6) A one-year discount bond with a par value of $5000 sold today, at issuance, for $4750 has a
yield to maturity of
A) 5.00%.
B) 5.26%.
C) 2.50%.
D) 9.75%.
7) A one-year discount bond with a par value of $1000 sold today, at issuance, for $943 has a
yield to maturity of
A) 4.30%.
B) 5.70%.
C) 6.04%.
D) 9.43%.
8) On a coupon bond, the yield to maturity
A) always equals the coupon rate.
B) equates the present value of all the bond’s payments to its price today.
C) increases when the market price of the bond increases.
D) equals the coupon payment divided by the current price of the bond.
9) What is the price of a coupon bond that has annual coupon payments of $85, a par value of
$1000, a yield to maturity of 10%, and a maturity of three years?
A) $211.38
B) $898.84
C) $962.70
D) $1255.0
10) What is the price of a coupon bond that has annual coupon payments of $75, a par value of
$1000, a yield to maturity of 5%, and a maturity of two years?
A) $1043.08
B) $1046.49
C) $1000.00
D) $1150.00
11) What is the yield to maturity of a consol with a coupon of $85 and a price of $944.44?
A) 5.56%
B) 8.50%
C) 9.00%
D) Not enough information has been provided to determine the answer.
12) If i is the yield to maturity of a fixed-payment loan,
A) the value of the loan today equals i times the sum of the values of all the loan payments.
B) i equals the present value of the loan payments.
C) the value of the loan today equals the sum of the values of the loan payments.
D) the value of the loan today equals the present value of the loan payments discounted at rate i.
13) If the current price of a bond is greater than its face value
A) an investor will receive a capital gain by holding the bond until maturity.
B) the yield to maturity must be less than the coupon rate.
C) the coupon rate must be less than the current yield.
D) the coupon rate must be equal to the current yield.
14) What is the yield to maturity of a perpetuity with a coupon of $40 and a price of $800?
15) A one-year discount bond has a face value of $1000 and price of $880. What is the yield to
maturity on the bond? Report using percentages with two decimal places.
3.4 The Inverse Relationship Between Bond Prices and Bond Yields
1) A bond’s price and its yield to maturity are inversely related because
A) discounting future payments at a higher rate reduces the present value of the payments.
B) discounting future payments at a higher rate increases the present value of the payments.
C) an increase in the yield to maturity will lower a bond’s coupon rate and hence its price.
D) a fall in a bond’s price will lower its par value and hence its yield to maturity.
2) An speculator who buys a fifty-year corporate bond
A) must be expecting to still be alive in fifty years.
B) is subject to substantial reinvestment risk.
C) is probably expecting market interest rates to increase in the future.
D) is probably expecting market interest rates to decrease in the future.
3) U.S. Treasury bonds
A) carry no risk of default and are therefore not risky investments.
B) have constant yields to maturity and are therefore not risky investments.
C) have constant coupon rates and are therefore not risky investments.
D) are subject to fluctuations in their market prices and are therefore risky investments.
4) Banks who held mortgage-backed securities “took a bath” during the financial crisis of 2007-
2009 due to:
A) rising yields in secondary markets which led to a decline in the price of mortgage-backed
securities.
B) falling yields in secondary markets which led to a decline in the price of mortgage-backed
securities.
C) their inability to issue new mortgages.
D) more rapid pre-payment of mortgages.
5) A capital gain occurs when the
A) coupon rate increases.
B) current yield increases.
C) price of an asset increases.
D) yield to maturity increases.
6) The bid price for a bond is
A) the minimum price that you are allowed to bid for a bond that is being auctioned by the
government.
B) the maximum price that you are allowed to bid for a bond that is being auctioned by the
government.
C) the price that you will receive from a securities dealer if you sell the bond.
D) the price that you must pay a securities dealer to purchase a bond.
7) With respect to U.S. Treasury bills,
A) the bid price is always greater than the asked price.
B) the asked price is always greater than the bid price.
C) the bid price is only greater than the asked price if investors expect interest rates to decline in
the future.
D) the asked price is only greater than the bid price if investors expect interest rates to decline in
the future.
8) If, while you are holding a coupon bond, its market price falls, you can be sure that
A) the coupon payment you are receiving must have been reduced.
B) the interest rate on other similar bonds must have fallen.
C) the interest rate on other similar bonds must have risen.
D) the par value of the bond must have declined.
9) If, while you are holding a coupon bond, the interest rates on other similar bonds fall, you can
be sure that
A) the coupon payments on your bond will fall.
B) the market price of your bond will rise.
C) the market price of your bond will fall.
D) the par value of your bond will rise.
10) What is the yield on a discount basis for a U.S. Treasury bill that has a face value of $10,000,
has a price of $9500, and will mature in 180 days?
A) 5.00%
B) 5.25%
C) 10.00%
D) 10.67%
11) In comparing the yield to maturity on a Treasury bill with the yield on a discount basis on the
same bill, we can say that the yield to maturity
A) will always be greater than the yield on a discount basis.
B) will always be less than the yield on a discount basis.
C) will always be equal to the yield on a discount basis, provided the holding period is the same
as the number of years to maturity.
D) rises whenever the yield on a discount basis falls.
12) A corporation issues a three year bond with a coupon of $50 and a face value of $1000.
Immediately after being issued, market interest rates decline to 4%. What is the price of the
bond? Report your answer to the nearest dollar.
