Chapter 1 Why Study Financial Markets and Institutions? Multiple Choice Questions 1. Financial markets and institutions (a) involve the movement of
... [Show More] huge quantities of money. (b) affect the profits of businesses. (c) affect the types of goods and services produced in an economy. (d)do all of the above. (e) do only (a) and (b) of the above. Answer: D 2. Financial market activities affect (a) personal wealth. (b)spending decisions by individuals and business firms. (c) the economy’s location in the business cycle. (d)all of the above. Answer: D 3. Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called (a) commodity markets. (b) funds markets. (c) derivative exchange markets. (d) financial markets. Answer: D 4. The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the (a) inflation rate. (b) exchange rate. (c) interest rate. contact: royfields212@gmail.com (d) aggregate price level. Answer: C 5. The bond markets are important because (a) they are easily the most widely followed financial markets in the United States. (b) they are the markets where interest rates are determined. (c) they are the markets where foreign exchange rates are determined. (d) all of the above. Answer: B 6. Interest rates are important to financial institutions since an interest rate increase _________ the cost of acquiring funds and _________ the income from assets. (a) decreases; decreases (b)increases; increases (c) decreases; increases (d) increases; decreases Answer: B 7. Typically, increasing interest rates (a) discourage individuals from saving. (b)discourage corporate investments. (c) encourage corporate expansion. (d) encourage corporate borrowing. (e) none of the above. Answer: B 8. Compared to interest rates on longterm U.S. government bonds, interest rates on _________ fluctuate more and are lower on average. (a) mediumquality corporate bonds (b) lowquality corporate bonds (c) highquality corporate bonds (d)threemonth Treasury bills (e) none of the above Answer: D 9. Compared to interest rates on longterm U.S. government bonds, interest rates on threemonth Treasury bills fluctuate _________ and are _________ on average. (a) more; lower (b) less; lower (c) more; higher (d) less; higher Answer: A 10. The stock market is important because (a) it is where interest rates are determined. (b)it is the most widely followed financial market in the United States. (c) it is where foreign exchange rates are determined. (d) all of the above. Answer: B Chapter 2 Overview of the Financial System Multiple Choice Questions 1. Every financial market performs the following function: (a) It determines the level of interest rates. (b) It allows common stock to be traded. (c) It allows loans to be made. (d)It channels funds from lenderssavers to borrowersspenders. Answer: D 2. Financial markets have the basic function of (a) bringing together people with funds to lend and people who want to borrow funds. (b) assuring that the swings in the business cycle are less pronounced. (c) assuring that governments need never resort to printing money. (d) both (a) and (b) of the above. (e) both (b) and (c) of the above. Answer: A 3. Which of the following can be described as involving direct finance? (a) A corporation’s stock is traded in an overthecounter market. NO (b) People buy shares in a mutual fund. NO (c) A pension fund manager buys commercial paper in the secondary market. NO (d) An insurance company buys shares of common stock in the overthecounter markets. NO (e) None of the above. Answer: E 4. Which of the following can be described as involving direct finance? (a) A corporation’s stock is traded in an overthecounter market. (b)A corporation buys commercial paper issued by another corporation. (c) A pension fund manager buys commercial paper from the issuing corporation. (d) Both (a) and (b) of the above. (e) Both (b) and (c) of the above. Answer: B 5. Which of the following can be described as involving indirect finance? (a) A corporation takes out loans from a bank. (b) People buy shares in a mutual fund. (c) A corporation buys commercial paper in a secondary market. (d) All of the above. (e) Only (a) and (b) of the above. Answer: E 6. Which of the following can be described as involving indirect finance? (a) A bank buys a U.S. Treasury bill from one of its depositors. (b) A corporation buys commercial paper issued by another corporation. (c) A pension fund manager buys commercial paper in the primary market. (d)Both (a) and (c) of the above. Answer: D 7. Financial markets improve economic welfare because (a) they allow funds to move from those without productive investment opportunities to those who have such opportunities. (b) they allow consumers to time their purchases better. (c) they weed out inefficient firms. (d) they do all of the above. (e) they do (a) and (b) of the above. Answer: E 8. A country whose financial markets function poorly is likely to (a) efficiently allocate its capital resources. (b) enjoy high productivity. (c) experience economic hardship and financial crises. (d) increase its standard of living. Answer: C 9. Which of the following are securities? (a) A certificate of deposit (b) A share of Texaco common stock (c) A Treasury bill (d)All of the above (e) Only (a) and (b) of the above Answer: D 10. Which of the following statements about the characteristics of debt and equity are true? (a) They both can be longterm financial instruments. (b) They both involve a claim on the issuer’s income. (c) They both enable a corporation to raise funds. (d)All of the above. (e) Only (a) and (b) of the above. Answer: D 11. The money market is the market in which _________ are traded. (a) new issues of securities (b) previously issued securities (c) shortterm debt instruments (d) longterm debt and equity instruments Answer: C 12. Longterm debt and equity instruments are traded in the _________ market. (a) primary (b)secondary (c) capital (d) money Answer: C 13. Which of the following are primary markets? (a) The New York Stock Exchange (b) The U.S. government bond market (c) The overthecounter stock market (d) The options markets (e) None of the above Answer: E 14. Which of the following are secondary markets? (a) The New York Stock Exchange (b) The U.S. government bond market (c) The overthecounter stock market (d) The options markets (e) All of the above Answer: E 15. A corporation acquires new funds only when its securities are sold in the (a) secondary market by an investment bank. (b)primary market by an investment bank. (c) secondary market by a stock exchange broker. (d)secondary market by a commercial bank. Answer: B 16. Intermediaries who are agents of investors and match buyers with sellers of securities are called (a) investment bankers. (b) traders. (c) brokers. (d) dealers. (e) none of the above. Answer: C 17. Intermediaries who link buyers and sellers by buying and selling securities at stated prices are called (a) investment bankers. (b) traders. (c) brokers. (d)dealers. (e) none of the above. Answer: D 18. An important financial institution that assists in the initial sale of securities in the primary market is the (a) investment bank. (b) commercial bank. (c) stock exchange. (d) brokerage house. Answer: A 19. Which of the following statements about financial markets and securities are true? (a) Most common stocks are traded overthecounter, although the largest corporations have their shares traded at organized stock exchanges such as the New York Stock Exchange. (b) A corporation acquires new funds only when its securities are sold in the primary market. (c) Money market securities are usually more widely traded than longerterm securities and so tend to be more liquid. (d)All of the above are true. (e) Only (a) and (b) of the above are true. Answer: D 20. Which of the following statements about financial markets and securities are true? (a) A bond is a longterm security that promises to make periodic payments called dividends to the firm’s residual claimants. (b) A debt instrument is intermediate term if its maturity is less than one year. (c) A debt instrument is long term if its maturity is ten years or longer. (d) The maturity of a debt instrument is the time (term) that has elapsed since it was issued. Answer: C 21. Which of the following statements about financial markets and securities are true? (a) Few common stocks are traded overthecounter, although the overthecounter markets have grown in recent years. (b)A corporation acquires new funds only when its securities are sold in the primary market. (c) Capital market securities are usually more widely traded than longer term securities and so tend to be more liquid. (d) All of the above are true. (e) Only (a) and (b) of the above are true. Answer: B 22. Which of the following markets is sometimes organized as an overthecounter market? (a) The stock market (b) The bond market (c) The foreign exchange market (d) The federal funds market (e) all of the above Answer: E 23. Bonds that are sold in a foreign country and are denominated in that country’s currency are known as (a) foreign bonds. (b) Eurobonds. (c) Eurocurrencies. (d) Eurodollars. Answer: A 24. Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known as (a) foreign bonds. (b)Eurobonds. (c) Eurocurrencies. (d) Eurodollars. Answer: B 25. Financial intermediaries (a) exist because there are substantial information and transaction costs in the economy. (b) improve the lot of the small saver. (c) are involved in the process of indirect finance. (d)do all of the above. (e) do only (a) and (b) of the above. Answer: D 26. The main sources of financing for businesses, in order of importance, are (a) financial intermediaries, issuing bonds, issuing stocks. (b) issuing bonds, issuing stocks, financial intermediaries. (c) issuing stocks, issuing bonds, financial intermediaries. (d) issuing stocks, financial intermediaries, issuing bonds. Answer: A 27. The presence of transaction costs in financial markets explains, in part, why (a) financial intermediaries and indirect finance play such an important role in financial markets. (b) equity and bond financing play such an important role in financial markets. (c) corporations get more funds through equity financing than they get from financial intermediaries. (d) direct financing is more important than indirect financing as a source of funds. Answer: A 28. Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage of (a) poorly informed consumers. (b)standardization. (c) economies of scale. (d) their market power. Answer: C 29. The purpose of diversification is to (a) reduce the volatility of a portfolio’s return. (b) raise the volatility of a portfolio’s return. (c) reduce the average return on a portfolio. (d) raise the average return on a portfolio. Answer: A 30. An investor who puts all her funds into one asset _________ her portfolio’s _________. (a) increases; diversification (b)decreases; diversification (c) increases; average return (d) decreases; average return Answer: B 31. Through risksharing activities, a financial intermediary _________ its own risk and _________ the risks of its customers. (a) reduces; increases (b)increases; reduces (c) reduces; reduces (d) increases; increases Answer: B 32. The presence of _________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets. (a) noncollateralized risk (b) freeriding (c) asymmetric information (d) costly state verification Answer: C 33. When the lender and the borrower have different amounts of information regarding a transaction, _________ is said to exist. (a) asymmetric information (b) adverse selection (c) moral hazard (d) fraud Answer: A 34. When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, _________ is said to exist. (a) asymmetric information (b)adverse selection (c) moral hazard (d) fraud Answer: B 35. When the borrower engages in activities that make it less likely that the loan will be repaid, _________ is said to exist. (a) asymmetric information (b) adverse selection (c) moral hazard (d) fraud Answer: C 36. The concept of adverse selection helps to explain (a) which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets. (b) why indirect finance is more important than direct finance as a source of business finance. (c) why direct finance is more important than indirect finance as a source of business finance. (d) only (a) and (b) of the above. (e) only (a) and (c) of the above. Answer: D 37. Adverse selection is a problem associated with equity and debt contracts arising from (a) the lender’s relative lack of information about the borrower’s potential returns and risks of his investment activities. (b) the lender’s inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults. (c) the borrower’s lack of incentive to seek a loan for highly risky investments. (d) none of the above. Answer: A 38. When the least desirable credit risks are the ones most likely to seek loans, lenders are subject to the (a) moral hazard problem. (b) adverse selection problem. (c) shirking problem. (d) freerider problem. (e) principalagent problem. Answer: B 39. Financial institutions expect that (a) moral hazard will occur, as the least desirable credit risks will be the ones most likely to seek out loans. (b) opportunistic behavior will occur, as the least desirable credit risks will be the ones most likely to seek out loans. (c) borrowers will commit moral hazard by taking on too much risk, and this is what drives financial institutions to take steps to limit moral hazard. (d) none of the above will occur. Answer: C 40. Successful financial intermediaries have higher earnings on their investments because they are better equipped than individuals to screen out good from bad risks, thereby reducing losses due to (a) moral hazard. (b) adverse selection. (c) bad luck. (d) financial panics. Answer: B 41. In financial markets, lenders typically have inferior information about potential returns and risks associated with any investment project. This difference in information is called (a) comparative informational disadvantage. (b) asymmetric information. (c) variant information. (d) caveat venditor. Answer: B 42. The largest depository institution at the end of 2004 was (a) life insurance companies. (b) pension funds. (c) state retirement funds. (d)none of the above. Answer: D 43. Which of the following financial intermediaries are depository institutions? (a) A savings and loan association (b) A commercial bank (c) A credit union (d) All of the above (e) Only (a) and (c) of the above Answer: D 44. Which of the following is a contractual savings institution? (a) A life insurance company (b) A credit union (c) A savings and loan association (d) A mutual fund Answer: A Chapter 3 What Do Interest Rates Mean and What Is Their Role in Valuation? Multiple Choice Questions 1. A loan that requires the borrower to make the same payment every period until the maturity date is called a (a) simple loan. (b) fixedpayment loan. (c) discount loan. (d) samepayment loan. (e) none of the above. Answer: B 2. A coupon bond pays the owner of the bond (a) the same amount every month until maturity date. (b) a fixed interest payment every period and repays the face value at the maturity date. (c) the face value of the bond plus an interest payment once the maturity date has been reached. (d) the face value at the maturity date. (e) none of the above. Answer: B 3. A bond’s future payments are called its (a) cash flows. (b) maturity values. (c) discounted present values. (d) yields to maturity. Answer: A 4. A credit market instrument that pays the owner the face value of the security at the maturity date and nothing prior to then is called a (a) simple loan. (b) fixedpayment loan. (c) coupon bond. (d) discount bond. Answer: D 5. (I) A simple loan requires the borrower to repay the principal at the maturity date along with an interest payment. (II) A discount bond is bought at a price below its face value, and the face value is repaid at the maturity date. (a) (I) is true, (II) false. (b) (I) is false, (II) true. (c) Both are true. (d) Both are false. Answer: C 6. Which of the following are true of coupon bonds? (a) The owner of a coupon bond receives a fixed interest payment every year until the maturity date, when the face or par value is repaid. (b) U.S. Treasury bonds and notes are examples of coupon bonds. (c) Corporate bonds are examples of coupon bonds. (d) All of the above. (e) Only (a) and (b) of the above. Answer: D 7. Which of the following are generally true of all bonds? (a) The longer a bond’s maturity, the lower is the rate of return that occurs as a result of the increase in an interest rate. (b) Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise. (c) Prices and returns for longterm bonds are more volatile than those for shorterterm bonds. (d) All of the above are true. (e) Only (a) and (b) of the above are true. Answer: D 8. (I) A discount bond requires the borrower to repay the principal at the maturity date plus an interest payment. (II) A coupon bond pays the lender a fixed interest payment every year until the maturity date, when a specified final amount (face or par value) is repaid. (a) (I) is true, (II) false. (b) (I) is false, (II) true. (c) Both are true. (d) Both are false. Answer: B 9. 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. (e) None of the above. Answer: A 10. An $8,000 coupon bond with a $400 annual coupon payment has a coupon rate of (a) 5 percent. (b) 8 percent. (c) 10 percent. (d) 40 percent. Answer: A 11. The concept of _________ is based on the commonsense 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 12. Dollars received in the future are worth _________ than dollars received today. The process of calculating what dollars received in the future are worth today is called _________ (a) more; discounting. (b) less; discounting. (c) more; inflating. (d) less; inflating. Answer: B 13. The process of calculating what dollars received in the future are worth today is called (a) calculating the yield to maturity. (b) discounting the future. (c) compounding the future. (d) compounding the present. Answer: B 14. With an interest rate of 5 percent, the present value of $100 received one year from now is approximately (a) $100. (b) $105. (c) $95. (d) $90. Answer: C 15. With an interest rate of 10 percent, the present value of a security that pays $1,100 next year and $1,460 four years from now is approximately (a) $1,000. (b) $2,000 (c) $2,560. (d) $3,000. Answer: B 16. With an interest rate of 8 percent, the present value of $100 received one year from now is approximately (a) $93. (b) $96. (c) $100. (d) $108. Answer: A 17. With an interest rate of 6 percent, the present value of $100 received one year from now is approximately (a) $106. (b) $100. (c) $94. (d) $92. Answer: C 18. The interest rate that equates the present value of the cash flow received from a debt instrument with its market price today is the (a) simple interest rate. (b) discount rate. (c) yield to maturity. (d) real interest rate. Answer: C 19. The interest rate that financial economists consider to be the most accurate measure is the (a) current yield. (b) yield to maturity. (c) yield on a discount basis. (d) coupon rate. Answer: B 20. Financial economists consider the _________ to be the most accurate measure of interest rates. (a) simple interest rate (b) discount rate (c) yield to maturity (d) real interest rate Answer: C 21. For a simple loan, the simple interest rate equals the (a) real interest rate. (b) nominal interest rate. (c) current yield. (d) yield to maturity. Answer: D 22. 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 23. The yield to maturity of a oneyear, simple loan of $500 that requires an interest payment of $40 is (a) 5 percent. (b) 8 percent. (c) 12 percent. (d) 12.5 percent. Answer: B 24. The yield to maturity of a oneyear, simple loan of $400 that requires an interest payment of $50 is (a) 5 percent. (b) 8 percent. (c) 12 percent. (d) 12.5 percent. Answer: D 25. 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 26. 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 27. 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 15 percent coupon bond selling for $1,000 (d) A 15 percent coupon bond selling for $900 Answer: D 28. 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 negatively related. (c) The yield to maturity is greater than the coupon rate when the bond price is below the par value. (d) All of the above are true. (e) Only (a) and (b) of the above are true. Answer: D 29. 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 negatively related. (c) The yield to maturity is greater than the coupon rate when the bond price is above the par value. (d) All of the above are true. (e) Only (a) and (b) of the above are true. Answer: E 30. 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) All of the above are true. (e) Only (a) and (b) of the above are true. Answer: A 31. A consol bond is a bond that (a) pays interest annually and its face value at maturity. (b) pays interest in perpetuity and never matures. (c) pays no interest but pays face value at maturity. (d) rises in value as its yield to maturity rises. Answer: B 32. The yield to maturity on a consol bond that pays $100 yearly and sells for $500 is (a) 5 percent. (b) 10 percent. (c) 12.5 percent. (d) 20 percent. (e) 25 percent. Answer: D 33. The yield to maturity on a consol bond that pays $200 yearly and sells for $1000 is (a) 5 percent. (b) 10 percent. (c) 20 percent. (d) 25 percent. Answer: C 34. A frequently used approximation for the yield to maturity on a longterm bond is the (a) coupon rate. (b) current yield. (c) cash flow interest rate. (d) real interest rate. Answer: B 35. The current yield on a coupon bond is the bond’s _________ divided by its _________. (a) annual coupon payment; price (b) annual coupon payment; face value (c) annual return; price (d) annual return; face value Answer: A 36. When a bond’s price falls, its yield to maturity _________ and its current yield _________. (a) falls; falls (b) rises; rises (c) falls; rises (d) rises; falls Answer: B 37. The yield to maturity for a oneyear discount bond equals (a) the increase in price over the year, divided by the initial price. (b) the increase in price over the year, divided by the face value. (c) the increase in price over the year, divided by the interest rate. (d) none of the above. Answer: A 38. If a $10,000 face value discount bond maturing in one year is selling for $8,000, then its yield to maturity is (a) 10 percent. (b) 20 percent. (c) 25 percent. (d) 40 percent. Answer: C 39. If a $10,000 face value discount bond maturing in one year is selling for $9,000, then its yield to maturity is (a) 9 percent. (b) 10 percent. (c) 11 percent. (d) 12 percent. Answer: C 40. If a $10,000 face value discount bond maturing in one year is selling for $5,000, then its yield to maturity is (a) 5 percent. (b) 10 percent. (c) 50 percent. (d) 100 percent. Answer: D 41. If a $5,000 face value discount bond maturing in one year is selling for $5,000, then its yield to maturity is (a) 0 percent. (b) 5 percent. (c) 10 percent. (d) 20 percent. Answer: A 42. The Fisher equation states that (a) the nominal interest rate equals the real interest rate plus the expected rate of inflation. (b) the real interest rate equals the nominal interest rate less the expected rate of inflation. (c) the nominal interest rate equals the real interest rate less the expected rate of inflation. (d) both (a) and (b) of the above are true. (e) both (a) and (c) of the above are true. Answer: D 43. If you expect the inflation rate to be 15 percent next year and a oneyear bond has a yield to maturity of 7 percent, then the real interest rate on this bond is (a) 7 percent. (b) 22 percent. (c) –15 percent. (d) –8 percent. (e) none of the above. Answer: D 44. If you expect the inflation rate to be 5 percent next year and a oneyear bond has a yield to maturity of 7 percent, then the real interest rate on this bond is (a) –12 percent. (b) –2 percent. (c) 2 percent. (d) 12 percent. Answer: C 45. The nominal interest rate minus the expected rate of inflation (a) defines the real interest rate. (b) is a better measure of the incentives to borrow and lend than is the nominal interest rate. (c) is a more accurate indicator of the tightness of credit market conditions than is the nominal interest rate. (d) all of the above. (e) only (a) and (b) of the above. Answer: D 46. The nominal interest rate minus the expected rate of inflation (a) defines the real interest rate. (b) is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate. (c) is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate. (d) defines the discount rate. Answer: A 47. In which of the following situations would you prefer to be making a loan? (a) The interest rate is 9 percent and the expected inflation rate is 7 percent. (b) The interest rate is 4 percent and the expected inflation rate is 1 percent. (c) The interest rate is 13 percent and the expected inflation rate is 15 percent. (d) The interest rate is 25 percent and the expected inflation rate is 50 percent. Answer: B 48. In which of the following situations would you prefer to be borrowing? (a) The interest rate is 9 percent and the expected inflation rate is 7 percent. (b) The interest rate is 4 percent and the expected inflation rate is 1 percent. (c) The interest rate is 13 percent and the expected inflation rate is 15 percent. (d) The interest rate is 25 percent and the expected inflation rate is 50 percent. Answer: D 49. What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 one year later? (a) 5 percent (b) 10 percent (c) –5 percent (d) 25 percent (e) None of the above Answer: D 50. What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 one year later? (a) 5 percent (b) 10 percent (c) –5 percent (d) –10 percent (e) None of the above Answer: C 51. The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100 one year later is (a) 5 percent. (b) 10 percent. (c) 14 percent. (d) 15 percent. Answer: D 52. The return on a 10 percent coupon bond that initially sells for $1,000 and sells for $900 one year later is (a) –10 percent. (b) –5 percent. (c) 0 percent. (d) 5 percent. Answer: C 53. Which of the following are generally true of all bonds? (a) The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period. (b) A rise in interest rates is associated with a fall in bond prices, resulting in capital losses on bonds whose term to maturities are longer than the holding period. (c) The longer a bond’s maturity, the greater is the price change associated with a given interest rate change. (d) All of the above are true. (e) Only (a) and (b) of the above are true. Answer: D 54. Which of the following are true concerning the distinction between interest rates and return? (a) The rate of return on a bond will not necessarily equal the interest rate on that bond. (b) The return can be expressed as the sum of the current yield and the rate of capital gains. (c) The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1. (d) All of the above are true. (e) Only (a) and (b) of the above are true. Answer: E 55. 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 twenty years to maturity Answer: A 56. Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity of 15 percent. If the interest rate on oneyear bonds rises from 15 percent to 20 percent over the course of the year, what is the yearly return on the bond you are holding? (a) 5 percent (b) 10 percent (c) 15 percent (d) 20 percent Answer: [Show Less]