1、Chapter3WhatDoInterestRatesMeanandWhatIsTheirRoleinValuationSingleChoiceAloanthatrequirestheborrowertomakethesamepaymenteveryperioduntilthematuritydateiscalledasimpleloan.fixed-paymentloan.discountloan.same-paymentloan.noneoftheabove.2)Acouponbondpaystheownerofthebondthesameamounteverymonthuntilmatu

2、ritydate.afixedinterestpaymenteveryperiodandrepaysthefacevalueatthematuritydate.thefacevalueofthebondplusaninterestpaymentoncethematuritydatehasbeenreached.thefacevalueatthematuritydate.noneoftheabove.AbondsfuturepaymentsarecalleditsA)cashflows.B)maturityvalues.C)discountedpresentvalues.D)yieldstoma

3、turity.AcreditmarketinstrumentthatpaystheownerthefacevalueofthesecurityatthematuritydateandnothingpriortotheniscalledaA)simpleloan.fixed-paymentloan.couponbond.discountbond.(I)Asimpleloanrequirestheborrowertorepaytheprincipalatthematuritydatealongwithaninterestpayment.(II)Adiscountbondisboughtatapri

4、cebelowitsfacevalue,andthefacevalueisrepaidatthematuritydate.(I)istrue,(II)false.(I)isfalse,(II)true.Botharetrue.Botharefalse.6)WhichofthefollowingaretrueofcouponbondsTheownerofacouponbondreceivesafixedinterestpaymenteveryyearuntilthematuritydate,whenthefaceorparvalueisrepaid.Treasurybondsandnotesar

5、eexamplesofcouponbonds.Corporatebondsareexamplesofcouponbonds.Alloftheabove.OnlyAandBoftheabove.7)WhichofthefollowingaregenerallytrueofallbondsThelongerabondsmaturity,theloweristherateofreturnthatoccursasaresultoftheincreaseinaninterestrate.B)Eventhoughabondhasasubstantialinitialinterestrate,itsretu

6、rncanturnouttobenegativeifinterestratesrise.C)Pricesandreturnsforlong-termbondsaremorevolatilethanthoseforshorter-termbonds.Alloftheabovearetrue.OnlyAandBoftheabovearetrue.(I)Adiscountbondrequirestheborrowertorepaytheprincipalatthematuritydateplusaninterestpayment.(II)Acouponbondpaysthelenderafixedi

7、nterestpaymenteveryyearuntilthematuritydate,whenaspecifiedfinalamount(faceorparvalue)isrepaid.A)(I)istrue,(II)false.B)(I)isfalse,(II)true.C)Botharetrue.D)Botharefalse.Ifa$5,000couponbondhasacouponrateof13percent,thenthecouponpaymenteveryyearisA)$650.B)$1,300.C)$130.D)$13.E)Noneoftheabove.An$8,000cou

8、ponbondwitha$400annualcouponpaymenthasacouponrateof5percent.8percent.10percent.40percent.11)Theconceptof_isbasedonthecommon-sensenotionthatadollarpaidtoyouinthefutureislessvaluabletoyouthanadollartoday.presentvaluefuturevalueinterestdeflationDollarsreceivedinthefutureareworth_thandollarsreceivedtoda

9、y.Theprocessofcalculatingwhatdollarsreceivedinthefutureareworthtodayiscalled_A)more;discounting.B)less;discounting.more;inflating.less;inflating.TheprocessofcalculatingwhatdollarsreceivedinthefutureareworthtodayiscalledA)calculatingtheyieldtomaturity.B)discountingthefuture.C)compoundingthefuture.D)c

10、ompoundingthepresent.Withaninterestrateof5percent,thepresentvalueof$100receivedoneyearfromnowisapproximatelyA)$100.B)$105.C)$95.D)$90.Withaninterestrateof10percent,thepresentvalueofasecuritythatpays$1,100nextyearand$1,460fouryearsfromnowisapproximately$1,000.$2,000.$2,560.$3,000.Withaninterestrateof

