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

simple loan.

Question 2

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

Answer 2

decreases

Question 3

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

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

Answer 3

falls

Question 4

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 5

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 6

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 7

All of the following are examples of coupon bonds except

A)Corporate bonds
B)U.S.Treasury bills
C)U.S.Treasury notes
D)U.S.Treasury bonds

Question 8

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 9

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 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

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

Question 12

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 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

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 15

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 16

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

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

Question 17

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 18

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 19

Which of the following are 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 20

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 21

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 22

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 23

Which of the following are 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 24

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 25

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 26

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 27

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 28

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 29

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 30

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 31

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 32

Examples of discount bonds include

A)U.S.Treasury bills.
B)corporate bonds.
C)U.S.Treasury notes.
D)municipal bonds.

Question 33

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 34

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 35

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 36

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 37

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 38

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)U.S.Treasury bonds and notes are examples of discount bonds.
D)The purchaser receives the par value at maturity plus any capital gains.

Question 39

Which of the following $5,000 face-value securities has the highest 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 40

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 41

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 42

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 43

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

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

Question 44

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 45

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 46

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 47

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 48

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 49

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 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

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 52

Which of the following are 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 53

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 54

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 55

If the interest rate is 5%,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%? Why?

Question 56

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 57

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 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

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

Question 60

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

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

Question 61

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

Question 62

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 63

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 64

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 65

The interest rate that describes how well a lender has done in real terms after the fact is called the

A)ex post real interest rate.
B)ex ante real interest rate.
C)ex post nominal interest rate.
D)ex ante nominal interest rate.

Question 66

The ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation.

A)Fisher equation
B)Keynesian equation
C)Monetarist equation
D)Marshall equation

Question 67

In which of the following situations would you prefer to be the borrower?

A)The interest rate is 9 percent and the expected inflation rate is 7 percent.
B)The interest rate is 4 percent and the expected inflation rate is 1 percent.
C)The interest rate is 13 percent and the expected inflation rate is 15 percent.
D)The interest rate is 25 percent and the expected inflation rate is 50 percent.

Question 68

In which of the following situations would you prefer to be the lender?

A)The interest rate is 9 percent and the expected inflation rate is 7 percent.
B)The interest rate is 4 percent and the expected inflation rate is 1 percent.
C)The interest rate is 13 percent and the expected inflation rate is 15 percent.
D)The interest rate is 25 percent and the expected inflation rate is 50 percent.

Question 69

Which of the following are 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 70

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 71

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 72

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 73

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 74

Which of the following are 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 75

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

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

Question 76

If the nominal rate of interest is 2 percent,and the expected inflation rate is -10 percent,the real rate of interest is

A)2 percent.
B)8 percent.
C)10 percent.
D)12 percent.

Question 77

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 78

Prices and returns for ________ bonds are more volatile than those for ________ bonds,everything else held constant.

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

Question 79

If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent,then the real interest rate on this bond is

A)7 percent.
B)22 percent.
C)-15 percent.
D)-8 percent.

Question 80

When the ________ interest rate is low,there are greater incentives to ________ and fewer incentives to ________.

A)nominal; lend; borrow
B)real; lend; borrow
C)real; borrow; lend
D)market; lend; borrow