Chapter 06
Bonds, Bond Prices, and the Determination of Interest Rates
Multiple-Choice Questions
1. A zero-coupon bond refers to a bond which:
a. does not pay any coupon payments because the issuer is in default.
b. promises a single future payment.
c. pays coupons only once a year.
d. pays coupons only if the bond price is above face value.
2. A consol is:
a. another name for a zero-coupon bond.
b. a bond with a maturity date exceeding 10 years.
c. a bond that makes periodic interest payments forever.
d. a form of a bond that is issued quite often by the U.S. Treasury.
3. A pure discount bond is also known as a:
a. consol.
b. fixed payment loan.
c. coupon bond.
d. zero-coupon bond.
4. The most common form of zero-coupon bonds found in the United States is:
a. AAA rated corporate bonds.
b. U.S. Treasury bills.
c. 30-year U.S. Treasury bonds.
d. municipal bonds.
5. Which of the following best expresses the formula for determining the price of a U.S. Treasury bill
that matures n periods from now per $100 of face value when the interest rate is i?
a. $100/(1 + i)n
b. $100(1 + i)
c. $100/(1 + i)
d. 1 + $100/(1 + i)n
6. Once you buy a coupon bond, which of the following can change?
a. Coupon rate
b. Coupon payment
c. Face value
d. Yield to maturity
7. Which of the following makes fixed payments indefinitely?
a. Amortized loan
b. Consol
c. Coupon bond
d. Zero-coupon bond
8. A 10-year Treasury note as a face value of $1,000, price of $1,200, and a 7.5% coupon rate.
Based on this information, we know the:
a. present value is greater than its price.
b. current yield is equal to 8.33%.
c. coupon payment on this bond is equal to $75.
d. coupon payment on this bond is equal to $90.
9. If the annual interest rate is 5% (.05), the price of a one-year Treasury bill per $100 of face
value would be:
a. $95.00
b. $97.50
c. $95.24
d. $96.10
10. If the annual interest rate is 5% (.05), the price of a six-month Treasury bill would be:
a. $97.50
b. $97.59
c. $95.25
d. $95.00
11. If the annual interest rate is 5% (.05), the price of a three-month Treasury bill would be:
a. $98.79
b. $95.00
c. $98.75
d. $97.59
12. The relationship between the price and the interest rate for a zero coupon bond is best
described as:
a. volatile.
b. fluctuating.
c. inverse.
d. non-existent.
13. When a loan is amortized, it means the:
a. borrower is in default.
b. principal and interest are paid off by the borrower over the life of the loan.
c. interest is due entirely at the maturity date.
d. principal in never repaid, only interest.
14. Most home mortgages are good examples of:
a. consols.
b. zero-coupon bonds.
c. coupon bonds.
d. fixed-payment loans.
15. The price of a coupon bond can best be described as the:
a. present value of the face value.
b. future value of the coupon payments.
c. future value of the coupon payments and the face value.
d. present value of the face value plus the present value of the coupon payments.
16. The difference in the prices of a zero-coupon bond and a coupon bond with the same face
value and maturity date is simply:
a. zero, since they are the same.
b. the present value of the final payment.
c. the present value of the coupon payments.
d. the future value of the coupon payments.
17. The price (P) of a consol offering an annual coupon payment (C) is best expressed by:
a. F/C
b. C(1 + i)
c. C/(1+ i)
d. C/i
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18. If a consol is offering an annual coupon of $50 and the annual interest rate is 6%, the price of
the consol is:
a. $47.17
b. $813.00 c.
$833.33
d. $8333.33
19. Which of the following statements is most accurate?
a. Yield to maturity is equal to the coupon rate if the bond is held to maturity.
b. Yield to maturity is the same as the coupon rate.
c. Yield to maturity will exceed the coupon rate if the bond is purchased for face value.
d. Yield to maturity is the same as the coupon rate if the bond is purchased for face value and
held to maturity.