11、8percent,thepresentvalueof$100receivedoneyearfromnowisapproximatelyA)$93.B)$96.$100.$108.Withaninterestrateof6percent,thepresentvalueof$100receivedoneyearfromnowisapproximatelyA)$106.B)$100.$94.$92.Theinterestratethatequatesthepresentvalueofthecashflowreceivedfromadebtinstrumentwithitsmarketpricetod

12、ayistheA)simpleinterestrate.B)discountrate.C)yieldtomaturity.D)realinterestrate.TheinterestratethatfinancialeconomistsconsidertobethemostaccuratemeasureistheA)currentyield.B)yieldtomaturity.C)yieldonadiscountbasis.D)couponrate.Financialeconomistsconsiderthe_tobethemostaccuratemeasureofinterestrates.

13、simpleinterestratediscountrateyieldtomaturityrealinterestrateForasimpleloan,thesimpleinterestrateequalstheA)realinterestrate.B)nominalinterestrate.C)currentyield.D)yieldtomaturity.Forsimpleloans,thesimpleinterestrateis_theyieldtomaturity.A)greaterthanB)lessthanC)equaltoD)notcomparabletoTheyieldtomat

14、urityofaone-year,simpleloanof$500thatrequiresaninterestpaymentof$40is5percent.8percent.12percent.percent.Theyieldtomaturityofaone-year,simpleloanof$400thatrequiresaninterestpaymentof$50is5percent.8percent.12percent.percent.A$10,000,8percentcouponbondthatsellsfor$10,000hasayieldtomaturityofA)8percent

15、.B)10percent.C)12percent.D)14percent.Whichofthefollowing$1,000facevaluesecuritieshasthehighestyieldtomaturityA)A5percentcouponbondsellingfor$1,000B)A10percentcouponbondsellingfor$1,000C)A12percentcouponbondsellingfor$1,000D)A12percentcouponbondsellingfor$1,100Whichofthefollowing$1,000facevaluesecuri

16、tieshasthehighestyieldtomaturityA)A5percentcouponbondsellingfor$1,000B)A10percentcouponbondsellingfor$1,000C)A15percentcouponbondsellingfor$1,000D)A15percentcouponbondsellingfor$900WhichofthefollowingaretrueforacouponbondWhenthecouponbondispricedatitsfacevalue,theyieldtomaturityequalsthecouponrate.T

17、hepriceofacouponbondandtheyieldtomaturityarenegativelyrelated.Theyieldtomaturityisgreaterthanthecouponratewhenthebondpriceisbelowtheparvalue.Alloftheabovearetrue.OnlyAandBoftheabovearetrue.29)WhichofthefollowingaretrueforacouponbondWhenthecouponbondispricedatitsfacevalue,theyieldtomaturityequalsthec

18、ouponrate.Thepriceofacouponbondandtheyieldtomaturityarenegativelyrelated.Theyieldtomaturityisgreaterthanthecouponratewhenthebondpriceisabovetheparvalue.Alloftheabovearetrue.OnlyAandBoftheabovearetrue.30)WhichofthefollowingaretrueforacouponbondWhenthecouponbondispricedatitsfacevalue,theyieldtomaturit

19、yequalsthecouponrate.Thepriceofacouponbondandtheyieldtomaturityarepositivelyrelated.Theyieldtomaturityisgreaterthanthecouponratewhenthebondpriceisabovetheparvalue.Alloftheabovearetrue.OnlyAandBoftheabovearetrue.31)Aconsolbondisabondthatpaysinterestannuallyanditsfacevalueatmaturity.paysinterestinperp

20、etuityandnevermatures.paysnointerestbutpaysfacevalueatmaturity.risesinvalueasitsyieldtomaturityrises.32)Theyieldtomaturityonaconsolbondthatpays$100yearlyandsellsfor$500is5percent.10percent.percent.20percent.25percent.33)Theyieldtomaturityonaconsolbondthatpays$200yearlyandsellsfor$1000is5percent.10pe

