Deck 4: Interest Rate Measurement and Behavior

Question 1

A $10,000, one-month loan pays an annualized interest rate of 10 percent. The dollar amount of interest received from the loan is

A) largest if simple interest is paid.
B) largest if interest is compounded monthly.
C) largest if interest is compounded quarterly.
D) the same whether interest is simple, compounded monthly, or compounded quarterly.

Answer 1

D

Question 2

A $1,000, 7 percent deposit pays interest compounded monthly. After six months, the deposit balance is $__________.

A) 1,036
B) 1,501
C) 1,350
D) 1,420

Answer 2

A

Question 3

The present value of an asset can be found by __________ the future value.

A) stripping
B) discounting
C) compounding
D) annualizing

Answer 3

B

Question 4

Which of the following is the correct formula for calculating simple interest?

A) Interest = Principal × Rate ÷ Time
B) Interest = Principal × Rate × Time
C) Interest = Principal × (Time + Rate)
D) Interest = Principal × (1 + Rate)

Question 5

Luther Schwarz currently has a balance of $838.55 in his savings account. __________ years ago, Luther deposited $500 in his savings account, which pays an annual interest rate of 9 percent, compounded annually.

A) 8
B) 7
C) 6
D) 5

Question 6

A 100-year, $1,000 loan that pays a 6 percent simple annual interest rate pays a total amount of interest of

A) $60.
B) $600.
C) $6,000.
D) $60,000.

Question 7

The dollar amount of interest is largest for a four-year loan if the interest is compounded

A) daily.
B) monthly.
C) annually.
D) once every two years.

Question 8

Buddy Bolly just received his annual bank statement. One year ago, Buddy deposited $10,000 in a savings account. Today, his balance is $10,509.45. Buddy's savings account interest is compounded quarterly. Buddy received an annualized interest rate of __________ percent.

A) 6
B) 5
C) 4
D) 3

Question 9

An individual pays $4,000 for a $5,000 face value, coupon-bearing bond that pays $400 per year and will be held until it matures in ten years. The current yield on this bond is

A) 10 percent.
B) 8 percent.
C) 6 percent.
D) 5 percent.

Question 10

The total amount of cash inflows a lender would receive on a $600 two-year loan with a simple annual interest rate of 8 percent is equal to

A) $48.
B) $96.
C) $648.
D) $696.

Question 11

Paul Oldy just purchased a $2,000 face value bond with. The bond pays $45 in interest semiannually. Paul could sell the bond today for $2,050. The current yield on this bond is __________ percent.

A) 2.25
B) 2.20
C) 4.50
D) 4.39

Question 12

The most widely used measure of interest rates in bond markets is the

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

Question 13

The present value of $900 to be received in three years, with an annual interest rate of 10 percent, compounded annually, is equal to $__________.

A) 772
B) 676
C) 816
D) 810

Question 14

The total amount of interest collected after two years from a $6,000 loan with an annual interest rate of 6 percent compounded annually is equal to $__________.

A) 720.00
B) 741.60
C) 360.00
D) 6,720.00

Question 15

The coupon rate is equal to the

A) yield to maturity for all bonds.
B) present value of the bond.
C) real rate of return.
D) interest rate printed on the face of the bond.

Question 16

If an individual received a total of $400 in simple interest payments on a $1,000 loan over four years, the annual simple interest rate was

A) 15 percent.
B) 5 percent.
C) 4 percent.
D) 10 percent.

Question 17

The total amount of interest collected after two years from a $6,000 loan with a simple annual interest rate of 6 percent is equal to

A) $360.
B) $720.
C) $12,360.
D) $6,360.

Question 18

Suppose an individual pays $4,000 for a $5,000 face-value, coupon-bearing bond that pays $400 per year in interest and will be held until it matures in ten years. The coupon rate on this bond is

A) 10 percent.
B) 8 percent.
C) 6 percent.
D) 5 percent.

Question 19

Pat Bosky just paid $843 to repay the principal and interest for a six-month, $800 loan. Pat paid a simple annual interest rate of __________ percent.

A) 4.3
B) 8.6
C) 10.8
D) 16.8

Question 20

If an investor pays $1,025 for a bond with a face value of $1,000 and annual payments, it follows that

A) the current yield and coupon rate are equal.
B) the coupon rate is greater than the current yield.
C) the current yield is greater than the coupon rate.
D) Insufficient information is provided to answer this question.

Question 21

The yield to maturity of a zero-coupon bond with a one-year maturity, a face value of $1,000, and a purchase price of $909 is closest to

A) 10 percent.
B) 11 percent.
C) 9 percent.
D) 5 percent.

Question 22

If a one year zero-coupon bond has a face value of $1,000 and a discount rate of 8.7 percent, its original selling price is

A) $900.
B) $920.
C) $950.
D) $960.

Question 23

A lottery winner receives $20 million in equal payments spread out over 20 years. The present value of the winnings is

A) equal to $20 million.
B) greater than $20 million.
C) less than $20 million.
D) either greater than or less than $20 million, depending on the discount rate used for the calculation.

Question 24

If an investor pays $1,025 for a bond with a face value of $1,000, it follows that the current yield is __________ than the coupon rate, and the investor will realize a capital __________ if he holds the bond until maturity.

A) greater; gain
B) less; gain
C) greater; loss
D) less; loss

Question 25

The yield to maturity on a bond is the

A) coupon rate.
B) annual interest payment divided by the purchase price.
C) coupon payment multiplied by the number of payments.
D) rate of discount that makes the sum of present values for all future payments equal to the purchase price.

Question 26

Quincy Ritter pays $1,100 for a bond with a face value of $1,000. The coupon rate is 10 percent, and payments are made annually. The current yield is equal to

A) 9.5 percent.
B) 9.1 percent.
C) 10 percent.
D) 11.1 percent.

Question 27

Assume that an investor pays $900 for a bond with a face value of $1,000. If the bond pays 10 percent interest annually, the current yield is equal to

A) 9.5 percent.
B) 9.1 percent.
C) 10.0 percent.
D) 11.1 percent.

Question 28

A bond has an annual coupon rate of 7 percent, a $1,000 face value, and ten years remaining until maturity. The bond currently sells for $1,138. The yield to maturity for this bond is __________ percent. (Note: This question requires a financial calculator.)

A) 7.0
B) 5.2
C) 13.8
D) 10.0

Question 29

The only difference between Treasury notes and bonds is

A) the frequency of coupon payments.
B) that notes are issued on a discount basis and bonds make coupon payments.
C) maturity.
D) the agency issuing the security.

Question 30

If an investor pays $925 for a bond with a face value of $1,000 and annual payments, it follows that

A) the current yield and coupon rate are equal.
B) the coupon rate is greater than the current yield.
C) the current yield is greater than the coupon rate.
D) Insufficient information is provided to answer this question.

Question 31

The yield to maturity of a zero-coupon bond is determined by the bo face value and its

A) purchase price.
B) current yield.
C) coupon rate.
D) real rate.

Question 32

To calculate the yield to maturity on a bond, it is necessary to know the

A) inflation rate.
B) T-bill rate.
C) coupon payments.
D) zero-coupon rate.

Question 33

The yield to maturity __________ capital gains; the current yield __________ capital gains.

A) reflects; reflects
B) reflects; does not reflect
C) does not reflect; reflects
D) does not reflect; does not reflect

Question 34

Julia hen just purchased a $1,000 face value bond for $987. The bond pays $50 in interest every six months and matures in five years. The yield to maturity for this bond is __________ percent. (Note: This question requires a financial calculator.)

A) 10.0
B) 10.2
C) 10.3
D) 10.6

Question 35

An investor pays $1,230 for a bond with a face value of $1,000 and an annual coupon rate of 9 percent. The investor plans to hold the bond until its maturity date in eight years. The bond has a yield to maturity of __________ percent. (Note: This question requires a financial calculator.)

