68) The interest rate that is adjusted for actual changes in the price level is called the
A) ex post real interest rate.
B) expected interest rate.
C) ex ante real interest rate.
D) none of the above.
69) The change in the bond’s price relative to the initial purchase price is
A) the current yield.
B) coupon payment.
C) yield to maturity.
D) rate of capital gain.
70) The return on a bond is equal to the yield to maturity when
A) the holding period is longer than the maturity of the bond.
B) the maturity of the bond is longer than the holding period.
C) the holding period and the maturity of the bond are identical.
D) none of the above.
71) Bonds whose term to maturity is shorter than the holding period are also subject to
A) default.
B) reinvestment risk.
C) both of the above.
D) none of the above.
72) A ________ is a type of loan that has the same cash flow payment every year throughout the
life of the loan.
A) discount loan
B) simple loan
C) fixed-payment loan
D) interest-free loan
73) The real interest rate is actually the ex ante real interest rate because it is adjusted for
________ changes in the price level.
A) actual
B) expected
C) nominal
D) real
74) An ex post real interest rate is adjusted for ________ changes in the price level.
A) actual
B) expected
C) nominal
D) real
1) A bond’s current market value is equal to the present value of the coupon payments plus the
present value of the face amount.
2) Discounting the future is the procedure used to find the future value of a dollar received today.
3) The current yield is the best measure of an investor’s return from holding a bond.
4) Unless a bond defaults, an investor cannot lose money investing in bonds.
5) The current yield is the yearly coupon payment divided by the current market price.
6) Prices for long-term bonds are more volatile than for shorter-term bonds.
7) A long-term bond’s price is less affected by interest rate movements than a short-term bond’s
price.
8) Increasing duration implies that interest-rate risk has increased.
9) All else being equal, the greater the interest rate the greater the duration is.
10) Interest-rate risk is the uncertainty that an investor faces because the interest rate at which a
bond’s future coupon payments can be invested is unknown.
11) The real interest rate is equal to the nominal rate minus inflation.
12) The current yield goes up as the price of a bond falls.
13) Changes in interest rates make investments in long-term bonds risky.
14) Bonds with a maturity that is longer than the holding period have no interest-rate risk.
20
15) A bonds with a 5% coupon as has a yield to maturity of 5%.
16) The real interest rate is actually the ex ante real interest rate because it is adjusted for actual
changes in the price level.
17) When the real interest rate is low, there are greater incentives to borrow and fewer incentives
to lend.
18) When the real interest rate is high, there are greater incentives to borrow and fewer
incentives to lend.
19) An indexed bond is a bonds whose interest and/or principal payments are adjusted for
changes in the price level.
1) Distinguish between coupon rate, yield to maturity, and current yield.
Topic: Chapter 3.1 Measuring Interest Rates
Question Status: Previous Edition
2) Describe the cash flows received from owning a coupon bond.
Topic: Chapter 3.1 Measuring Interest Rates
Question Status: Previous Edition
3) What concept is used to value a bond?
Topic: Chapter 3.1 Measuring Interest Rates
Question Status: Previous Edition
4) How is a bond’s current yield calculated? Why is current yield a more accurate approximation
of yield to maturity for a long-term bond than for a short-term bond?
Topic: Chapter 3.1 Measuring Interest Rates
Question Status: Previous Edition
21
5) Why are long-term bonds more risky than short-term bonds?
Topic: Chapter 3.3 Distinction Between Interest Rates and Returns
Question Status: Previous Edition
6) What is interest-rate risk and how is it measured?
Topic: Chapter 3.3 Distinction Between Interest Rates and Returns
Question Status: Previous Edition
7) Why may a bond’s rate of return differ from its yield to maturity?
Topic: Chapter 3.3 Distinction Between Interest Rates and Returns
Question Status: Previous Edition
8) How does reinvestment risk differ from interest-rate risk?
Topic: Chapter 3.3 Distinction Between Interest Rates and Returns
Question Status: Previous Edition
9) What is the distinction between the nominal interest rate and the real interest rate? Which is a
better indicator of incentives to borrow and lend? Why?
Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates
Question Status: Previous Edition
10) Describe how Treasury Inflation Protection Securities (TIPS) work and how they help
policymakers estimate expected inflation.
Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates
Question Status: Previous Edition
11) What is the purpose of discounting cash flows?
Topic: Chapter 3.1 Measuring Interest Rates
Question Status: Previous Edition
12) What is the relationship between the current yield and yield to maturity for a bond?
Topic: Chapter 3.1 Measuring Interest Rates
Question Status: New Question
13) What happened in Japan in the late-1990s to generate negative rates on the government debt?
Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates
Question Status: New Question