Question 1

Treasury STRIPS came into existence because

Accepted Answer

A)  investors demanded a tax-free long-term bond.
B)  the Treasury wished to shift from long-term borrowing to short-term borrowing.
C)  high inflation rates led to an increased demand for high-yield bonds.
D)  investors demanded long-term discount bonds.

Question 2

If, while you are holding a coupon bond, the interest rates on other similar bonds fall, you can be sure that

Accepted Answer

A)  the coupon payments on your bond will fall.
B)  the market price of your bond will rise.
C)  the market price of your bond will fall.
D)  the par value of your bond will rise.

Question 3

When you place your funds in a savings account at a bank, those funds are

Accepted Answer

A)  an asset to you and a liability to the bank.
B)  a liability to you and an asset to the bank.
C)  an asset both to you and the bank.
D)  a liability both to you and bank.

Question 4

Which of the following is a fixed payment loan?

Accepted Answer

A)  A home mortgage
B)  A U.S. Treasury bill
C)  A U.S. Treasury note
D)  A zero-coupon bond

Question 5

If investors are willing to pay more than the par value for a bond, you can be sure that

Accepted Answer

A)  the tax rate on the bond must be very low.
B)  the coupon rate on the bond must be higher than on other similar bonds.
C)  the coupon rate on the bond must be lower than on other similar bonds.
D)  the par value for the bond must be very low.

Question 6

Nominal interest rates are higher than real interest rates as long as

Accepted Answer

A)  expected inflation is positive.
B)  the government taxes interest income.
C)  inflation is expected to decline in the future.
D)  long-term interest rates are higher than short-term interest rates.

Question 7

The total payment to a lender for a simple loan is

Accepted Answer

A)  P.
B)  P + i.
C)  i(1 + i) .
D)  P(1 + i) .

Question 8

If the interest rate is 9%, what would you expect to pay for a discount bond paying $10,000 in two years?

Accepted Answer

A)  $8417
B)  $8200
C)  $10,000
D)  $11,881

Question 9

Suppose that the inflation rate is currently 8% and that most investors believe that inflation will remain at this level indefinitely. You are convinced, however, that the inflation will decline to 5% or less. Should you buy a 10-year Treasury bond or a 10-year TIPS?

Accepted Answer

You should buy the 10-year Treasury bond...

Question 10

When a bond is listed as having two maturity dates,

Accepted Answer

A)  the bond is callable and may be redeemed by the issuer on the first maturity date.
B)  half of the par value of the bond will be paid on the first date and the other half on the second date.
C)  interest payments on the bond begin on the first date and end on the second date.
D)  the purchaser may insist on being paid the par value of the bond on the first maturity date.

Question 11

If i is the yield to maturity of a fixed-payment loan,

Accepted Answer

A)  the value of the loan today equals i times the sum of the values of all the loan payments.
B)  i equals the present value of the loan payments.
C)  the value of the loan today equals the sum of the values of the loan payments.
D)  the value of the loan today equals the present value of the loan payments discounted at rate i.

Question 12

Debt instruments are also called

Accepted Answer

A)  equities.
B)  credit market instruments.
C)  prospectuses.
D)  units of account.

Question 13

The yield to maturity is equal to

Accepted Answer

A)  the interest rate at which the present value of an asset's returns is equal to its value today.
B)  the face value or par value of a coupon bond.
C)  any payments received from an asset at the date the asset matures.
D)  interest rate on the asset minus any taxes owed on the interest received.

Question 14

Suppose Matt's New Cars issues a discount bond with a face value of $10,000 payable in one year with an interest rate of 4%. How much will Acme receive for the bond?

Accepted Answer

A)  $9600
B)  $9615
C)  $14,000
D)  $10,400

Question 15

Which of the following is the correct expression for the expected real interest rate?

Accepted Answer

A)  r = i + 
B)  r = i - 
C)  r = i/ 
D)  r =

Question 16

Which of the following statements about the total rate of return is NOT correct?

