1. The key to present value calculations is that they

A) allow easy comparison of taxable and non-taxable investments.

B) provide a common unit for measuring funds at different times.

C) provide accurate answers only in a low-inflation environment.

D) provide accurate answers only in a high-inflation environment.

2. For a coupon bond, the yield to maturity

A) equates the present value of all the bond's payments to its price today.

B) equals the coupon rate.

C) increases when the market price of the bond increases.

D) equals the coupon payment divided by the current price of the bond.

3. If the current price of a bond is less than its face value

A) the coupon rate must be equal to the current yield.

B) the coupon rate must be less than the current yield.

C) the yield to maturity must be less than the coupon rate.

D) an investor will suffer a capital loss by holding the bond until maturity.

4. Which of the following bonds would you prefer to be selling? Assume n = 30 for all bond maturities.

A) A $10,000 face-value security with a 6% coupon rate selling for $9,000.

B) A $10,000 face-value security with a 6% coupon rate selling for $10,000.

C) A $10,000 face-value security with a 6% coupon rate selling for $11,000.

D) A $10,000 face-value security with a 7% coupon rate selling for $9,500.

E) A $10,000 face-value security with a 7% coupon rate selling for $11,500.

5. The present value of a security is

A) directly related to the discount rate. B) inversely related to the time until maturity.

C) inversely related to the principal amount. D) is not related to the discount rate.

6. If a lender is certain that market interest rates will rise in the near future, which of the following will she be most

likely to purchase?

A) A six-month Treasury bill currently yielding 1.45%

B) A five-year Treasury note currently yielding 2.25%

C) A twenty-year Treasury bond currently yielding 3.65%

D) A twenty-year AAA rated corporate bond currently yielding 3.65%

7. Which of the following options would you choose to receive if the rate of discount is 7.5%?

A) $1200 in one year B) $1500 in four years C) $1920 in eight years D) $2100 in ten years

8. Suppose you are holding a 5% coupon bond maturing in 15 years with a yield to maturity of 6.5%. If market

interest rates on 15-year instruments fall from 6.5% to 5.2%, what is the expected yearly yield on the

bond you are currently holding?

A) 5% B) 5.2% C) 5.85% D) 6.5 % E) impossible to determine with given information

9. A higher market interest rate:

A) decreases the future value of current money.

B) increases the present value of future money.

C) maintains the same present value of future money.

D) decreases the present value of future money.

10. The issuer of a bond is a

A) personal investor. B) borrower. C) lender. D) corporation.

11. Everything else held constant, if the expected return on Verizon stock rises from 7 to 8 percent and the yield to

maturity on 20-year U.S. Treasury bonds rises from 2.55 to 3.45 percent, then the expected return of holding

Verizon stock ________ relative to U.S. Treasury bonds and the demand for U.S. Treasury bonds ________.

A) rises; rises B) rises; falls C) falls; rises D) falls; falls

12. If the federal government were to offer larger tax breaks on the purchase of new equipment for businesses, all

other factors constant, we would expect to see: A) The bond demand curve shift right. B) The bond supply curve shift left. C) The bond supply curve shift right. D) The bond demand curve shift left.

13. If fluctuations in the stock market prices become less volatile, then, other things equal, the demand for long-

term bonds should ________ and the yield on long-term bonds should ________.

A) increase; increase B) increase; decrease

C) decrease; decrease D) decrease; increase