Question 1

The larger the bond dealer's spread the:

Accepted Answer

A)   less liquid is the market for that bond.
B)   greater is the coupon rate for that bond.
C)   more liquid is the market for that bond.
D)   less risk there is for the dealer to hold that bond.E) None of the above
F) A) and C)

Question 2

If the risk on foreign government bonds increases relative to U.S. government bonds, the price of U.S. government bonds should:

Accepted Answer

A)   not change since U.S. government bonds are free of default risk.
B)   decrease since people will bail out of all government bonds.
C)   increase as the demand for these bonds increases.
D)   not be affected because the two types of bonds are traded in different markets.E) A) and B)
F) B) and D)

Question 3

Bond prices and yields:

Accepted Answer

A)   move together in the same direction.
B)   do not change if the coupon is fixed.
C)   move together inversely.
D)   are independent of each other.E) B) and C)
F) A) and B)

Question 4

The bond dealer's spread is:

Accepted Answer

A)   the asking price less the bid price.
B)   the difference between the current yield and the yield to maturity.
C)   the bid price less the asking price.
D)   usually negative; the dealer makes a profit holding the bonds.E) A) and D)
F) All of the above

Question 5

If the quantity of bonds supplied exceeds the quantity of bonds demanded, bond prices would:

Accepted Answer

A)   rise and yields would fall.
B)   fall and yields would rise.
C)   rise but yields will remain constant.
D)   fall and yields would fall.E) A) and D)
F) A) and C)

Question 6

When the price of a bond is above face value the yield to maturity:

Accepted Answer

A)   is below the coupon rate.
B)   will be above the coupon rate.
C)   will equal the current yield.
D)   will equal the coupon rate.E) None of the above
F) All of the above

Question 7

Calculate the price of a $1,000 face value bond that offers a $45 annual coupon, and has six years to maturity, when the interest rate is 6.0% (0.060).

Accepted Answer

Using a financial calculator the price o...

Question 8

When expected inflation decreases for any given nominal interest rate, all of the following occur except the:

Accepted Answer

A)   real interest rate decreases.
B)   bond supply curve shifts to the left.
C)   cost of borrowing increases and the desire to borrow decreases.
D)   price of bonds increases.E) B) and D)
F) All of the above

Question 9

Suppose that a bond is purchased at a discount (meaning that it is sold for less than face value). Could the yield to maturity ever be less than the coupon rate? Could the holding period return be less than the coupon rate? Explain.

Accepted Answer

If a bond is purchased for less than fac...

Question 10

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 the:

Accepted Answer

A)   bond demand curve shift right.
B)   bond supply curve shift left.
C)   bond supply curve shift right.
D)   bond demand curve shift left.E) A) and C)
F) C) and D)

Question 11

Suppose a family member approaches you to borrow $2,000 for the down payment on an automobile. You have the cash available in a savings account that currently earns 5% annual interest. You and the family member consider the following repayment options:
(i) Borrower repays $259 each year over the next ten years
(ii) Borrower repays $300 each year over the next five years, plus a lump-sum payment of $895 in the fifth year.
(iii) Borrower repays you $2,100 at the end of one year.
For each of the options above, show that the present values of each option are approximately equal. Then, relate each of the options above to the four types of bonds, indicating which option is equivalent to which type of bond. Explain why.

Accepted Answer

The present values are calculated as fol...

Question 12

Interest-rate risk results from:

Accepted Answer

A)   bond prices being fixed over the life of the bond.
B)   a mismatch between an individual's investment horizon and a bond's maturity.
C)   the fact that most people hold bonds until they mature.
D)   inflation being uncertain.E) None of the above
F) A) and B)

Question 13

The most common form of zero-coupon bonds found in the United States is:

Accepted Answer

A)   AAA rated corporate bonds.
B)   U.S. Treasury bills.
C)   30-year U.S. Treasury bonds.
D)   municipal bonds.E) All of the above
F) B) and C)

Question 14

When the current yield and the coupon rate are equal, the bond is:

Accepted Answer

A)   purchased at a discount.
B)   purchased at a price that equals the face value.
C)   a zero-coupon bond.
D)   purchased at a price that exceeds its face value.E) B) and D)
F) A) and B)

Question 15

A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has a:

Accepted Answer

A)   current yield and coupon rate equal to 6.22% and a coupon rate above this.
B)   current yield equal to 6.22% and a coupon rate below this.
C)   coupon rate equal to 6.00% and a current yield below this.
D)   yield to maturity and current yield equal to 6.00%.E) A) and B)
F) A) and C)

Question 16

Which of the following is true of interest-rate risk?

