Deck 3: Interest Rates and Rates of Return

Question 1

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

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

Answer 1

$8,417

Question 2

A debt instrument represents

A) an ownership claim by the purchaser on the issuer.
B) a promise by a borrower to repay principal plus interest to a lender.
C) an attempt by a borrower in default to restore his or her credit.
D) a nontaxable asset, owned primarily by large corporations.

Answer 2

a promise by a borrower to repay principal plus interest to a lender.

Question 3

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?

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

Answer 3

$4,632

Question 4

Suppose Matt's New Cars issues a bond in which they'll need to pay $10,000 in one year,which includes 4% interest.How much will they receive for the bond?

A) $9,600
B) $9,615
C) $10,000
D) $10,400

Question 5

Compounding refers to

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 6

Suppose you had $1,000 and were deciding between two investments.One pays 5% a year for two years while the other pays 8% the first year and 2% the second year.Which investment would provide a higher return?

Question 7

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.

Question 8

What are three reasons that banks charge interest on loans?

Question 9

Simple loans and discount bonds differ from coupon bonds and fixed-payment loans in that

A) interest on simple loans and discount bonds is taxable, while interest on coupon bonds and fixed-payment loans is not.
B) interest on coupon bonds and fixed-payment loans is taxable, while interest on simple loans and discount bonds is not.
C) interest rates on simple loans and discount bonds are generally higher than interest rates on comparable coupon bonds and fixed-payment loans.
D) interest on simple loans and discount bonds is paid in a single payment, while issuers of coupon bonds and fixed-payment loans make multiple payments of interest and principal.

Question 10

Debt instruments are also called

A) equities.
B) credit market instruments.
C) prospectuses.
D) units of account.

Question 11

If you deposit $500 in a savings account at an annual interest rate of 5%,how much will you have in the account at the end of five years?

A) $392
B) $550
C) $625
D) $638

Question 12

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

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

Question 13

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

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

Question 14

At an interest rate of 3%,what is the present value of $1,000 to be received five years from now?

A) $850
B) $863
C) $1,159
D) $1,667

Question 15

The price of a financial asset equals the

A) future value of all payments.
B) sum of all payments.
C) present value of all future payments.
D) difference between the future value and present value of all payments.

Question 16

$1 received n years from now has a value today of

A) ($1 + i)/i.
B) $1/(1 + i).
C) ($1 + i)ⁿ/i.
D) $1/(1 + i)ⁿ.

Question 17

The key to present value calculations is that they

A) are appropriate only for funds in the same time period.
B) provide a common unit for measuring funds at different times.
C) provide accurate answers only in a low-inflation environment.
D) provide accurate answers only in a high-inflation environment.

Question 18

If you deposit $10,000 in a savings account at an annual interest rate of 6%,how much will you have in the account at the end of three years?

A) $8,396
B) $10,600
C) $11,800
D) $11,910

Question 19

Suppose you have two clients who need your services for two years.One agreed to pay you $50,000 one year from now and another $50,000 in two years while the other paid $35,000 after one year,but $65,000 after two years.Assuming an interest rate of 10%,which one has a higher present value? Round off to the nearest dollar.

Question 20

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

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

Question 21

Which of the following is a coupon bond?

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

Question 22

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

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

Question 23

The current yield is equal to

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 24

A coupon bond involves

A) interest payments from the borrower to the lender periodically during the life of the loan and payment by the borrower to the lender of the face value of the loan at maturity.
B) interest and principal payments from the borrower to the lender periodically during the life of the loan.
C) periodic payments by the borrower to the lender that include both principal and interest.
D) periodic payments by the borrower to the lender that include principal, but not interest.

Question 25

A coupon bond has an annual coupon of $75,a par value of $1,000,and a market price of $900.Its current yield equals

A) 7.50%.
B) 8.33%.
C) its yield to maturity.
D) Not enough information has been provided to calculate the current yield for this bond.

Question 26

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

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

Question 27

The coupon rate is the

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 28

Suppose First National Bank makes a one-year simple loan of $1,000 at 7% interest to Harry's Restaurant.At the end of one year Harry's Restaurant will pay First National

A) $934.58.
B) $1,007.
C) $1,070.
D) $1,700.

Question 29

When the price of a coupon bond increases

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

Question 30

Suppose a coupon bond with a par value of $1,000 is currently priced at $950 and has a coupon of $40.Which of the following is TRUE?

