Question 1

A student receives a five-year loan to pay for a $2,000 used car. The lender and the student agree to an 8% interest rate on a fixed-rate loan. Expected inflation was estimated to equal 2.5%, but unexpectedly decreases to 2%. Which of the following is true?

Accepted Answer

A)   The real interest rate decreased.
B)   The student is made worse off because her real cost of borrowing is higher.
C)   The lender is made worst off because his real return on the car loan is lower.
D)   Both the student and the lender benefit.E) A) and B)
F) B) and D)

Question 2

An increase in the nation's wealth, all other factors constant, would cause:

Accepted Answer

A)   bond prices to fall and yields to increase.
B)   bond prices and yields to increase.
C)   bond prices to rise and yields to decrease.
D)   the bond supply curve to shift right.E) C) and D)
F) B) and D)

Question 3

How can a bond mutual fund report a return of over 13% when the coupon rate of the bonds they are holding are just 7% and interest rates are falling?

Accepted Answer

The bond mutual fund is advertising its ...

Question 4

Many people are worried that, with the growing number of people that will retire in the US over the next 40 years, the federal government will need to borrow large amounts of money to finance the Social Security System. If we assume that Social Security taxes and the current eligibility age remain constant, explain the likely impact this will have on bond markets.

Accepted Answer

If the Social Security Administration (S...

Question 5

The price of a coupon bond can best be described as the:

Accepted Answer

A)   present value of the face value.
B)   future value of the coupon payments.
C)   future value of the coupon payments and the face value.
D)   present value of the face value plus the present value of the coupon payments.E) B) and C)
F) A) and D)

Question 6

As general business conditions deteriorate, all other factors constant:

Accepted Answer

A)   the bond supply curve will shift left.
B)   there will be a movement down the existing bond supply curve.
C)   the bond demand curve shifts left.
D)   the price of bonds will decrease.E) B) and C)
F) None of the above

Question 7

The bond supply curve slopes upward because:

Accepted Answer

A)   as bond prices rise people holding bonds are more tempted to hold them.
B)   as bond prices rise yields increase.
C)   for companies seeking financing, the higher the price of bonds the more attractive it is to sell bonds.
D)   as bond prices rise yields decrease.E) A) and D)
F) B) and C)

Question 8

If a consol is offering an annual coupon of $50 and the annual interest rate is 6%, the price of the consol is:

Accepted Answer

A)   $47.17
B)   $813.00
C)   $833.33
D)   $8333.33E) B) and C)
F) None of the above

Question 9

Suppose there is a decrease in the price at which a bondholder sells her bond. In this case, the holding period return will:

Accepted Answer

A)   increase, since yields and prices are inversely related.
B)   decrease, since this lowers the capital gain.
C)   be negative.
D)   equal the coupon rate.E) B) and D)
F) C) and D)

Question 10

A $1,000 face value bond, with an annual coupon of $40, one year to maturity and a purchase price of $980 has a:

Accepted Answer

A)   current yield that equals 4.00%.
B)   coupon rate that equals 4.08%.
C)   current yield that equals 4.08% and a yield to maturity that equals 6.12%.
D)   A current yield that equals 4.08% and a yield to maturity that equals 4.0%.E) All of the above
F) A) and B)

Question 11

If the U.S. government's borrowing needs increase, all other factors constant the:

Accepted Answer

A)   price of bonds will increase.
B)   supply of bonds will increase.
C)   demand for bonds will decrease.
D)   supply of bonds and the demand for bonds will both increase.E) A) and B)
F) A) and C)

Question 12

If interest rates are expected to fall, bond prices will:

Accepted Answer

A)   fall as the demand for bonds decreases.
B)   remain constant until interest rates actually change.
C)   fall as people fear capital losses in the future.
D)   increase due to the demand for bonds increasing.E) None of the above
F) B) and D)

Question 13

The impact of a decrease in expected inflation in the bond market will have a relatively large effect on the prices of bonds prices because the bond demand curve:

