1. The present value of a security is A) directly related to the discount rate.
ID: 1166778 • Letter: 1
Question
1. The present value of a security is
A) directly related to the discount rate. B) inversely related to the time until maturity.
C) inversely related to the principal amount. D) is not related to the discount rate.
2. Which of the following options would you choose to receive if the rate of discount is 7.5%?
A) $1200 in one year B) $1500 in four years C) $1920 in eight years D) $2100 in ten years
3. A higher market interest rate:
A) increases the future value of current money. B) increases the present value of future money.
C) maintains the same present value of future money. D) decreases the future value of future money.
4. If the current price of a bond is less than its face value
A) the coupon rate must be equal to the current yield.
B) the coupon rate must be less than the current yield.
C) the yield to maturity must be less than the coupon rate.
D) a lender will suffer a capital loss by holding the bond until maturity.
5. If a lender is certain that market interest rates will fall in the near future, which of the following will she be most
likely to purchase?
A) A six-month Treasury bill currently yielding 1.45%
B) A five-year Treasury note currently yielding 2.25%
C) A twenty-year Treasury bond currently yielding 3.65%
D) A twenty-year AAA rated corporate bond currently yielding 3.65%
6. Which of the following bonds would you prefer to be selling? Assume n = 30 for all bond maturities.
A) A $10,000 face-value security with a 6% coupon rate selling for $9,000.
B) A $10,000 face-value security with a 6% coupon rate selling for $10,000.
C) A $10,000 face-value security with a 6% coupon rate selling for $11,000.
D) A $10,000 face-value security with a 7% coupon rate selling for $9,500.
E) A $10,000 face-value security with a 7% coupon rate selling for $11,500.
7. Suppose you are holding a 5% coupon bond maturing in 15 years with a yield to maturity of 6.5%. If market
interest rates on 15-year instruments fall from 6.5% to 5.2%, what is the expected yearly yield on the
bond you are currently holding?
A) 5% B) 5.2% C) 5.85% D) 6.5 % E) impossible to determine with given information
8. The issuer of a bond is a
A) personal investor. B) borrower. C) lender. D) corporation.
9. Which of the following would NOT cause a shift in the willingness to lend curves?
A) A recession. B) A decrease in marginal income tax rates.
C) A change in the current market interest rate. D) Our unfortunate involvement in another world war.
10. If the federal government were to offer larger tax breaks on the purchase of new equipment for businesses, all
other factors constant, we would expect to see:
A) The bond demand curve shift right. B) The bond supply curve shift left.
C) The bond supply curve shift right. D) The bond demand curve shift left.
11 Everything else held constant, if the expected return on Verizon stock rises from 7 to 8 percent and the yield to
maturity on 20-year U.S. Treasury bonds rises from 2.55 to 3.45 percent, then the expected return of holding
Verizon stock ________ relative to U.S. Treasury bonds and the demand for U.S. Treasury bonds ________.
A) rises; rises B) rises; falls C) falls; rises D) falls; falls
12. The supply of loanable funds curve would be shifted to the left by
A) a relative decrease in expected returns on other assets.
B) a decrease in the U.S. government deficit.
C) an increase in expected inflation.
D) an increase in the liquidity of bonds relative to other assets.
13. Which of the following could be expected to cause the equilibrium interest rate to rise?
A) a decrease in government deficits. B) a decrease in the corporate tax on profits.
C) a decrease in subsidies for corporate investment. D) a decrease in expected inflation.
14. If asset one is a AAA rated U.S. Treasury bond yielding 3.5% and asset two is a BBB rated corporate bond with the
same time to maturity as asset one and is yielding of 6.5%, individual investors would
A) prefer asset one.
B) prefer asset two.
C) be indifferent between the two assets.
D) require more information before choosing asset one or asset two.
15. Interest rates typically follow a __________ pattern relative to economic activity and the default premium
typically follows a ___________ pattern relative to economic activity.
A) procyclical; procyclical B) procyclical; countercyclical
C) countercyclical; procyclical D) countercyclical; countercyclical
16. If there is an excess demand for money
A) individuals sell bonds, causing the interest rate to rise. B) individuals sell bonds, causing the interest rate to fall.
C) individuals buy bonds, causing interest rates to fall. D) individuals buy bonds, causing interest rates to rise.
17. According to the preferred habitat theory of the term structure, a slightly upward sloping yield curve indicates that short-
term interest rates are expected to
A) rise slightly in the future. B) remain unchanged in the future.
C) decline moderately in the future. D) decline sharply in the future.
18. If the expected path of 1-year interest rates over the next five years is 1 percent, 2 percent, 3 percent, 4 percent,
and 5 percent, the preferred habitat theory predicts that the bond with the highest interest rate today is the one
with a maturity of
A) one year. B) two years. C) four years. D) five years. E) unable to be determined with the information given.
19. Which of the following 20-year bonds normally has the lowest yield to maturity?
A) Corporate Baa bonds B) U.S. Treasury bonds C) Corporate Aaa bonds D) Municipal bonds
20. Which theory of term structure predicts that long-term yields will exceed short-term yields on average?
A) Pure expectations B) Segmented markets C) Liquidity premium D) None of the previous.
Explanation / Answer
1.
Right answer is :
B) inversely related to the time until maturity.
More the time, discount factor would reduce amount of present value.
2)
Right answer is :
B) $1500 in four years
Present value is maximum when 1500 are discounted for four years.
3.
Right answer is :
A) increases the future value of current money.
Interest rate increases income on investment.
.
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