A) current yield > coupon rate
B) current yield < coupon rate
C) Coupon rate has risen.
D) Coupon rate has declined.

Question 31

A simple loan involves

A) interest payments from the borrower to the lender periodically during the life of the loan.
B) no payment of interest by the borrower to the lender.
C) payment of interest by the borrower to the lender only at the time the loan matures.
D) payment only of principal by the borrower to the lender at maturity.

Question 32

Which of the following is NOT a fixed payment loan?

A) a home mortgage
B) a car loan
C) a U.S. Treasury note
D) a student loan

Question 33

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

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

Question 34

A discount bond resembles a simple loan in that

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 35

Which of the following is NOT a discount bond?

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

Question 36

The most common type of simple loan is a(an)

A) automobile loan from a bank.
B) mortgage loan from a bank.
C) commercial loan from a bank.
D) corporate bond.

Question 37

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

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 38

Which of the following is a fixed payment loan?

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

Question 39

Issuers of coupon bonds

A) make a single payment of principal when the bonds matures, but multiple payments of interest over the life of the bond.
B) make a single payment of interest and principal.
C) make multiple payments of principal, but a single payment of interest.
D) make a single payment of principal at the time the bond is issued and multiple payments of interest over the life of the bond.

Question 40

A discount bond involves

A) interest payments from the borrower to the lender periodically during the life of the loan.
B) payment by the borrower to the lender of the face value of the loan at maturity.
C) no payment of principal by the borrower to the lender.
D) payment of interest by the borrower to the lender every six months during the life of the loan.

Question 41

Suppose Matt's New Cars issues and sells a one-year discount bond for $9,259 and repays $10,000 at maturity.The interest rate on this bond would be

A) 2.6%.
B) 7.41%.
C) 8%.
D) 10%.

Question 42

For simple loans,the yield to maturity

A) is always less than the specified simple interest rate.
B) is always greater than the specified simple interest rate.
C) is always equal to the specified simple interest rate.
D) may be less than, greater than, or equal to the specified simple interest rate, depending on the maturity of the loan.

Question 43

The yield to maturity is equal to

A) the interest rate at which the present value of an asset's returns is equal to its price today.
B) the face value or par value of a coupon bond.
C) any payments received from an asset at the date the asset matures.
D) interest rate on the asset minus any taxes owed on the interest received.

Question 44

Suppose a bond has a coupon of $75,face value of $1,000,and current price of $1,100.What is the coupon rate? What is its current yield? Report a percentage with two decimal places.

Question 45

Which of the following involves payment of part of the face value or principal prior to maturity?

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

Question 46

What is the yield to maturity on a simple loan that requires payment of $500 plus $30 in interest one year from now?

A) 5.3%
B) 6%
C) 6.38%
D) Not enough information has been provided to determine the answer.

Question 47

Which of the following is a consequence of extending the payback period of a student loan from 10 to 30 years?

A) higher monthly payments
B) more interest paid over the life of the loan
C) faster payoff of principal
D) lower monthly payments initially, but higher monthly payments in the future

Question 48

What is the price of a coupon bond that has annual coupon payments of $75,a par value of $1,000,a yield to maturity of 5%,and a maturity of two years?

A) $1,043.08
B) $1,046.49
C) $1,000.00
D) $1,150.00

Question 49

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

Question 50

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

A) mortgage
B) car loan
C) student loan
D) corporate bond

Question 51

Suppose a firm receives $975 for a discount bond with a face value of $1,000 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.

Question 52

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

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

Question 53

A one-year discount bond with a par value of $5,000 sold today,at issuance,for $4,750 has a yield to maturity of

A) 2.50%.
B) 5.00%.
C) 5.26%.
D) 9.75%.

Question 54

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

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 55

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

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

Question 56

On a coupon bond,the yield to maturity

A) always equals the coupon rate.
B) equates the present value of all the bond's payments to its price today.
C) increases when the market price of the bond increases.
D) equals the coupon payment divided by the current price of the bond.

Question 57

What is the price of a coupon bond that has annual coupon payments of $85,a par value of $1,000,a yield to maturity of 10%,and a maturity of three years?

A) $211.38
B) $898.84
C) $962.70
D) $1,255.00

Question 58

A one-year discount bond with a par value of $1,000 sold today,at issuance,for $943 has a yield to maturity of

A) 4.30%.
B) 5.70%.
C) 6.04%.
D) 9.43%.

Question 59

Which of the following is fixed on a coupon bond?