A) 5.39
B) 5.67
C) 10.94
D) 9.00

Question 36

The annual dollar interest payment of a security is equal to $60, and the security currently sells for $400. The current yield of this security is equal to

A) 7 percent.
B) 10 percent.
C) 15 percent.
D) 24 percent.

Question 37

If an investor paid $900 for a bond with a $1,000 face value and a current yield of 10 percent, then the coupon rate is

A) 9 percent.
B) 10 percent.
C) 12 percent.
D) 15 percent.

Question 38

Bond prices are

A) equal to the face value of the bond.
B) equal to the real interest rate.
C) equal to the nominal interest rate.
D) inversely related to the interest rate.

Question 39

The impact of capital gains and losses is reflected in the

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

Question 40

The __________ is the interest rate that makes the sum of present values for all future payments equal to a security's purchase price.

A) yield to maturity
B) current yield
C) coupon rate
D) capital gain

Question 41

An increase in interest rates causes __________ the demand-for-loanable funds curve

A) a rightward shift in
B) a leftward shift in
C) a movement down along
D) a movement up along

Question 42

A __________ yield to maturity implies a __________ bond price.

A) lower; lower
B) higher; lower
C) higher; higher
D) None of the above.

Question 43

__________ will cause a movement up along the demand for loanable funds curve.

A) A rise in interest rates
B) A decline in interest rates
C) An increase in business borrowing
D) A decrease in business borrowing

Question 44

Long-term bonds are __________ than short-term bonds, and long-term bonds often have a __________ yield than short-term bonds.

A) less risky; lower
B) more risky; lower
C) less risky; higher
D) more risky; higher

Question 45

An increase in the demand for loanable funds causes

A) the price of securities to rise.
B) interest rates to rise.
C) the supply of securities to shift to the left.
D) the demand for securities to shift to the right.

Question 46

A fall in interest rates will cause long-term bond prices to

A) fall less than short-term bond prices.
B) fall more than short-term bond prices.
C) rise less than short-term bond prices.
D) rise more than short-term bond prices.

Question 47

Interest rates are determined by the supply of and demand for

A) financial services.
B) loanable funds.
C) currency.
D) consols.

Question 48

The supply of loanable funds is equivalent to the

A) demand for loanable funds.
B) supply of securities.
C) demand for securities.
D) supply of bonds.

Question 49

Paul would like to buy a consol promising an interest rate of 8 percent and paying $90 annually. Paul should not pay more than $__________ for the console.

A) 90
B) 1,000
C) 1,125
D) 900

Question 50

If individuals save __________, there is usually __________ pressure on interest rates.

A) less; upward
B) more; upward
C) less; downward
D) None of the above.

Question 51

A consol has an annual coupon payment of $50. If the price of the consol rose from $400 to $500, the yield on the consol would

A) fall from 10 percent to 8 percent.
B) fall from 12.5 percent to 10 percent.
C) rise from 10 percent to 12.5 percent.
D) rise from 8 percent to 10 percent.

Question 52

A consol has an annual coupon payment of $100 and a price of $800. The yield on this security is equal to __________ percent

A) 6
B) 10
C) 12.5
D) 14

Question 53

The ex ante real interest rate is __________, while the ex post real rate is __________.

A) the nominal interest rate minus expected inflation; the nominal interest rate minus actual inflation
B) the nominal interest rate minus actual inflation; the nominal interest rate minus expected inflation
C) the real interest rate plus expected inflation; the real interest rate plus actual inflation
D) the real interest rate plus actual inflation; the real interest rate plus expected inflation

Question 54

Which of the following would not cause an increase in the demand for loanable funds?

A) An increase in business borrowing
B) An increase in consumer borrowing
C) An increase in the public debt
D) A decrease in interest rates

Question 55

At the beginning of the year an investor pays $1,100 for a bond with a face value of $1,000. The bond pays a coupon payment of $60, and the investor sells it for $1,150 at the end of the year. The return is

A) 5.5 percent.
B) 6.0 percent.
C) 10.0 percent.
D) 10.5 percent.