21、rcent.20percent.25percent.Afrequentlyusedapproximationfortheyieldtomaturityonalong-termbondistheA)couponrate.B)currentyield.C)cashflowinterestrate.D)realinterestrate.Thecurrentyieldonacouponbondisthebonds_dividedbyits_.A)annualcouponpayment;priceB)annualcouponpayment;facevalueC)annualreturn;priceD)a

22、nnualreturn;facevalueWhenabondspricefalls,itsyieldtomaturity_anditscurrentyield_.A)falls;fallsB)rises;risesfalls;risesrises;fallsTheyieldtomaturityforaone-yeardiscountbondequalsA)theincreaseinpriceovertheyear,dividedbytheinitialprice.B)theincreaseinpriceovertheyear,dividedbythefacevalue.C)theincreas

23、einpriceovertheyear,dividedbytheinterestrate.D)noneoftheabove.Ifa$10,000facevaluediscountbondmaturinginoneyearissellingfor$8,000,thenitsyieldtomaturityisA)10percent.B)20percent.C)25percent.D)40percent.39)Ifa$10,000facevaluediscountbondmaturinginoneyearissellingfor$9,000,thenitsyieldtomaturityis9perc

24、ent.10percent.11percent.12percent.40)Ifa$10,000facevaluediscountbondmaturinginoneyearissellingfor$5,000,thenitsyieldtomaturityis5percent.10percent.50percent.100percent.Ifa$5,000facevaluediscountbondmaturinginoneyearissellingfor$5,000,thenitsyieldtomaturityisA)0percent.B)5percent.10percent.20percent.

25、42)TheFisherequationstatesthatthenominalinterestrateequalstherealinterestrateplustheexpectedrateofinflation.therealinterestrateequalsthenominalinterestratelesstheexpectedrateofinflation.thenominalinterestrateequalstherealinterestratelesstheexpectedrateofinflation.bothAandBoftheabovearetrue.bothAandC

26、oftheabovearetrue.Ifyouexpecttheinflationratetobe15percentnextyearandaone-yearbondhasayieldtomaturityof7percent,thentherealinterestrateonthisbondisA)7percent.B)22percent.C)-15percent.D)-8percent.E)noneoftheabove.Ifyouexpecttheinflationratetobe5percentnextyearandaone-yearbondhasayieldtomaturityof7per

27、cent,thentherealinterestrateonthisbondisA)-12percent.B)-2percent.C)2percent.D)12percent.ThenominalinterestrateminustheexpectedrateofinflationA)definestherealinterestrate.isabettermeasureoftheincentivestoborrowandlendthanisthenominalinterestrate.isamoreaccurateindicatorofthetightnessofcreditmarketcon

28、ditionsthanisthenominalinterestrate.alloftheabove.onlyAandBoftheabove.46)Thenominalinterestrateminustheexpectedrateofinflationdefinestherealinterestrate.isalessaccuratemeasureoftheincentivestoborrowandlendthanisthenominalinterestrate.isalessaccurateindicatorofthetightnessofcreditmarketconditionsthan

29、isthenominalinterestrate.definesthediscountrate.InwhichofthefollowingsituationswouldyouprefertobemakingaloanA)Theinterestrateis9percentandtheexpectedinflationrateis7percent.B)Theinterestrateis4percentandtheexpectedinflationrateis1percent.Theinterestrateis13percentandtheexpectedinflationrateis15perce

30、nt.Theinterestrateis25percentandtheexpectedinflationrateis50percent.48)InwhichofthefollowingsituationswouldyouprefertobeborrowingTheinterestrateis9percentandtheexpectedinflationrateis7percent.Theinterestrateis4percentandtheexpectedinflationrateis1percent.Theinterestrateis13percentandtheexpectedinfla

31、tionrateis15percent.Theinterestrateis25percentandtheexpectedinflationrateis50percent.49)Whatisthereturnona5percentcouponbondthatinitiallysellsfor$1,000andsellsfor$1,200oneyearlater5percent10percent-5percent25percentNoneoftheaboveWhatisthereturnona5percentcouponbondthatinitiallysellsfor$1,000andsells

