70. An increase in the nation’s wealth, all other factors constant, would cause:
a. bond prices to fall and yields to increase.
b. bond prices and yields to increase.
c. bond prices to rise and yields to decrease.
d. the bond supply curve to shift right.
71. A decrease in the nation’s wealth, all other factors constant, would cause:
a. the bond demand curve to shift left.
b. bond prices to rise.
c. interest rates to decrease.
d. the bond supply curve to shift left.
72. An increase in expected inflation for any given nominal interest rate will cause the:
a. bond supply curve to shift to the left.
b. bond demand curve to shift to the right.
c. price of bonds to decrease.
d. price of bonds to increase.
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73. A decrease in expected inflation for any given nominal interest rate will cause:
a. bond prices to increase and interest rates to decrease.
b. bond prices to decrease and interest rates to increase.
c. the bond demand curve to shift to the left.
d. the bond supply curve to shift to the left.
74. An increase in expected inflation for any given nominal interest rate will cause:
a. the real return to bondholders to decrease.
b. a movement down the bond demand curve, but no change in the bond demand curve.
c. the bond demand curve to shift right.
d. the price of bonds to increase.
75. Suppose that the expected return on bonds falls relative to other assets. In the bond market
this will result in:
a. the bond supply curve shifting left.
b. a movement down the bond demand curve.
c. a shift to the left of the bond demand curve.
d. an increase in the price of bonds.
76. Suppose that the return on assets other than bonds falls. In the bond market this will result
in a(n):
a. movement down the bond demand curve.
b. shift to the left of the bond demand curve.
c. increase in the price of bonds.
d. shift to the left of the bond supply curve.
77. The return on bonds rises relative to other assets, in the bond market this will result in:
a. the price of bonds falling and the yields increasing.
b. a rightward shift in the bond supply curve.
c. a shift to the left of the bond demand curve.
d. an increase in bond prices.
78. If interest rates are expected to rise, the bond prices will:
a. not change until interest rates actually change.
b. fall, due to the demand for bonds decreasing.
c. rise, as people seek capital gains.
d. move in the same direction as the expected change in interest rates.
79. If interest rates are expected to fall, bond prices will:
a. fall as the demand for bonds decreases.
b. remain constant until interest rates actually change.
c. fall as people fear capital losses in the future.
d. increase due to the demand for bonds increasing.
80. Suppose that general business conditions improve, and at the same time, wealth increases.
Based on this information, we know that:
a. bond prices increase.
b. yield to maturity decreases.
c. the real interest rate increases.
d. the quantity of bonds increases.
81. If the risk on foreign government bonds increases relative to U.S. government bonds, the
price of U.S. government bonds should:
a. not change since U.S. government bonds are free of default risk.
b. decrease since people will bail out of all government bonds.
c. increase as the demand for these bonds increases.
d. not be affected because the two types of bonds are traded in different markets.
82. The demand for U.S. government bonds is high relative to other bond issues because:
a. liquidity of other bond issues is high relative to U.S. government bonds.
b. U.S. bond market has low transaction spreads due to high illiquidity.
c. market for U.S. government bonds is more liquid than most if not all other bond markets.
d. U.S. government bonds have higher default.
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83. The impact of a decrease in expected inflation in the bond market will have a relatively large
effect on the prices of bonds prices because the bond demand curve:
a. will shift right as will the bond supply curve.
b. will shift right but the bond supply curve shifts left.
c. and supply curves will shift left.
d. will shift left as the bond supply curve shifts right.
84. Which of the following statements about the result of a deterioration in business conditions
that also causes a decrease in a nation’s wealth is false?
a. The impact on bond prices will be ambiguous since both the bond demand and supply curves
shift left.
b. The price of bonds will increase if bond supply decreases more than bond demand.
c. Interest rates will increase if bond demand decreases more than bond supply.
d. Neither bond demand nor bond supply will shift.
85. The market for bonds is initially described by the supply of bonds – S0, and the demand for
bonds – D0, with the equilibrium price and quantity being P0 and Q0. An increase in the
nation’s wealth, all else constant, would cause the
a. Bond supply curve to shift to S1.
b. Bond demand curve to shift to D1.
c. Bond supply curve to shift to S2.
d. Bond demand curve to shift to D2.
