Practice Mid-Term Examination
Economics 4210
Spring 2005
Multiple Choice:
1.
A coupon bond pays the owner of the bond
a.
the same amount every month until maturity date.
b.
the face value of the bond plus an interest payment once the maturity date
has been reached.
c.
a fixed-interest payment every period and repays the face value at the
maturity date.
d.
the face value at the maturity date.
e.
none of the above.
2.
If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon
payment every year is
a.
$650.
b.
$1,300.
c.
$130.
d.
$13.
e.
none of the above.
3.
With an interest rate of 10 percent, the present value of a security that pays $1,100
next year and $1,460 four years from now is:
a.
$1,000.
b.
$2,560.
c.
$3,000.
d.
$2,000.
4.
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
5.
Which of the following $1,000 face-value securities has the highest yield to
maturity?
a.
A 5 percent coupon bond with a price of $600
b
A 5 percent coupon bond with a price of $800.
c.
A 5 percent coupon bond with a price of $1,000.
d.
A 5 percent coupon bond with a price of $1,200.
e.
A 5 percent coupon bond with a price of $1,500.
6.
The current yield on a $6,000, 10 percent coupon bond selling for $5,000 is
a.
5 percent.
b.
10 percent.
c.
12 percent.
d.
15 percent.
7.
The yield on a discount basis of a 90-day, $1,000 Treasury bill selling for $950 is
a.
5 percent.
b.
10 percent.
c.
15 percent.
d.
20 percent.
e.
none of the above.
8.
If the interest rates on all bonds rise from 5 to 6 percent over the course of the
year, which bond would you prefer to have been holding?
a.
A bond with one year to maturity
b.
A bond with five years to maturity
c.
A bond with ten years to maturity
d.
A bond with twenty years to maturity
9.
If you expect the inflation rate to be 15 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.
7 percent.
b.
22 percent.
c.
-15 percent.
d.
-8 percent.
e.
none of the above.
10.
In which of the following situations would you prefer to be borrowing?
a.
The interest rate is 9 percent and the expected inflation rate is 7 percent.
b.
The interest rate is 4 percent and the expected inflation rate is 1 percent.
c.
The interest rate is 13 percent and the expected inflation rate is 15 percent.
d.
The interest rate is 25 percent and the expected inflation rate is 50 percent.
11.
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.
12.
A credit market instrument that pays the owner the face value of the security at
the maturity date and nothing prior to then is called a
a.
simple loan.
b.
fixed-payment loan.
c.
coupon bond.
d.
discount bond.
13.
A ______ pays the owner a fixed coupon payment every year until the maturity
date, when the ______ value is repaid.
a.
coupon bond; discount
b.
discount bond; discount
c.
coupon bond; face
d.
discount bond; face
14.
If a $10,000 face-value discount bond maturing in one year is selling for $8,000,
then its yield to maturity is
a.
10 percent.
b.
20 percent.
c.
25 percent.
d.
40 percent.
15.
Which of the following are true of coupon bonds?
a.
The owner of a coupon bond receives a fixed interest payment every year
until the maturity date, when the face or par value is repaid.
b.
U.S. Treasury bonds and notes are examples of coupon bonds.
c.
Corporate bonds are examples of coupon bonds.
d.
All of the above.
e.
Only (a) and (b) of the above.
16.
Which of the following are true for discount bonds?
a.
A discount bond is bought at a price below its face value.
b.
The purchaser receives the face value of the bond at the maturity date.
c.
U.S. Treasury bonds and notes are examples of discount bonds.
d.
All of the Above.
e.
Only (a) and (b) of the above.
17.
The concept of _____ is based on the common-sense notion that a dollar paid to
you in the future is less valuable to you than a dollar today.
a.
present value
b.
future value
c.
interest
d.
deflation
18.
Which of the following are true for a coupon bond?
a.
When the coupon bond is priced at its face value, the yield to maturity
equals the coupon rate.
b.
The price of a coupon bond and the yield to maturity are negatively
related.
c.
The yield to maturity is greater than the coupon rate when the bond price
is below the par value.
d.
All of the above are true.
e.
Only (a) and (b) of the above are true.
19.
Which of the following are true concerning the distinction between interest rates
and return?
a.
The rate of return on a bond will not necessarily equal the interest rate on
that bond.
b.
The return can be expressed as the sum of the current yield and the rate of
capital gains.
c.
The rate of return will be greater than the interest rate when the price of
the bond rises between time t and time t+1.
d.
All of the above are true.
e.
Only (a) and (b) of the above are true.
20.
Which of the following are generally true of all bonds?
a.
The only bond whose return equals the initial yield to maturity is one
whose time to maturity is the same as the holding period.
b.
A rise in interest rates is associated with a fall in bond prices, resulting in
capital losses on bonds whose term to maturities are longer than the
holding period.
c.
The longer a bond's maturity, the greater is the size of the price change
associated with an interest rate change.
d.
All of the above are true.
e.
Only (a) and (b) of the above are true.
21.
The _____ states that the nominal interest rate equals the real interest rate plus the
expected rate of inflation.
a.
Fisher equation.
b.
Keynesian equation.
c.
Monetarist equation.
d.
Marshall equation.
22.
Holding everything else constant,
a.
if an asset's risk rises relative to that of alternative assets, the demand will
fall.
b.
the more liquid an asset, relative to alternative assets, the greater will be
the demand.
c.
the lower the expected return relative to alternative assets, the greater will
be the demand.
d.
e.
all of the above.
only (a) and (b) of the above.
23.
When the price of a bond is above the equilibrium price, there is an excess _____
for (of) bonds and price will _____.
a.
demand; rise
b.
demand; fall
c.
supply; fall
d.
supply; rise
24.
When the price of a bond is _____ the equilibrium price, there is an excess _____
for (of) bonds and price will _____.
a.
below; demand; rise
b.
below; demand; fall
c.
below; supply; fall
d.
above; supply; rise
25.
When the interest rate changes,
a.
the demand curve for bonds shifts to the right.
b.
the demand curve for bonds shifts to the left.
c.
the supply curve for bonds shifts to the right.
d.
the supply curve for bonds shifts to the left.
e.
none of the above occurs.
26.
When a recession occurs, normally the demand for bonds _____ and the supply of
bonds _____.
a.
increases; increases
b.
increases; decreases
c.
decreases; decreases
d.
decreases; increases
27.
When an economy grows out of a recession, normally the demand for bonds
_____ and the supply of bonds _____.
a.
increases; increases
b.
increases; decreases
c.
decreases; decreases
d.
decreases; increases
28.
When people revise upward their expectations of future interest rates, the _____
curve for bonds shifts to the _____.
a.
demand; right
b.
demand; left
c.
supply; left
d.
supply; right
29.
When stock prices become more volatile, the ______ curve for bonds shifts to the
_____.
a.
demand; right
b.
demand; left
c.
supply; left
d.
supply; right
30.
When the federal government's budget deficit increases, the _____ curve for
bonds shifts to the _____.
a.
demand; right
b.
demand; left
c.
supply; left
d.
supply; right
31.
When the expected inflation rate increases, the demand for bonds _____, the
supply of bonds _____, and the interest rate ______.
a.
increases; increases; rises
b.
decreases; decreases; falls
c.
increases; decreases; falls
d.
decreases; increases; rises
32.
When people begin to expect a run up in large stock market, the demand curve for
bonds shifts to the _____ and the interest rate _____.
a.
right; rises
b.
right; falls
c.
left; falls
d.
left; rises
33.
The theory of asset demand provides a framework for deciding what factors cause
the demand curve for bonds shift. These factors include changes in the
a.
wealth of investors.
b.
liquidity of bonds relative to alternative assets.
c.
expected returns on bonds relative to alternative assets.
d.
risk of bonds relative to alternative assets.
e.
all of the above.
34.
Factors that cause the demand curve for bonds to shift to the right include
a.
a decrease in the inflation rate.
b.
an increase in the volatility of stock prices.
c.
an increase in the liquidity of stocks.
d.
all of the above.
e.
only (a) and (b) of the above.
35.
Factors that can cause the supply curve for bonds to shift to the right include
a.
an expansion in overall economic activity.
b.
an increase in expected inflation.
c.
d.
e.
an increase in government deficits.
all of the above.
only (a) and (b) of the above.
36.
The demand curve for bonds has the usual downward slope, indicating that at
_____ prices of the bond, everything else equal, the _____ is higher.
a. higher, demand
b. higher, quantity demanded
c. lower, demand
d. lower, quantity demanded
37.
As the price of a bond falls and the expected return _____, bonds become _____
attractive to investors.
a.
falls, less
b.
falls, more
c.
rises, less
d.
rises, more
38.
When the inflation rate is expected to increase, the real cost of borrowing declines
at any given interest rate; the supply of bonds _____ increases and the supply
curve shifts to the _____.
a.
increases, left
b.
increases, right
c.
decreases, left
d.
decreases, right
39.
When the inflation rate is expected to increase, the expected return on bonds
relative to real assets falls for any given interest rate; the _____ for bonds falls
and the _____ curve shifts to the left.
a.
demand, demand
b.
demand, supply
c.
supply, demand
d.
supply, supply
Figure 6-1
40.
In Figure 6-1, the most likely cause of the increase in the equilibrium interest rate
from i1 to i2 is
a.
an increase in the price of bonds.
b.
a decline in the price of bonds.
c.
an increase in the expected inflation rate.
d.
a decrease in the expected inflation rate.
41.
In Figure 6-1, the most likely cause of the increase in the equilibrium interest rate
from i1 to i2 is
a.
an increase in the expected inflation rate.
b.
a decrease in the expected inflation rate.
c.
a sharp decline in the growth rate of the money supply.
d.
a combination of both (a) and (c) of the above.
42.
In Figure 6-1, the most likely cause of the increase in the equilibrium interest rate
from i1 to i2 is
a.
an expected decrease in the government budget deficit.
b.
an expected increase in the government budget deficit.
c.
a sharp decline in the growth rate of the money supply.
d.
a combination of both (a) and (c) of the above.
43.
The term structure of interest rates is
a.
the relationship among interest rates of different bonds with the same
maturity.
b.
the structure of how interest rates move over time.
c.
the relationship among the term to maturity of different bonds.
d.
the relationship among interest rates on bonds with different maturities.
44.
The risk structure of interest rates is
a.
the structure of how interest rates move over time.
b.
the relationship among interest rates of different bonds with the same
maturity.
c.
the relationship among the term to maturity of different bonds.
d.
the relationship among interest rates on bonds with different
maturities.
45.
When the default risk in corporate bonds increases, other things equal, the
demand curve for corporate bonds shifts to the _____ and the demand curve for
Treasury bonds shifts to the _____.
a.
right;right
b.
right;left
c.
left;left
d.
left;right
46.
When the Treasury bond market becomes more liquid, other things equal, the
demand curve for corporate bonds shifts to the _____ and the demand curve for
Treasury bonds shifts to the _____.
a.
right;right
b.
right;left
c.
left;left
d.
left;right
47.
The risk premium on corporate bonds becomes smaller if
a.
the riskiness of corporate bonds increases.
b.
the liquidity of corporate bonds increases.
c.
the liquidity of corporate bonds decreases.
d.
the riskiness of corporate bonds decreases.
e.
both (b) and (d) occur.
48.
If the expected path of one-year interest rates over the next five years is 4 percent,
5 percent, 7 percent, 8 percent, and 6 percent, then the expectations hypothesis
predicts that today's interest rate on the five-year bond is
a.
4 percent.
b.
5 percent.
c.
6 percent.
d.
7 percent.
e.
8 percent.
49.
Which of the following theories of the term structure are able to explain the fact
that yield curves usually slope upward?
a.
The expectations hypothesis
b.
The segmented markets theory
c.
The preferred habitat theory
d.
Both (b) and (c) of the above
e.
Both (a) and (c) of the above
50.
Interest rates on bonds of the same maturity will differ because of differences in
a.
liquidity.
b.
risk.
c.
income tax treatment.
d.
all of the above.
e.
only (a) and (b) of the above.
51.
Yield curves can be classified as
a. upward sloping.
b. downward sloping.
c.
flat.
d. all of the above.
e. only (a) and (b) of the above.
52.
According to the expectations hypothesis of the term structure
a. the interest rate on long-term bonds will equal an average of short-term
interest rates that people expect to occur over the life of the long-term bonds.
b. buyers of bonds do not prefer bonds of one maturity over another.
c. interest rates on bonds of different maturities move together over time.
d. only (a) and (b) of the above.
53.
According to the segmented markets theory of the term structure
a. the interest rate on long-term bonds will equal an average of short-term
interest rates that people expect to occur over the life of the long-term bonds.
b. buyers of bonds do not prefer bonds of one maturity over another.
c. interest rates on bonds of different maturities do not move together over time.
d. all of the above.
54.
According to the preferred habitat theory of the term structure
a. because buyers of bonds may prefer bonds of one maturity over another,
interest rates on bonds of different maturities do not move together over time.
b. the interest rate on long-term bonds will equal an average of short-term
interest rates that people expect to occur over the life of the long-term bonds
plus a term premium.
c. because of the positive term premium, the yield curve will not be observed to
be downward sloping.
d. all of the above.
e. only (a) and (b) of the above.
55.
The spread between the interest rates on bonds with default risk and default-free
bonds is called the
a. risk premium.
b. junk margin.
c. bond margin.
d. default premium.
56.
The expectations hypothesis and the segmented markets theory do not explain the
facts very well, but they provide the groundwork for the most widely accepted
theory of the term structure of interest rates,
a. the Keynesian theory.
b. separable markets theory.
c. preferred habitat theory.
d. the asset market approach.
57.
Economists attempts to explain the term structure of interest rates
a. illustrate how economists modify theories to improve them when they are
inconsistent with the empirical evidence.
b. illustrate how economists continue to accept theories that fail to explain
observed behavior of interest rate movements.
c. prove that the real world is a special case that tends to get short shrift in
theoretical models.
d. have proved entirely unsatisfactory to date.
58.
The _____ of the term structure of interest rates states that the interest rate on a
long-term bond will equal the average of short-term interest rates that individuals
expect to occur over the life of the long-term bond.
a. segmented markets theory
b. expectations hypothesis
c. preferred habitat theory
d. separable markets theory
59.
When the yield curve is upward sloping,
a. the expectations hypothesis suggests that short-term interest rates are expected
to rise.
b. the expectations hypothesis suggests that short-term interest rates are expected
to fall.
c. the segmented markets theory suggests that short-term interest rates are
expected to fall.
d. the preferred habitat theory suggests that short-term interest rates are expected
to fall.
60.
When the yield curve slopes down,
a. the expectations hypothesis suggests that short-term interest rates are expected
to rise.
b. the expectations hypothesis suggests that short-term interest rates are expected
c.
d.
to fall.
the segmented markets theory suggests that short-term interest rates are
expected to rise.
the preferred habitat theory suggests that short-term interest rates are expected
to rise.