupon payments and the investor will have no cash to reinvest. 
A) a bond's value may fall in the future. 
B) a bond's future coupon payments may have to be invested at a rate lower than the bond's yield to maturity. 
C) an investor's holding period will be short and equal in length to the maturity of the bonds he or she holds. 
D) a bond's issuer may fail to make the future coupon payments and the investor will have no cash to reinvest.

Question 3

A loan that requires the borrower to make the same payment every period until the maturity date is called a

Accepted Answer

A) simple loan. 
B) fixed-payment loan. 
C) discount loan. 
D) same-payment loan. 
E) none of the above. 
A) simple loan. 
B) fixed-payment loan. 
C) discount loan. 
D) same-payment loan. 
E) none of the above.

Question 4

Prices for long-term bonds are more volatile than for shorter-term bonds.

Accepted Answer

A) True 
 B)False

Question 5

Dollars received in the future are worth ________ than dollars received today. The process of calculating what dollars received in the future are worth today is called ________.

Accepted Answer

A) more; discounting 
B) less; discounting 
C) more; inflating 
D) less; inflating 
A) more; discounting 
B) less; discounting 
C) more; inflating 
D) less; inflating

Question 6

The current yield is the yearly coupon payment divided by the current market price.

Accepted Answer

A) True 
 B)False

Question 7

A frequently used approximation for the yield to maturity on a long-term bond is the

Accepted Answer

A) coupon rate. 
B) current yield. 
C) cash flow interest rate. 
D) real interest rate. 
A) coupon rate. 
B) current yield. 
C) cash flow interest rate. 
D) real interest rate.

Question 8

(I)A discount bond requires the borrower to repay the principal at the maturity date plus an interest payment. (II)A coupon bond pays the lender a fixed interest payment every year until the maturity date, when a specified final amount (face or par value)is repaid.

Accepted Answer

A) (I)is true, (II)false. 
B) (I)is false, (II)true. 
C) Both are true. 
D) Both are false. 
A) (I)is true, (II)false. 
B) (I)is false, (II)true. 
C) Both are true. 
D) Both are false.

Question 9

(I)Prices of longer-maturity bonds respond less dramatically to changes in interest rates. (II)Prices and returns for long-term bonds are less volatile than those for shorter-term bonds.

Accepted Answer

A) (I)is true, (II)false. 
B) (I)is false, (II)true. 
C) Both are true. 
D) Both are false. 
A) (I)is true, (II)false. 
B) (I)is false, (II)true. 
C) Both are true. 
D) Both are false.

Question 10

Which of the following are true for a coupon bond?

Accepted Answer

A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. 
B) The price of a coupon bond and the yield to maturity are positively related. 
C) The yield to maturity is greater than the coupon rate when the bond price is above the par value. 
D) All of the above are true. 
E) Only A and B of the above are true. 
A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. 
B) The price of a coupon bond and the yield to maturity are positively related. 
C) The yield to maturity is greater than the coupon rate when the bond price is above the par value. 
D) All of the above are true. 
E) Only A and B of the above are true.

Question 11

The current yield is the best measure of an investor's return from holding a bond.

Accepted Answer

A) True 
 B)False

Question 12

What concept is used to value a bond?

Accepted Answer

The answer of What concept is used to value a...

Question 13

The return on a bond is equal to the yield to maturity when

Accepted Answer

A) the holding period is longer than the maturity of the bond. 
B) the maturity of the bond is longer than the holding period. 
C) the holding period and the maturity of the bond are identical. 
D) none of the above. 
A) the holding period is longer than the maturity of the bond. 
B) the maturity of the bond is longer than the holding period. 
C) the holding period and the maturity of the bond are identical. 
D) none of the above.

Question 14

If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is

Accepted Answer

A) 7 percent. 
B) 22 percent. 
C) -15 percent. 
D) -8 percent. 
E) none of the above. 
A) 7 percent. 
B) 22 percent. 
C) -15 percent. 
D) -8 percent. 
E) none of the above.

