Deck 4: Interest Rates

Question 1

The compounding period is the amount of time that passes when interest is no longer accumulating.

Answer 1

False

Question 2

Shorter maturity bonds have greater default risk.

Answer 2

False

Question 3

For a coupon bond, if the price is greater than the face value, then the coupon rate must be greater than the yield to maturity.

Answer 3

True

Question 4

The real interest rate is a more accurate measure of the cost of borrowing than the nominal rate.

Question 5

The current yield and the yield to maturity for a consol are the same.

Question 6

The annual rate of return on a one-year bond is the same as the yield.

Question 7

The current yield is the most accurate measure of the return on a bond.

Question 8

The present value of a future payment is always greater than the payment.

Question 9

Rates of return are always positive.

Question 10

A discount bond with three years to maturity makes three future payments.

Question 11

Yield to maturity is the most accurate measure of the return on a bond.

Question 12

The present value of a future payment depends on the period of time until the payment.

Question 13

If the nominal interest rate is less than expected inflation, the real interest rate is positive.

Question 14

Yield to maturity and rate of return on a bond always move in the same direction.

Question 15

A falling real interest rate means nominal rates are falling as well.

Question 16

Deflation (falling prices) means that real rates are greater than nominal rates.

Question 17

The present value of a future payment is higher the longer the period of time until the payment, ceteris paribus.

Question 18

Longer maturity bonds have greater interest rate risk.

Question 19

Interest is the opportunity cost of money.

Question 20

The accuracy of the current yield increases with the time to maturity of a bond.

Question 21

The price of a coupon bond is inversely related to

A) the face value.
B) the coupon rate.
C) both of the above.
D) neither of the above.

Question 22

A three-year coupon bond has a face value of $1,000, a coupon rate of 5% and a yield to maturity of 3%. What is the price of the bond?

A) $1,000.
B) $1,052.41.
C) $1,056.57.
D) none of the above.

Question 23

Discounts bonds and zero coupon bonds are the same type of debt instrument.

Question 24

The price of a bond is inversely related to

A) the time to maturity.
B) the yield to maturity.
C) both of the above.
D) neither of the above.

Question 25

A two-year discount bond with face value $500 and price $450 has a yield of

A) 4.9%.
B) 10%.
C) 11.1%.
D) none of the above.

Question 26

After three years, a deposit of $1,000 that compounds annually at an interest rate of 20% returns

A) $1,000.
B) $1,200.
C) $1,440.
D) $1,728.

Question 27

A one-year discount bond with face value $1,000 and price $800 has a yield of

A) 20%.
B) 25%.
C) 80%.
D) none of the above.

Question 28

Examples of debt instruments include bonds, IOUs, and simple loans.

Question 29

Brittany and Christina both buy bonds with yield to maturity of 4%, but Brittany's bond has 2 years to maturity and Christina's has 5. After one year, yields for these bonds rise to 7%.

A) Both bonds rise in value but Brittany's rises more.
B) Both bonds rise in value but Christina's rises more.
C) Both bonds fall in value but Brittany's falls more.
D) Both bonds fall in value but Christina's falls more.

Question 30

The opportunity cost of money is

A) growth rate of prices.
B) real GDP.
C) interest rate.
D) none of the above.

Question 31

The price of a bond is directly related to

A) the face value.
B) the yield to maturity.
C) both of the above.
D) neither of the above.

Question 32

A borrower periodically pays a portion only of the principal in a fixed-payment loan.

Question 33

A one-year discount bond has a face value of $1,500 and a price of $1,200. What is the yield to maturity?

A) 15%
B) 20%
C) 25%
D) 30%

Question 34

After 100 years, a deposit of $1 that compounds annually at 1% returns

A) $2.
B) $100.
B) $2.70.
C) none of the above.

Question 35

A two-year coupon bond has a face value of $1,000, a coupon rate of 4% and a yield to maturity of 6%. What is the price of the bond?

A) $925.60.
B) $963.33.
C) $980.03.
D) $1,037.72.

Question 36

The present value of a discount bond with two years to maturity, face value of $10,000 and yield to maturity 4% is

A) $7,142.86.
B) $9,245.56.
C) $9,615.38.
D) none of the above.

Question 37

The present value of a discount bond with one year to maturity, face value $1,000 and yield to maturity 5% is

A) $952.38.
B) $1,000.00.
C) $1,005.00.
D) $1,050.00.

Question 38

Your uncle Albert gives you a savings bond that pays $500 four years from now. If the relevant interest rate for you is 2%, what is the present value of the bond?

A) $461.92.
B) $490.19.
C) $510.00.
D) $541.21.

Question 39

A two-year coupon bond has a face value of $1,000, a coupon rate of 5% and a yield to maturity of 2%. What is the price of the bond?

A) $944.21.
B) $1,000.
C) $1,058.25.
D) $1,078.43.