86. The market for bonds is initially described by the supply of bonds – S0, and the demand for
bonds – D0, with the equilibrium price and quantity being P0 and Q0. Suppose that the expected
return on bonds falls relative to other assets. In the bond market this will result in:
a. Bond supply curve to shift to S1
b. Bond demand curve to shift to D1
c. Bond supply curve to shift to S2
d. Bond demand curve to shift to D2
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87. The market for bonds is initially described by the supply of bonds – S0, and the demand for
bonds – D0, with the equilibrium price and quantity being P0 and Q0. 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:
a. Bond supply curve to shift to S1
b. Bond demand curve to shift to D1
c. Bond supply curve to shift to S2
d. Bond demand curve to shift to D2
88. The market for bonds is initially described by the supply of bonds – S0, and the demand for
bonds – D0,with the equilibrium price and quantity being P0 and Q0. If the U.S. government’s
borrowing needs decrease, all other factors constant:
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a. Bond supply curve to shift to S1
b. Bond demand curve to shift to D1
c. Bond supply curve to shift to S2
d. Bond demand curve to shift to D2
89. Fly–By-Night Inc. issues $100 face value, zero-coupon, one-year bonds. The current return
on one-year, zero-coupon U.S. government bonds is 3.5%. If the Fly-By-Night bonds are selling
for $92.00, what is the risk premium for these bonds?
a. 8.7%
b. 1.5%
c. 5.2%
d. 8.0%
90. Default risk is the risk associated with:
a. the bond issuer not being able to make the promised payments.
b. the illiquidity associated with small issues.
c. the effect on bond prices caused by changes in market rates of interest.
d. changes in the expected inflation rate.
91. Consider the bonds below. Which is subject to the greatest interest-rate risk?
a. A 30-year fixed-rate mortgage (fixed payment loan)
b. A consol
c. A Treasury bill
d. A 20-year corporate bond
92. Consider a zero-coupon bond with a $1,100 payment in one year. Suppose the interest rate
decreases from 10% to 8%. The price of this bond:
a. increases from $1,000 to $1,018.
b. increases from $1,000 to $1,375.
c. decreases from $110 to $88.
d. decreases from $1,210 to $1,188.
93. Consider a one-year corporate bond that has a 20% probability of default. The payoff on the
bond is $2,000 if the corporation does not default. The interest rate is 10%. If buyers of this bond
are risk-neutral, this bond will sell for:
a. $400
b. $909.09
c. $1,454.54
d. $1,600
94. A student receives a five-year loan to pay for a $2,000 used car. The lender and the student
agree to an 8% interest rate on a fixed-rate loan. Expected inflation was estimated to equal 2.5%,
but unexpectedly decreases to 2%. Which of the following is true?
a. The real interest rate decreased.
b. The student is made worse off because her real cost of borrowing is
highe
r.
c
. The lender is made worst off because his real return on the car loan is lower.
d. Both the student and the lender benefit.
95. Which of the following is true of interest-rate risk?
a. It is the risk that the coupon rate for a bond will change, affecting current bondholders’ coupon
payments.
b. It refers to the probability that a borrower will default on debt obligations.
c. It is the risk that the face value of a bond will change before maturity.
d. Individuals owning long-term bonds are exposed to greater interest-rate risk.
96. U.S. government bonds that provide for bondholders to receive a fixed rate of interest plus
the change in the consumer price index were designed to remove:
a. default risk.
b. liquidity risk.
c. inflation risk.
d. interest-rate risk.
97. The U.S. Treasury issues bonds where the return is indexed to the consumer price index. We
should expect that these bonds, relative to other U.S. Treasury bonds, will have:
a. lower price and lower return due to the decreased risk.
b. lower price and a lower fixed return since the demand for them should be higher.
c. higher price and higher fixed return since we always seem to have some inflation.
d. higher price and lower return due to the decreased risk from inflation in holding these bonds.
98. Interest-rate risk results from:
a. bond prices being fixed over the life of the bond.
b. a mismatch between an individual’s investment horizon and a bond’s maturity.
c. the fact that most people hold bonds until they mature.
d. inflation being uncertain.
99. Interest-rate risk would not matter to which of the following bondholders?
a. A holder of a U.S. government bond.
b. A holder of a U.S. government bond indexed for inflation.
c. A holder of a U.S. government bond who plans on selling it in one year.
d. A holder of a U.S. government bond that plans on holding it until it matures.