Question 1

What is the yield on a discount basis for a U.S. Treasury bill that has a face value of $10,000, has a price of $9500, and will mature in 180 days?

Accepted Answer

A) 5)00% 
B) 5)25% 
C) 10.00% 
D) 10.67%

Question 2

Which of the following is NOT a discount bond?

Accepted Answer

A) a U.S. savings bond 
B) a U.S. Treasury bill 
C) a U.S. Treasury note 
D) a zero-coupon bond

Question 3

Suppose a firm receives $975 for a discount bond with a face value of $1000 to be repaid in one year. What is the amount of interest on the bond? What is the interest rate on the bond? Report a percentage with two decimal places.

Accepted Answer

The answer of Suppose a firm receives $975 for a...

Question 4

A one-year discount bond with a par value of $5000 sold today, at issuance, for $4750 has a yield to maturity of

Accepted Answer

A) 5)00%. 
B) 5)26%. 
C) 2)50%. 
D) 9)75%.

Question 5

A corporation issues a three year bond with a coupon of $50 and a face value of $1000. Immediately after being issued, market interest rates decline to 4%. What is the price of the bond? Report your answer to the nearest dollar.

Accepted Answer

The answer of A corporation issues a three year bond...

Question 6

Though Treasury bonds may have little default risk, what type of risk exists when current interest rates are low?

Accepted Answer

A) price risk 
B) refinancing risk 
C) interest-rate risk 
D) present value risk

Question 7

A borrower and a lender agree on a mortgage interest rate. If inflation turns out to be less than expected

Accepted Answer

A) the actual real interest rate will exceed the expected real interest rate. 
B) the actual real interest rate will be less than the expected real interest rate. 
C) the actual nominal interest rate will be higher than expected. 
D) the actual nominal interest rate will be less than expected.

Question 8

The coupon rate is the

Accepted Answer

A) annual coupon payment divided by the face value of the bond. 
B) annual coupon payment divided by the market value of the bond. 
C) difference between the face value of the bond and its par value. 
D) coupon paid every 6 months divided by par value.

Question 9

Which of the following is NOT true of a fixed payment loan?

Accepted Answer

A) The borrower is required to make regular periodic payments to the lender. 
B) The payments made by the borrower include both interest and principal. 
C) The borrower is left with a substantial unpaid principal at the maturity of the loan. 
D) A home mortgage is an example of fixed payment loan.

Question 10

When the price of a coupon bond increases,

Accepted Answer

A) the coupon rate declines 
B) the coupon rate increases 
C) the current yield declines 
D) the current yield increases

Question 11

What is the price of a coupon bond that has annual coupon payments of $75, a par value of $1000, a yield to maturity of 5%, and a maturity of two years?

Accepted Answer

A) $1043.08 
B) $1046.49 
C) $1000.00 
D) $1150.00

Question 12

Which of the following will lead to a higher interest rate on a loan?

Accepted Answer

A) lower inflation 
B) lower opportunity cost 
C) increased perceived risk of default 
D) reduced likelihood of borrower not paying the loan

Question 13

The total payment to a lender for a one-period simple loan is

Accepted Answer

A) (P + i)n. 
B) P + i. 
C) i(1 + i). 
D) P(1 + i).

Question 14

If, while you are holding a coupon bond, its market price falls, you can be sure that

Accepted Answer

A) the coupon payment you are receiving must have been reduced. 
B) the interest rate on other similar bonds must have fallen. 
C) the interest rate on other similar bonds must have risen. 
D) the par value of the bond must have declined.

Question 15

Compounding refers to

Accepted Answer

A) the calculation of interest rates after the compounding effect of taxes has been allowed for. 
B) the paying back of both interest and principal during the life of a fixed payment loan. 
C) the process of earning interest on both the interest and the principal of an investment. 
D) the increased value of an investment that arises from the payment of periodic interest.

Question 16

If the current price of a bond is less than its face value,

Accepted Answer

A) an investor will receive a capital gain by holding the bond until maturity. 
B) the yield to maturity must be less than the current yield. 
C) the coupon rate must be greater than the current yield. 
D) the coupon rate must be equal to the current yield.

Question 17

If the annual interest rate is 8%, what would you expect to pay for a bond paying a lump sum of $10,000 in ten years?

Accepted Answer

A) $4,632 
B) $9,259 
C) $10,000 
D) $21,589

Question 18

The yield to maturity on a new one-year discount bond equals

Accepted Answer

A) (F V- P)/P. 
B) (D - FV)/P. 
C) (FV - P)/FV. 
D) (P - FV)/FV.

Question 19

At an interest rate of 6%, how much will need to be invested today to have $10,000 in 5 years?

Accepted Answer

A) $5,000 
B) $7,473 
C) $10,000 
D) $13,382

Question 20

If the real interest rate is 2% and expected inflation is 2%, the nominal interest rate is:

Accepted Answer

A) 0% 
B) 1% 
C) 2% 
D) 4%

Exam 3: Interest Rates and Rates of Return