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ECON 310 C01 Money & Banking 10 July, 2001
Summer 2001
Quiz 2 Name
Multiple Choice
For each question, circle the answer which best completes or best answers the question (2 pts each).
- A loan that requires the borrower to make the same payment every period until the maturity date is called a
a) simple loan
b) fixed-payment loan.
c) discount loan.
d) a same-payment loan.
- If a $5,000 coupon bond has a coupon rate of 13%, then the coupon payment every year is
a) $650.
b) $1,300.
c) $130.
d) $13.
- With an interest rate of 5%, the present value of $100 next year is approximately
a) $100.
b) $105.
c) $95.
d) $90.
- Which of the following $1,000 face-value securities has the higest yield to maturity?
a) A 5% coupon bond with a price of $600.
b) A 5% coupon bond with a price of $800.
c) A 5% coupon bond with a price of $1,000.
d) A 5% coupon bond with a price of $1,200.
e) A 5% coupon bond with a price of $1,500.
- The current yield on a $6,000, 10% coupon bond selling for $5000 is
a) 5%
b) 10%
c) 12%
d) 15%
- What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1200 next year?
a) 5%
b) 10%
c) -5%
d) 25%
- If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding?
a) A bond with one year to maturity.
b) A bond with five years to maturity.
c) A bond with ten years to maturity.
d) A bond with thirty years to maturity.
- In which of the following situations would you prefer to be making a loan?
a) The interest rate is 9% and the expected inflation rate is 7%.
b) The interest rate is 4% and the expected inflation rate is 1%.
c) The interest rate is 13% and the expected inflation rate is 15%.
d) The interest rate is 25% and the expected inflation rate is 50%.
- The theory of asset demand provides a framework for deciding what factors cause the demand curve for bonds to shift. These factors include:
a) wealth of investors.
b) liquidity of bonds relative to alternative assets.
c) expected returns on bonds relative to alternative assets. d) risk of bonds relative to alternative assets.
e) all of the above.
- Given your knowledge of the risk structure of interest rates, which one of the following long-term bonds
has the lowest interest rate.
a) Corporate Baa bonds
b) Corporate Aaa bonds
c) U.S. Treasury bonds
d) Municipal bonds
- If income tax rates rise, then
a) the prices of municipal bonds would fall.
b) the prices of Treasury bonds would rise.
c) the interest rate on Treasury bonds would rise.
d) the interest rate on municipal bonds would rise.
Bonds
P i @ @ @ @ @ @ @ @ @ @ @ @ @ @ D @ @ @ @ @ @ @ @ @ @ @ @ @
D′
S
S′
P i
P ′^ i′
(a) U.S. Treasury market
Bonds
P i @ @ @ @ @ @ @ @ @ @ @ @ @ @ D @ @ @ @ @ @ @ @ @ @ @ @ @
D′
S
S′
P i
P ′^ i′
(b) Corporate bond market
Figure 1: Effects of a business cycle expansion on the bonds.
Bonds
P i @ @ @ @ @ @ @ @ @ @ @ @ @ @ D @ @ @ @ @ @ @ @ @ @ @ @
D′
S
P i
P ′^ i′
(a) U.S. Treasury market
Bonds
P i @ @ @ @ @ @ @ @ @ @ @ @ @ @ D
D′
S
P i
P ′^ i′
(b) Corporate bond market
Figure 2: Effects of weak corporate results on bond markets.
