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Economics of Money, Banking, and Financial Markets, 11e, Global Edition
(Mishkin)
Chapter 4
The Meaning of Interest Rates
4.1
Measuring Interest Rates
1) The concept of ________ is based on the common-sense notion that a dollar paid to you in the
future is less valuable to you than a dollar today.
A) present value
B) future value
C) interest
D) deflation
Answer:
A
AACSB:
Application of Knowledge
2) The present value of an expected future payment ________ as the interest rate increases.
A) falls
B) rises
C) is constant
D) is unaffected
Answer:
A
AACSB:
Reflective Thinking
3) An increase in the time to the promised future payment ________ the present value of the
payment.
A) decreases
B) increases
C) has no effect on
D) is irrelevant to
Answer:
A
AACSB:
Reflective Thinking
4) With an interest rate of 6 percent, the present value of $$100 next year is approximately
A) $$106.
B) $$100.
C) $$94.
D) $$92.
Answer:
C
AACSB:
Analytical Thinking
5) What is the present value of $$500.00 to be paid in two years if the interest rate is 5 percent?
A) $$453.51
B) $$500.00
C) $$476.25
D) $$550.00
Answer:
A
AACSB:
Analytical Thinking
6) If a security pays $$55 in one year and $$133 in three years, its present value is $$150 if the
interest rate is
A) 5 percent.
B) 10 percent.
C) 12.5 percent.
D) 15 percent.
Answer:
B
AACSB:
Analytical Thinking
7) To claim that a lottery winner who is to receive $$1 million per year for twenty years has won
$$20 million ignores the process of
A) face value.
B) par value.
C) deflation.
D) discounting the future.
Answer:
D
AACSB:
Analytical Thinking
8) A credit market instrument that provides the borrower with an amount of funds that must be
repaid at the maturity date along with an interest payment is known as a
A) simple loan.
B) fixed- payment loan.
C) coupon bond.
D) discount bond.
Answer:
A
AACSB:
Application of Knowledge
9) A credit market instrument that requires the borrower to make the same payment every period
until the maturity date is known as a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
Answer:
B
AACSB:
Application of Knowledge
10) Which of the following are TRUE of fixed payment loans?
A) The borrower repays both the principal and interest at the maturity date.
B) Installment loans and mortgages are frequently of the fixed payment type.
C) The borrower pays interest periodically and the principal at the maturity date.
D) Commercial loans to businesses are often of this type.
Answer:
B
AACSB:
Reflective Thinking
11) A fully amortized loan is another name for
A) a simple loan.
B) a fixed-payment loan.
C) a commercial loan.
D) an unsecured loan.
Answer:
B
AACSB:
Application of Knowledge
12) A credit market instrument that pays the owner a fixed coupon payment every year until the
maturity date and then repays the face value is called a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
Answer:
C
AACSB:
Application of Knowledge
13) A ________ pays the owner a fixed coupon payment every year until the maturity date, when
the ________ value is repaid.
A) coupon bond; discount
B) discount bond; discount
C) coupon bond; face
D) discount bond; face
Answer:
C
AACSB:
Analytical Thinking
14) The ________ is the final amount that will be paid to the holder of a coupon bond.
A) discount value
B) coupon value
C) face value
D) present value
Answer:
C
AACSB:
Application of Knowledge
15) When talking about a coupon bond, face value and ________ mean the same thing.
A) par value
B) coupon value
C) amortized value
D) discount value
Answer:
A
AACSB:
Application of Knowledge
16) The dollar amount of the yearly coupon payment expressed as a percentage of the face value
of the bond is called the bond's
A) coupon rate.
B) maturity rate.
C) face value rate.
D) payment rate.
Answer:
A
AACSB:
Application of Knowledge
17) The ________ is calculated by multiplying the coupon rate times the par value of the bond.
A) present value
B) face value
C) coupon payment
D) maturity payment
Answer:
C
AACSB:
Analytical Thinking
18) If a $$1000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon
payment every year is
A) $$37.50.
B) $$3.75.
C) $$375.00.
D) $$13.75
Answer:
A
AACSB:
Analytical Thinking
19) If a $$5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every
year is
A) $$650.
