Chapter 4 Understanding Interest Rates
1) A loan that requires the borrower to make the same payment every period until the maturity date is called a
A) simple loan.
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B) fixed-payment loan.
C) discount loan.
D) a same-payment loan.
E) none of the above.
Answer: B
5) A $16,000 coupon bond with an $800 coupon payment every year has a coupon rate of
A) 4 percent.
B) 8 percent.
C) 10 percent.
D) 40 percent.
E) None of the above.
Answer: E
10) 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.
E) A 5 percent coupon bond with a price of $1,500.
Answer: A
15) 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
Answer: A
20) The yield on a discount basis of a 90-day, $1,000 Treasury bill selling for $950 is
A) 5 percent.
B) 10 percent.
C) 15 percent.
D) 20 percent.
E) none of the above.
Answer: D
25) 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
Answer: A
30) Of the following measures of interest rates, which is considered by economists to be the most accurate?
A) The yield to maturity B) The coupon rate
C) The current yield D) The yield on a discount basis.
Answer: A
35) 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.
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D) defines the discount rate.
Answer: A
40) 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.
Answer: D
45) The yield to maturity for a one-year discount bond equals
A) the increase in price over the year, divided by the initial price.
B) the increase in price over the year, divided by the face value.
C) the increase in price over the year, divided by the interest rate.
D) none of the above.
Answer: A
50) If a $10,000 coupon bond has a coupon rate of 4 percent, then the coupon payment every year is
A) $40. B) $140. C) $400. D) $640.
Answer: C
55) If a $20,000 coupon bond has a coupon rate of 8 percent, then the coupon payment every year is
A) $80.
B) $160.
C) $800.
D) $1600.
E) none of the above.
Answer: D
60) A $6,000 coupon bond with a $480 coupon payment every year has a coupon rate of
A) 2 percent. B) 4 percent. C) 6 percent. D) 8 percent.
Answer: D
65) With an interest rate of 8 percent, the present value of $100 next year is approximately
A) $108. B) $100. C) $96. D) $93.
Answer: D
70) Prices and returns for _____ bonds are more volatile than those for _____ bonds.
A) long-term; long-term B) long-term; short-term
C) short-term; long-term D) short-term; short-term
Answer: B
75) The current yield on a $10,000, 10 percent coupon bond selling for $8,000 is
A) 10.0 percent. B) 12.5 percent. C) 15.0 percent. D) 17.5 percent.
Answer: B
80) The yield on a discount basis of a 90-day $1,000 Treasury bill selling for $900 is
A) 10 percent. B) 20 percent. C) 25 percent. D) 40 percent.
Answer: D
85) The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100 next year is
A) 5 percent. B) 10 percent. C) 14 percent. D) 15 percent.
Answer: D
90) If you expect the inflation rate to be 12 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) -5 percent. B) -2 percent. C) 2 percent. D) 12 percent.
Answer: A
95) Which of the following are true of coupon bonds?
A) The owner of a coupon bond receives a fixed interest payment every year until the maturity date, when the face or par value is repaid.
B) U.S. Treasury bonds and notes are examples of coupon bonds.
C) Corporate bonds are examples of coupon bonds.
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D) All of the above.
E) Only (a) and (b) of the above.
Answer: D
100) 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) Only (a) and (b) of the above.
Answer: B
105) The process of calculating what dollars received in the future are worth today is called
A) calculating the yield to maturity. B) discounting the future.
C) deflating the future. D) none of the above.
Answer: B
110) 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 negatively related.
C) The yield to maturity is greater than the coupon rate when the bond price is above the par value.
D) All of the above are true.
E) Only (a) and (b) of the above are true.
Answer: E
115) Which of the following are true for the current yield?
A) The current yield is defined as the yearly coupon payment divided by the price of the security.
B) The formula for the current yield is identical to the formula describing the yield to maturity for a discount bond.
C) The current yield is always a poor approximation for the yield to maturity.
D) All of the above are true.
E) Only (a) and (b) of the above are true.
Answer: A
120) Which of the following are true concerning the distinction between interest rates and return?
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 sum of 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 rises between time t and time t+1.
D) All of the above are true.
E) Only (a) and (b) of the above are true.
Answer: D
125) Which of the following are generally true of all 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 term to maturities are longer than the holding period.
C) The longer a bond’s maturity, the smaller is the size of the price change associated with an interest rate change.
D) All of the above are true.
E) Only (a) and (b) of the above are true.
Answer: A
130) The Fisher equation states that
A) the nominal interest rate equals the real interest rate plus the expected rate of inflation.
B) the real interest rate equals the nominal interest rate less the expected rate of inflation.
C) the nominal interest rate equals the real interest rate less the expected rate of inflation.
D) both (a) and (b) of the above are true.
E) both (a) and (c) of the above are true.
Answer: A
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