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Fundamentals of Investing, 13e (Smart)
Chapter 11 Bond Valuation
11.1 Learning Goal 1
1) The interest rate on the 10 year Treasury Bond has rarely fallen below the rate of inflation.
influence investment choices
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 1
2) The risk premium component of a bond's market interest rate is related to the characteristics
of the particular bond and its issuer.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
3) The risk-free rate of return considers the expected rate of inflation.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
4) Actions by the Federal Reserve can keep the risk-free rate below the rate of inflation, at least
temporarily.
influence investment choicesAACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
5) Municipal bonds usually have higher yields than bonds issued by the U. S. Government.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
2
6) The higher a bond's Moody's or Standard & Poor's rating, the higher its yield.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
7) Changes in the inflation rate have a direct and pronounced effect on market interest rates.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
8) The required return on a bond is equal to
A) the real rate of return plus a risk premium plus an expected inflation premium.
B) the real rate of return plus the coupon rate plus an inflation rate.
C) the risk-free rate plus a risk premium plus an expected inflation premium.
D) the real rate plus a risk premium.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
9) The risk-free rate of return is equal to the
A) real rate plus a risk premium.
B) required return minus the inflation premium.
C) real rate plus the inflation premium.
D) required return minus the real rate.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
3
10) Which of the following tend to raise interest rates?
I. an increase in the money supply
II. an increase in the expected rate of inflation
III. Federal Reserve actions taken to lower expected rates of inflation
IV. an increase in investing activities by businesses
A) I, II, III only
B) II, III, IV only
C) I, II and IV only
D) I, III, and IV only
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AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 1
11) Interest rates in the U.S. and in major foreign economies
A) are uncorrelated or very weakly correlated.
B) tend to move in opposite directions.
C) tend to move in the same direction.
D) are the same when adjusted for inflation.
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AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 1
12) Which of the following factors influence short-term interest rates on government securities?
I. Federal Reserve actions
II. interest rate risk
III. expected future inflation
IV. the real rate of return
A) I and III only
B) II and IV only
C) I, II and IV only
D) I, III and IV only
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
4
13) Which of the following risks are included in the risk premium?
I. interest rate risk
II. liquidity risk
III. financial risk
IV. purchasing power risk
A) I and II only
B) II and III only
C) III and IV only
D) I and IV only
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
14) Which one of the following will tend to cause domestic interest rates to rise?
A) an increase in the money supply
B) a decrease in the rate of inflation
C) a decrease in the federal budget deficit
D) an increase in interest rates overseas
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
15) The single most important factor that influences the behavior of market interest rates is
A) inflation.
B) business profits.
C) the supply of new bonds.
D) the stock market.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
5
16) Which one of the following statements concerning interest rates is correct?
A) A decrease in the money supply will cause interest rates to decline.
B) A federal budget surplus will cause interest rates to decline.
C) Economic expansions will cause interest rates to decline.
D) Rising interest rates in foreign countries will cause U.S. interest rates to decline.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
11.2 Learning Goal 2
1) The relationship between the rate of return and the time to maturity of similar-risk securities
is known as the term structure of interest rates.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
2) A yield curve depicts the term structure of interest rates for similar-risk securities.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
3) Yield curves for corporate and government securities have similar shapes, but the corporate
rates track below the government rates.
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AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 2
6
4) Treasury bond yields are commonly used as the basis for yield curves because they are low
risk and homogeneous in nature.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
5) A normal yield curve is flat or downward sloping.
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Learning Goal: Learning Goal 2
6) A downward sloping yield curve (short-term rates are higher than long-term rates) often
precedes a recession.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
7) The real rate of return is the same for all maturities.
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AACSB: 3 Analytical thinking
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Learning Goal: Learning Goal 2
8) According to the expectations hypothesis, if investors anticipate higher rates of inflation in
the future, the yield curve will be downsloping.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
7
9) According to the liquidity preference theory, borrowers should pay a higher interest rate for
long-term borrowing than for short-term borrowing.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
10) Market segmentation theory would explain an upward sloping yield curve as a high demand
for short-term securities relative to the supply.
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AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 2
11) A steep yield curve is generally considered a bullish sign for bonds.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
12) The yield curve depicts the relationship between a bond's yield to maturity and its
A) duration.
B) term to call.
C) term to maturity.
D) volatility.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
8
13) An inverted yield curve
A) means that long-term bonds are yielding more than short-term bonds.
B) results when investor demand for longer maturities exceeds the demand for shorter
maturities.
C) rewards long-term investors for the additional risk they are assuming.
D) sometimes results from actions by the Federal Reserve to control inflation.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
14) The expectations hypothesis states that investors
A) require higher long-term interest rates today if they expect higher inflation rates in the
future.
B) expect higher long-term interest rates because of the lack of liquidity for long-term bonds.
C) require the real rate of return to rise in direct proportion to the length of time to maturity.
D) normally expect the yield curve to be downsloping.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
15) According to expectations theory if the 1 year interest is 3% this year and expected to be
5% next year, the 2 year interest rate should be approximately
A) 8%.
B) 5%.
C) 4%.
D) 3%.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
9
16) According to expectations theory if the 2 year interest rate is 4% and the 1 year rate is now
3%, the 1 year rate next year is expected to be
A) 8%.
B) 5%.
C) 4%.
D) 3%.
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AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 2
17) Downward sloping or flat yield curves often indicate
A) a recession in the near future.
B) an economic expansion in the near future.
C) higher inflation in the near future.
D) a weaker dollar in the foreign exchange markets.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
18) Long-term bonds are ________ than short-term bonds.
A) less risky
B) more liquid
C) subject to more uncertainty
D) less sensitive to interest rate changes
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
10
19) When compared to the yield curve for Treasury securities, the yield curve for corporate
securities should
A) slope in the opposite direction.
B) be similar in shape but higher.
C) be similar in shape but lower.
D) be nearly identical.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
20) The liquidity preference theory supports ________ yield curves.
A) upward sloping
B) flat
C) humped
D) downward sloping
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
21) The market segmentation theory holds that
A) an increase in demand for long-term borrowings leads to an inverted yield curve.
B) expectations about the future level of interest rates is the major determinant of the shape of
the yield curve.
C) the yield curve reflects the maturity preferences of financial institutions and investors.
D) the shape of the yield curve is always downsloping.
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AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