A) coupon rate
B) current yield
C) market price
D) yield to maturity

Question 60

Suppose a bond has a coupon of $40,face value of $1,000,and current price of $950.What is the coupon rate? What is its current yield? Report a percentage with two decimal places.

Question 61

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

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 62

Which of the following will result in a decrease in the price of an existing corporate bond?

A) lower expectations of inflation
B) new bonds issued at a lower interest rate
C) increased default risk
D) all of the above

Question 63

With respect to U.S.Treasury bills

A) the bid price is always greater than the asked price.
B) the asked price is always greater than the bid price.
C) the bid price is only greater than the asked price if investors expect interest rates to decline in the future.
D) the asked price is only greater than the bid price if investors expect interest rates to decline in the future.

Question 64

A one-year discount bond has a face value of $1,000 and a price of $925.What is the yield to maturity on the bond? Report using percentages with two decimal places.

Question 65

An speculator who buys a fifty-year corporate bond

A) must be expecting to still be alive in fifty years.
B) is subject to substantial reinvestment risk.
C) is probably expecting market interest rates to increase in the future.
D) is probably expecting market interest rates to decrease in the future.

Question 66

As the housing bubble began to burst in 2006-2008,investors would only buy mortgage-backed securities at high yields to compensate for higher perceived default risk.As a result

A) banks suffered significant capital losses as the value of their holdings of mortgage-backed securities declined.
B) funds available for mortgages increased.
C) bank profits rose as they earned higher interest on mortgages.
D) the price of mortgage-backed securities tended to rise due to the higher yields.

Question 67

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

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 68

A capital gain occurs when the

A) coupon rate increases.
B) current yield increases.
C) price of an asset increases.
D) yield to maturity increases.

Question 69

Banks who held mortgage-backed securities "took a bath" during the financial crisis of 2007-2009 due to

A) rising yields in secondary markets which led to a decline in the price of mortgage-backed securities.
B) falling yields in secondary markets which led to a decline in the price of mortgage-backed securities.
C) their inability to issue new mortgages.
D) more rapid pre-payment of mortgages.

Question 70

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

Question 71

Unless otherwise indicated,when economists or investors refer to the interest rate on a financial asset,they are referring to the

A) current yield.
B) coupon rate.
C) yield to maturity.
D) prime rate.

Question 72

If,while you are holding a coupon bond,the interest rates on other similar bonds fall,you can be sure that

A) the coupon payments on your bond will fall.
B) the market price of your bond will rise.
C) the market price of your bond will fall.
D) the par value of your bond will rise.

Question 73

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

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

Question 74

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 $9,500,and will mature in 180 days?

A) 5.00%
B) 5.25%
C) 10.00%
D) 10.67%

Question 75

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

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 76

A one-year discount bond has a face value of $1,000 and price of $880.What is the yield to maturity on the bond? Report using percentages with two decimal places.

Question 77

The bid price for a bond is

A) the minimum price that you are allowed to bid for a bond that is being auctioned by the government.
B) the maximum price that you are allowed to bid for a bond that is being auctioned by the government.
C) the price that you will receive from a securities dealer if you sell the bond.
D) the price that you must pay a securities dealer to purchase a bond.

Question 78

Which of the following types of mortgage loans became more common during the housing boom of the early-to-mid 2000s?

A) those with flawed credit histories
B) thirty-year, fixed-rate mortgages
C) prime mortgages
D) those with down payments of at least 20%

Question 79

Which of the following represents the equation that would be used to determine the yield to maturity of a three-year fixed payment loan of $1,400 which has payments of $500 per year?

A) $1,400 = $500/(1 + i) + $500/(1 + i)² + $500/(1 + i)³
B) $1,400 = $500/(1 + i)³
C) i = (1,400-500)/1,400
D) $1,400 = $500/(1 + i) + $500/(1 + i)² + $500(1 + i)³ + 1,400/(1 + i)³

Question 80

Which of the following represents the equation that would be used to determine the yield to maturity of a corporate bond with a face value of $1,000,price of $1,100,coupon rate of 5%,and maturity in three years?

A) $1,100 = $1,500/(1 + i)³
B) $1,100 = $500/(1 + i) + $500/(1 + i)² + 1,000/(1 + i)³
C) $1,100 = $500/(1 + i) + $500/(1 + i)² + 500/(1 + i)³
D) $1,100 = $500/(1 + i) + $500/(1 + i)² + 1,500/(1 + i)³