Deck 4: Understanding Interest Rates

Question 1

A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a ________.

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

Answer 1

A

Question 2

A ________ pays the owner a fixed coupon payment every year until the maturity date,when the ________ value is repaid.

A) coupon bond; discount
B) discount bond; discount
C) coupon bond; face
D) discount bond; face

Answer 2

C

Question 3

With an interest rate of 6 percent,the present value of $100 next year is approximately ________.

A) $106
B) $100
C) $94
D) $92

Answer 3

C

Question 4

A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a ________.

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

Question 5

The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's ________.

A) coupon rate
B) maturity rate
C) face value rate
D) payment rate

Question 6

If a security pays $55 in one year and $133 in three years,its present value is $150 if the interest rate is ________.

A) 5 percent
B) 10 percent
C) 12.5 percent
D) 15 percent

Question 7

A bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a ________.

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

Question 8

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

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

Question 9

The present value of an expected future payment ________ as the interest rate increases.

A) falls
B) rises
C) is constant
D) is unaffected

Question 10

The ________ is the final amount that will be paid to the holder of a coupon bond.

A) discount value
B) coupon value
C) face value
D) present value

Question 11

When talking about a coupon bond,face value and ________ mean the same thing.

A) par value
B) coupon value
C) amortized value
D) discount value

Question 12

An increase in the time to the promised future payment ________ the present value of the payment.

A) decreases
B) increases
C) has no effect on
D) is irrelevant to

Question 13

To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of ________.

A) face value
B) par value
C) deflation
D) discounting the future

Question 14

All of the following are examples of coupon bonds except ________.

A) Corporate bonds
B) Treasury bills
C) Zero coupon bonds
D) Government bonds

Question 15

Which of the following is true of fixed payment loans?

A) The borrower repays both the principal and interest at the maturity date.
B) Installment loans and mortgages are frequently of the fixed payment type.
C) The borrower pays interest periodically and the principal at the maturity date.
D) Commercial loans to businesses are often of this type.

Question 16

An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of ________.

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

Question 17

A ________ is bought at a price below its face value,and the ________ value is repaid at the maturity date.

A) coupon bond; discount
B) discount bond; discount
C) coupon bond; face
D) discount bond; face

Question 18

A fully amortized loan is another name for ________.

A) a simple loan
B) a fixed-payment loan
C) a commercial loan
D) an unsecured loan

Question 19

If a $5,000 coupon bond has a coupon rate of 13 percent,then the coupon payment every year is ________.

A) $650
B) $1,300
C) $130
D) $13

Question 20

A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a ________.

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

Question 21

The price of a coupon bond and the yield to maturity are ________ related; that is,as the yield to maturity ________,the price of the bond ________.

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

Question 22

Which of the following is true for a coupon bond?

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) The yield is less than the coupon rate when the bond price is below the par value.

Question 23

Examples of discount bonds include ________.

A) Treasury bills
B) corporate bonds
C) coupon bonds
D) municipal bonds

Question 24

Economists consider the ________ to be the most accurate measure of interest rates.

A) simple interest rate
B) current yield
C) yield to maturity
D) real interest rate

Question 25

Which of the following bonds would you prefer to be buying?

A) A $10,000 face-value security with a 10 percent coupon selling for $9,000
B) A $10,000 face-value security with a 7 percent coupon selling for $10,000
C) A $10,000 face-value security with a 9 percent coupon selling for $10,000
D) A $10,000 face-value security with a 10 percent coupon selling for $10,000

Question 26

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

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

Question 27

Which of the following are true for discount bonds?

A) A discount bond is bought at par.
B) The purchaser receives the face value of the bond at the maturity date.
C) Canada bonds and notes are examples of discount bonds.
D) The purchaser receives the par value at maturity plus any capital gains.

Question 28

For simple loans,the simple interest rate is ________ the yield to maturity.

A) greater than
B) less than
C) equal to
D) not comparable to

Question 29

Which of the following $1,000 face-value securities has the highest yield to maturity?

A) A 5 percent coupon bond with a price of $600
B) A 5 percent coupon bond with a price of $800
C) A 5 percent coupon bond with a price of $1,000
D) A 5 percent coupon bond with a price of $1,200

Question 30

If $22,050 is the amount payable in two years for a $20,000 simple loan made today,the interest rate is ________.

A) 5 percent
B) 10 percent
C) 22 percent
D) 25 percent

Question 31

For a 3-year simple loan of $10,000 at 10 percent,the amount to be repaid is ________.