32、for$900oneyearlaterA)5percentB)10percentC)-5percentD)-10percentE)NoneoftheaboveThereturnona5percentcouponbondthatinitiallysellsfor$1,000andsellsfor$1,100oneyearlateris5percent.10percent.14percent.15percent.Thereturnona10percentcouponbondthatinitiallysellsfor$1,000andsellsfor$900oneyearlateris-10perc

33、ent.-5percent.0percent.5percent.53)WhichofthefollowingaregenerallytrueofallbondsTheonlybondwhosereturnequalstheinitialyieldtomaturityisonewhosetimetomaturityisthesameastheholdingperiod.Ariseininterestratesisassociatedwithafallinbondprices,resultingincapitallossesonbondswhosetermtomaturitiesarelonger

34、thantheholdingperiod.Thelongerabondsmaturity,thegreateristhepricechangeassociatedwithagiveninterestratechange.Alloftheabovearetrue.OnlyAandBoftheabovearetrue.WhichofthefollowingaretrueconcerningthedistinctionbetweeninterestratesandreturnA)Therateofreturnonabondwillnotnecessarilyequaltheinterestrateo

35、nthatbond.B)Thereturncanbeexpressedasthesumofthecurrentyieldandtherateofcapitalgains.C)Therateofreturnwillbegreaterthantheinterestratewhenthepriceofthebondfallsbetweentimetandtimet+1.Alloftheabovearetrue.OnlyAandBoftheabovearetrue.Iftheinterestratesonallbondsrisefrom5to6percentoverthecourseoftheyear

36、,whichbondwouldyouprefertohavebeenholdingA)AbondwithoneyeartomaturityB)AbondwithfiveyearstomaturityAbondwithtenyearstomaturityAbondwithtwentyyearstomaturitySupposeyouareholdinga5percentcouponbondmaturinginoneyearwithayieldtomaturityof15percent.Iftheinterestrateonone-yearbondsrisesfrom15percentto20pe

37、rcentoverthecourseoftheyear,whatistheyearlyreturnonthebondyouareholdingA)5percentB)10percentC)15percentD)20percent(I)Pricesoflonger-maturitybondsrespondmoredramaticallytochangesininterestrates.(II)Pricesandreturnsforlong-termbondsarelessvolatilethanthoseforshort-termbonds.A)(I)istrue,(II)false.B)(I)

38、isfalse,(II)true.C)Botharetrue.D)Botharefalse.(I)Pricesoflonger-maturitybondsrespondlessdramaticallytochangesininterestrates.(II)Pricesandreturnsforlong-termbondsarelessvolatilethanthoseforshorter-termbonds.A)(I)istrue,(II)false.B)(I)isfalse,(II)true.C)Botharetrue.D)Botharefalse.Theriskinessofanasse

39、tsreturnthatresultsfrominterestratechangesiscalledinterest-raterisk.coupon-raterisk.reinvestmentrisk.yield-to-maturityrisk.Ifaninvestorsholdingperiodislongerthanthetermtomaturityofabond,heorsheisexposedtoA)interest-raterisk.B)reinvestmentrisk.C)bond-marketrisk.D)yield-to-maturityrisk.Reinvestmentris

40、kistheriskthatabondsvaluemayfallinthefuture.abondsfuturecouponpaymentsmayhavetobeinvestedataratelowerthanthebondsyieldtomaturity.aninvestorsholdingperiodwillbeshortandequalinlengthtothematurityofthebondsheorsheholds.abondsissuermayfailtomakethefuturecouponpaymentsandaninvestorwillhavenocashtoreinves

41、t.(I)Theaveragelifetimeofadebtsecuritysstreamofpaymentsiscalledduration.(II)Thedurationofaportfolioistheweightedaverageofthedurationsoftheindividualsecurities,withtheweightsreflectingtheproportionoftheportfolioinvestedineach.A)(I)istrue,(II)false.B)(I)isfalse,(II)true.C)Botharetrue.D)Botharefalse.Thedurationofaten-year,10percentcouponbondwhentheinterestrateis10percentisyears.Whathappenstothepriceoft