Deck 6: Bonds, Bond Prices, and the Determination of Interest Rates

Question 1

A pure discount bond is also known as:

A)A consol
B)A fixed payment loan
C)A coupon bond
D)A zero-coupon bond

Answer 1

D

Question 2

The difference in the prices of a zero-coupon bond and a coupon bond with the same face value and maturity date is simply:

A)Zero, since they are the same
B)The present value of the final payment
C)The present value of the coupon payments
D)The future value of the coupon payments

Answer 2

C

Question 3

The price of a coupon bond can best be described as:

A)The present value of the face value
B)The future value of the coupon payments
C)The future value of the coupon payments and the face value
D)The present value of the face value plus the present value of the coupon payments

Answer 3

D

Question 4

A zero-coupon bond refers to a bond which:

A)Does not pay any coupon payments because the issuer is in default
B)Promises a single future payment
C)Pays coupons only once a year
D)Pays coupons only if the bond price is above face value

Question 5

The relationship between the price and the interest rate for a zero coupon bond is best described as:

A)Volatile
B)Fluctuating
C)Inverse
D)Non-existent

Question 6

A 10-year Treasury note has a face value of $1,000, price of $1,200, and a 7.5% coupon rate.Based on this information, we know:

A)The present value is greater than its price
B)The current yield is equal to 8.33%
C)The coupon payment on this bond is equal to $75
D)The coupon payment on this bond is equal to $90

Question 7

When a loan is amortized, it means:

A)The borrower is in default
B)The principal and interest are paid off by the borrower over the life of the loan
C)The interest is due entirely at the maturity date
D)The principal is never repaid, only interest

Question 8

The most common form of zero-coupon bonds found in the United States is:

A)AAA rated corporate bonds
B)U.S.Treasury bills
C)30-year U.S.Treasury bonds
D)Municipal bonds

Question 9

Which of the following makes fixed payments indefinitely?

A)Amortized loan
B)Consol
C)Coupon bond
D)Zero-coupon bond

Question 10

If the annual interest rate is 5% (.05), the price of a six-month Treasury bill would be:

A)$97.50
B)$97.59
C)$95.25
D)$95.00

Question 11

Which of the following best expresses the formula for determining the price of a U.S.Treasury bill that matures n periods from now per $100 of face value when the interest rate is i?

A)$100/(1 + i)n
B)$100(1 + i)
C)$100/(1 + i)
D)1 + $100/(1 + i)n

Question 12

If a consol is offering an annual coupon of $50 and the annual interest rate is 6%, the price of the consol is:

A)$47.17
B)$813.00
C)$833.33
D)$8333.33

Question 13

If the annual interest rate is 5% (.05), the price of a three-month Treasury bill would be:

A)$98.79
B)$95.00
C)$98.75
D)$97.59

Question 14

Which of the following statements is most accurate?

A)Yield to maturity is equal to the coupon rate if the bond is held to maturity
B)Yield to maturity is the same as the coupon rate
C)Yield to maturity will exceed the coupon rate if the bond is purchased for face value
D)Yield to maturity is the same as the coupon rate if the bond is purchased for face value and held to maturity

Question 15

The price (P) of a consol offering an annual coupon payment (C) is best expressed by:

A)F/C
B)C(1 + i)
C)C/(1+ i)
D)C/i

Question 16

A consol is:

A)Another name for a zero-coupon bond
B)A bond with a maturity date exceeding 10 years
C)A bond that makes periodic interest payments forever but never matures
D)A form of a bond that is issued quite often by the U.S.Treasury

Question 17

Once you buy a coupon bond, which of the following can change?

A)Coupon rate
B)Coupon payment
C)Face value
D)Yield to maturity

Question 18

When the price of a bond is above face value:

A)The yield to maturity is below the coupon rate
B)The yield to maturity will be above the coupon rate
C)The yield to maturity will equal the current yield
D)The yield to maturity will equal the coupon rate

Question 19

If the annual interest rate is 5% (.05), the price of a one-year Treasury bill per $100 of face value would be:

A)$95.00
B)$97.50
C)$95.24
D)$96.10

Question 20

Most home mortgages are good examples of:

A)Consols
B)Zero-coupon bonds
C)Coupon bonds
D)Fixed-payment loans

Question 21

The yield on a discount basis:

A)Is the same as the yield to maturity
B)Is computed as if the year is 360 days long
C)Uses the difference in face value and purchase price over purchase price to determine the return
D)Uses the coupon payments to determine the return

Question 22

The size of the bond dealer's spread is mainly a function of:

A)The purchase price of the bond
B)The current yield
C)The liquidity of the bond market
D)The face value of the bond

