Question 1

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.

Question 2

If the annual interest rate is 9%,what would you expect to pay for a discount bond paying $10,000 in two years?

Accepted Answer

A)  $8,417 
B)  $8,200 
C)  $10,000 
D)  $11,881

Question 3

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.

Question 4

A sustained decrease in the price level is known as

Accepted Answer

A)  inflation. 
B)  disinflation. 
C)  reflation. 
D)  deflation.

Question 5

The amount of funds the borrower receives from the lender with a simple loan is called the

Accepted Answer

A)  principal. 
B)  equity. 
C)  claim. 
D)  collateral.

Question 6

If i is the yield to maturity of a fixed-payment loan,

Accepted Answer

A)  the value of the loan today equals i times the sum of the values of all the loan payments. 
B)  i equals the present value of the loan payments. 
C)  the value of the loan today equals the sum of the values of the loan payments. 
D)  the value of the loan today equals the present value of the loan payments discounted at rate i.

Question 7

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%.

Question 8

Interest-rate risk can best be characterized as the risk that

Accepted Answer

A)  you could have earned a higher interest rate if you waited to purchase a bond. 
B)  fluctuations in the price of a financial asset in response to changes in market interest rates. 
C)  you could have gotten a lower interest rate if you waited to lock in a mortgage. 
D)  short-term interest rates may exceed long-term interest rates.

Question 9

Suppose you put $500 in your savings account and earn 4% interest per year.How much will you have in your account after two years? Be sure to round off to the nearest cent

Accepted Answer

The answer of Suppose you put $500 in your savings...

Question 10

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.

Question 11

How do payments on a fixed-payment loan differ from a coupon bond?

Accepted Answer

The answer of How do payments on a fixed-payment loan...

Question 12

The total rate of return is equal to the

Accepted Answer

A)  sum of the coupon rate and the current yield. 
B)  yield to maturity. 
C)  sum of the current yield and the actual rate of capital gain or loss. 
D)  sum of the current yield and the expected rate of capital gain.

Question 13

Which group is hurt by inflation being less than expected?

Accepted Answer

A)  holders of TIPS 
B)  lenders of fixed-rate mortgages 
C)  borrowers with fixed-rate mortgages 
D)  all of the above

Question 14

The key difficulty in answering the question: "Would you be better off financing your new home with a 15-year mortgage at 5% or by borrowing for five years at 4% and refinancing thereafter?" is that

Accepted Answer

A)  housing prices are very erratic. 
B)  the tax deductibility of mortgage interest payments has changed over time. 
C)  dollars paid in different periods do not have the same value. 
D)  15-year mortgages are fixed-payment loans while 5-year mortgages are simple loans.

Question 15

What is the yield to maturity of a perpetuity with a coupon of $40 and a price of $800?

Accepted Answer

The answer of What is the yield to maturity of...

Question 16

What is the yield to maturity of a consol with a coupon of $85 and a price of $944.44?

Accepted Answer

A)  5.56% 
B)  8.50% 
C)  9.00% 
D)  Not enough information has been provided to determine the answer.

Question 17

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 18

A bond's price and its yield to maturity are inversely related because

Accepted Answer

A)  discounting future payments at a higher rate reduces the present value of the payments. 
B)  discounting future payments at a higher rate increases the present value of the payments. 
C)  an increase in the yield to maturity will lower a bond's coupon rate and hence its price. 
D)  a fall in a bond's price will lower its par value and hence its yield to maturity.

Question 19

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 20

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

Accepted Answer

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

Exam 3: Interest Rates and Rates of Return