Answer: B Ques Status: New 5)
The yield on a discount basis of a 90-day, $1,000 Treasury bill selling for $950 is A) 5 percent. B) 10 percent. C) 15 percent. D) 20 percent.
Answer: D Ques Status: Revised
6)The yield on a discount basis of a 180-day $1,000 Treasury bill selling for $900 is A) 10 percent. B) 20 percent. C) 25 percent. D) 40 percent.
Answer: B Ques Status: Previous Edition
7)The yield to maturity on a $10,000 Treasury bill selling for $9,800 with 73 days to maturity is approximately A) 2 percent. B) 5 percent. C) 10 percent. D) 20 percent.
Answer: C Ques Status: Revised
8) When referring to changes in yields, a basis point equals A) 10 percent. B) 1 percent. C) 0.1 percent. D) 0.01 percent.
Answer: D Ques Status: Revised 9)
To say that a yield increased by twenty basis points means the interest rate increased by A) 20 percent. B) 2 percent. C) 0.2 percent. D) 0.02 percent.
Answer: C Ques Status: Revised · 10)
If the yield on Treasury bills falls from 5.27 percent to 5.22 percent, then the yield has
A) increased by 5 basis points. B) increased by 0.5 basis point. C) decreased by 0.5 basis point. D) decreased by 5 basis points. Answer: D Ques Status: Revised 11)
If the yield on Treasury bills increases from 6.34 percent to 6.44 percent, the yield has
A) increased by 0.01 basis point. B) increased by 0.1 basis point. C) increased by 1 basis point. D) increased by 10 basis points. Answer: D Ques Status: Revised 12)
You are considering alternative quotes, a one-year Treasury note with a yield to maturity of
4.5% and a one-year Treasury bill with a yield on a discount basis of 4.5%. Would these be equivalent? Why or why not? Answer:
No, these are not the same. The yield on a discount basis always understates true yield
so the yield to maturity on the one-year Treasury bill is higher than the quoted value. Ques Status: New
4.3 The Distinction Between Interest Rates and Returns 1)
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
Answer: C Ques Status: New
2)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
Answer: D Ques Status: Revised 3)
What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year? A) 5 percent
B) 10 percent C) -5 percent D) -10 percent Answer: C Ques Status: Revised 4)
The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is A) -10 percent. B) -5 percent. C) 0 percent. D) 5 percent.
Answer: C Ques Status: Previous Edition 5)
Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to
maturity of 15 percent. If the interest rate on one-year bonds rises from 15 percent to 20
percent over the course of the year, what is the yearly return on the b
ond you are holding? A) 5 percent B) 10 percent C) 15 percent D) 20 percent
Answer: C Ques Status: Previous Edition · 6)
If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding? A) A bond with one year to maturity B) A bond with five years to maturity C) A bond with ten years to maturity D) A bond with twenty years to maturity Answer: A Ques Status: Previous Edition 7) An equal decrease in all bond interest rates A)
increases the price of a five-year bond more than the price of a ten-year bond. B)
increases the price of a ten-year bond more than the price of a five-year bond. C)
decreases the price of a five-year bond more than the price of a ten-year bond. D)
decreases the price of a ten-year bond more than the price of a five-year bond.
Answer: B Ques Status: Revised
8) An equal increase in all bond interest rates
A) increases the return to all bond maturities by an equal amount. B) decreases the return to all bond maturities by an equal amount. C) has no effect on the returns to bonds. D)
decreases long-term bond returns more than short-term bond returns. Answer: D Ques Status: Previous Edition 9)
Which of the following are true concerning the distinction between interest rates and returns? A)
The rate of return on a bond will not necessarily equal the interest rate on that bond. B)
The return can be expressed as the difference between the current yield and the rate of capital gains. C)
The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1. D)
The return can be expressed as the sum of the discount yield and the rate of capital gains.
Answer: A Ques Status: Previous Edition
10) Which of the following are generally true of bonds?
