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Chapter4
UnderstandingInterestRates
4.1 MeasuringInterestRates
1) Theconceptof________isbasedonthecommon -sensenotionthatadollarpaidtoyouinthe
futureislessvaluabletoyouthanadollartoday.
A) presentvalue
B) futurevalue
C) interest
D) deflation
Answer: A
QuesStatus:PreviousEdition
2) Withaninterestrateof6percent,thepresentvalueof$100nextyearisapproximately
A) $106.
B) $100.
C) $94.
D) $92.
Answer: C
3) Thepresentvalueofanexpectedfuturepayment________astheinterestrateincreases.
A) falls
B) rises
C) isconstant
D) isunaffected
Answer: A
QuesStatus:New
4) Ifasecuritypays$55inoneyearand$133inthreeyears,itspresentvalueis$150iftheinterest
rateis
A) 5percent.
B) 10percent.
C) 12.5percent.
D) 15percent.
Answer: B
QuesStatus:Revised
Chapter4 UnderstandingInterestRates75
5) Anincreaseinthetimetothepromisedfuturepayment________thepresentvalueofthe
payment.
A) decreases
B) increases
C) hasnoeffecton
D) isirrelevantto
Answer: A
QuesStatus:New
6) Toclaimthatalotterywinnerwhoistoreceive$1millionperyearfortwentyyearshaswon
$20millionignorestheconceptof
A) facevalue.
B) parvalue.
C) deflation.
D) discountingthefuture.
Answer: D
QuesStatus:Revised
7) Theinterestratethatequatesthepresentvalueofpaymentsreceivedfromadebtinstrument
withitsvaluetodayisthe
A) simpleinterestrate.
B) currentyield.
C) yieldtomaturity.
D) realinterestrate.
Answer: C
QuesStatus:Revised
8) Economistsconsiderthe________tobethemostaccuratemeasureofinterestrates.
A) simpleinterestrate.
B) currentyield.
C) yieldtomaturity.
D) realinterestrate.
Answer: C
QuesStatus:Revised
76MishkinEconomicsofMoney,Banking,andFinancialMarkets,EighthEdition
9) Ifasecuritypays$110nextyearand$121theyearafterthat,whatisitsyieldtomaturityifit
sellsfor$200?
A) 9percent
B) 10percent
C) 11percent
D) 12percent
Answer: B
10) Acreditmarketinstrumentthatprovidestheborrowerwithanamountoffundsthatmustbe
repaidatthematuritydatealongwithaninterestpaymentisknownasa
A) simpleloan.
B) fixed-paymentloan.
C) couponbond.
D) discountbond.
Answer: A
11) Forsimpleloans,thesimpleinterestrateis________theyieldtomaturity.
A) greaterthan
B) lessthan
C) equalto
D) notcomparableto
Answer: C
12) Iftheamountpayableintwoyearsis$2420forasimpleloanat10percentinterest,theloan
amountis
A) $1000.
B) $1210.
C) $2000.
D) $2200.
Answer: C
QuesStatus:Revised
13) Fora3-yearsimpleloanof$10,000at10percent,theamounttoberepaidis
A) $10,030.
B) $10,300.
C) $13,000.
D) $13,310.
Answer: D
QuesStatus:Revised
14) If$22,050istheamountpayableintwoyearsfora$20,000simpleloanmadetoday,the
interestrateis
A) 5percent.
B) 10percent.
C) 22percent.
D) 25percent.
Answer: A
QuesStatus:Revised
15) Acreditmarketinstrumentthatrequirestheborrowertomakethesamepaymentevery
perioduntilthematuritydateisknownasa
A) simpleloan.
C) couponbond.
D) discountbond.
Answer: B
16) Whichofthefollowingaretrueoffixedpaymentloans?
A) Theborrowerrepaysboththeprincipalandinterestatthematuritydate.
B) Installmentloansandmortgagesarefrequentlyofthefixedpaymenttype.
C) Theborrowerpaysinterestperiodicallyandtheprincipalatthematuritydate.
D) Commercialloanstobusinessesareoftenofthistype.
Answer: B
QuesStatus:Revised
17) Afullyamortizedloanisanothernamefor
A) asimpleloan.
B) afixed-paymentloan.
C) acommercialloan.
D) anunsecuredloan.
Answer: B
18) Acreditmarketinstrumentthatpaystheownerafixedcouponpaymenteveryyearuntilthe
maturitydateandthenrepaysthefacevalueiscalleda
A) simpleloan.
C) couponbond.
D) discountbond.
Answer: C
19) A________paystheownerafixedcouponpaymenteveryyearuntilthematuritydate,when
the________valueisrepaid.
A) couponbond;discount
B) discountbond;discount
C) couponbond;face
D) discountbond;face
Answer: C
20) The________isthefinalamountthatwillbepaidtotheholderofacouponbond.
A) discountvalue
B) couponvalue
C) facevalue
D) presentvalue
Answer: C
QuesStatus:New
21) Allofthefollowingareexamplesofcouponbondsexcept
A) Corporatebonds
B) U.S.Treasurybills
C) U.S.Treasurynotes
D) U.S.Treasurybonds
Answer: B
QuesStatus:New
22) Whichofthefollowingaretrueforacouponbond?
A) Whenthecouponbondispricedatitsfacevalue,theyieldtomaturityequalsthecoupon
rate.
B) Thepriceofacouponbondandtheyieldtomaturityarepositivelyrelated.
C) Theyieldtomaturityisgreaterthanthecouponratewhenthebondpriceisabovethe
parvalue.
D) Theyieldislessthanthecouponratewhenthebondpriceisbelowtheparvalue.
Answer: A
QuesStatus:Revised
23) Ifa$5,000couponbondhasacouponrateof13percent,thenthecouponpaymenteveryyear
is
A) $650.
B) $1,300.
C) $130.
D) $13.
Answer: A
QuesStatus:Revised
24) An$8,000couponbondwitha$400couponpaymenteveryyearhasacouponrateof
A) 5percent.
B) 8percent.
C) 10percent.
D) 40percent.
Answer: A
25) Thepriceofacouponbondandtheyieldtomaturityare________related;thatis,astheyield
tomaturity________,thepriceofthebond________.
A) positively;rises;rises
B) negatively;falls;falls
C) positively;rises;falls
D) negatively;rises;falls
Answer: D
QuesStatus:New
26) A$10,0008percentcouponbondthatsellsfor$10,000hasayieldtomaturityof
A) 8percent.
B) 10percent.
C) 12percent.
D) 14percent.
Answer: A
27) Whichofthefollowing$1,000face-valuesecuritieshasthehighestyieldtomaturity?
A) A5percentcouponbondsellingfor$1,000
B) A10percentcouponbondsellingfor$1,000
C) A12percentcouponbondsellingfor$1,000
D) A12percentcouponbondsellingfor$1,100
Answer: C
28) Whichofthefollowing$1,000face-valuesecuritieshasthehighestyieldtomaturity?
A) A5percentcouponbondwithapriceof$600
B) A5percentcouponbondwithapriceof$800
C) A5percentcouponbondwithapriceof$1,000
D) A5percentcouponbondwithapriceof$1,200
Answer: A
QuesStatus:Revised
29) Whichofthefollowing$1,000face-valuesecuritieshasthelowestyieldtomaturity?
D) A15percentcouponbondsellingfor$900
Answer: A
30) Whichofthefollowing$5,000face-valuesecuritieshasthehighesttomaturity?
D) A12percentcouponbondsellingfor$4,500
Answer: D
QuesStatus:Revised
31) Theyieldtomaturityis________thanthe________ratewhenthebondpriceis________its
facevalue.
A) greater;coupon;above
B) greater;coupon;below
C) greater;perpetuity;above
D) less;perpetuity;below
Answer: B
QuesStatus:New
32) Whichofthefollowingbondswouldyouprefertobebuying?
A) A$10,000face-valuesecuritywitha10percentcouponsellingfor$9,000
B) A$10,000face-valuesecuritywitha7percentcouponsellingfor$10,000
C) A$10,000face-valuesecuritywitha9percentcouponsellingfor$10,000
D) A$10,000face-valuesecuritywitha10percentcouponsellingfor$10,000
Answer: A
QuesStatus:Revised
33) Thepriceofaconsolequalsthecouponpayment
A) timestheinterestrate.
B) plustheinterestrate.
C) minustheinterestrate.
D) dividedbytheinterestrate.
Answer: D
QuesStatus:Revised
34) Theinterestrateonaconsolequalsthe
A) pricetimesthecouponpayment.
B) pricedividedbythecouponpayment.
C) couponpaymentplustheprice.
D) couponpaymentdividedbytheprice.
Answer: D
QuesStatus:Revised
35) Aconsolpaying$20annuallywhentheinterestrateis5percenthasapriceof
A) $100.
B) $200.
C) $400.
D) $800.
Answer: C
QuesStatus:Revised
36) Ifaconsolhasapriceof$500andanannualinterestpaymentof$25,theinterestrateis
A) 2.5percent.
B) 5percent.
C) 7.5percent.
D) 10percent.
Answer: B
QuesStatus:Revised
37) Abondthatisboughtatapricebelowitsfacevalueandthefacevalueisrepaidatamaturity
dateiscalleda
A) simpleloan.
C) couponbond.
D) discountbond.
Answer: D
38) A________isboughtatapricebelowitsfacevalue,andthe________valueisrepaidatthe
maturitydate.
A) couponbond;discount
B) discountbond;discount
C) couponbond;face
D) discountbond;face
Answer: D
39) Adiscountbond
A) paysthebondholderafixedamounteveryperiodandthefacevalueatmaturity.
B) paysthebondholderthefacevalueatmaturity.
C) paysallinterestandthefacevalueatmaturity.
D) paysthefacevalueatmaturityplusanycapitalgain.
Answer: B
QuesStatus:Revised
40) Examplesofdiscountbondsinclude
A) U.S.Treasurybills.
B) corporatebonds.
C) U.S.Treasurynotes.
D) municipalbonds.
Answer: A
QuesStatus:Revised
41) Theyieldtomaturityforaone-yeardiscountbondequalstheincreaseinpriceovertheyear,
dividedbythe
A) initialprice.
B) facevalue.
C) interestrate.
D) couponrate.
Answer: A
QuesStatus:Revised
42) Whichofthefollowingaretruefordiscountbonds?
A) Adiscountbondisboughtatpar.
B) Thepurchaserreceivesthefacevalueofthebondatthematuritydate.
C) U.S.Treasurybondsandnotesareexamplesofdiscountbonds.
D) Thepurchaserreceivestheparvalueatmaturityplusanycapitalgains.
Answer: B
QuesStatus:Revised
43) Ifa$10,000face-valuediscountbondmaturinginoneyearissellingfor$5,000,thenitsyield
tomaturityis
A) 5percent.
B) 10percent.
C) 50percent.
D) 100percent.
Answer: D
44) Ifa$5,000face-valuediscountbondmaturinginoneyearissellingfor$5,000,thenitsyieldto
maturityis
A) 0percent.
B) 5percent.
C) 10percent.
D) 20percent.
Answer: A
45) Adiscountbondsellingfor$15,000withafacevalueof$20,000inoneyearhasayieldto
maturityof
A) 3percent.
B) 20percent.
C) 25percent.
D) 33.3percent.
Answer: D
QuesStatus:Revised
46) InJapanin1998,interestrateswerenegativeforashortperiodoftimebecauseinvestorsfound
itconvenienttoholdsix-monthbillsasastoreofvaluebecause
A) ofthehighinflationrate.
B) thesebillssoldatadiscountfromfacevalue.
C) thebillsweredenominatedinsmallamountsandcouldbestoredelectronically.
D) thebillsweredenominatedinlargeamountsandcouldbestoredelectronically.
Answer: D
QuesStatus:Revised
47) Iftheinterestrateis5%,whatisthepresentvalueofasecuritythatpaysyou$1,050nextyear
and$1,102.50twoyearsfromnow?Ifthissecuritysoldfor$2200,istheyieldtomaturity
greaterorlessthan5%?Why?
Answer: PV=$1,050/(1.+.05)+$1,102.50/(1+0.5)2
PV=$2,000
Ifthissecuritysoldfor$2200,theyieldtomaturityislessthan5%.Thelowerthe
interestratethehigherthepresentvalue.
QuesStatus:New
4.2 YieldonaDiscountBasis
1) DealersinU.S.Treasurysecuritiesalwaysrefertopricesbyquotingthe
A) yieldtomaturity.
B) couponrate.
C) currentyield
D) yieldonadiscountbasis.
Answer: D
2) Whichofthefollowingaretrueoftheyieldonadiscountbasisasameasureoftheinterest
rate?
A) Itusesthepercentagegainonthepurchasepriceofthesecurity,ratherthanthe
percentagegainonthefacevalueofthesecurity.
B) Itputstheyieldontheannualbasisofa360-dayyear.
C) Itignoresthetimetomaturity.
D) Itoverstatestheyieldtomaturity.
Answer: B
QuesStatus:Revised
3) Aproblemwiththeyieldondiscountbasisisthatit________theyieldtomaturity,andthis
________increases,the________thematurityofthediscountbond.
A) understates;understatement;longer
B) understates;understatement;shorter
C) overstates;overstatement;longer
D) overstates;overstatement;shorter
Answer: A
QuesStatus:Revised
4) DealersinT-billsmakeprofitsbysellingT-billsata________pricethantheypayforthem,
thus,the________discountyieldshouldbelowerthanthe________discountyield.
A) higher;bid;asked
B) higher;asked;bid
C) lower;bid;asked
D) lower;asked;bid
Answer: B
QuesStatus:New
5) Theyieldonadiscountbasisofa90-day,$1,000Treasurybillsellingfor$950is
A) 5percent.
B) 10percent.
C) 15percent.
D) 20percent.
Answer: D
QuesStatus:Revised
6) Theyieldonadiscountbasisofa180-day$1,000Treasurybillsellingfor$900is
A) 10percent.
B) 20percent.
C) 25percent.
D) 40percent.
Answer: B
7) Theyieldtomaturityona$10,000Treasurybillsellingfor$9,800with73daystomaturityis
approximately
A) 2percent.
B) 5percent.
C) 10percent.
D) 20percent.
Answer: C
QuesStatus:Revised
8) Whenreferringtochangesinyields,abasispointequals
A) 10percent.
B) 1percent.
C) 0.1percent.
D) 0.01percent.
Answer: D
QuesStatus:Revised
9) Tosaythatayieldincreasedbytwentybasispointsmeanstheinterestrateincreasedby
A) 20percent.
B) 2percent.
C) 0.2percent.
D) 0.02percent.
Answer: C
QuesStatus:Revised
10) IftheyieldonTreasurybillsfallsfrom5.27percentto5.22percent,thentheyieldhas
A) increasedby5basispoints.
B) increasedby0.5basispoint.
C) decreasedby0.5basispoint.
D) decreasedby5basispoints.
Answer: D
QuesStatus:Revised
11) IftheyieldonTreasurybillsincreasesfrom6.34percentto6.44percent,theyieldhas
A) increasedby0.01basispoint.
B) increasedby0.1basispoint.
C) increasedby1basispoint.
D) increasedby10basispoints.
