Question 1

What is the yield to maturity of a perpetuity with a coupon of $40 and a price of $800?

Accepted Answer

The answer of What is the yield to maturity of...

Question 2

If, while you are holding a coupon bond, its market price falls, you can be sure that
A)the coupon payment you are receiving must have been reduced.
B)the interest rate on other similar bonds must have fallen.
C)the interest rate on other similar bonds must have risen.
D)the par value of the bond must have declined.

Accepted Answer

When the market price of a coupon bond falls, it indicates that the interest rate on other similar bonds has risen. This is because the yield on the bond (which is the interest rate that investors receive as a percentage of the bond's market price) is now lower than the interest rate on other similar bonds, making the bond less attractive to investors and causing its price to fall.

Question 3

If the current price of a bond is greater than its face value
A)an investor will receive a capital gain by holding the bond until maturity.
B)the yield to maturity must be less than the coupon rate.
C)the coupon rate must be less than the current yield.
D)the coupon rate must be equal to the current yield.

Accepted Answer

When the current price of a bond is greater than its face value, it means the bond is trading at a premium. This occurs because the coupon rate (interest rate) of the bond is higher than the prevailing market interest rates, making the bond more attractive. Therefore, the yield to maturity, which is the total return anticipated on a bond if the bond is held until it matures, must be less than the coupon rate to account for the premium paid over the face value.

Question 4

A one-year discount bond has a face value of $1000 and a price of $925. What is the yield to maturity on the bond? Report using percentages with two decimal places.

Accepted Answer

The answer of A one-year discount bond has a face...

Question 5

With respect to U.S. Treasury bills,
A)the bid price is always greater than the asked price.
B)the asked price is always greater than the bid price.
C)the bid price is only greater than the asked price if investors expect interest rates to decline in the future.
D)the asked price is only greater than the bid price if investors expect interest rates to decline in the future.

Accepted Answer

The bid price is the price at which a buyer is willing to purchase a security, while the asked price is the price at which a seller is willing to sell the security. In the case of U.S. Treasury bills, the asked price is typically higher than the bid price, as sellers generally want to receive more than the current market value for the security. This is not necessarily dependent on investor expectations for future interest rates.

Question 6

A capital gain occurs when the
A)coupon rate increases.
B)current yield increases.
C)price of an asset increases.
D)yield to maturity increases.

Accepted Answer

A capital gain occurs when the price of an asset increases. This means that if an investor bought an asset and the price of that asset increased, they would have made a capital gain if they were to sell that asset at the higher price. The other choices (A, B, and D) are all related to changes in the yield or coupon rate of an asset, which do not necessarily result in a capital gain.

Question 7

A one-year discount bond has a face value of $1000 and price of $880. What is the yield to maturity on the bond? Report using percentages with two decimal places.

Accepted Answer

The answer of A one-year discount bond has a face...

Question 8

As the housing bubble began to burst in 2006-2008, investors would only buy mortgage-backed securities at high yields to compensate for higher perceived default risk. As a result::
A)banks suffered significant capital losses as the value of their holdings of mortgage-backed securities declined
B)funds available for mortgages increased
C)bank profits rose as they earned higher interest on mortgages
D)the price of mortgage-backed securities tended to rise due to the higher yields

Accepted Answer

As investors demanded high yields to compensate for perceived default risk, the value of mortgage-backed securities declined, causing banks to suffer significant capital losses as the value of their holdings decreased.

Question 9

What is the yield on a discount basis for a U.S. Treasury bill that has a face value of $10,000, has a price of $9500, and will mature in 180 days?
A)5)00%
B)5)25%
C)10.00%
D)10.67%

Accepted Answer

The answer of What is the yield on a discount...

Question 10

Unless otherwise indicated, when economists or investors refer to the interest rate on a financial asset, they referring to the:
A)current yield
B)coupon rate
C)yield to maturity
D)prime rate

Accepted Answer

Yield to maturity is the total return anticipated on a bond if the bond is held until it matures. It takes into account the current market price of the bond, its face value, the coupon rate, and the time to maturity. This is generally the interest rate that investors focus on when evaluating the return on a fixed-income investment like a bond. The other options (current yield, coupon rate, prime rate) may also be relevant in certain contexts, but they do not provide a comprehensive measure of the return on a financial asset.

Question 11

Which of the following represents the equation that would be used to determine the yield to maturity of a corporate bond with a face value of $1000, price of $1100, coupon rate of 5%, and maturity in three years? A)$1100 = $1500/(1 + i)³ B)$1100 = $500/(1 + i)+ $500/(1 + i)² + 1000/(1 + i)³ C)$1100 = $500/(1 + i)+ $500/(1 + i)² + 500/(1 + i)³ D)$1100 = $500/(1 + i)+ $500/(1 + i)² + 1500/(1 + i)³

Accepted Answer

The answer of Which of the following represents the equation...

Question 12

A bond's price and its yield to maturity are inversely related because
A)discounting future payments at a higher rate reduces the present value of the payments.
B)discounting future payments at a higher rate increases the present value of the payments.
C)an increase in the yield to maturity will lower a bond's coupon rate and hence its price.
D)a fall in a bond's price will lower its par value and hence its yield to maturity.

Accepted Answer

When the yield to maturity increases, the required rate of return on the bond also increases. Discounting future payments (i.e. coupons and principal) at a higher rate reduces their present value, thus decreasing the overall price of the bond. Conversely, if the yield to maturity decreases, the required rate of return on the bond decreases and discounting future payments at a lower rate increases their present value, thus increasing the overall price of the bond.

Question 13

Which of the following will result in a decrease in the price of an existing corporate bond?
A)lower expectations of inflation
B)new bonds issued at a lower interest rate
C)increased default risk
D)all of the above

Accepted Answer

The answer of Which of the following will result in...

Question 14

An speculator who buys a fifty-year corporate bond
A)must be expecting to still be alive in fifty years.
B)is subject to substantial reinvestment risk.
C)is probably expecting market interest rates to increase in the future.
D)is probably expecting market interest rates to decrease in the future.

Accepted Answer

Speculators who buy long-term bonds, like a fifty-year corporate bond, generally do so with the expectation that market interest rates will decrease in the future. When interest rates decrease, the value of existing bonds with higher interest rates increases, potentially allowing the speculator to sell the bond at a profit before maturity.

Question 15

Which of the following types of mortgage loans became more common during the housing boom of the early-to-mid 2000s?
A)those with flawed credit histories
B)thirty-year, fixed-rate mortgages
C)prime Mortgages
D)those with down payments of at least 20%

Accepted Answer

During the housing boom of the early-to-mid 2000s, there was an increase in the number of subprime mortgages that were offered to people with flawed credit histories. This led to a rise in risky lending practices and ultimately contributed to the housing market crash of 2008. Therefore, the answer is A.

Question 16

Banks who held mortgage-backed securities "took a bath" during the financial crisis of 2007-2009 due to:
A)rising yields in secondary markets which led to a decline in the price of mortgage-backed securities.
B)falling yields in secondary markets which led to a decline in the price of mortgage-backed securities.
C)their inability to issue new mortgages.
D)more rapid pre-payment of mortgages.

Accepted Answer

During the financial crisis of 2007-2009, rising yields in secondary markets led to a decline in the price of mortgage-backed securities. This decline in price meant that the value of these securities held by banks decreased significantly, causing substantial financial losses.

Question 17

If, while you are holding a coupon bond, the interest rates on other similar bonds fall, you can be sure that
A)the coupon payments on your bond will fall.
B)the market price of your bond will rise.
C)the market price of your bond will fall.
D)the par value of your bond will rise.

Accepted Answer

When interest rates fall, the market demand for existing coupon bonds increases, driving up their prices. This happens because the prevailing interest rate becomes lower than the coupon rate paid by the bond, making the bond more attractive to investors. As a result, the market price of your coupon bond will rise. The coupon payments and par value of the bond remain unchanged.

Question 18

Which of the following represents the equation that would be used to determine the yield to maturity of a three-year fixed payment loan of $1400 which has payments of $500 per year? A)$1400 = $500/(1+i)+ $500/(1+i)² + $500/(1+i)³ B)$1400 = $500/(1+i)³ C)i = (1400-500)/1400 D)$1400 = $500/(1+i)+ $500/(1+i)² + $500(1+i)³ + 1400/(1+i)³

Accepted Answer

The correct equation for determining the yield to maturity of a three-year fixed payment loan involves summing the present values of all payments made over the term of the loan. Each payment is discounted back to its present value using the formula $500/(1 + i)^n, where n is the number of years from the payment to the present. The sum of these present values equals the initial loan amount of $1,400.

Question 19

In comparing the yield to maturity on a Treasury bill with the yield on a discount basis on the same bill, we can say that the yield to maturity
A)will always be greater than the yield on a discount basis.
B)will always be less than the yield on a discount basis.
C)will always be equal to the yield on a discount basis, provided the holding period is the same as the number of years to maturity.
D)rises whenever the yield on a discount basis falls.

Accepted Answer

The yield to maturity on a Treasury bill takes into account the compounding effect over the period until maturity, while the yield on a discount basis does not. This results in the yield to maturity being always greater than the yield on a discount basis, as it reflects the true earnings on the investment over time.

Question 20

The bid price for a bond is
A)the minimum price that you are allowed to bid for a bond that is being auctioned by the government.
B)the maximum price that you are allowed to bid for a bond that is being auctioned by the government.
C)the price that you will receive from a securities dealer if you sell the bond.
D)the price that you must pay a securities dealer to purchase a bond.

Accepted Answer

The answer of The bid price for a bond is
A)the...

Quiz 3: Interest Rates and Rates of Return

What is the yield to maturity of a perpetuity with a coupon of $40 and a price of $800?

If, while you are holding a coupon bond, its market price falls, you can be sure that

If the current price of a bond is greater than its face value

A one-year discount bond has a face value of $1000 and a price of $925. What is the yield to maturity on the bond? Report using percentages with two decimal places.

With respect to U.S. Treasury bills,

A capital gain occurs when the

A one-year discount bond has a face value of $1000 and price of $880. What is the yield to maturity on the bond? Report using percentages with two decimal places.

As the housing bubble began to burst in 2006-2008, investors would only buy mortgage-backed securities at high yields to compensate for higher perceived default risk. As a result::

What is the yield on a discount basis for a U.S. Treasury bill that has a face value of $10,000, has a price of $9500, and will mature in 180 days?

Unless otherwise indicated, when economists or investors refer to the interest rate on a financial asset, they referring to the:

Which of the following represents the equation that would be used to determine the yield to maturity of a corporate bond with a face value of $1000, price of $1100, coupon rate of 5%, and maturity in three years?

A bond's price and its yield to maturity are inversely related because

Which of the following will result in a decrease in the price of an existing corporate bond?

An speculator who buys a fifty-year corporate bond

Which of the following types of mortgage loans became more common during the housing boom of the early-to-mid 2000s?

Banks who held mortgage-backed securities "took a bath" during the financial crisis of 2007-2009 due to:

If, while you are holding a coupon bond, the interest rates on other similar bonds fall, you can be sure that

Which of the following represents the equation that would be used to determine the yield to maturity of a three-year fixed payment loan of $1400 which has payments of $500 per year?

In comparing the yield to maturity on a Treasury bill with the yield on a discount basis on the same bill, we can say that the yield to maturity

The bid price for a bond is