# Quiz 4: Interest Rates

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Q 4Q 4

The present value of a future payment is higher the longer the period of time until the payment, .

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Q 9Q 9

If the nominal interest rate is less than expected inflation, the real interest rate is positive.

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Q 10Q 10

The real interest rate is a more accurate measure of the cost of borrowing than the nominal rate.

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Q 13Q 13

For a coupon bond, if the price is greater than the face value, then the coupon rate must be greater than the yield to maturity.

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Q 20Q 20

The compounding period is the amount of time that passes when interest is no longer accumulating.

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Q 24Q 24

The opportunity cost of money is
A) growth rate of prices.
B) real GDP.
C) interest rate.
D) none of the above.

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Q 25Q 25

The price of a bond is inversely related to
A) the time to maturity.
B) the yield to maturity.
C) both of the above.
D) neither of the above.

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Q 26Q 26

The price of a bond is directly related to
A) the face value.
B) the yield to maturity.
C) both of the above.
D) neither of the above.

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Q 27Q 27

The price of a coupon bond is inversely related to
A) the face value.
B) the coupon rate.
C) both of the above.
D) neither of the above.

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Q 28Q 28

The present value of a discount bond with one year to maturity, face value $1,000 and yield to maturity 5% is
A) $952.38.
B) $1,000.00.
C) $1,005.00.
D) $1,050.00.

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Q 29Q 29

The present value of a discount bond with two years to maturity, face value of $10,000 and yield to maturity 4% is
A) $7,142.86.
B) $9,245.56.
C) $9,615.38.
D) none of the above.

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Q 30Q 30

A one-year discount bond with face value $1,000 and price $800 has a yield of
A) 20%.
B) 25%.
C) 80%.
D) none of the above.

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Q 31Q 31

A two-year discount bond with face value $500 and price $450 has a yield of
A) 4.9%.
B) 10%.
C) 11.1%.
D) none of the above.

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Q 32Q 32

A two-year discount bond with face value $1,000 and price $950 has a yield of
A) 4.9%.
B) 5%.
C) 5.3%.
D) none of the above.

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Q 33Q 33

After three years, a deposit of $1,000 that compounds annually at an interest rate of 20% returns
A) $1,000.
B) $1,200.
C) $1,440.
D) $1,728.

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Q 34Q 34

After 100 years, a deposit of $1 that compounds annually at 1% returns
A) $2.
B) $2.70.
B) $100.
C) none of the above.

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Q 35Q 35

Your uncle Albert gives you a savings bond that pays $500 four years from now. If the relevant interest rate for you is 2%, what is the present value of the bond?
A) $461.92.
B) $490.19.
C) $510.00.
D) $541.21.

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Q 36Q 36

A two-year coupon bond has a face value of $1,000, a coupon rate of 4% and a yield to maturity of 6%. What is the price of the bond?
A) $925.60.
B) $963.33.
C) $980.03.
D) $1,037.72.

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Q 37Q 37

A two-year coupon bond has a face value of $1,000, a coupon rate of 5% and a yield to maturity of 2%. What is the price of the bond?
A) $944.21.
B) $1,000.
C) $1,058.25.
D) $1,078.43.

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Q 38Q 38

A three-year coupon bond has a face value of $1,000, a coupon rate of 5% and a yield to maturity of 3%. What is the price of the bond?
A) $1,000.
B) $1,052.41.
C) $1,056.57.
D) none of the above.

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Q 39Q 39

A one-year discount bond has a face value of $1,500 and a price of $1,200. What is the yield to maturity?
A) 15%
B) 20%
C) 25%
D) 30%

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Q 40Q 40

Brittany and Christina both buy bonds with yield to maturity of 4%, but Brittany's bond has 2 years to maturity and Christina's has 5. After one year, yields for these bonds rise to 7%.
A) Both bonds rise in value but Brittany's rises more.
B) Both bonds rise in value but Christina's rises more.
C) Both bonds fall in value but Brittany's falls more.
D) Both bonds fall in value but Christina's falls more.

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Q 41Q 41

Brittany and Christina both buy bonds with yield to maturity of 4% but Brittany's bond has 2 years to maturity and Christina's has 5. After one year, yields for these bonds rise.
A) The rate of return on both bonds is above 4% but Brittany's is higher.
B) The rate of return on both bonds is above 4% but Christina's is higher.
C) The rate of return on both bonds is below 4% but Brittany's is lower.
D) The rate of return on both bonds is below 4% but Christina's is lower.

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Q 42Q 42

Short maturity bonds have ____ interest rate risk than long maturity bonds.
A) more
B) less
C) equal
D) cannot be determined

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Q 43Q 43

The relationship between real and nominal rates is called the
A) inflation relation.
B) Fisher equation.
C) Friedman equation.
D) none of the above.

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Q 44Q 44

The chance that a bond issuer won't make promised payments is called
A) default risk.
B) credit risk.
C) interest rate risk.
D) representation risk.

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Q 45Q 45

The chance that a bond issuer won't make promised payments is called
A) representation risk.
B) credit risk.
C) interest rate risk.
D) none of the above.

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Q 46Q 46

The rate of return on a bond can be negative if market yields
A) rise.
B) fall.
C) become negative.
D) Rates of return cannot be negative.

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Q 47Q 47

Susan decides that moving in with her boyfriend was a mistake. This is a(n) _____ judgment.
A) ex-ante
B) ex-poste
C) ceteris paribus
D) none of the above

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Q 48Q 48

James decides that going to graduate school would not be a good idea and applies for the Peace Corps. This is a(n) _____ decision.
A) ex-ante
B) ex-poste
C) ceteris paribus
D) none of the above

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Q 49Q 49

A bond is bought at par and market yields rise after purchase. If the bond is held to maturity, the rate of return at maturity will be _____ the yield at purchase.
A) greater than
B) less than
C) equal to
D) cannot be determined

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Q 50Q 50

A _____ is the type of loan where the borrower repays the principal and interest at the end of the loan.
A) simple loan
B) fixed-payment loan
C) principled interest loan
D) none of the above.

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Q 51Q 51

If you had a fixed-payment loan of $500,000 for thirty years at 6%, how much of your payment is principal in year 10?
A) $520.60
B) $752.25
C) none; the principal isn't paid until year 30
D) none of the above

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Q 52Q 52

A _____ is a type of perpetual bond issued by the British government.
A) consol
B) money market bond
C) discount coupon
D) none of the above.

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Q 53Q 53

Write the equation relating the present value and future value of a payment, identifying all the parts.

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Q 56Q 56

Find the present value of a payment of $50 four years from now if the relevant interest rate is 6%.

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Q 57Q 57

Find the present value of a payment of $200 one hundred years from now if the relevant interest rate is 10%.

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Q 59Q 59

A discount bond has a face value of $1,000 and two years to maturity. Find the price of the bond if the yield is 9%. Find the price if the yield is 10%. Explain briefly why the price and yield to maturity are inversely related.

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Q 60Q 60

Two discount bonds both have a face value of $100 and yield 5%, but one has one year to maturity and the other has two years to maturity. Find the price of both bonds and explain why one is higher than the other.

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Q 61Q 61

A special bond pays $200 after 3 years and $500 after 6 years. If the relevant interest rate is 4%, what is the present value of the bond?
$

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Q 62Q 62

A coupon bond has two years to maturity, a face value of $1,000 and a coupon payment of $50. If the yield to maturity is 10%, what is the price?

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Q 63Q 63

A coupon bond has two years to maturity, a face value of $1,000 and a coupon rate of 4%. You buy the bond at par, and, after 1 year, market yields fall to 2%. Find the rate of return on your bond for the first year.

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Q 64Q 64

The coupon payment for a consol is $100 and the yield to maturity is 5%. What is the price of the bond?

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Q 65Q 65

The coupon payment for a consol is $100 and its value is $400. What does this imply about the yield to maturity?

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Q 66Q 66

A bond with three years to maturity has a face value of $1,000 and a coupon rate of 5%. It is initially bought at a yield to maturity of 7%, then sold after one year when market yields have fallen to 5%. What are the sale price and the rate of return for the first year?

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Q 70Q 70

If a bond is sold before maturity, under what circumstance would the rate of return equal the yield when the bond was purchased?

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