20. When the price of a bond is above face value the yield to maturity:
a. is below the coupon rate.
b. will be above the coupon rate.
c. will equal the current yield.
d. will equal the coupon rate.
21. When the price of a bond is below the face value, the yield to maturity:
a. is below the coupon rate.
b. will be above the coupon rate.
c. will equal the current yield.
d. will equal the coupon rate.
22. When the price of a bond equals the face value the:
a. yield to maturity will be above the coupon rate.
b. yield to maturity will be below the coupon rate.
c. current yield is equal to the coupon rate.
d. yield to maturity is greater than the current yield.
23. If the purchase price of a bond exceeds the face value, the yield to maturity:
a. is greater than the coupon rate because the capital gain is positive.
b. will equal the current yield.
c. will be less than the coupon rate because the capital gain will be negative.
d. will be greater than the current yield.
24. The current yield of a bond:
a. is another term for the coupon rate.
b. is another term for the yield to maturity.
c. equals zero for a zero-coupon bond since these bonds have no coupon payments.
d. is the difference between its future value and its present value.
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25. A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20
years to maturity has a:
a. a current yield equal to 6.22%.
b. a current yield equal to 6.00%.
c. a coupon rate equal to 6.22%.
d. a yield to maturity and current yield equal to 6.00%.
26. A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20
years to maturity has a:
a. current yield and coupon rate equal to 6.22% and a coupon rate above this.
b. current yield equal to 6.22% and a coupon rate below this.
c. coupon rate equal to 6.00% and a current yield below this.
d. yield to maturity and current yield equal to 6.00%.
27. In calculating the current yield for a bond the:
a. coupon payment is ignored.
b. present value of the capital gain/loss is ignored.
c. present value of the final payment is the only important consideration.
d. present value of the coupon payments is the only important consideration.
28. In calculating the current yield for a bond the:
a. coupon payment and purchase price is all that is needed.
b. present value of the capital gain/loss is ignored.
c. present value of the final payment is the only important consideration.
d. present value of the coupon payments is the only important consideration.
29. When the current yield and the coupon rate are equal, the bond is:
a. purchased at a discount.
b. purchased at a price that equals the face value.
c. a zero-coupon bond.
d. purchased at a price that exceeds its face value.
30. If a bond’s purchase price equals the face value the:
a. coupon rate equals the current yield, which is less than the yield to maturity.
b. current yield equals the yield to maturity, which exceeds the coupon rate.
c. coupon rate equals the yield to maturity, which equals the current yield.
d. coupon rate does not equal the current yield, which does not equal the yield to maturity.
31. Which of the following is not a reason why the yield to maturity can differ from the current
yield?
a. Because the yield to maturity considers the capital gain/loss.
b. Because the current yield focuses only on the coupon payment and the purchase price.
c. Because most bonds are not purchased for face value.
d. Because the current yield moves in the opposite direction from price.
32. A $1,000 face value bond, with one year to maturity that sells for $950 and has a $40 annual
coupon has a:
a. current yield and yield to maturity of 4.00%.
b. yield to maturity that equals the current yield.
c. coupon rate of 4.00% and a current yield that is below this.
d. current yield of 4.21%.
33. A $1,000 face value bond, with an annual coupon of $40, one year to maturity and a
purchase price of $980 has a:
a. current yield that equals 4.00%.
b. coupon rate that equals 4.08%.
c. current yield that equals 4.08% and a yield to maturity that equals 6.12%.
d. A current yield that equals 4.08% and a yield to maturity that equals 4.0%.
34. A 30-year Treasury bond as a face value of $1,000, price of $1,200 with a $50 coupon
payment. Assume the price of this bond decreases to $1,100 over the next year. The one-year
holding period return is equal to:
a. -9.17%.
b. -8.33%.
c. -4.17%.
d. -3.79%.