Question 40

A two-year discount bond with face value $1,000 and price $950 has a yield of

A) 4.9%.
B) 5%.
C) 5.3%.
D) none of the above.

Question 41

A bond is bought at par and market yields rise after purchase. If the bond is held to maturity, the rate of return at maturity will be _____ the yield at purchase.

A) greater than
B) less than
C) equal to
D) cannot be determined

Question 42

The chance that a bond issuer won't make promised payments is called

A) representation risk.
B) credit risk.
C) interest rate risk.
D) none of the above.

Question 43

Find the future value of a four-year investment of $50 at an interest rate of 6%.

Question 44

Find the future value of a 50-year investment of $2 at an interest rate of 3%.

Question 45

If you had a fixed-payment loan of $500,000 for thirty years at 6%, how much of your payment is principal in year 10?

A) $520.60
B) $752.25
C) none; the principal isn't paid until year 30
D) none of the above

Question 46

Two discount bonds both have a face value of $100 and yield 5%, but one has one year to maturity and the other has two years to maturity. Find the price of both bonds and explain why one is higher than the other.

Question 47

The relationship between real and nominal rates is called the

A) inflation relation.
B) Fisher equation.
C) Friedman equation.
D) none of the above.

Question 48

Short maturity bonds have ____ interest rate risk than long maturity bonds.

A) more
B) less
C) equal
D) cannot be determined

Question 49

A discount bond has a face value of $1,000 and two years to maturity. Find the price of the bond if the yield is 9%. Find the price if the yield is 10%. Explain briefly why the price and yield to maturity are inversely related.

Question 50

A one-year discount bond has a face value of F, and a price of P. What is the formula for the yield?

Question 51

Write the equation relating the present value and future value of a payment, identifying all the parts.

Question 52

The rate of return on a bond can be negative if market yields

A) rise.
B) fall.
C) become negative.
D) Rates of return cannot be negative.

Question 53

James decides that going to graduate school would not be a good idea and applies for the Peace Corps. This is a(n) _____ decision.

A) ex-ante
B) ex-poste
C) ceteris paribus
D) none of the above

Question 54

Find the present value of a payment of $200 one hundred years from now if the relevant interest rate is 10%.

Question 55

Brittany and Christina both buy bonds with yield to maturity of 4% but Brittany's bond has 2 years to maturity and Christina's has 5. After one year, yields for these bonds rise.

A) The rate of return on both bonds is above 4% but Brittany's is higher.
B) The rate of return on both bonds is above 4% but Christina's is higher.
C) The rate of return on both bonds is below 4% but Brittany's is lower.
D) The rate of return on both bonds is below 4% but Christina's is lower.

Question 56

Susan decides that moving in with her boyfriend was a mistake. This is a(n) _____ judgment.

A) ex-ante
B) ex-poste
C) ceteris paribus
D) none of the above

Question 57

The chance that a bond issuer won't make promised payments is called

A) default risk.
B) credit risk.
C) interest rate risk.
D) representation risk.

Question 58

A _____ is a type of perpetual bond issued by the British government.

A) consol
B) money market bond
C) discount coupon
D) none of the above.

Question 59

A _____ is the type of loan where the borrower repays the principal and interest at the end of the loan.

A) simple loan
B) fixed-payment loan
C) principled interest loan
D) none of the above.

Question 60

Find the present value of a payment of $50 four years from now if the relevant interest rate is 6%.

Question 61

What is the difference between ex-ante and ex-post judgments?

Question 62

A coupon bond has two years to maturity, a face value of $1,000 and a coupon rate of 4%. You buy the bond at par, and, after 1 year, market yields fall to 2%. Find the rate of return on your bond for the first year.

Question 63

What is the name of the relation between real and nominal interest rates?

Question 64

A special bond pays $200 after 3 years and $500 after 6 years. If the relevant interest rate is 4%, what is the present value of the bond?

Question 65

If a bond is sold before maturity, under what circumstance would the rate of return equal the yield when the bond was purchased?

Question 66

Why are interest rates so important?

Question 67

The coupon payment for a consol is $100 and the yield to maturity is 5%. What is the price of the bond?

Question 68

The coupon payment for a consol is $100 and its value is $400. What does this imply about the yield to maturity?

Question 69

Why do longer term bonds have greater interest rate risk?

Question 70

Why is unexpected inflation bad for lenders?

Question 71

A bond with three years to maturity has a face value of $1,000 and a coupon rate of 5%. It is initially bought at a yield to maturity of 7%, then sold after one year when market yields have fallen to 5%. What are the sale price and the rate of return for the first year?

Question 72

Why is a dollar today worth more than a dollar tomorrow in fiat money?

Question 73

Write an equation for the Fisher equation identifying all the parts.

Question 74

A coupon bond has two years to maturity, a face value of $1,000 and a coupon payment of $50. If the yield to maturity is 10%, what is the price?