44) The Fisher equation states that
A) the nominal interest rate equals the real interest rate plus the expected rate of inflation.
B) the real interest rate equals the nominal interest rate less the expected rate of inflation.
C) the nominal interest rate equals the real interest rate less the expected rate of inflation.
D) both A and B of the above are true.
E) both A and C of the above are true.
45) 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.
E) none of the above.
46) If you expect the inflation rate to be 5 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) -12 percent.
B) -2 percent.
C) 2 percent.
D) 12 percent.
47) The nominal interest rate minus the expected rate of inflation
A) defines the real interest rate.
B) is a better measure of the incentives to borrow and lend than the nominal interest rate.
C) is a more accurate indicator of the tightness of credit market conditions than the nominal
interest rate.
D) all of the above.
E) only A and B of the above.
48) 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.
49) In which of the following situations would you prefer to be making a loan?
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.
50) 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.
51) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for
$1,200 one year later?
A) 5 percent
B) 10 percent
C) -5 percent
D) 25 percent
E) None of the above
52) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for
$900 one year later?
A) 5 percent
B) 10 percent
C) -5 percent
D) -10 percent
E) None of the above
53) The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100 one
year later is
A) 5 percent.
B) 10 percent.
C) 14 percent.
D) 15 percent.
54) The return on a 10 percent coupon bond that initially sells for $1,000 and sells for $900 one
year later is
A) -10 percent.
B) -5 percent.
C) 0 percent.
D) 5 percent.
55) Which of the following are generally true of all bonds?
A) The only bond whose return equals the initial yield to maturity is one 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 losses on
bonds whose term to maturities are longer than the holding period.
C) The longer a bond’s maturity, the greater is the price change associated with a given interest
rate change.
D) All of the above are true.
E) Only A and B of the above are true.
56) Which of the following are true concerning the distinction between interest rates and return?
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 sum of 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) All of the above are true.
E) Only A and B of the above are true.
57) 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
58) 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 bond you are holding?
A) 5 percent
B) 10 percent
C) 15 percent
D) 20 percent
59) (I) Prices of longer-maturity bonds respond more dramatically to changes in interest rates.
(II) Prices and returns for long-term bonds are less volatile than those for short-term bonds.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
60) (I) Prices of longer-maturity bonds respond less dramatically to changes in interest rates.
(II) Prices and returns for long-term bonds are less volatile than those for shorter-term bonds.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
61) The riskiness of an asset’s return that results from interest rate changes is called
A) interest-rate risk.
B) coupon-rate risk.
C) reinvestment risk.
D) yield-to-maturity risk.
62) If an investor’s holding period is longer than the term to maturity of a bond, he or she is
exposed to
A) interest-rate risk.
B) reinvestment risk.
C) bond-market risk.
D) yield-to-maturity risk.
63) Reinvestment risk is the risk that
A) a bond’s value may fall in the future.
B) a bond’s future coupon payments may have to be invested at a rate lower than the bond’s yield
to maturity.
C) an investor’s holding period will be short and equal in length to the maturity of the bonds he
or she holds.
D) a bond’s issuer may fail to make the future coupon payments and the investor will have no
cash to reinvest.
64) (I) The average lifetime of a debt security’s stream of payments is called duration.
(II) The duration of a portfolio is the weighted average of the durations of the individual
securities, with the weights reflecting the proportion of the portfolio invested in each.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
65) The duration of a ten-year, 10 percent coupon bond when the interest rate is 10 percent is
6.76 years. What happens to the price of the bond if the interest rate falls to 8 percent?
A) It rises 20 percent.
B) It rises 12.3 percent.
C) It falls 20 percent.
D) It falls 12.3 percent.
66) When the lender provides the borrower with an amount of funds that must be repaid to the
lender at the maturity date, along with an additional payment for the interest, it is called a
________.
A) fixed-payment loan
B) discount loan
C) simple loan
D) none of the above
67) A discount bond
A) is also called a coupon bond.
B) is also called a zero-coupon bond.
C) is also called a fixed-payment bond.
D) is also called a corporate bond.