Accepted Answer

A)  The total rate of return may be greater or less than the current yield.
B)  The total rate of return may be greater or less than the rate of capital gain.
C)  The total rate of return may never be negative.
D)  The total rate of return is greater than the coupon, holding everything else constant.

Question 17

If, while you are holding a coupon bond, its market price falls, you can be sure that

Accepted Answer

A)  the coupon payment you are receiving must have been reduced.
B)  the interest rate on other similar bonds must have fallen.
C)  the interest rate on other similar bonds must have risen.
D)  the par value of the bond must have declined.

Question 18

Simple loans and discount bonds differ from coupon bonds and fixed-payment loans in that

Accepted Answer

A)  interest on simple loans and discount bonds is taxable, while interest on coupon bonds and fixed-payment loans is not.
B)  interest on coupon bonds and fixed-payment loans is taxable, while interest on simple loans and discount bonds is not.
C)  interest rates on simple loans and discount bonds are generally higher than interest rates on comparable coupon bonds and fixed-payment loans.
D)  interest on simple loans and discount bonds is paid in a single payment, while issuers of coupon bonds and fixed-payment loans make multiple payments of interest and principal.

Question 19

For simple loans, the yield to maturity

Accepted Answer

A)  is always less than the specified simple interest rate.
B)  is always greater than the specified simple interest rate.
C)  is always equal to the specified simple interest rate.
D)  may be less than, greater than, or equal to the specified simple interest rate, depending on the maturity of the loan.

Question 20

Which of the following is NOT a discount bond?

Accepted Answer

A)  A U.S. savings bond
B)  A U.S. Treasury bill
C)  A U.S. Treasury note
D)  A zero-coupon bond

Exam 4: Interest Rates and Rates of Return

Which of the following is the correct expression for the expected real interest rate?

Correct AnswerverifiedShow Answer

Debt instruments are also called

Correct AnswerverifiedShow Answer

If investors are willing to pay more than the par value for a bond, you can be sure that

Correct AnswerverifiedShow Answer

For simple loans, the yield to maturity

Correct AnswerverifiedShow Answer

Which of the following statements about the total rate of return is NOT correct?

Correct AnswerverifiedShow Answer

Suppose that the inflation rate is currently 8% and that most investors believe that inflation will remain at this level indefinitely. You are convinced, however, that the inflation will decline to 5% or less. Should you buy a 10-year Treasury bond or a 10-year TIPS?

Correct AnswerverifiedYou should buy the 10-year Treasury bond...View AnswerShow Answer

If, while you are holding a coupon bond, its market price falls, you can be sure that

Correct AnswerverifiedShow Answer

Treasury STRIPS came into existence because

Correct AnswerverifiedShow Answer

Simple loans and discount bonds differ from coupon bonds and fixed-payment loans in that

Correct AnswerverifiedShow Answer

Which of the following is a fixed payment loan?

Correct AnswerverifiedShow Answer

Suppose Matt's New Cars issues a discount bond with a face value of $10,000 payable in one year with an interest rate of 4%. How much will Acme receive for the bond?

Correct AnswerverifiedShow Answer

When a bond is listed as having two maturity dates,

Correct AnswerverifiedShow Answer

The total payment to a lender for a simple loan is

Correct AnswerverifiedShow Answer

Nominal interest rates are higher than real interest rates as long as

Correct AnswerverifiedShow Answer

If i is the yield to maturity of a fixed-payment loan,

Correct AnswerverifiedShow Answer

If the interest rate is 9%, what would you expect to pay for a discount bond paying $10,000 in two years?

Correct AnswerverifiedShow Answer

When you place your funds in a savings account at a bank, those funds are

Correct AnswerverifiedShow Answer

Which of the following is NOT a discount bond?

Correct AnswerverifiedShow Answer

The yield to maturity is equal to

Correct AnswerverifiedShow Answer

If, while you are holding a coupon bond, the interest rates on other similar bonds fall, you can be sure that

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
You should buy the 10-year Treasury bond...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified