Chapter 6

Question 1

Which of the following statements is true about fixed-payment loans?

Answer 1

Each payment on a fixed-payment loan pays off some principal and some interest.

Question 2

In the equation for the price of a coupon bond, to the right of the equal sign, there are two parts. The first part represents ______, while the part on the far right represents ______.

Answer 2

the interest; the value of the promise to repay the principal at maturity

Question 3

Which of the following is true about consols (perpetuities)?

Answer 3

The borrower pays only interest, not the principal.

Question 4

Which of the following is not true about zero-coupon bonds?

Answer 4

They pay regular interest payments.

Question 5

All else equal, the price of a one-year Treasury bill will be ______ than that of a six-month Treasury bill; in other words. the ______ the time to maturity, the more we are willing to pay.

Answer 5

lower, shorter

Question 6

A loan that promises a fixed number of equal payments at regular intervals is called a ______.

Answer 6

fixed payment loan

Question 7

We can value a coupon bond using

Answer 7

present value formula

Question 8

What is the yield to maturity?

Answer 8

The yield bondholders receive if they hold the bond until maturity

Question 9

Why are governments the only borrowers of perpetuities or consols?

Answer 9

They are the only borrowers that can credibly promise to make payments forever.

Question 10

When the price of a bond rises, its yield ______. Therefore, when a bond’s price is lower than its face value, its yield to maturity must be ______ its coupon rate.

Answer 10

falls; above

Question 11

When a bond’s yield to maturity falls below its coupon rate, the bondholder has experienced

Answer 11

capital loss

Question 12

Current yield measures

Answer 12

the proceeds a bondholder receives for lending.

Question 13

The yield bondholders receive if they hold the bond until maturity is called ______.

Answer 13

yield to maturity

Question 14

Because price and yield have _______ relationship, when the price of a bond is greater than its face value, its coupon rate will be _______ the current yield.

Answer 14

inverse, above

Question 15

Consider a coupon bond with a face value of $500. If its price is currently $525, then

Answer 15

its yield to maturity must be below its coupon rate, because price and yield have an inverse relationship.

Question 16

When the price of the bond is below the face value,

Answer 16

the return exceeds the coupon rate.

Question 17

Holding period return is calculated when a bond is sold ____ maturity.

Answer 17

before

Question 18

Current yield has ______ relationship with bond price; when the bond price rises, current yield ______.

Answer 18

an inverse; falls

Question 19

The investment horizon describes the

Answer 19

time to bond’s maturity

Question 20

In the market for bonds, when the price of bonds is above the equilibrium price

Answer 20

bond sellers will start dropping their prices.

Question 21

All else equal, when the demand for a bond increases

Answer 21

price rises, yields fall

Question 22

To calculate the one-year holding period return,

Answer 22

add current yield to capital gain

Question 23

Which of the following happens when inflation is expected to increase in an economy?

Answer 23

The supply curve for bonds shifts rightward and the price of bonds falls.

Question 24

In the market for bonds, when the price of bonds is below the equilibrium price

Answer 24

quantity demanded will be greater than quantity supplied.

Question 25

If interest rates are expected to be higher in the future than they are today, we would now expect

Answer 25

the price of bonds to fall and their yield to rise.

Question 26

Which of the following can definitely not cause a curve to shift in the market for a bond?

Answer 26

change of bond price

Question 27

When the government wants to spend more relative to the taxes it brings in,

Answer 27

the price of bonds falls and their yield rises.

Question 28

As a bond is perceived to provide a higher return, or to be more liquid or less risky than other bonds,

Answer 28

its price will rise and its yield will fall.

Question 29

Expected inflation affects

Answer 29

both bond supply and demand

Question 30

All else equal, when the demand for a bond increases

Answer 30

its price rises and its yield falls.

Question 31

A bondholder's investment horizon may be shorter than the time to maturity of the bond. This leads to which of the following kinds of risk?

Answer 31

interest rate risk

Question 32

Which of the following happens when inflation is expected to increase in an economy?

Answer 32

The supply curve for bonds shifts rightward and the price of bonds falls.

Question 33

An increase in expected inflation,

Answer 33

shifts bond supply to the right. shifts bond demand to the left.

Question 34

When financial institutions pool assets that generate payment streams and turn them into tradeable bonds, this is called ______.

Answer 34

securitization

Question 35

Even if bond payments are made, increases in overall prices may reduce those payments' real value. This is referred to as ______.

Answer 35

inflation risk

Question 36

risk tends to

Answer 36

lower the price an investor is willing to pay. raises the yield received by investors. reduce the expected value of a given promise.

Question 37

When general business conditions decline,

Answer 37

the price of bonds increases and their yield falls.

Question 38

There is some evidence that increased inflation is associated with ______ nominal interest rates, particularly in nations where inflation is especially _________.

Answer 38

higher, unstable

Question 39

Which of the following is not a way securitization uses the efficiency of markets to lower the cost of borrowing?

Answer 39

removing systemic risk

Question 40

Interest-rate risk increases as the bond's __________ increases.

Answer 40

time to maturity

Question 41

A bondholder's investment horizon may be shorter than the time to maturity of the bond. This leads to which of the following kinds of risk?

Answer 41

interest rate risk

Question 42

As the default risk of a bond rises, we expect the price of the bond to _____ and its yield to ____.

Answer 42

fall, rise

Question 43

Which of the following happens when inflation is expected to increase in an economy?

Answer 43

The supply curve for bonds shifts rightward and the price of bonds falls.

Question 44

Which of the following can be considered part of the interest rate?

Answer 44

Expected inflation The real interest rate Compensation for risk

Question 45

Interest-rate risk arises because of a mismatch between an investor's _________ and the _______ of the bond.

Answer 45

investment horizon, time to maturity

Question 46

Risk tends to

Answer 46

reduce the expected value of a given promise. lower the price an investor is willing to pay. raises the yield received by investors.

Question 47

As the default risk of a bond rises, we expect the price of the bond to _____ and its yield to ____.

Answer 47

fall, rise