35. The bid price for a bond quote is:
a. the price at which the bond dealer is willing to sell the bond.
b. the price at which the bond dealer is willing to purchase the bond.
c. fixed over the life of a bond.
d. determined solely by the time left to maturity.
36. In reading bond quotes:
a. the bid price is usually above the asked price.
b. the asked price is fixed over the life of the bond. c.
the asked price is usually above the bid price.
d. bid and asked prices must be equal as set forth by SEC regulations.
37. The bond dealer’s spread is:
a. the asking price less the bid price.
b. the difference between the current yield and the yield to maturity.
c. the bid price less the asking price.
d. usually negative; the dealer makes a profit holding the bonds.
38. The size of the bond dealer’s spread is mainly a function of the:
a. purchase price of the bond.
b. current yield.
c. liquidity of the bond market.
d. face value of the bond.
39. The larger the bond dealer’s spread the:
a. less liquid is the market for that bond.
b. greater is the coupon rate for that bond.
c. more liquid is the market for that bond.
d. less risk there is for the dealer to hold that bond.
40. The holding period return on a bond:
a. can never be more than the yield to maturity.
b. will equal the yield to maturity if the bond is purchased for face value and sold at a lower price.
c. will be less than the yield to maturity if the bond is sold for more than face value.
d. will be less than the yield to maturity if the bond is sold for less than face value.
41. One characteristic that distinguishes holding period return from the coupon rate, the current
yield, and the yield to maturity is:
a. all of the other returns can be calculated at the time the bond is purchased, but holding period
return cannot.
b. holding period return will always be the highest return.
c. holding period return will usually be less than the other returns.
d. only the holding period return includes the capital gain/loss.
42. Which of the following best expresses the equation for holding period return?
a. Current yield + coupon rate
b. Yield to maturity – current yield
c. Current yield + capital gain
d. Coupon rate + capital gain
43. In considering the holding period return, the longer the term of the bond the:
a. less important is the capital gain and the more important in the current yield.
b. less important is the coupon rate and the more important is the current yield.
c. less important is the capital gain.
d. more important is the capital gain.
44. The holding period return has relevance because:
a. most bonds are held by the original purchaser until maturity.
b. most bonds are held by the original purchaser until they mature.
c. bonds are frequently traded.
d. current yields are not that important to bondholders.
45. Suppose there is a decrease in the price at which a bondholder sells her bond. In this case,
the holding period return will:
a. increase, since yields and prices are inversely related.
b. decrease, since this lowers the capital gain.
c. be negative.
d. equal the coupon rate.
46. If a one-year zero-coupon bond has a face value of $100, is purchased for $94, and is held to
maturity the:
a. holding period return will exceed the yield to maturity.
b. yield to maturity will exceed the holding period return.
c. yield to maturity will be 6.38%.
d. holding period return is 6.0%.
47. Bond prices and yields:
a. move together in the same direction.
b. do not change if the coupon is fixed.
c. move together inversely.
d. are independent of each other.
48. As bond prices increase:
a. the quantity of bonds supplied
increa
s
e
s.
b. the quantity of bonds supplied
decrea
s
e
s.
c
. the quantity of bonds demanded increases.
d. yields increase.
49. The bond supply curve slopes upward because:
a. as bond prices rise people holding bonds are more tempted to hold them.
b. as bond prices rise yields increase.
c. for companies seeking financing, the higher the price of bonds the more attractive it is to sell bonds.
d. as bond prices rise yields decrease.
50. The bond demand curve slopes downward because:
a. at lower prices the reward for holding the bond increases.
b. as bond prices fall so do yields.
c. as bond prices fall bonds are less attractive.
d. as bond prices rise yields increase.
51. If the quantity of bonds supplied exceeds the quantity of bonds demanded, bond prices would:
a. rise and yields would fall.
b. fall and yields would rise.
c. rise but yields will remain constant.
d. fall and yields would fall.