Question 15

A credit market instrument that pays the owner the face value of the security at the maturity date and nothing prior to then is called a

Accepted Answer

A) simple loan. 
B) fixed-payment loan. 
C) coupon bond. 
D) discount bond. 
A) simple loan. 
B) fixed-payment loan. 
C) coupon bond. 
D) discount bond.

Question 16

Which of the following are true of coupon bonds?

Accepted Answer

A) The owner of a coupon bond receives a fixed interest payment every year until the maturity date, when the face or par value is repaid. 
B) U)S. Treasury bonds and notes are examples of coupon bonds. 
C) Corporate bonds are examples of coupon bonds. 
D) All of the above. 
E) Only A and B of the above. 
A) The owner of a coupon bond receives a fixed interest payment every year until the maturity date, when the face or par value is repaid. 
B) U)S. Treasury bonds and notes are examples of coupon bonds. 
C) Corporate bonds are examples of coupon bonds. 
D) All of the above. 
E) Only A and B of the above.

Question 17

The duration of a ten-year, 10 percent coupon bond when the interest rate is 10 percent is 6.76 years. What happens to the price of the bond if the interest rate falls to 8 percent?

Accepted Answer

A) It rises 20 percent. 
B) It rises 12.3 percent. 
C) It falls 20 percent. 
D) It falls 12.3 percent. 
A) It rises 20 percent. 
B) It rises 12.3 percent. 
C) It falls 20 percent. 
D) It falls 12.3 percent.

Question 18

What is the distinction between the nominal interest rate and the real interest rate? Which is a better indicator of incentives to borrow and lend? Why?

Accepted Answer

The nominal interest rate is the interes

Question 19

The real interest rate is equal to the nominal rate minus inflation.

Accepted Answer

A) True 
 B)False

Question 20

Interest-rate risk is the uncertainty that an investor faces because the interest rate at which a bond's future coupon payments can be invested is unknown.

Accepted Answer

A) True 
 B)False

Exam 3: What Do Interest Rates Mean and What Is Their Role in Valuation

Changes in interest rates make investments in long-term bonds risky.

Reinvestment risk is the risk that

A loan that requires the borrower to make the same payment every period until the maturity date is called a

Prices for long-term bonds are more volatile than for shorter-term bonds.

Dollars received in the future are worth ________ than dollars received today. The process of calculating what dollars received in the future are worth today is called ________.

The current yield is the yearly coupon payment divided by the current market price.

A frequently used approximation for the yield to maturity on a long-term bond is the

(I)A discount bond requires the borrower to repay the principal at the maturity date plus an interest payment. (II)A coupon bond pays the lender a fixed interest payment every year until the maturity date, when a specified final amount (face or par value)is repaid.

(I)Prices of longer-maturity bonds respond less dramatically to changes in interest rates. (II)Prices and returns for long-term bonds are less volatile than those for shorter-term bonds.

Which of the following are true for a coupon bond?

The current yield is the best measure of an investor's return from holding a bond.

What concept is used to value a bond?

The return on a bond is equal to the yield to maturity when

If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is

A credit market instrument that pays the owner the face value of the security at the maturity date and nothing prior to then is called a

Which of the following are true of coupon bonds?

The duration of a ten-year, 10 percent coupon bond when the interest rate is 10 percent is 6.76 years. What happens to the price of the bond if the interest rate falls to 8 percent?

What is the distinction between the nominal interest rate and the real interest rate? Which is a better indicator of incentives to borrow and lend? Why?

The real interest rate is equal to the nominal rate minus inflation.

Interest-rate risk is the uncertainty that an investor faces because the interest rate at which a bond's future coupon payments can be invested is unknown.

Why Study Financial Markets and Institutions

Overview of the Financial System

Why Do Interest Rates Change

How Do Risk and Term Structure Affect Interest Rates

Are Financial Markets Efficient

Why Do Financial Institutions Exist

Why Do Financial Crises Occur and Why Are They so Damaging to the Economy

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging With Financial Derivatives

Savings Associations and Credit Unions

Finance Companies

Filters

Dollars received in the future are worth than dollars received today. The process of calculating what dollars received in the future are worth today is called .