13) A corporation issues a three-year bond with a coupon of $50 and a face value of $1000. A
year later, market interest rates have declined to 4%. What is the price of the bond a year after it
was issued? Report your answer to the nearest dollar.
1) The total rate of return is equal to the
A) sum of the coupon rate and the current yield.
B) yield to maturity.
C) sum of the current yield and the actual rate of capital gain or loss.
D) sum of the current yield and the expected rate of capital gain.
2) What is the total rate of return on a bond with a coupon of $55 that was purchased for $900
and sold one year later for $950?
A) 5.56%
B) 6.11%
C) 11.67%
D) 12.43%
3) Which of the following statements about the total rate of return is NOT correct?
A) The total rate of return may be greater or less than the current yield.
B) The total rate of return may be greater or less than the rate of capital gain.
C) The total rate of return may never be negative.
D) The total rate of return is greater than the coupon, holding everything else constant.
4) The total rate of return is equal to
A) the coupon rate plus the rate of capital gains.
B) the coupon rate plus the current yield.
C) the current yield plus the rate of capital gains.
D) the coupon rate multiplied by the rate of capital gains.
5) If the current price of a bond is equal to its face value,
A) there is no capital gain or loss from holding the bond until maturity.
B) the yield to maturity must be greater than the current yield.
C) the current yield must be greater than the coupon rate.
D) the coupon rate must be greater than the yield to maturity.
6) If the current price of a bond is less than its face value,
A) an investor will receive a capital gain by holding the bond until maturity.
B) the yield to maturity must be less than the current yield.
C) the coupon rate must be greater than the current yield.
D) the coupon rate must be equal to the current yield.
7) For a specific change in the yield to maturity
A) the shorter the time until a bond matures, the greater will be the change in its price.
B) the longer the time until a bond matures, the greater will be the change in its price.
C) the longer the time until a bond matures, the greater will be the change in its par value.
D) the shorter the time until a bond matures, the greater will be the change in its coupon rate.
8) If an investor is certain that market interest rates will decline in the future, which of the
following will she be most likely to purchase?
A) a six-month government bill
B) a two-year government note
C) a ten-year government bond
D) a fifty-year government bond
9) What is the total rate of return on a bond with a coupon of $38 payable in one year that was
purchased for $950 and sold one year later for $931?
A) 2%
B) 4%
C) 6%
D) 19%
10) Interest-rate risk can best be characterized as the risk that
A) you could have earned a higher interest rate if you waited to purchase a bond.
B) fluctuations in the price of a financial asset in response to changes in market interest rates.
C) you could have gotten a lower interest rate if you waited to lock in a mortgage.
D) short-term interest rates may exceed long-term interest rates.
11) Suppose you purchase a bond with a coupon of $30 for $1025. You sell it one year later for
$1050. What rate of return did you earn? Report a percentage with two decimal places.
12) Suppose you purchase a bond with a coupon of $50 for $1010. You sell it one year later for
$900. What rate of return did you earn? Report a percentage with two decimal places.
3.6 Nominal Interest Rates Versus Real Interest Rates
1) The expected real interest rate approximately equals
A) the nominal interest rate minus the tax rate.
B) the nominal interest rate minus the expected rate of inflation.
C) the nominal interest rate plus the expected rate of inflation.
D) the yield to maturity on a coupon bond held to maturity.
2) Which of the following is the correct expression for the approximate expected real interest
rate?
A) r = i +pe
B) r = i – pe
C) r = i/pe
D) r = ipe
3) A sustained decrease in the price level is known as
A) inflation.
B) disinflation.
C) reflation.
D) deflation.
4) Nominal interest rates are higher than real interest rates as long as
A) expected inflation is positive.
B) the government taxes interest income.
C) inflation is expected to decline in the future.
D) long-term interest rates are higher than short-term interest rates.
5) Why may investors buy a Treasury bill with a negative real interest rate?
A) fear of rising inflation
B) concern about high yields on other bonds
C) fear of default by the US government
D) concern about the high default risk of alternative investments
6) Suppose you have a fixed-rate mortgage with a nominal interest rate of 6% and the expected
annual inflation rate over the life of the mortgage is 2%. What is the expected real interest rate?
A) 3%
B) 4%
C) 8%
D) 12%
7) A borrower and a lender agree on a mortgage interest rate. If inflation turns out to be less than
expected
A) the actual real interest rate will exceed the expected real interest rate.
B) the actual real interest rate will be less than the expected real interest rate.
C) the actual nominal interest rate will be higher than expected.
D) the actual nominal interest rate will be less than expected.
8) Which type of bond would you purchase if you expected higher rates of inflation during the
life of the bond?
A) Treasury bond
B) TIPS
C) corporate bond
D) municipal bond
9) How are TIPS adjusted for inflation?
A) the interest rate is adjusted for inflation during each period
B) the principal is adjusted once the bond reaches maturity
C) the principal is adjusted for inflation each period
D) the interest rate is adjusted once the bond reaches maturity
10) Which group is hurt by inflation being less than expected?
A) holders of TIPS
B) lenders of fixed-rate mortgages
C) borrowers with fixed-rate mortgages
D) all of the above
11) Declining default risk in late 2009 and 2010 led to
A) increase in the price of junk bonds.
B) increase in the yield of junk bonds.
C) increase in yield of Treasury bonds.
D) increase in the price of Treasury bonds.
12) For bonds issued at the same point in time, which of the following is likely to have the
highest coupon?
A) Treasury bond
B) high-grade corporate bond
C) medium-grade corporate bond
D) “junk” bond