1)

The interest rate that equates the present value of payments received from a debt instrument with its value today is the

Select one:

A. real interest rate.

B. yield to maturity.

C. current yield.

D. simple interest rate.

2)

If you expect the inflation rate to be 4 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

Select one:

A. -3 percent.

B. -2 percent.

C. 3 percent.

D. 7 percent.

3)

Higher government deficits ________ the supply of bonds and shift the supply curve to the ________, everything else held constant.

Select one:

A. decrease; right

B. increase; right

C. increase; left

D. decrease; left

4)

If the possibility of a default increases because corporations begin to suffer losses, then the default risk on corporate bonds will ________, and the bonds' returns will become ________ uncertain, meaning that the expected return on these bonds will decrease, everything else held constant.

Select one:

A. decrease; more

B. increase; less

C. decrease; less

D. increase; more

5)

If 1-year interest rates for the next three years are expected to be 1, 1, and 1 percent, and the 3-year term premium is 1 percent, than the 3-year bond rate will be

Select one:

A. 1 percent.

B. 2 percent.

C. 3 percent.

D. 4 percent.