B) $$1,300.
C) $$130.
D) $$13.
Answer:
A
AACSB:
Analytical Thinking
20) An $$8,000 coupon bond with a $$400 coupon payment every year has a coupon rate of
A) 5 percent.
B) 8 percent.
C) 10 percent.
D) 40 percent.
Answer:
A
AACSB:
Analytical Thinking
21) A $$1000 face value coupon bond with a $$60 coupon payment every year has a coupon rate of
A) .6 percent.
B) 5 percent.
C) 6 percent.
D) 10 percent.
Answer:
C
AACSB:
Analytical Thinking
22) All of the following are examples of coupon bonds EXCEPT
A) corporate bonds.
B) U.S. Treasury bills.
C) U.S. Treasury notes.
D) U.S. Treasury bonds.
Answer:
B
AACSB:
Analytical Thinking
23) A bond that is bought at a price below its face value and the face value is repaid at a maturity
date is called a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
Answer:
D
AACSB:
Application of Knowledge
24) A ________ is bought at a price below its face value, and the ________ value is repaid at the
maturity date.
A) coupon bond; discount
B) discount bond; discount
C) coupon bond; face
D) discount bond; face
Answer:
D
AACSB:
Analytical Thinking
25) A discount bond
A) pays the bondholder a fixed amount every period and the face value at maturity.
B) pays the bondholder the face value at maturity.
C) pays all interest and the face value at maturity.
D) pays the face value at maturity plus any capital gain.
Answer:
B
AACSB:
Reflective Thinking
26) Examples of discount bonds include
A) U.S. Treasury bills.
B) corporate bonds.
C) U.S. Treasury notes.
D) municipal bonds.
Answer:
A
AACSB:
Analytical Thinking
27) Which of the following are TRUE for discount bonds?
A) A discount bond is bought at par.
B) The purchaser receives the face value of the bond at the maturity date.
C) U.S. Treasury bonds and notes are examples of discount bonds.
D) The purchaser receives the par value at maturity plus any capital gains.
Answer:
B
AACSB:
Reflective Thinking
28) The interest rate that equates the present value of payments received from a debt instrument
with its value today is the
A) simple interest rate.
B) current yield.
C) yield to maturity.
D) real interest rate.
Answer:
C
AACSB:
Application of Knowledge
29) Economists consider the ________ to be the most accurate measure of interest rates.
A) simple interest rate.
B) current yield.
C) yield to maturity.
D) real interest rate.
Answer:
C
AACSB:
Reflective Thinking
30) For simple loans, the simple interest rate is ________ the yield to maturity.
A) greater than
B) less than
C) equal to
D) not comparable to
Answer:
C
AACSB:
Application of Knowledge
31) If the amount payable in two years is $$2420 for a simple loan at 10 percent interest, the loan
amount is
A) $$1000.
B) $$1210.
C) $$2000.
D) $$2200.
Answer:
C
AACSB:
Analytical Thinking
32) For a 3-year simple loan of $$10,000 at 10 percent, the amount to be repaid is
A) $$10,030.
B) $$10,300.
C) $$13,000.
D) $$13,310.
Answer:
D
AACSB:
Analytical Thinking
33) If $$22,050 is the amount payable in two years for a $$20,000 simple loan made today, the
interest rate is
A) 5 percent.
B) 10 percent.
C) 22 percent.
D) 25 percent.
Answer:
A
AACSB:
Analytical Thinking
34) If a security pays $$110 next year and $$121 the year after that, what is its yield to maturity if it
sells for $$200?
A) 9 percent
B) 10 percent
C) 11 percent
D) 12 percent
Answer:
B
AACSB:
Analytical Thinking
35) The present value of a fixed-payment loan is calculated as the ________ of the present value
of all cash flow payments.
A) sum
B) difference
C) multiple
D) log
Answer:
A
AACSB:
Analytical Thinking
36) Which of the following are TRUE for a coupon bond?
A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.
B) The price of a coupon bond and the yield to maturity are positively related.
C) The yield to maturity is greater than the coupon rate when the bond price is above the par
value.
D) The yield is less than the coupon rate when the bond price is below the par value.