A)The only bond whose return equals the initial yield to maturity is o
ne whose time to maturity is the same as the holding period. B)A rise in interest rates is associated with a fall in bond prices, resulting in capital gains on
bonds whose terms to maturity are longer than the holding periods. C) The longer a bond?
s maturity, the smaller is the size of the price change associated with an interest rate change. D)
Prices and returns for short-term bonds are more volatile than those for longer-term bonds.
Answer: A Ques Status: Revised
11) Which of the following are generally true of all bonds? A) The longer a bond?
s maturity, the greater is the rate of return that occurs as a result of the increase in the interest rate. B)
Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise. C)
Prices and returns for short-term bonds are more volatile than those for longer term bonds. D)
A fall in interest rates results in capital losses for bonds whose terms to maturity are longer than the holding period. Answer: B Ques Status: Revised 12) 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. Answer: D Ques Status: Revised
13) Interest-rate risk is the riskiness of an asset?s returns due to A) interest-rate changes. B) changes in the coupon rate. C) default of the borrower. D) changes in the asset?s maturity. Answer: A Ques Status: Revised · 14)
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 Answer: B Ques Status: Previous Edition 15)
Your favorite uncle advises you to purchase long-term bonds because their interest rate is 10%. Should you follow his advice? Answer:
It depends on where you think interest rates are headed in the future. If you think
interest rates will be going up, you should not follow your uncle?
s advice because you
would then have to discount your bond if you needed to sell it before the maturity date. Long-term bonds have a greater interest-rate risk. Ques Status: New
4.4 The Distinction Between Real and Nominal Interest Rates 1)
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
Answer: A Ques Status: Previous Edition
2) The nominal interest rate minus the expected rate of inflation A) defines the real interest rate. B)
is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate. C)
is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate. D) defines the discount rate.
Answer: A Ques Status: Previous Edition
3)The ________ interest rate more accurately reflects the true cost of borrowing. A) nominal B) real C) discount D) market
Answer: B Ques Status: New 4)
If you expect the inflation rate to be 15 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 A) 7 percent.
B) 22 percent. C) -15 percent. D) -8 percent. Answer: D Ques Status: Revised 5)
When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________. A) nominal; lend; borrow B) real; lend; borrow C) real; borrow; lend D) market; lend; borrow Answer: C Ques Status: New 6)
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.
Answer: B Ques Status: Previous Edition · 7)
In which of the following situations would you prefer to be borrowing? 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.
Answer: D Ques Status: Previous Edition 8)
If you expect the inflation rate to be 12 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 A) -5 percent. B) -2 percent. C) 2 percent. D) 12 percent.
Answer: A Ques Status: Previous Edition 9)
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 A) -3 percent. B) -2 percent. C) 3 percent. D) 7 percent.
Answer: C Ques Status: Previous Edition 10)
If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is A) 2 percent.
B) 8 percent. C) 10 percent. D) 12 percent.
Answer: D Ques Status: Revised
11)The interest rate on Treasury Inflation Protected Securities is a direct measure of A) the real interest rate. B) the nominal interest rate. C) the rate of inflation. D) the rate of deflation. Answer: A Ques Status: Revised 12)
Assuming the same coupon rate and maturity length, the difference between the yield on a
Treasury Inflation Protected Security and the yield on a nonindexed Treasury security provides insight into A) the nominal interest rate. B) the real interest rate. C) the nominal exchange rate. D) the expected inflation rate. Answer: D Ques Status: Revised 13)
Assuming the same coupon rate and maturity length, when the interest rate on a Treasury
Inflation Protected Security is 3 percent, and the yield on a nonindexed Treasury bond is 8 percent, the expected rate of inflation is A) 3 percent. B) 5 percent. C) 8 percent. D) 11 percent.
