Question 1

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) B) and D)
F) A) and D)

Question 2

When expected inflation increases, for any given nominal interest rate the:

Accepted Answer

A)  real cost of repayment for bond issuers increases.
B)  real return for bondholders increases.
C)  real cost of repayment for bond issuers decreases.
D)  bond demand curve shifts right.E) All of the above
F) C) and D)

Question 3

If interest rates are expected to fall, bond prices will:

Accepted Answer

A)  fall as the demand for bonds decreases.
B)  remain constant until interest rates actually change.
C)  fall as people fear capital losses in the future.
D)  increase due to the demand for bonds increasing.E) C) and D)
F) A) and C)

Question 4

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) A) and B)
F) A) and C)

Question 5

Which of the following would lead to a decrease in bond demand?

Accepted Answer

A)  An increase in expected inflation.
B)  An increase in wealth.
C)  A decrease in risk.
D)  A decrease in liquidity.E) B) and C)
F) B) and D)

Question 6

Which of the following is not a reason why the yield to maturity can differ from the current yield?

Accepted Answer

A)  Because the yield to maturity considers the capital gain/loss.
B)  Because the current yield focuses only on the coupon payment and the purchase price.
C)  Because most bonds are not purchased for face value.
D)  Because the current yield moves in the opposite direction from price.E) C) and D)
F) B) and C)

Question 7

If interest rates are expected to rise, the bond prices will:

Accepted Answer

A)  not change until interest rates actually change.
B)  fall, due to the demand for bonds decreasing.
C)  rise, as people seek capital gains.
D)  move in the same direction as the expected change in interest rates.E) C) and D)
F) A) and D)

Question 8

Consider the bonds below.Which is subject to the greatest interest-rate risk?

Accepted Answer

A)  A 30-year fixed-rate mortgage (fixed payment loan) 
B)  A consol
C)  A Treasury bill
D)  A 20-year corporate bondE) A) and C)
F) All of the above

Question 9

Use our model of the bond market (supply and demand) to explain what happens if the U.S.economy continues to grow at robust rates.

Accepted Answer

Growth in the economy should result in g...

Question 10

A decrease in the nation's wealth, all other factors constant, would cause:

Accepted Answer

A)  the bond demand curve to shift left.
B)  bond prices to rise.
C)  interest rates to decrease.
D)  the bond supply curve to shift left.E) A) and B)
F) None of the above

Question 11

When expected inflation increases, for any given nominal interest rate the:

Accepted Answer

A)  cost of borrowing increases and the desire to borrow decreases.
B)  real interest rate increases.
C)  bond supply curve shifts to the left.
D)  cost of borrowing decreases and the desire to borrow increases.E) None of the above
F) A) and B)

Question 12

Consider a one-year corporate bond that has a 20% probability of default.The payoff on the bond is $2,000 if the corporation does not default.The interest rate is 10%.If buyers of this bond are risk-neutral, this bond will sell for:

Accepted Answer

A)  $400
B)  $909.09
C)  $1,454.54
D)  $1,600E) All of the above
F) A) and B)

Question 13

A $1,000 face value bond, with an annual coupon of $40, one year to maturity and a purchase price of $980 has a:

Accepted Answer

A)  current yield that equals 4.00%.
B)  coupon rate that equals 4.08%.
C)  current yield that equals 4.08% and a yield to maturity that equals 6.12%.
D)  current yield that equals 4.08% and a yield to maturity that equals 4.0%.E) A) and D)
F) A) and C)

Question 14

A $1000 face value bond, with one year to maturity that sells for $950 and has a $40 annual coupon has a:

Accepted Answer

A)  current yield and yield to maturity of 4.00%.
B)  yield to maturity that equals the current yield.
C)  coupon rate of 4.00% and a current yield that is below this.
D)  current yield of 4.21%.E) A) and D)
F) A) and C)

Question 15

How can a bond mutual fund report a return of over 13% when the coupon rate of the bonds they are holding are just 7% and interest rates are falling?

Accepted Answer

The bond mutual fund is advertising its ...

Question 16

A student receives a five-year loan to pay for a $2,000 used car.The lender and the student agree to an 8% interest rate on a fixed-rate loan.Expected inflation was estimated to equal 2.5%, but unexpectedly decreases to 2%.Which of the following is true?

Accepted Answer

A)  The real interest rate decreased.
B)  The student is made worse off because her real cost of borrowing is higher.
C)  The lender is made worst off because his real return on the car loan is lower.
D)  Both the student and the lender benefit.E) A) and B)
F) A) and C)

Question 17

As bond prices increase:

Accepted Answer

A)  the quantity of bonds supplied increases.
B)  the quantity of bonds supplied decreases.
C)  the quantity of bonds demanded increases.
D)  yields increases.E) A) and C)
F) A) and B)

Question 18

You win your state lottery.The lottery officials offer you the option of taking your winnings in one lump-sum payment, or fixed annual payments for the next 20 years.The sum of the 20 annual payments is larger than the lump-sum payment.Before deciding, what are the key factors you will want to consider that could influence your decision?

Accepted Answer

Although this is certainly a pleasant de...

Question 19

The U.S.Treasury offers several ways to purchase U.S.government bonds.There are the traditional coupon bonds and Treasury Inflation-Indexed Securities.How do these bonds differ from their traditional counterparts?

Accepted Answer

Inflation-indexed securities protect the...

Question 20

When expected inflation increases, for any given nominal interest rate the:

Accepted Answer

A)  bond demand curve shifts right.
B)  bond supply curve shifts right.
C)  price of bonds increases.
D)  yield on bonds will increase.E) B) and D)
F) A) and C)

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

A decrease in the nation's wealth, all other factors constant, would cause:

Correct Answer
verified

A student receives a five-year loan to pay for a $2,000 used car.The lender and the student agree to an 8% interest rate on a fixed-rate loan.Expected inflation was estimated to equal 2.5%, but unexpectedly decreases to 2%.Which of the following is true?

Correct Answer
verified

Which of the following is not a reason why the yield to maturity can differ from the current yield?

Correct Answer
verified

When expected inflation increases, for any given nominal interest rate the:

Correct Answer
verified

Which of the following would lead to a decrease in bond demand?

Correct Answer
verified

When expected inflation increases, for any given nominal interest rate the:

Correct Answer
verified

The U.S.Treasury offers several ways to purchase U.S.government bonds.There are the traditional coupon bonds and Treasury Inflation-Indexed Securities.How do these bonds differ from their traditional counterparts?

Correct Answer
verified
Inflation-indexed securities protect the...
View Answer

The holding period return has relevance because:

Correct Answer
verified

As bond prices increase:

Correct Answer
verified

How can a bond mutual fund report a return of over 13% when the coupon rate of the bonds they are holding are just 7% and interest rates are falling?

Correct Answer
verified
The bond mutual fund is advertising its ...
View Answer

A $1000 face value bond, with one year to maturity that sells for $950 and has a $40 annual coupon has a:

Correct Answer
verified

The bond dealer's spread is:

Correct Answer
verified

Consider a one-year corporate bond that has a 20% probability of default.The payoff on the bond is $2,000 if the corporation does not default.The interest rate is 10%.If buyers of this bond are risk-neutral, this bond will sell for:

Correct Answer
verified

Consider the bonds below.Which is subject to the greatest interest-rate risk?

Correct Answer
verified

When expected inflation increases, for any given nominal interest rate the:

Correct Answer
verified

If interest rates are expected to fall, bond prices will:

Correct Answer
verified

Correct Answer
verified
Although this is certainly a pleasant de...
View Answer

Use our model of the bond market (supply and demand) to explain what happens if the U.S.economy continues to grow at robust rates.

Correct Answer
verified
Growth in the economy should result in g...
View Answer

If interest rates are expected to rise, the bond prices will:

Correct Answer
verified

A $1,000 face value bond, with an annual coupon of $40, one year to maturity and a purchase price of $980 has a:

Correct Answer
verified

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

A decrease in the nation's wealth, all other factors constant, would cause:

Correct AnswerverifiedShow Answer

A student receives a five-year loan to pay for a $2,000 used car.The lender and the student agree to an 8% interest rate on a fixed-rate loan.Expected inflation was estimated to equal 2.5%, but unexpectedly decreases to 2%.Which of the following is true?

Correct AnswerverifiedShow Answer

Which of the following is not a reason why the yield to maturity can differ from the current yield?

Correct AnswerverifiedShow Answer

When expected inflation increases, for any given nominal interest rate the:

Correct AnswerverifiedShow Answer

Which of the following would lead to a decrease in bond demand?

Correct AnswerverifiedShow Answer

When expected inflation increases, for any given nominal interest rate the:

Correct AnswerverifiedShow Answer

The U.S.Treasury offers several ways to purchase U.S.government bonds.There are the traditional coupon bonds and Treasury Inflation-Indexed Securities.How do these bonds differ from their traditional counterparts?

Correct AnswerverifiedInflation-indexed securities protect the...View AnswerShow Answer

The holding period return has relevance because:

Correct AnswerverifiedShow Answer

As bond prices increase:

Correct AnswerverifiedShow Answer

How can a bond mutual fund report a return of over 13% when the coupon rate of the bonds they are holding are just 7% and interest rates are falling?

Correct AnswerverifiedThe bond mutual fund is advertising its ...View AnswerShow Answer

A $1000 face value bond, with one year to maturity that sells for $950 and has a $40 annual coupon has a:

Correct AnswerverifiedShow Answer

The bond dealer's spread is:

Correct AnswerverifiedShow Answer

Consider a one-year corporate bond that has a 20% probability of default.The payoff on the bond is $2,000 if the corporation does not default.The interest rate is 10%.If buyers of this bond are risk-neutral, this bond will sell for:

Correct AnswerverifiedShow Answer

Consider the bonds below.Which is subject to the greatest interest-rate risk?

Correct AnswerverifiedShow Answer

When expected inflation increases, for any given nominal interest rate the:

Correct AnswerverifiedShow Answer

If interest rates are expected to fall, bond prices will:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedAlthough this is certainly a pleasant de...View AnswerShow Answer

Use our model of the bond market (supply and demand) to explain what happens if the U.S.economy continues to grow at robust rates.

Correct AnswerverifiedGrowth in the economy should result in g...View AnswerShow Answer

If interest rates are expected to rise, the bond prices will:

Correct AnswerverifiedShow Answer

A $1,000 face value bond, with an annual coupon of $40, one year to maturity and a purchase price of $980 has a:

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Inflation-indexed securities protect the...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The bond mutual fund is advertising its ...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Although this is certainly a pleasant de...
View Answer

Correct Answer
verified
Growth in the economy should result in g...
View Answer

Correct Answer
verified

Correct Answer
verified