Question 23

The bond dealer's spread is:

A)The asking price less the bid price
B)The difference between the current yield and the yield to maturity
C)The bid price less the asking price
D)Usually negative; the dealer makes a profit holding the bonds

Question 24

A $1000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has:

A)A current yield and coupon rate equal to 6.22%
B)A current yield equal to 6.22% and a coupon rate below this
C)A coupon rate equal to 6.00% and a current yield below this
D)A yield to maturity and current yield equal to 6.00%

Question 25

A $1000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has:

A)A current yield equal to 6.22%
B)A current yield equal to 6.00%
C)A coupon rate equal to 6.22%
D)A yield to maturity and current yield equal to 6.00%

Question 26

When the price of a bond is below the face value, the yield to maturity:

A)Is below the coupon rate
B)Will be above the coupon rate
C)Will equal the current yield
D)Will equal the coupon rate

Question 27

The current yield of a bond:

A)Is another term for the coupon rate
B)Is another term for the yield to maturity
C)Equals zero for a zero-coupon bond since these bonds have no coupon payments
D)Is the difference between its future value and its present value

Question 28

In reading bond quotes:

A)The bid price is usually above the asked price
B)The asked price is fixed over the life of the bond
C)The asked price is usually above the bid price
D)Bid and asked prices must be equal as set forth by SEC regulations

Question 29

The larger the bond dealer's spread:

A)The less liquid is the market for that bond
B)The greater is the coupon rate for that bond
C)The more liquid is the market for that bond
D)The less risk there is for the dealer to hold that bond

Question 30

When the current yield and the coupon rate are equal, the bond is:

A)Purchased at a discount
B)Purchased at a price that equals the face value
C)A zero-coupon bond
D)Purchased at a price that exceeds its face value

Question 31

A $1,000 face value bond, with an annual coupon of $40, one year to maturity and a purchase price of $980 has:

A)A current yield that equals 4.00%
B)A coupon rate that equals 4.08%
C)A current yield that equals 4.08% and a yield to maturity that equals 6.12%
D)A current yield that equals 4.08% and a yield to maturity that equals 4.0%

Question 32

A $1000 face value bond, with one year to maturity that sells for $950 and has a $40 annual coupon has:

A)A current yield and yield to maturity of 4.00%
B)A yield to maturity that equals the current yield
C)A coupon rate of 4.00% and a current yield that is below this
D)A current yield of 4.21%

Question 33

When the price of a bond equals the face value:

A)The yield to maturity will be above the coupon rate
B)The yield to maturity will be below the coupon rate
C)The current yield is equal to the coupon rate
D)The yield to maturity is greater than the current yield

Question 34

In calculating the current yield for a bond:

A)The coupon payment is ignored
B)The present value of the capital gain/loss is ignored
C)The present value of the final payment is the only important consideration
D)The present value of the coupon payments is the only important consideration

Question 35

A 30-year Treasury bond as a face value of $1,000, price of $1,200 with a $50 coupon payment.Assume the price of this bond decreases to $1,100 over the next year.The one-year holding period return is equal to:

A)-9.17%
B)-8.33%
C)-4.17%
D)-3.79%

Question 36

In calculating the current yield for a bond:

A)The coupon payment and purchase price is all that is needed
B)The present value of the capital gain/loss is ignored
C)The present value of the final payment is the only important consideration
D)The present value of the coupon payments is the only important consideration

Question 37

If the purchase price of a bond exceeds the face value, the yield to maturity:

A)Is greater than the coupon rate because the capital gain is positive
B)Will equal the current yield
C)Will be less than the coupon rate because the capital gain will be negative
D)Will be greater than the current yield

Question 38

If a bond's purchase price equals the face value:

A)The coupon rate equals the current yield, which is less than the yield to maturity
B)The current yield equals the yield to maturity, which exceeds the coupon rate
C)The coupon rate equals the yield to maturity, which equals the current yield
D)The coupon rate does not equal the current yield, which does not equal the yield to maturity

Question 39

The bid price for a bond quote is:

A)The price at which the bond dealer is willing to sell the bond
B)The price at which the bond dealer is willing to purchase the bond
C)Fixed over the life of a bond
D)Determined solely by the time left to maturity

Question 40

Which of the following is not a reason why the yield to maturity can differ from the current yield?

A)Because the yield to maturity considers the capital gain/loss
B)Because the current yield focuses only on the coupon payment and the purchase price
C)Because most bonds are not purchased for face value
D)Because the current yield moves in the opposite direction from price

Question 41

The holding period return has relevance because:

A)Most bonds are held by the original purchaser until maturity
B)Most bonds are held by the original purchaser until they mature
C)Bonds are frequently traded
D)Current yields are not that important to bondholders

Question 42

Which of the following best expresses the equation for holding period return?