Answer: B Ques Status: Revised 14)
Would it make sense to buy a house when mortgage rates are 14% and expected inflation is 15%? Explain your answer. Answer:
Even though the nominal rate for the mortgage appears high, the real cost of borrowing
the funds is -1%. Yes, under this circumstance it would be reasonable to make this purchase. Ques Status: New Chapter 5 The Behavior of Interest Rates 5.1 Determinants of Asset Demand
1)Of the four factors that influence asset demand, which factor will cause the demand for all
assets to increase when it increases, everything else held constant? A) wealth B) expected returns C) risk D) liquidity
Answer: A Ques Status: New
2)
If wealth increases, the demand for stocks ________ and that of long-term bonds ________, everything else held constant. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases
Answer: A Ques Status: Previous Edition
3) Everything else held constant, a decrease in wealth A) increases the demand for stocks. B) increases the demand for bonds. C) reduces the demand for housing. D) increases the demand for housing. Answer: C Ques Status: Revised
4)Everything else held constant, if the expected return on ABC stock rises from 5 to 10 percent
and the expected return on CBS stock is unchanged, then the expected return of holding CBS
stock ________ relative to ABC stock and the demand for CBS stock ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls
Answer: D Ques Status: Revised 5)
Everything else held constant, if the expected return on U.S. Treasury bonds falls from 10 to 5
percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return
of holding GE stock ________ relative to U.S. Treasury bonds and the demand for GE stock ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls
Answer: A Ques Status: Revised
6)If housing prices are suddenly expected to shoot up, then, other things equal, the demand for
houses will ________ and that of Treasury bills will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase
Answer: B Ques Status: Previous Edition
7)If stock prices are expected to drop dramatically, then, other things equal, the demand for
stocks will ________ and that of Treasury bills will ________. A) increase; increase
B) increase; decrease C) decrease; decrease D) decrease; increase
Answer: D Ques Status: Previous Edition
8)Everything else held constant, if the expected return on RST stock declines from 12 to 9 percent
and the expected return on XYZ stock declines from 8 to 7 percent, then the expected return of
holding RST stock ________ relative to XYZ stock and demand for XYZ stock ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls
Answer: C Ques Status: Revised 9)
Everything else held constant, if the expected return on U.S. Treasury bonds falls from 8 to 7
percent and the expected return on corporate bonds falls from 10 to 8 percent, then the
expected return of corporate bonds ________ relative to U.S. Treasury bonds and the demand for corporate bonds ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls
Answer: D Ques Status: Revised 10)
An increase in the expected rate of inflation will ________ the expected return on bonds
relative to the that on ________ assets, everything else held constant. A) reduce; financial B) reduce; real C) raise; financial D) raise; real
Answer: B Ques Status: Revised 11)
If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks
________ and the demand for long-term bonds ________. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases
Answer: D Ques Status: Previous Edition
12)If the price of gold becomes less volatile, then, other things equal, the demand for stocks will
________ and the demand for antiques will ________. A) increase; increase
B) increase; decrease C) decrease; decrease D) decrease; increase
Answer: C Ques Status: Previous Edition 13)
If brokerage commissions on bond sales decrease, then, other things equal, the demand for
bonds will ________ and the demand for real estate will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: B Ques Status: New 14)
If gold becomes acceptable as a medium of exchange, the demand for gold will ________ and
the demand for bonds will ________, everything else held constant. A) decrease; decrease B) decrease; increase C) increase; increase D) increase; decrease Answer: D Ques Status: New 15)
The demand for Jackson Pollack paintings rises (holding everything else equal) when:
A) stocks become easier to sell.
B) people expect a boom in real estate prices. C) Treasury securities become riskier. D) people suddenly expect gold prices to rise. Answer: C Ques Status: Previous Edition · 16)
The demand for silver bullion decreases, other things equal, when A) the gold market is suddenly expected to boom. B) the market for silver bullion becomes more liquid. C) wealth grows rapidly.
D) interest rates are expected to fall. Answer: A Ques Status: Revised 17)
You would be less willing to purchase U.S. Treasury bonds, other things equal, if
A) you inherit $1 million from your Uncle Harry. B) you expect interest rates to fall. C) gold becomes more liquid. D) stocks become easier to sell. Answer: C Ques Status: Revised 18)
You would be more willing to buy AT&T bonds (holding everything else constant) if