Question 56

The demand for loanable funds is equivalent to the

A) supply of loanable funds.
B) supply of securities.
C) demand for securities.
D) supply of bonds.

Question 57

If the inflation rate is expected to be 2 percent and creditors will lend only if the real interest rate is 3 percent, the nominal interest rate will be

A) 1 percent.
B) 5 percent.
C) 7 percent.
D) 12 percent.

Question 58

A rise in interest rates will cause short-term bond prices to

A) fall less than long-term bond prices.
B) fall more than long-term bond prices.
C) rise more than long-term bond prices.
D) rise less than long-term bond prices.

Question 59

The return on an asset with a purchase price of $940 and a selling price of $900 and coupon payments of $100 is

A) 6.4 percent.
B) 6.7 percent.
C) 14.9 percent.
D) 15.6 percent.

Question 60

If the inflation rate is expected to be 5 percent and nominal interest rate is 9 percent, then the real interest rate will be

A) 14 percent.
B) 9 percent.
C) 5 percent.
D) 4 percent.

Question 61

A rightward shift in the supply of loanable funds curve could be caused by

A) an easing of monetary policy.
B) a tightening of monetary policy.
C) increased government borrowing.
D) decreased government borrowing.

Question 62

Which of these will cause the equilibrium interest rate to rise?

A) A decrease in the supply of loanable funds
B) A decrease in the demand for loanable funds
C) An increase in the supply of loanable funds
D) A decrease in the quantity of loanable funds demanded

Question 63

An increase in inflationary expectations will cause a(n)__________ in the demand for loanable funds and a(n)__________ in the supply of loanable funds.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question 64

A change in inflationary expectations will influence

A) the supply of loanable funds only.
B) the demand for loanable funds only.
C) neither the supply nor demand for loanable funds.
D) both the supply and demand for loanable funds.

Question 65

An increase in the expected rate of inflation causes

A) a decrease in the demand for loanable funds.
B) an increase in the supply of loanable funds.
C) interest rates to rise.
D) interest rates to fall.

Question 66

During the expansion phase of the business cycle

A) the demand for loanable funds tends to fall.
B) interest rates tend to rise.
C) bond prices tend to rise.
D) inflationary expectations tend to fall.

Question 67

The equilibrium interest rate will fall if the

A) supply of loanable funds decreases.
B) demand for loanable funds decreases.
C) demand for securities decreases.
D) inflation rate increases.

Question 68

Which of these will cause the equilibrium interest rate to rise?

A) The savings rate decreases
B) Business borrowing decreases
C) The federal deficit decreases
D) Household borrowing increases

Question 69

The level of interest rates tends to __________ during periods of business cycle expansion and __________ during periods of cyclical recession.

A) rise; rise
B) fall; rise
C) rise; fall
D) fall; fall

Question 70

When the Fed tightens monetary policy during business expansions, the __________ loanable funds shifts to the __________.

A) demand for; right
B) demand for; left
C) supply of; left
D) supply of; right

Question 71

The equilibrium interest rate rises when

A) inflationary expectations increase.
B) the economy enters a recession.
C) the supply of credit increases.
D) the demand for credit decreases.

Question 72

Interest rates have fallen since the early 1980s because the

A) federal deficit has declined.
B) federal deficit has increased.
C) inflation rate has declined.
D) inflation rate has increased.

Question 73

Lenders expecting lower inflation will

A) supply more loanable funds at each nominal interest rate.
B) supply less loanable funds at each nominal interest rate.
C) supply more loanable funds at each real interest rate.
D) supply less loanable funds at each real interest rate.

Question 74

An increase in saving by households will

A) result in a lower equilibrium interest rate.
B) raise the equilibrium interest rate.
C) have no effect on the equilibrium interest rate.
D) lower the price of securities.