1. The present value formula indicates

a. yields and bond prices are inversely or negatively related

b. yields and bond prices are directly or positively related

c. yields and expected annual payments are inversely or negatively related

d. expected annual payments and present value are inversely or negatively related

2. If the interest rate is 15%, what is the value today of a promise to receive $1.00 in 20 years?

a. $0.25

b. $0.14

c. $0.06

d. $0.39

3. In a severely declining economy

a. supply of funds rises and interest rates rise

b. supply of funds falls and interest rates rise

c. demand for funds falls and interest rates fall

d. demand for funds rises and interest rates rise

4. Zero-coupon bonds differ from most bonds in that they

a. have no maturity date

b. involve no market risk

c. provide no annual flow of income

d. involve no default risk

5. If b , the coefficient relating the response of interest rates to changes in expected inflation, is less than 1.00

a. inflation is neutral

b. inflation redistributes income from creditors (lenders) to debtors (borrowers)

c. higher inflation causes an increase in real interest rates

d. none of the above are correct

ANSWER KEY - 1a; 2c; 3c; 4c; 5b