Question 1

What is the purpose of discounting cash flows?

Accepted Answer

The answer of What is the purpose of discounting cash...

Question 2

Bonds with a maturity that is longer than the holding period have no interest-rate risk.

Accepted Answer

A) True 
 B)False

Question 3

If a $10,000 face value discount bond maturing in one year is selling for $8,000, then its yield to maturity is

Accepted Answer

A) 10 percent. 
B) 20 percent. 
C) 25 percent. 
D) 40 percent. 
A) 10 percent. 
B) 20 percent. 
C) 25 percent. 
D) 40 percent.

Question 4

If a $10,000 face value discount bond maturing in one year is selling for $5,000, then its yield to maturity is

Accepted Answer

A) 5 percent. 
B) 10 percent. 
C) 50 percent. 
D) 100 percent. 
A) 5 percent. 
B) 10 percent. 
C) 50 percent. 
D) 100 percent.

Question 5

How does reinvestment risk differ from interest-rate risk?

Accepted Answer

The answer of How does reinvestment risk differ from interest-rate...

Question 6

If an investor's holding period is longer than the term to maturity of a bond, he or she is exposed to

Accepted Answer

A) interest-rate risk. 
B) reinvestment risk. 
C) bond-market risk. 
D) yield-to-maturity risk. 
A) interest-rate risk. 
B) reinvestment risk. 
C) bond-market risk. 
D) yield-to-maturity risk.

Question 7

What concept is used to value a bond?

Accepted Answer

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

Question 8

The yield to maturity on a consol bond that pays $100 yearly and sells for $500 is

Accepted Answer

A) 5 percent. 
B) 10 percent. 
C) 12.5 percent. 
D) 20 percent. 
E) 25 percent. 
A) 5 percent. 
B) 10 percent. 
C) 12.5 percent. 
D) 20 percent. 
E) 25 percent.

Question 9

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 10

The yield to maturity of a one-year, simple loan of $400 that requires an interest payment of $50 is

Accepted Answer

A) 5 percent. 
B) 8 percent. 
C) 12 percent. 
D) 12.5 percent. 
A) 5 percent. 
B) 8 percent. 
C) 12 percent. 
D) 12.5 percent.

Question 11

An $8,000 coupon bond with a $400 annual coupon payment has a coupon rate of

Accepted Answer

A) 5 percent. 
B) 8 percent. 
C) 10 percent. 
D) 40 percent. 
A) 5 percent. 
B) 8 percent. 
C) 10 percent. 
D) 40 percent.

Question 12

When a bond's price falls, its yield to maturity ________ and its current yield ________.

Accepted Answer

A) falls; falls 
B) rises; rises 
C) falls; rises 
D) rises; falls 
A) falls; falls 
B) rises; rises 
C) falls; rises 
D) rises; falls

Question 13

A coupon bond pays the owner of the bond

Accepted Answer

A) the same amount every month until the maturity date. 
B) a fixed interest payment every period, plus the face value of the bond at the maturity date. 
C) the face value of the bond plus an interest payment once the maturity date has been reached. 
D) the face value at the maturity date. 
E) none of the above. 
A) the same amount every month until the maturity date. 
B) a fixed interest payment every period, plus the face value of the bond at the maturity date. 
C) the face value of the bond plus an interest payment once the maturity date has been reached. 
D) the face value at the maturity date. 
E) none of the above.

Question 14

All else being equal, the greater the interest rate the greater the duration is.

Accepted Answer

A) True 
 B)False

Question 15

A $10,000, 8 percent coupon bond that sells for $10,000 has a yield to maturity of

Accepted Answer

A) 8 percent. 
B) 10 percent. 
C) 12 percent. 
D) 14 percent. 
A) 8 percent. 
B) 10 percent. 
C) 12 percent. 
D) 14 percent.

Question 16

A bond's current market value is equal to the present value of the coupon payments plus the present value of the face amount.

Accepted Answer

A) True 
 B)False

Question 17

The concept of ________ is based on the notion that a dollar paid to you in the future is less valuable to you than a dollar today.

Accepted Answer

A) present value 
B) future value 
C) interest 
D) deflation 
A) present value 
B) future value 
C) interest 
D) deflation

Question 18

The nominal interest rate minus the expected rate of inflation

Accepted Answer

A) defines the real interest rate. 
B) is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate. 
C) is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate. 
D) defines the discount rate. 
A) defines the real interest rate. 
B) is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate. 
C) is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate. 
D) defines the discount rate.

Question 19

The yield to maturity for a one-year discount bond equals

Accepted Answer

A) the increase in price over the year, divided by the initial price. 
B) the increase in price over the year, divided by the face value. 
C) the increase in price over the year, divided by the interest rate. 
D) none of the above. 
A) the increase in price over the year, divided by the initial price. 
B) the increase in price over the year, divided by the face value. 
C) the increase in price over the year, divided by the interest rate. 
D) none of the above.

Question 20

The Fisher equation states that

Accepted Answer

A) the nominal interest rate equals the real interest rate plus the expected rate of inflation. 
B) the real interest rate equals the nominal interest rate less the expected rate of inflation. 
C) the nominal interest rate equals the real interest rate less the expected rate of inflation. 
D) both A and B of the above are true. 
E) both A and C of the above are true. 
A) the nominal interest rate equals the real interest rate plus the expected rate of inflation. 
B) the real interest rate equals the nominal interest rate less the expected rate of inflation. 
C) the nominal interest rate equals the real interest rate less the expected rate of inflation. 
D) both A and B of the above are true. 
E) both A and C of the above are true.

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

What is the purpose of discounting cash flows?

Bonds with a maturity that is longer than the holding period have no interest-rate risk.

If a $10,000 face value discount bond maturing in one year is selling for $8,000, then its yield to maturity is

If a $10,000 face value discount bond maturing in one year is selling for $5,000, then its yield to maturity is

How does reinvestment risk differ from interest-rate risk?

If an investor's holding period is longer than the term to maturity of a bond, he or she is exposed to

What concept is used to value a bond?

The yield to maturity on a consol bond that pays $100 yearly and sells for $500 is

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

The yield to maturity of a one-year, simple loan of $400 that requires an interest payment of $50 is

An $8,000 coupon bond with a $400 annual coupon payment has a coupon rate of

When a bond's price falls, its yield to maturity ________ and its current yield ________.

A coupon bond pays the owner of the bond

All else being equal, the greater the interest rate the greater the duration is.

A $10,000, 8 percent coupon bond that sells for $10,000 has a yield to maturity of

A bond's current market value is equal to the present value of the coupon payments plus the present value of the face amount.

The concept of ________ is based on the notion that a dollar paid to you in the future is less valuable to you than a dollar today.

The nominal interest rate minus the expected rate of inflation

The yield to maturity for a one-year discount bond equals

The Fisher equation states that

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

When a bond's price falls, its yield to maturity and its current yield .