Accepted Answer

A)   will shift right as will the bond supply curve.
B)   will shift right but the bond supply curve shifts left.
C)   and supply curves will shift left.
D)   will shift left as the bond supply curve shifts right.E) B) and C)
F) A) and B)

Question 14

The market for bonds is initially described by the supply of bonds - S₀, and the demand for bonds - D₀, with the equilibrium price and quantity being P₀ and Q₀. Suppose that the expected return on bonds falls relative to other assets. In the bond market this will result in:

Accepted Answer

A)   Bond supply curve to shift to S₁
B)   Bond demand curve to shift to D₁
C)   Bond supply curve to shift to S₂
D)   Bond demand curve to shift to D₂E) A) and D)
F) A) and C)

Question 15

Notice the following model of a bond market. In each situation given, explain what happens to the bond price and yield and why.
  
a) Expected inflation increases
b) The return on bonds rises relative to other assets c) The federal government deficit increases

Accepted Answer

a) If expected inflation increases the d...

Question 16

As general business conditions improve, we would witness the following in the bond market:

Accepted Answer

A)   the bond demand curve shifting left.
B)   the bond supply curve shifting left.
C)   bond prices decreasing.
D)   bond prices increasing.E) B) and D)
F) C) and D)

Question 17

Use our model of the bond market (supply and demand) to explain what happens if the U.S. economy continues to grow at robust rates.

Accepted Answer

Growth in the economy should result in g...

Question 18

In the late 1990s, the U.S. government ran a surplus for the first time in decades. It
instituted a buyback program, whereby the Treasury bought outstanding government bonds. How would this program affect the bond market price, yield, and quantity of bonds? How might it affect the liquidity of government bonds?

Accepted Answer

The buyback of government bond...

Question 19

The price (P)  of a consol offering an annual coupon payment (C)  is best expressed by:

Accepted Answer

A)   F/C
B)   C(1 + i) 
C)   C/(1+ i) 
D)   C/iE) A) and D)
F) A) and C)

Question 20

The holding period return on a bond:

Accepted Answer

A)   can never be more than the yield to maturity.
B)   will equal the yield to maturity if the bond is purchased for face value and sold at a lower price.
C)   will be less than the yield to maturity if the bond is sold for more than face value.
D)   will be less than the yield to maturity if the bond is sold for less than face value.E) A) and D)
F) B) and C)

Exam 6: Bonds, Bond Prices, and the Determination of Interest Rates

As general business conditions improve, we would witness the following in the bond market:

Correct Answer
verified

The price (P) of a consol offering an annual coupon payment (C) is best expressed by:

Correct Answer
verified

Use our model of the bond market (supply and demand) to explain what happens if the U.S. economy continues to grow at robust rates.

Correct Answer
verified
Growth in the economy should result in g...
View Answer

A student receives a five-year loan to pay for a $2,000 used car. The lender and the student agree to an 8% interest rate on a fixed-rate loan. Expected inflation was estimated to equal 2.5%, but unexpectedly decreases to 2%. Which of the following is true?

Correct Answer
verified

An increase in the nation's wealth, all other factors constant, would cause:

Correct Answer
verified

A $1,000 face value bond, with an annual coupon of $40, one year to maturity and a purchase price of $980 has a:

Correct Answer
verified

The market for bonds is initially described by the supply of bonds - S₀, and the demand for bonds - D₀, with the equilibrium price and quantity being P₀ and Q₀. Suppose that the expected return on bonds falls relative to other assets. In the bond market this will result in:

Correct Answer
verified

If interest rates are expected to fall, bond prices will:

Correct Answer
verified

Suppose there is a decrease in the price at which a bondholder sells her bond. In this case, the holding period return will:

Correct Answer
verified

The holding period return on a bond:

Correct Answer
verified

Correct Answer
verified
If the Social Security Administration (S...
View Answer

Correct Answer
verified
The buyback of government bond...
View Answer

The impact of a decrease in expected inflation in the bond market will have a relatively large effect on the prices of bonds prices because the bond demand curve:

Correct Answer
verified

The bond supply curve slopes upward because:

Correct Answer
verified

As general business conditions deteriorate, all other factors constant:

Correct Answer
verified

If a consol is offering an annual coupon of $50 and the annual interest rate is 6%, the price of the consol is:

Correct Answer
verified

Notice the following model of a bond market. In each situation given, explain what happens to the bond price and yield and why. a) Expected inflation increases b) The return on bonds rises relative to other assets c) The federal government deficit increases

Correct Answer
verified
a) If expected inflation increases the d...
View Answer

The price of a coupon bond can best be described as the:

Correct Answer
verified

If the U.S. government's borrowing needs increase, all other factors constant the:

Correct Answer
verified

How can a bond mutual fund report a return of over 13% when the coupon rate of the bonds they are holding are just 7% and interest rates are falling?

Correct Answer
verified
The bond mutual fund is advertising its ...
View Answer

Exam 6: Bonds, Bond Prices, and the Determination of Interest Rates

As general business conditions improve, we would witness the following in the bond market:

Correct AnswerverifiedShow Answer

The price (P) of a consol offering an annual coupon payment (C) is best expressed by:

Correct AnswerverifiedShow Answer

Use our model of the bond market (supply and demand) to explain what happens if the U.S. economy continues to grow at robust rates.

Correct AnswerverifiedGrowth in the economy should result in g...View AnswerShow Answer

A student receives a five-year loan to pay for a $2,000 used car. The lender and the student agree to an 8% interest rate on a fixed-rate loan. Expected inflation was estimated to equal 2.5%, but unexpectedly decreases to 2%. Which of the following is true?

Correct AnswerverifiedShow Answer

An increase in the nation's wealth, all other factors constant, would cause:

Correct AnswerverifiedShow Answer

A $1,000 face value bond, with an annual coupon of $40, one year to maturity and a purchase price of $980 has a:

Correct AnswerverifiedShow Answer

The market for bonds is initially described by the supply of bonds - S₀, and the demand for bonds - D₀, with the equilibrium price and quantity being P₀ and Q₀. Suppose that the expected return on bonds falls relative to other assets. In the bond market this will result in:

Correct AnswerverifiedShow Answer

If interest rates are expected to fall, bond prices will:

Correct AnswerverifiedShow Answer

Suppose there is a decrease in the price at which a bondholder sells her bond. In this case, the holding period return will:

Correct AnswerverifiedShow Answer

The holding period return on a bond:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedIf the Social Security Administration (S...View AnswerShow Answer

Correct AnswerverifiedThe buyback of government bond...View AnswerShow Answer

The impact of a decrease in expected inflation in the bond market will have a relatively large effect on the prices of bonds prices because the bond demand curve:

Correct AnswerverifiedShow Answer

The bond supply curve slopes upward because:

Correct AnswerverifiedShow Answer

As general business conditions deteriorate, all other factors constant:

Correct AnswerverifiedShow Answer

If a consol is offering an annual coupon of $50 and the annual interest rate is 6%, the price of the consol is:

Correct AnswerverifiedShow Answer

Notice the following model of a bond market. In each situation given, explain what happens to the bond price and yield and why. a) Expected inflation increases b) The return on bonds rises relative to other assets c) The federal government deficit increases

Correct Answerverifieda) If expected inflation increases the d...View AnswerShow Answer

The price of a coupon bond can best be described as the:

Correct AnswerverifiedShow Answer

If the U.S. government's borrowing needs increase, all other factors constant the:

Correct AnswerverifiedShow Answer

How can a bond mutual fund report a return of over 13% when the coupon rate of the bonds they are holding are just 7% and interest rates are falling?

Correct AnswerverifiedThe bond mutual fund is advertising its ...View AnswerShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Growth in the economy should result in g...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
If the Social Security Administration (S...
View Answer

Correct Answer
verified
The buyback of government bond...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
a) If expected inflation increases the d...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The bond mutual fund is advertising its ...
View Answer