A)Current yield + coupon rate
B)Yield to maturity - current yield
C)Current yield + capital gain
D)Coupon rate + capital gain

Question 43

If the quantity of bonds supplied exceeds the quantity of bonds demanded, bond prices:

A)Would rise and yields would fall
B)Would fall and yields would rise
C)Would rise but yields will remain constant
D)Would fall and yields would fall

Question 44

The bond supply curve slopes upward because:

A)As bond prices rise people holding bonds are more tempted to hold them
B)As bond prices rise yields increase
C)For companies seeking financing, the higher the price of bonds the more attractive it is to sell bonds
D)As bond prices rise yields decrease

Question 45

Suppose there is a decrease in the price at which a bondholder sells her bond.In this case, the holding period return will:

A)Increase, since yields and prices are inversely related
B)Decrease, since this lowers the capital gain
C)Be negative
D)Equal the coupon rate

Question 46

When looking at Treasury note quotes in the Wall Street Journal, you notice that a Treasury note has an "i" following the maturity date.This indicates that this financial instrument:

A)Is subject to risk associated with changes in the inflation rate
B)Has an interest rate that is adjusted for inflation
C)Has a fixed interest rate
D)Makes coupon payments intermittently

Question 47

If a one-year zero-coupon bond has a face value of $100, is purchased for $94, and is held to maturity:

A)The holding period return will exceed the yield to maturity
B)The yield to maturity will exceed the holding period return
C)The yield to maturity will be 6.38%
D)The holding period return will be 6.38%

Question 48

The yield on a discount basis for a $100 Treasury bill that sells for $98.50 and matures in 90 days is:

A)1.50%
B)4.80%
C)6.00%
D)4.94%

Question 49

If the U.S.government's borrowing needs increase, all other factors constant:

A)The price of bonds will increase
B)The supply of bonds will increase
C)The demand for bonds will decrease
D)The supply of bonds and the demand for bonds will both increase

Question 50

The bond demand curve slopes downward because:

A)At lower prices the reward for holding the bond increases
B)As bond prices fall so do yields
C)As bond prices fall bonds are less attractive
D)As bond prices rise yields increase

Question 51

The yield on a discount basis:

A)Will overstate the return on a Treasury bill versus using yield to maturity since they are sold at discounts
B)Will understate the return on Treasury bills versus yield to maturity since they are sold at premiums
C)Will understate the return on Treasury bills versus yield to maturity since they are sold at discounts
D)Is the same as yield to maturity

Question 52

One characteristic that distinguishes holding period return from the coupon rate, the current yield, and the yield to maturity is:

A)All of the other returns can be calculated at the time the bond is purchased, but holding period return cannot
B)Holding period return will always be the highest return
C)Holding period return will usually be less than the other returns
D)Only the holding period return includes the capital gain/loss

Question 53

U.S.Treasury strips are:

A)Bonds where the present value of the final payment and coupon payments are sold separately
B)Bonds that are stripped of their financial rating
C)Another name for Treasury Bills
D)Initially zero-coupon bonds

Question 54

As bond prices increase:

A)The quantity of bonds supplied increases
B)The quantity of bonds supplied decreases
C)The quantity of bonds demanded increases
D)Yields increase

Question 55

If the quantity of bonds demanded exceeds the quantity of bonds supplied, bond prices:

A)Would rise and yields would fall
B)Would fall and yields would increase
C)Will rise and yields will remain constant
D)Will rise and yields would increase

Question 56

Bond prices and yields:

A)Move together in the same direction
B)Do not change if the coupon is fixed
C)Move together inversely
D)Are independent of each other

Question 57

If the U.S.government's borrowing needs decrease, all other factors constant:

A)The supply of bonds will increase
B)The demand for bonds will decrease
C)The price of bonds will decrease
D)The price of bonds will increase

Question 58

If the U.S.government's borrowing needs increase, all other factors constant:

A)The demand for bonds will decrease
B)The price of bonds will increase
C)The supply of bonds will increase
D)The yields on bonds will decrease

Question 59

The holding period return on a bond:

A)Can never be more than the yield to maturity
B)Will equal the yield to maturity if the bond is purchased for face value and sold at a lower price
C)Will be less than the yield to maturity if the bond is sold for more than face value
D)Will be less than the yield to maturity if the bond is sold for less than face value

Question 60

In considering the holding period return, the longer the term of the bond the:

A)Less important is the capital gain and the more important in the current yield
B)Less important is the coupon rate and the more important is the current yield
C)Less important is the capital gain
D)More important is the capital gain

Question 61

A decrease in expected inflation for any given nominal interest rate will cause:

A)Bond prices to increase and interest rates to decrease
B)Bond prices to decrease and interest rates to increase
C)The bond demand curve to shift to the left
D)The bond supply curve to shift to the left

Question 62

When expected inflation increases, for any given nominal interest rate:

A)The bond demand curve shifts right
B)The bond supply curve shifts right
C)The price of bonds increases
D)The yield on bonds will increase

Question 63

An increase in the nation's wealth, all other factors constant, would cause:

A)Bond prices to fall and yields to increase
B)Bond prices and yields to increase
C)Bond prices to rise and yields to decrease
D)The bond supply curve to shift right

Question 64

An increase in the nation's wealth, all other factors constant, would cause the:

A)Bond supply curve to shift left
B)Bond demand curve to shift left
C)Bond supply curve to shift right
D)Bond demand curve to shift right

Question 65

An increase in expected inflation for any given nominal interest rate will cause:

A)The bond supply curve to shift to the left
B)The bond demand curve to shift to the right
C)The price of bonds to decrease
D)The price of bonds to increase

Question 66

When expected inflation increases, for any given nominal interest rate:

A)The real cost of repayment for bond issuers increases
B)The real return for bondholders increases
C)The real cost of repayment for bond issuers decreases
D)The bond demand curve shifts right

Question 67

Suppose that the expected return on bonds falls relative to other assets.In the bond market this will result in:

A)The bond supply curve shifting left
B)A movement down the bond demand curve
C)A shift to the left of the bond demand curve
D)An increase in the price of bonds

Question 68

As general business conditions improve, we would witness the following in the bond market:

A)The bond demand curve shifting left
B)The bond supply curve shifting left
C)Bond prices decreasing
D)Bond prices increasing

Question 69

As general business conditions deteriorate, all other factors constant:

A)The demand for bonds will decrease
B)The supply of bonds will increase
C)Bond prices will decrease
D)Bond yields will increase

Question 70

When expected inflation decreases for any given nominal interest rate, all of the following occur except:

A)The real interest rate decreases
B)The bond supply curve shifts to the left
C)The cost of borrowing increases and the desire to borrow decreases
D)The price of bonds increases

Question 71

An increase in expected inflation for any given nominal interest rate will cause:

A)The real return to bondholders to decrease
B)A movement down the bond demand curve, but no change in the bond demand curve
C)The bond demand curve to shift right
D)The price of bonds to increase

Question 72

If the U.S.government's borrowing needs increase, in the bond market this would be seen as:

A)The bond demand curve shifting right
B)A movement up the bond supply curve
C)The bond demand curve shifting left
D)The bond supply curve shifting right

Question 73

If the federal government were to offer larger tax breaks on the purchase of new equipment for businesses, all other factors constant, we would expect to see:

A)The bond demand curve shift right
B)The bond supply curve shift left
C)The bond supply curve shift right
D)The bond demand curve shift left

Question 74

A decrease in the nation's wealth, all other factors constant:

A)Would cause the bond demand curve to shift left
B)Would cause bond prices to rise
C)Would cause interest rates to decrease
D)Would cause the bond supply curve to shift left

Question 75

As general business conditions improve, all other factors constant:

A)The price of bonds will increase
B)The yield on bonds will increase
C)The bond demand curve shifts right
D)The bond supply curve shifts left

Question 76

Which of the following would lead to a decrease in bond demand?

A)An increase in expected inflation
B)An increase in wealth
C)A decrease in risk
D)A decrease in liquidity

Question 77

As general business conditions deteriorate, all other factors constant:

A)The bond supply curve will shift left
B)There will be a movement down the existing bond supply curve
C)The bond demand curve shifts left
D)The price of bonds will decrease

Question 78

Which of the following would lead to an increase in bond supply?

A)A decrease in government spending relative to revenue
B)An increase in corporate taxes
C)A decrease in expected inflation
D)An improvement in general business conditions

Question 79

When expected inflation increases, for any given nominal interest rate:

A)The cost of borrowing increases and the desire to borrow decreases
B)The real interest rate increases
C)The bond supply curve shifts to the left
D)The cost of borrowing decreases and the desire to borrow increases

Question 80

If the U.S.government's borrowing needs increase, in the bond market this would be seen as:

A)The bond demand curve shifting right
B)The bond supply curve shifting right
C)The bond demand curve shifting left
D)The bond supply curve shifting left