Q1) The present value of an expected future payment ________ as the interest rate increases.

A) falls

B) rises

C) is constant

D) is unaffected

Q2) An increase in the time to the promised future payment ________ the present value of the payment.

A) decreases

B) increases

C) has no effect on

D) is irrelevant to

Q3) With an interest rate of 6 percent, the present value of $100 next year is approximately

A) $106.

B) $100.

C) $94.

D) $92.

Q4) What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent?

A) $453.51

B) $500.00

C) $476.25

D) $550.00

Q5) If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is

A) 5 percent.

B) 10 percent.

C) 12.5 percent.

D) 15 percent.

(2)

Q6) To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of

A) face value.

B) par value.

C) deflation.

D) discounting the future.

Q7) A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a

A) simple loan.

B) fixed-payment loan.

C) coupon bond.

D) discount bond.

Q8) A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a

A) simple loan.

B) fixed-payment loan.

C) coupon bond.

D) discount bond.

Q9) A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a

A) simple loan.

B) fixed-payment loan.

C) coupon bond.

D) discount bond.

Q10) If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is

A) $650.

B) $1,300.

C) $130.

D) $13.

Q11) An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of

A) 5 percent.

B) 8 percent.

C) 10 percent.

D) 40 percent.

Q12) 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.

(3)

Q13) A discount bond

A) pays the bondholder a fixed amount every period and the face value at maturity.

B) pays the bondholder the face value at maturity.

C) pays all interest and the face value at maturity.

D) pays the face value at maturity plus any capital gain.

Q14) The interest rate that equates the present value of payments received from a debt instrument with its value today is the

A) simple interest rate.

B) current yield.

C) yield to maturity.

D) real interest rate.

Q15) Economists consider the ________ to be the most accurate measure of interest rates.

A) simple interest rate.

B) current yield.

C) yield to maturity.

D) real interest rate.

Q16) For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is

A) $10,030.

B) $10,300.

C) $13,000.

D) $13,310.

Q17) If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the interest rate is

A) 5 percent.

B) 10 percent.

C) 22 percent.

D) 25 percent.

Q18) If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200?

A) 9 percent

B) 10 percent

C) 11 percent

D) 12 percent

Q19) The present value of a fixed-payment loan is calculated as the ________ of the present value of all cash flow payments.

A) sum

B) difference

C) multiple

D) log

(4)

Q20) 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 positively related.

C) The yield to maturity is greater than the coupon rate when the bond price is above the par value.

D) The yield is less than the coupon rate when the bond price is below the par value.

Q21) Which of the following $1,000 face-value securities has the highest 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 12 percent coupon bond selling for $1,000

D) A 12 percent coupon bond selling for $1,100

Q22) The price of a consol equals the coupon payment

A) times the interest rate.

B) plus the interest rate.

C) minus the interest rate.

D) divided by the interest rate.

Q23) A consol paying $20 annually when the interest rate is 5 percent has a price of

A) $100.

B) $200.

C) $400.

D) $800.

Q24) If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is

A) 2.5 percent.

B) 5 percent.

C) 7.5 percent.

D) 10 percent.

Q25) A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of

A) 3 percent.

B) 20 percent.

C) 25 percent.

D) 33.3 percent.

Q26) If the interest rate is 5%, what is the present value of a security that pays you $1, 050 next year and $1,102.50 two years from now? If this security sold for $2200, is the yield to maturity greater or less than 5%? Why?

(5)

PartPart 2: 2: The DistinctioThe Distinction Between Interest Rates and Returnsn Between Interest Rates and Returns

Q27) The ________ is defined as the payments to the owner plus the change in a security's value expressed as a fraction of the security's purchase price.

A) yield to maturity

B) current yield

C) rate of return

D) yield rate

Q28) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?

A) 5 percent

B) 10 percent

C) -5 percent

D) 25 percent

Part 3:Part 3: InterestInterest--Rate RiskRate Risk

Q29) The riskiness of an asset's returns due to changes in interest rates is

A) exchange-rate risk.

B) price risk.

C) asset risk.

D) interest-rate risk.

Q30) Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant.

A) long-term; long-term

B) long-term; short-term

C) short-term; long-term

D) short-term; short-term

Q31) There is ________ for any bond whose time to maturity matches the holding period.

A) no interest-rate risk

B) a large interest-rate risk

C) rate-of-return risk

D) yield-to-maturity risk

(6)

Part 4: Part 4: The Distinction Between Real and Nominal Interest RatesThe Distinction Between Real and Nominal Interest Rates

Q32) The ________ interest rate more accurately reflects the true cost of borrowing.

A) nominal

B) real

C) discount

D) market

Q33) The ________ interest rate is adjusted for expected changes in the price level.

A) ex ante real

B) ex post real

C) ex post nominal

D) ex ante nominal

Q34) The ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation.

A) Fisher equation

B) Keynesian equation

C) Monetarist equation

D) Marshall equation

Q35) In which of the following situations would you prefer to be the lender?

A) The interest rate is 9 percent and the expected inflation rate is 7 percent.

B) The interest rate is 4 percent and the expected inflation rate is 1 percent.

C) The interest rate is 13 percent and the expected inflation rate is 15 percent.

D) The interest rate is 25 percent and the expected inflation rate is 50 percent