Answer:
A
AACSB:
Reflective Thinking
37) The ________ of a coupon bond and the yield to maturity are inversely related.
A) price
B) par value
C) maturity date
D) term
Answer:
A
AACSB:
Reflective Thinking
38) The price of a coupon bond and the yield to maturity are ________ related; that is, as the
yield to maturity ________, the price of the bond ________.
A) positively; rises; rises
B) negatively; falls; falls
C) positively; rises; falls
D) negatively; rises; falls
Answer:
D
AACSB:
Reflective Thinking
39) The yield to maturity is ________ than the ________ rate when the bond price is ________
its face value.
A) greater; coupon; above
B) greater; coupon; below
C) greater; perpetuity; above
D) less; perpetuity; below
Answer:
B
AACSB:
Reflective Thinking
40) The ________ is below the coupon rate when the bond price is ________ its par value.
A) yield to maturity; above
B) yield to maturity; below
C) discount rate; above
D) discount rate; below
Answer:
A
AACSB:
Reflective Thinking
41) A $$10,000 8 percent coupon bond that sells for $$10,000 has a yield to maturity of
A) 8 percent.
B) 10 percent.
C) 12 percent.
D) 14 percent.
Answer:
A
AACSB:
Analytical Thinking
42) Which of the following $$1,000 face-value securities has the highest yield to maturity?
A) a 5 percent coupon bond selling for $$1,000
B) a 10 percent coupon bond selling for $$1,000
C) a 12 percent coupon bond selling for $$1,000
D) a 12 percent coupon bond selling for $$1,100
Answer:
C
AACSB:
Analytical Thinking
43) Which of the following $$5,000 face-value securities has the highest yield to maturity?
A) a 6 percent coupon bond selling for $$5,000
B) a 6 percent coupon bond selling for $$5,500
C) a 10 percent coupon bond selling for $$5,000
D) a 12 percent coupon bond selling for $$4,500
Answer:
D
AACSB:
Analytical Thinking
44) Which of the following $$1,000 face-value securities has the highest yield to maturity?
A) a 5 percent coupon bond with a price of $$600
B) a 5 percent coupon bond with a price of $$800
C) a 5 percent coupon bond with a price of $$1,000
D) a 5 percent coupon bond with a price of $$1,200
Answer:
A
AACSB:
Analytical Thinking
45) Which of the following $$1,000 face-value securities has the lowest yield to maturity?
A) a 5 percent coupon bond selling for $$1,000
B) a 10 percent coupon bond selling for $$1,000
C) a 15 percent coupon bond selling for $$1,000
D) a 15 percent coupon bond selling for $$900
Answer:
A
AACSB:
Analytical Thinking
46) Which of the following bonds would you prefer to be buying?
A) a $$10,000 face-value security with a 10 percent coupon selling for $$9,000
B) a $$10,000 face-value security with a 7 percent coupon selling for $$10,000
C) a $$10,000 face-value security with a 9 percent coupon selling for $$10,000
D) a $$10,000 face- value security with a 10 percent coupon selling for $$10,000
Answer:
A
AACSB:
Analytical Thinking
47) A coupon bond that has no maturity date and no repayment of principal is called a
A) consol.
B) cabinet.
C) Treasury bill.
D) Treasury note.
Answer:
A
AACSB:
Application of Knowledge
48) The price of a consol equals the coupon payment
A) times the interest rate.
B) plus the interest rate.
C) minus the interest rate.
D) divided by the interest rate.
Answer:
D
AACSB:
Analytical Thinking
49) The interest rate on a consol equals the
A) price times the coupon payment.
B) price divided by the coupon payment.
C) coupon payment plus the price.
D) coupon payment divided by the price.
Answer:
D
AACSB:
Analytical Thinking
50) A consol paying $$20 annually when the interest rate is 5 percent has a price of
A) $$100.
B) $$200.
C) $$400.
D) $$800.
Answer:
C
AACSB:
Analytical Thinking
51) If a perpetuity has a price of $$500 and an annual interest payment of $$25, the interest rate is
A) 2.5 percent.
B) 5 percent.
C) 7.5 percent.
D) 10 percent.
Answer:
B
AACSB:
Analytical Thinking
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