Answer: D
QuesStatus:Revised
12) Youareconsideringalternativequotes,aone-yearTreasurynotewithayieldtomaturityof
4.5%andaone-yearTreasurybillwithayieldonadiscountbasisof4.5%.Wouldthesebe
equivalent?Whyorwhynot?
Answer: No,thesearenotthesame.Theyieldonadiscountbasisalwaysunderstatestrueyield
sotheyieldtomaturityontheone-yearTreasurybillishigherthanthequotedvalue.
QuesStatus:New
4.3 TheDistinctionBetweenInterestRatesandReturns
1) The________isdefinedasthepaymentstotheownerplusthechangeinasecuritysvalue
expressedasafractionofthesecurityspurchaseprice.
A) yieldtomaturity
B) currentyield
C) rateofreturn
D) yieldrate
Answer: C
QuesStatus:New
2) Whatisthereturnona5percentcouponbondthatinitiallysellsfor$1,000andsellsfor$1,200
nextyear?
A) 5percent
B) 10percent
C) -5percent
D) 25percent
Answer: D
QuesStatus:Revised
3) Whatisthereturnona5percentcouponbondthatinitiallysellsfor$1,000andsellsfor$900
nextyear?
A) 5percent
B) 10percent
C) -5percent
D) -10percent
Answer: C
QuesStatus:Revised
4) Thereturnona5percentcouponbondthatinitiallysellsfor$1,000andsellsfor$950nextyear
is
A) -10percent.
B) -5percent.
C) 0percent.
D) 5percent.
Answer: C
5) Supposeyouareholdinga5percentcouponbondmaturinginoneyearwithayieldto
maturityof15percent.Iftheinterestrateonone-yearbondsrisesfrom15percentto20
percentoverthecourseoftheyear,whatistheyearlyreturnonthebondyouareholding?
A) 5percent
B) 10percent
C) 15percent
D) 20percent
Answer: C
6) Iftheinterestratesonallbondsrisefrom5to6percentoverthecourseoftheyear,which
bondwouldyouprefertohavebeenholding?
A) Abondwithoneyeartomaturity
B) Abondwithfiveyearstomaturity
C) Abondwithtenyearstomaturity
D) Abondwithtwentyyearstomaturity
Answer: A
7) Anequaldecreaseinallbondinterestrates
A) increasesthepriceofafive-yearbondmorethanthepriceofaten-yearbond.
B) increasesthepriceofaten-yearbondmorethanthepriceofafive-yearbond.
C) decreasesthepriceofafive-yearbondmorethanthepriceofaten-yearbond.
D) decreasesthepriceofaten-yearbondmorethanthepriceofafive-yearbond.
Answer: B
QuesStatus:Revised
8) Anequalincreaseinallbondinterestrates
A) increasesthereturntoallbondmaturitiesbyanequalamount.
B) decreasesthereturntoallbondmaturitiesbyanequalamount.
C) hasnoeffectonthereturnstobonds.
D) decreaseslong-termbondreturnsmorethanshort-termbondreturns.
Answer: D
9) Whichofthefollowingaretrueconcerningthedistinctionbetweeninterestratesandreturns?
A) Therateofreturnonabondwillnotnecessarilyequaltheinterestrateonthatbond.
B) Thereturncanbeexpressedasthedifferencebetweenthecurrentyieldandtherateof
capitalgains.
C) Therateofreturnwillbegreaterthantheinterestratewhenthepriceofthebondfalls
betweentimetandtimet+1.
D) Thereturncanbeexpressedasthesumofthediscountyieldandtherateofcapitalgains.
Answer: A
10) Whichofthefollowingaregenerallytrueofbonds?
A) Theonlybondwhosereturnequalstheinitialyieldtomaturityisonewhosetimeto
maturityisthesameastheholdingperiod.
B) Ariseininterestratesisassociatedwithafallinbondprices,resultingincapitalgainson
bondswhosetermstomaturityarelongerthantheholdingperiods.
C) Thelongerabondsmaturity,thesmalleristhesizeofthepricechangeassociatedwith
aninterestratechange.
D) Pricesandreturnsforshort-termbondsaremorevolatilethanthoseforlonger-term
bonds.
Answer: A
QuesStatus:Revised
11) Whichofthefollowingaregenerallytrueofallbonds?
A) Thelongerabondsmaturity,thegreateristherateofreturnthatoccursasaresultofthe
increaseintheinterestrate.
B) Eventhoughabondhasasubstantialinitialinterestrate,itsreturncanturnouttobe
negativeifinterestratesrise.
C) Pricesandreturnsforshort-termbondsaremorevolatilethanthoseforlongerterm
bonds.
D) Afallininterestratesresultsincapitallossesforbondswhosetermstomaturityare
longerthantheholdingperiod.
Answer: B
QuesStatus:Revised
12) Theriskinessofanassetsreturnsduetochangesininterestratesis
A) exchange-raterisk.
B) pricerisk.
C) assetrisk.
D) interest-raterisk.
Answer: D
QuesStatus:Revised
13) Interest-rateriskistheriskinessofanassetsreturnsdueto
A) interest-ratechanges.
B) changesinthecouponrate.
C) defaultoftheborrower.
D) changesintheassetsmaturity.
Answer: A
QuesStatus:Revised
14) Pricesandreturnsfor________bondsaremorevolatilethanthosefor________bonds,
everythingelseheldconstant.
A) long-term;long-term
B) long-term;short-term
C) short-term;long-term
D) short-term;short-term
Answer: B
15) Yourfavoriteuncleadvisesyoutopurchaselong-termbondsbecausetheirinterestrateis
10%.Shouldyoufollowhisadvice?
Answer: Itdependsonwhereyouthinkinterestratesareheadedinthefuture.Ifyouthink
interestrateswillbegoingup,youshouldnotfollowyourunclesadvicebecauseyou
wouldthenhavetodiscountyourbondifyouneededtosellitbeforethematuritydate.
Long-termbondshaveagreaterinterest-raterisk.
QuesStatus:New
4.4 TheDistinctionBetweenRealandNominalInterestRates
1) The________statesthatthenominalinterestrateequalstherealinterestrateplustheexpected
rateofinflation.
A) Fisherequation
B) Keynesianequation
C) Monetaristequation
D) Marshallequation
Answer: A
2) Thenominalinterestrateminustheexpectedrateofinflation
A) definestherealinterestrate.
B) isalessaccuratemeasureoftheincentivestoborrowandlendthanisthenominal
interestrate.
C) isalessaccurateindicatorofthetightnessofcreditmarketconditionsthanisthenominal
interestrate.
D) definesthediscountrate.
Answer: A
3) The________interestratemoreaccuratelyreflectsthetruecostofborrowing.
A) nominal
B) real
C) discount
D) market
Answer: B
QuesStatus:New
4) Ifyouexpecttheinflationratetobe15percentnextyearandaone -yearbondhasayieldto
maturityof7percent,thentherealinterestrateonthisbondis
A) 7percent.
B) 22percent.
C) -15percent.
D) -8percent.
Answer: D
QuesStatus:Revised
5) Whenthe________interestrateislow,therearegreaterincentivesto________andfewer
incentivesto________.
A) nominal;lend;borrow
B) real;lend;borrow
C) real;borrow;lend
D) market;lend;borrow
Answer: C
QuesStatus:New
6) Inwhichofthefollowingsituationswouldyouprefertobethelender?
A) Theinterestrateis9percentandtheexpectedinflationrateis7percent.
B) Theinterestrateis4percentandtheexpectedinflationrateis1percent.
C) Theinterestrateis13percentandtheexpectedinflationrateis15percent.
D) Theinterestrateis25percentandtheexpectedinflationrateis50percent.
Answer: B
7) Inwhichofthefollowingsituationswouldyouprefertobeborrowing?
A) Theinterestrateis9percentandtheexpectedinflationrateis7percent.
B) Theinterestrateis4percentandtheexpectedinflationrateis1percent.
C) Theinterestrateis13percentandtheexpectedinflationrateis15percent.
D) Theinterestrateis25percentandtheexpectedinflationrateis50percent.
Answer: D
8) Ifyouexpecttheinflationratetobe12percentnextyearandaone -yearbondhasayieldto
A) -5percent.
B) -2percent.
C) 2percent.
D) 12percent.
Answer: A
9) Ifyouexpecttheinflationratetobe4percentnextyearandaoneyearbondhasayieldto
A) -3percent.
B) -2percent.
C) 3percent.
D) 7percent.
Answer: C
10) Ifthenominalrateofinterestis2percent,andtheexpectedinflationrateis-10percent,the
realrateofinterestis
A) 2percent.
B) 8percent.
C) 10percent.
D) 12percent.
Answer: D
QuesStatus:Revised
11) TheinterestrateonTreasuryInflationProtectedSecuritiesisadirectmeasureof
A) therealinterestrate.
B) thenominalinterestrate.
C) therateofinflation.
D) therateofdeflation.
Answer: A
QuesStatus:Revised
12) Assumingthesamecouponrateandmaturitylength,thedifferencebetweentheyieldona
TreasuryInflationProtectedSecurityandtheyieldonanonindexedTreasurysecurity
providesinsightinto
A) thenominalinterestrate.
B) therealinterestrate.
C) thenominalexchangerate.
D) theexpectedinflationrate.
Answer: D
QuesStatus:Revised
13) Assumingthesamecouponrateandmaturitylength,whentheinterestrateonaTreasury
InflationProtectedSecurityis3percent,andtheyieldonanonindexedTreasurybondis8
percent,theexpectedrateofinflationis
A) 3percent.
B) 5percent.
C) 8percent.
D) 11percent.
Answer: B
QuesStatus:Revised
14) Woulditmakesensetobuyahousewhenmortgageratesare14%andexpectedinflationis
15%?Explainyouranswer.
Answer: Eventhoughthenominalrateforthemortgageappearshigh,therealcostofborrowing
thefundsis-1%.Yes,underthiscircumstanceitwouldbereasonabletomakethis
purchase.
QuesStatus:New
4.5 WebAppendix1:MeasuringInterest-RateRisk:Duration
1) Durationis
A) anassetstermtomaturity.
B) thetimeuntilthenextinterestpaymentforacouponbond.
C) theaveragelifetimeofadebtsecuritysstreamofpayments.
D) thetimebetweeninterestpaymentsforacouponbond.
Answer: C
QuesStatus:Revised
2) Comparingadiscountbondandacouponbondwiththesamematurity,
A) thecouponbondhasthegreatereffectivematurity.
B) thediscountbondhasthegreatereffectivematurity.
C) theeffectivematuritycannotbecalculatedforacouponbond.
D) theeffectivematuritycannotbecalculatedforadiscountbond.
Answer: B
QuesStatus:Revised
3) Thedurationofacouponbondincreases
A) thelongeristhebondstermtomaturity.
B) wheninterestratesincrease.
C) thehigherthecouponrateonthebond.
D) thehigherthebondprice.
Answer: A
QuesStatus:Revised
4) Allelseequal,the________thecouponrateonabond,the________thebondsduration.
A) higher;longer
B) higher;shorter
C) lower;shorter
D) greater;longer
Answer: B
QuesStatus:New
5) Ifafinancialinstitutionhas50%ofitsportfolioinabondwithafive-yeardurationand50%of
itsportfolioinabondwithaseven-yearduration,whatisthedurationoftheportfolio?
A) 12years
B) 7years
C) 6years
D) 5years
Answer: C
QuesStatus:New
6) Anassetsinterestraterisk________asthedurationoftheasset________.
A) increases;decreases
B) decreases;decreases
C) decreases;increases
D) remainsconstant;increases
Answer: B
QuesStatus:Revised

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Chapter4

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