Accepted Answer

A)   It is the risk that the coupon rate for a bond will change, affecting current bondholders' coupon payments.
B)   It refers to the probability that a borrower will default on debt obligations.
C)   It is the risk that the face value of a bond will change before maturity.
D)   Individuals owning long-term bonds are exposed to greater interest-rate risk.E) B) and D)
F) A) and D)

Question 17

The U.S. Treasury issues bonds where the return is indexed to the consumer price index. We should expect that these bonds, relative to other U.S. Treasury bonds, will have:

Accepted Answer

A)   lower price and lower return due to the decreased risk.
B)   lower price and a lower fixed return since the demand for them should be higher.
C)   higher price and higher fixed return since we always seem to have some inflation.
D)   higher price and lower return due to the decreased risk from inflation in holding these bonds.E) B) and D)
F) A) and B)

Question 18

In calculating the current yield for a bond the:

Accepted Answer

A)   coupon payment is ignored.
B)   present value of the capital gain/loss is ignored.
C)   present value of the final payment is the only important consideration.
D)   present value of the coupon payments is the only important consideration.E) A) and D)
F) None of the above

Question 19

The holding period return has relevance because:

Accepted Answer

A)   most bonds are held by the original purchaser until maturity.
B)   most bonds are held by the original purchaser until they mature.
C)   bonds are frequently traded.
D)   current yields are not that important to bondholders.E) B) and C)
F) All of the above

Question 20

A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has a:

Accepted Answer

A)   a current yield equal to 6.22%.
B)   a current yield equal to 6.00%.
C)   a coupon rate equal to 6.22%.
D)   a yield to maturity and current yield equal to 6.00%.E) A) and B)
F) All of the above

Exam 6: Bonds, Bond Prices, and the Determination of Interest Rates

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 the:

Correct Answer
verified

When the price of a bond is above face value the yield to maturity:

Correct Answer
verified

In calculating the current yield for a bond the:

Correct Answer
verified

Calculate the price of a $1,000 face value bond that offers a $45 annual coupon, and has six years to maturity, when the interest rate is 6.0% (0.060).

Correct Answer
verified
Using a financial calculator the price o...
View Answer

The U.S. Treasury issues bonds where the return is indexed to the consumer price index. We should expect that these bonds, relative to other U.S. Treasury bonds, will have:

Correct Answer
verified

Interest-rate risk results from:

Correct Answer
verified

A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has a:

Correct Answer
verified

The larger the bond dealer's spread the:

Correct Answer
verified

If the risk on foreign government bonds increases relative to U.S. government bonds, the price of U.S. government bonds should:

Correct Answer
verified

The holding period return has relevance because:

Correct Answer
verified

Suppose that a bond is purchased at a discount (meaning that it is sold for less than face value). Could the yield to maturity ever be less than the coupon rate? Could the holding period return be less than the coupon rate? Explain.

Correct Answer
verified
If a bond is purchased for less than fac...
View Answer

The bond dealer's spread is:

Correct Answer
verified

If the quantity of bonds supplied exceeds the quantity of bonds demanded, bond prices would:

Correct Answer
verified

Bond prices and yields:

Correct Answer
verified

When expected inflation decreases for any given nominal interest rate, all of the following occur except the:

Correct Answer
verified

Correct Answer
verified
The present values are calculated as fol...
View Answer

A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has a:

Correct Answer
verified

When the current yield and the coupon rate are equal, the bond is:

Correct Answer
verified

The most common form of zero-coupon bonds found in the United States is:

Correct Answer
verified

Which of the following is true of interest-rate risk?

Correct Answer
verified

Exam 6: Bonds, Bond Prices, and the Determination of Interest Rates

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 the:

Correct AnswerverifiedShow Answer

When the price of a bond is above face value the yield to maturity:

Correct AnswerverifiedShow Answer

In calculating the current yield for a bond the:

Correct AnswerverifiedShow Answer

Calculate the price of a $1,000 face value bond that offers a $45 annual coupon, and has six years to maturity, when the interest rate is 6.0% (0.060).

Correct AnswerverifiedUsing a financial calculator the price o...View AnswerShow Answer

The U.S. Treasury issues bonds where the return is indexed to the consumer price index. We should expect that these bonds, relative to other U.S. Treasury bonds, will have:

Correct AnswerverifiedShow Answer

Interest-rate risk results from:

Correct AnswerverifiedShow Answer

A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has a:

Correct AnswerverifiedShow Answer

The larger the bond dealer's spread the:

Correct AnswerverifiedShow Answer

If the risk on foreign government bonds increases relative to U.S. government bonds, the price of U.S. government bonds should:

Correct AnswerverifiedShow Answer

The holding period return has relevance because:

Correct AnswerverifiedShow Answer

Suppose that a bond is purchased at a discount (meaning that it is sold for less than face value). Could the yield to maturity ever be less than the coupon rate? Could the holding period return be less than the coupon rate? Explain.

Correct AnswerverifiedIf a bond is purchased for less than fac...View AnswerShow Answer

The bond dealer's spread is:

Correct AnswerverifiedShow Answer

If the quantity of bonds supplied exceeds the quantity of bonds demanded, bond prices would:

Correct AnswerverifiedShow Answer

Bond prices and yields:

Correct AnswerverifiedShow Answer

When expected inflation decreases for any given nominal interest rate, all of the following occur except the:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedThe present values are calculated as fol...View AnswerShow Answer

A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has a:

Correct AnswerverifiedShow Answer

When the current yield and the coupon rate are equal, the bond is:

Correct AnswerverifiedShow Answer

The most common form of zero-coupon bonds found in the United States is:

Correct AnswerverifiedShow Answer

Which of the following is true of interest-rate risk?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Using a financial calculator the price o...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
If a bond is purchased for less than fac...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The present values are calculated as fol...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified