ECON 303 Chapter 4 Study Questions
1) The interest rate that equates the present value of payments received from a debt instrument with its value today is the
(a) simple interest rate.
(b) discount rate.
(c) yield to maturity.
(d) real interest rate.
2) The present value of a lottery prize paying $1 million each year for twenty years, discounted at a rate of 10 percent, is worth
(a) more then $30 million.
(b) between $20 million and $30 million.
(c) exactly $20 million.
(d) $18 million.
(e) less than $10 million.
3) If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200?
(a) 9 percent
(b) 10 percent
(c) 11 percent
(d) 12 percent
4) With an interest rate of 8 percent, the present value of $100 next year is approximately
(a) $108.
(b) $100.
(c) $96.
(d) $93.
5)
If $22,050 is
the amount payable in two years for a $20,000 simple loan made today, the
interest rate is
(a) 5 percent.
(b) 10 percent.
(c) 22 percent.
(d) 25 percent.
(e) 205 percent.
6) If the price of a consol paying $75 annually is $1000, the rate of interest is
(a) 5 percent.
(b) 7.5 percent.
(c) 10 percent.
(d) 15 percent.
(e) 75 percent.
7) A $4,000 coupon bond with a $480 coupon payment every year has a coupon rate of
(a) 2 percent.
(b) 6 percent.
(c) 8 percent.
(d) 12 percent.
8) Which of the following bonds would you prefer to be selling?
(a) A $10,000 face-value security with a 6 percent coupon selling for $10,000
(b) A $10,000 face-value security with a 6 percent coupon selling for $9,000
(c) A $10,000 face-value security with a 6 percent coupon selling for $11,000
(d) A $10,000 face-value security with a 7 percent coupon selling for $10,000
(e) A $10,000 face-value security with a 7 percent coupon selling for $9,000
9) If a $5,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is
(a) 0 percent.
(b) 5 percent.
(c) 10 percent.
(d) 20 percent.
10) The current yield on a $10,000, 10 percent coupon bond selling for $5,000 is
(a) 30 percent.
(b) 33 percent.
(c) 60 percent.
(d) 20 percent.
11) Prices and returns for _____ bonds are more volatile than those for _____ bonds.
(a) long-term; long-term
(b) long-term; short-term
(c) short-term; long-term
(d) short-term; short-term
12) The nominal interest rate minus the expected rate of inflation
(a) defines the real interest rate.
(b) is a better measure of the incentives to borrow and lend than is the nominal interest rate.
(c) is a more accurate indicator of the tightness of credit market conditions than is the nominal interest rate.
(d) indicates all of the above.
(e) indicates only (a) and (b) of the above.
13) If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is
(a) -3 percent.
(b) -2 percent.
(c) 3 percent.
(d) 7 percent.
14)
If the nominal rate of interest is 2 percent, and
prices are expected to fall (negative inflation) by
10 percent, the real rate of interest is
(a) 2 percent.
(b) 8 percent.
(c) 10 percent.
(d) 12 percent.
(e) -8 percent.
15) When the interest rate on a Treasury Inflation Protected Security is 3 percent, and the yield on a nonindexed Treasury bond is 8 percent, the expected rate of inflation is
(a) 3 percent.
(b) 5 percent.
(c) 8 percent.
(d) 11 percent.
(e) 24 percent.