52. If the quantity of bonds demanded exceeds the quantity of bonds supplied, bond prices:
a. would rise and yields would fall.
b. would fall and yields would increase.
c. will rise and yields will remain constant.
d. will rise and yields would increase.
53. If the U.S. government’s borrowing needs increase, all other factors constant the:
a. demand for bonds will decrease.
b. price of bonds will increase.
c. supply of bonds will increase.
d. yields on bonds will decrease.
54. If the U.S. government’s borrowing needs decrease, all other factors constant the:
a. supply of bonds will increase.
b. demand for bonds will decrease.
c. price of bonds will decrease.
d. price of bonds will increase.
55. If the U.S. government’s borrowing needs increase, all other factors constant the:
a. price of bonds will increase.
b. supply of bonds will increase.
c. demand for bonds will decrease.
d. supply of bonds and the demand for bonds will both increase.
56. If the U.S. government’s borrowing needs increase, in the bond market this would be seen
as the:
a. bond demand curve shifting right.
b. bond supply curve shifting right.
c. bond demand curve shifting
left.
d. bond supply curve shifting left.
57. If the U.S. government’s borrowing needs increase, in the bond market this would be seen
as:
a. the bond demand curve shifting right.
b. a movement up the bond supply curve.
c. the bond demand curve shifting left.
d. the bond supply curve shifting right.
58. As general business conditions improve, we would witness the following in the bond
market:
a. the bond demand curve shifting left.
b. the bond supply curve shifting left.
c. bond prices decreasing.
d. bond prices increasing.
59. As general business conditions deteriorate, all other factors constant:
a. the demand for bonds will decrease.
b. the supply of bonds will increase.
c. bond prices will decrease.
d. bond yields will increase.
60. As general business conditions improve, all other factors constant the:
a. price of bonds will increase.
b. yield on bonds will increase.
c. bond demand curve shifts right.
d. bond supply curve shifts left.
61. As general business conditions deteriorate, all other factors constant:
a. the bond supply curve will shift left.
b. there will be a movement down the existing bond supply curve.
c. the bond demand curve shifts left.
d. the price of bonds will decrease.
62. When expected inflation increases, for any given nominal interest rate the:
a. cost of borrowing increases and the desire to borrow decreases.
b. real interest rate increases.
c. bond supply curve shifts to the left.
d. cost of borrowing decreases and the desire to borrow increases.
63. When expected inflation decreases for any given nominal interest rate, all of the following
occur except the:
a. real interest rate decreases.
b. bond supply curve shifts to the left.
c. cost of borrowing increases and the desire to borrow decreases.
d. price of bonds increases.
64. When expected inflation increases, for any given nominal interest rate the:
a. bond demand curve shifts right.
b. bond supply curve shifts
right.
c
. price of bonds increases.
d. yield on bonds will increase.
65. When expected inflation increases, for any given nominal interest rate the:
a. real cost of repayment for bond issuers increases.
b. real return for bondholders increases.
c. real cost of repayment for bond issuers decreases.
d. bond demand curve shifts right.
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66. If the federal government were to offer larger tax breaks on the purchase of new equipment
for businesses, all other factors constant, we would expect to see the:
a. bond demand curve shift right.
b. bond supply curve shift left.
c. bond supply curve shift right.
d. bond demand curve shift left.
67. Which of the following would lead to an increase in bond supply?
a. A decrease in government spending relative to revenue.
b. An increase in corporate taxes.
c. A decrease in expected inflation.
d. An improvement in general business conditions.
68. Which of the following would lead to a decrease in bond demand?
a. An increase in expected inflation.
b. An increase in wealth.
c. A decrease in risk.
d. A decrease in liquidity.
69. An increase in the nation’s wealth, all other factors constant, would cause the:
a. bond supply curve to shift
left.
b. bond demand curve to shift left.
c. bond supply curve to shift right.
d. bond demand curve to shift right.