A) $10,030
B) $10,300
C) $13,000
D) $13,310

Question 32

If a security pays $110 next year and $121 the year after that,what is its yield to maturity if it sells for $200?

A) 9 percent
B) 10 percent
C) 11 percent
D) 12 percent

Question 33

The present value of a fixed-payment loan is calculated as the ________ of the present value of all cash flow payments.

A) sum
B) difference
C) multiple
D) log

Question 34

The interest rate that equates the present value of payments received from a debt instrument with its value today is the ________.

A) simple interest rate
B) current yield
C) yield to maturity
D) real interest rate

Question 35

Which of the following $1,000 face-value securities has the lowest yield to maturity?

A) A 5 percent coupon bond selling for $1,000
B) A 10 percent coupon bond selling for $1,000
C) A 15 percent coupon bond selling for $1,000
D) A 15 percent coupon bond selling for $900

Question 36

The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value.

A) greater; coupon; above
B) greater; coupon; below
C) greater; perpetuity; above
D) less; perpetuity; below

Question 37

If the amount payable in two years is $2420 for a simple loan at 10 percent interest,the loan amount is ________.

A) $1000
B) $1210
C) $2000
D) $2200

Question 38

Which of the following $1,000 face-value securities has the highest yield to maturity?

A) A 5 percent coupon bond selling for $1,000
B) A 10 percent coupon bond selling for $1,000
C) A 12 percent coupon bond selling for $1,000
D) A 12 percent coupon bond selling for $1,100

Question 39

A discount bond ________.

A) pays the bondholder a fixed amount every period and the face value at maturity
B) pays the bondholder the face value at maturity
C) pays all interest and the face value at maturity
D) pays the face value at maturity plus any capital gain

Question 40

Which of the following $5,000 face-value securities has the highest yield-to maturity?

A) A 6 percent coupon bond selling for $5,000
B) A 6 percent coupon bond selling for $5,500
C) A 10 percent coupon bond selling for $5,000
D) A 12 percent coupon bond selling for $4,500

Question 41

If the interest rate is 5 percent,what is the present value of a security that pays you $1,050 next year and $1,102.50 two years from now? If this security sold for $2200,is the yield to maturity greater or less than 5 percent? Why?

Question 42

Which of the following is true concerning the distinction between interest rates and returns?

A) The rate of return on a bond will not necessarily equal the interest rate on that bond.
B) The return can be expressed as the difference between the current yield and the rate of capital gains.
C) The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1.
D) The return can be expressed as the sum of the discount yield and the rate of capital gains.

Question 43

Explain why the current bond prices and interest rates are negatively related.

Question 44

What is a coupon bond? Describe its basic properties.

Question 45

The ________ is defined as the payments to the owner plus the change in a security's value expressed as a fraction of the security's purchase price.

A) yield to maturity
B) current yield
C) rate of return
D) yield rate

Question 46

A coupon bond that has no maturity date and no repayment of principal is called a ________.

A) consol
B) cabinet
C) Treasury bill
D) Government note

Question 47

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

A) 0 percent
B) 5 percent
C) 10 percent
D) 20 percent

Question 48

A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of ________.

A) 3 percent
B) 20 percent
C) 25 percent
D) 33.3 percent

Question 49

The yield to maturity for a one-year discount bond equals the increase in price over the year,divided by the ________.

A) initial price
B) face value
C) interest rate
D) coupon rate

Question 50

The yield to maturity for a discount bond is ________ related to the current bond price.

A) negatively
B) positively
C) not
D) directly

Question 51

How is current yield defined? How can it be used to determine yield to maturity for long-term bonds?

Question 52

The interest rate on a consol equals the ________.

A) price times the coupon payment
B) price divided by the coupon payment
C) coupon payment plus the price
D) coupon payment divided by the price

Question 53

A relative has just won a state lottery paying $20 million in installments of $1 million per year for twenty years.Your relative states that she is $20 million richer.Is she correct? Create a simple example for two years to illustrate your position.

Question 54

In Japan in 1998 and in the U.S.in 2008,interest rates were negative for a short period of time because investors found it convenient to hold six-month bills as a store of value because ________.

A) of the high inflation rate
B) these bills sold at a discount from face value
C) the bills were denominated in small amounts and could be stored electronically
D) the bills were denominated in large amounts and could be stored electronically

Question 55

If a perpetuity has a price of $500 and an annual interest payment of $25,the interest rate is ________.

A) 2.5 percent
B) 5 percent
C) 7.5 percent
D) 10 percent

Question 56

The price of a consol equals the coupon payment ________.

A) times the interest rate
B) plus the interest rate
C) minus the interest rate
D) divided by the interest rate

Question 57

A consol paying $20 annually when the interest rate is 5 percent has a price of ________.

A) $100
B) $200
C) $400
D) $800

Question 58

The yield to maturity for a perpetuity is a useful approximation for the yield to maturity on long-term coupon bonds.It is called the ________ when approximating the yield for a coupon bond.

A) current yield
B) discount yield
C) future yield
D) star yield

Question 59

The sum of the current yield and the rate of capital gain is called the ________.

A) rate of return
B) discount yield
C) perpetuity yield
D) par value

Question 60

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

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

Question 61

Which of the following is generally true of all bonds?

A) The longer a bond's maturity, the greater is the rate of return that occurs as a result of the increase in the interest rate.
B) Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise.
C) Prices and returns for short-term bonds are more volatile than those for longer term bonds.
D) A fall in interest rates results in capital losses for bonds whose terms to maturity are longer than the holding period.

Question 62

The nominal interest rate minus the expected rate of inflation ________.

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 63

Your favorite uncle advises you to purchase long-term bonds because their interest rate is 10 percent.Should you follow his advice?

Question 64

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?

A) 5 percent
B) 10 percent
C) -5 percent
D) 25 percent

Question 65

There is ________ for any bond whose time to maturity matches the holding period.

A) no interest-rate risk
B) a large interest-rate risk
C) rate-of-return risk
D) yield-to-maturity risk

Question 66

If the interest rates on all bonds rise from 5 to 6 percent over the course of the year,which bond would you prefer to have been holding?

A) A bond with one year to maturity
B) A bond with five years to maturity
C) A bond with ten years to maturity
D) A bond with twenty years to maturity

Question 67

Interest-rate risk is the riskiness of an asset's returns due to ________.

A) interest-rate changes
B) changes in the coupon rate
C) default of the borrower
D) changes in the asset's maturity

Question 68

Your friend tells you that she bought a 10-year to maturity discount bond that she plans to hold until maturity in order to finance her daughter's university education.She also tells you that she is worried that due to interest-rate-risk she may suffer significant capital losses if interest rates increase.Are her fears justified?

Question 69

In a country where prices never change,the nominal interest rate is equal to the ________.

A) real exchange rate
B) inflation rate
C) expected inflation rate
D) real interest rate

Question 70

Bonds whose term-to-maturity is longer than the holding period are subject to ________.

A) interest rate risk
B) exchange-rate risk
C) inflation
D) deflation

Question 71

The ________ interest rate is adjusted for expected changes in the price level.

A) ex ante real
B) ex post real
C) ex post nominal
D) ex ante nominal

Question 72

An equal increase in all bond interest rates ________.

A) increases the return to all bond maturities by an equal amount
B) decreases the return to all bond maturities by an equal amount
C) has no effect on the returns to bonds
D) decreases long-term bond returns more than short-term bond returns

Question 73

The riskiness of an asset's returns due to changes in interest rates is ________.

A) exchange-rate risk
B) price risk
C) asset risk
D) interest-rate risk

Question 74

An equal decrease in all bond interest rates ________.

A) increases the price of a five-year bond more than the price of a ten-year bond
B) increases the price of a ten-year bond more than the price of a five-year bond
C) decreases the price of a five-year bond more than the price of a ten-year bond
D) decreases the price of a ten-year bond more than the price of a five-year bond

Question 75

The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is ________.

A) -10 percent
B) -5 percent
C) 0 percent
D) 5 percent

Question 76

Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity of 15 percent.If the interest rate on one-year bonds rises from 15 percent to 20 percent over the course of the year,what is the yearly return on the bond you are holding?

A) 5 percent
B) 10 percent
C) 15 percent
D) 20 percent

Question 77

Prices and returns for ________ bonds are more volatile than those for ________ bonds.

A) long-term; long-term
B) long-term; short-term
C) short-term; long-term
D) short-term; short-term

Question 78

Which of the following is generally true of bonds?

A) The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period.
B) A rise in interest rates is associated with a fall in bond prices, resulting in capital gains on bonds whose terms to maturity are longer than the holding periods.
C) The longer a bond's maturity, the smaller is the size of the price change associated with an interest rate change.
D) Prices and returns for short-term bonds are more volatile than those for longer-term bonds.

Question 79

The ________ interest rate more accurately reflects the true cost of borrowing.

A) nominal
B) real
C) discount
D) market

Question 80

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year?

A) 5 percent
B) 10 percent
C) -5 percent
D) -10 percent