CONTENTS Preface Chapter 1 Why Study Financial Markets and Institutions?............................................................1 Chapter 2 Overview
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[Show More] of the Financial System.................................................................................9 Chapter 3 Understanding Interest Rates.......................................................................................21 Chapter 4 The Behavior of Interest Rates....................................................................................37 Chapter 5 The Risk and Term Structure of Interest Rates............................................................55 Chapter 6 Structure of Central Banks and the Federal Reserve System.......................................71 Chapter 7 Conduct of Monetary Policy: Tools, Goals and Targets .............................................89 Chapter 8 The Money Markets ..................................................................................................109 Chapter 9 The Capital Markets..................................................................................................119 Chapter 10 The Stock Market and the Efficient Markets Hypothesis..........................................131 Chapter 11 The Mortgage Markets..............................................................................................141 Chapter 12 The Foreign Exchange Market..................................................................................151 Chapter 13 The International Financial System...........................................................................165 Chapter 14 Theory of Financial Structure....................................................................................187 Chapter 15 The Banking Firm and Bank Management ...............................................................203 Chapter 16 The Commercial Banking Industry: Structure and Competition ...............................221 Chapter 17 Savings Associations and Credit Unions...................................................................239 Chapter 18 Banking Regulation...................................................................................................253 Chapter 19 Insurance Companies and Pension Funds .................................................................263 Chapter 20 Venture Capital Firms, Finance Companies and Financial Conglomerates ..............271 Chapter 21 Investment Banks, Brokerage Firms, and Mutual Funds...........................................281 Chapter 22 Risk Management in Financial Institutions ...............................................................291 Chapter 23 Hedging with Financial Derivatives..........................................................................303 contact: royfields212@gmail.com PREFACE This Test Bank to accompany Financial Markets and Institutions, Fourth Edition, by Frederic S. Mishkin and Stanley G. Eakins, has been thoroughly updated to reflect content changes from the previous edition. It contains multiple choice, true/false, and short discussion questions for each of the textbook’s twenty-three chapters. There are approximately 40-80 multiple-choice questions, 10 true/false questions, and 5-8 discussion questions for each chapter. This edition of the Test Bank was prepared by Professor James Eaton of Bridgewater College. Please send any comments or questions regarding its content to jeaton@bridgewater.edu. Jim Eaton Bridgewater College Bridgewater, VA 1 Chapter 1 Why Study Financial Markets and Institutions? 1.1 Multiple Choice Questions 1) Financial markets and institutions A) involve the movement of 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) 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) fund-available markets. C) derivative exchange markets. D) financial markets. Answer: D 3) 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. D) aggregate price level. Answer: C 4) 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 foreign exchange rates are determined. C) they are the markets where interest rates are determined. D) of all of the above. E) of only (A) and (B) of the above. Answer: C 5) Interest rates are important to financial institutions since an interest rate increase A) decreases the cost of acquiring funds. B) increases the cost of acquiring funds. C) raises the income from assets. D) (B) and (C) of the above. E) (A) and (C) of the above. Answer: D 2 6) Typically, increasing interest rates A) discourage corporate investments. B) discourage individuals from saving. C) encourage corporate expansion. D) encourage corporate borrowing. E) none of the above. Answer: A 7) Compared to interest rates on long-term U.S. government bonds, interest rates on ____ fluctuate more and are lower on average. A) medium-quality corporate bonds B) low-quality corporate bonds C) high-quality corporate bonds D) three-month Treasury bills E) none of the above Answer: D 8) Compared to interest rates on long-term U.S. government bonds, interest rates on three-month Treasury bills fluctuate _____ and are _____ on average. A) more; lower B) less; lower C) more; higher D) less; higher Answer: A 9) 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 10) Stock prices since the 1950s have been A) relatively stable, trending upward at a steady pace. B) relatively stable, trending downward at a moderate rate. C) extremely volatile. D) unstable, trending downward at a moderate rate. Answer: C 3 11) A rising stock market index due to higher share prices A) increases people’s wealth and as a result may increase their willingness to spend. B) increases the amount of funds that business firms can raise by selling newly issued stock. C) decreases the amount of funds that business firms can raise by selling newly issued stock. D) both (A) and (B) of the above. Answer: D 12) A declining stock market index due to lower share prices A) reduces people’s wealth and as a result may reduce their willingness to spend. B) increases people’s wealth and as a result may increase their willingness to spend. C) decreases the amount of funds that business firms can raise by selling newly issued stock. D) both (A) and (C) of the above. E) both (B) and (C) of the above. Answer: D 13) Changes in stock prices A) affect people’s wealth and their willingness to spend. B) affect firm’s decisions to sell stock to finance investment spending. C) are characterized by considerable fluctuations. D) all of the above. E) only (A) and (B) of the above. Answer: D 14) (I) Debt markets are often referred to generically as the bond market. (II) A bond is a security that is a claim on the earnings and assets of a corporation. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: A 15) (I) A bond is a debt security that promises to make payments periodically for a specified period of time. (II) A stock is a security that is a claim on the earnings and assets of a corporation. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C 4 16) The price of one country’s currency in terms of another’s is called A) the exchange rate. B) the interest rate. C) the Dow Jones industrial average. D) none of the above. Answer: A 17) A stronger dollar benefits _____ and hurts _____ A) American businesses; American consumers. B) American businesses; foreign businesses. C) American consumers; American businesses. D) foreign businesses; American consumers. Answer: C 18) A weaker dollar benefits _____ and hurts _____ A) American businesses; American consumers. B) American businesses; foreign consumers. C) American consumers; American businesses. D) foreign businesses; American consumers. Answer: A 19) From 1980 to early 1985 the dollar _____ in value, thereby benefiting American _____ A) appreciated; consumers. B) appreciated; businesses. C) depreciated; consumers. D) depreciated; businesses. Answer: A 20) Money is defined as A) anything that is generally accepted in payment for goods and services or in the repayment of debt. B) bills of exchange. C) a riskless repository of spending power. D) all of the above. E) only (A) and (B) of the above. Answer: A 21) The organization responsible for the conduct of monetary policy in the United States is the A) Comptroller of the Currency. B) U.S. Treasury. C) Federal Reserve System. D) Bureau of Monetary Affairs. Answer: C 5 22) The central bank of the United States is A) Citicorp. B) Bank America. C) The treasury. D) The Fed. E) none of the above. Answer: D 23) Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. Financial intermediaries A) act as middlemen, borrowing funds from those who have saved and lending these funds to others. B) produce nothing of value and are therefore a drain on society’s resources. C) help promote a more efficient and dynamic economy. D) do all of the above. E) do only (A) and (C) of the above. Answer: E 24) Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. Financial intermediaries A) act as middlemen, borrowing funds from those who have saved and lending these funds to others. B) play an important role in determining the quantity of money in the economy. C) help promote a more efficient and dynamic economy. D) do all of the above. E) do only (A) and (C) of the above. Answer: D 25) Banks are important to the study of money and the economy because they A) provide a channel for linking those who want to save with those who want to invest. B) have been a source of rapid financial innovation that is expanding the alternatives available to those wanting to invest their money. C) are the only financial institution to play a role in determining the quantity of money in the economy. D) do all of the above. E) do only (A) and (B) of the above. Answer: E 6 26) Banks, savings and loan associations, mutual savings banks, and credit unions A) are no longer important players in financial intermediation. B) have been providing services only to small depositors since deregulation. C) have been adept at innovating in response to changes in the regulatory environment. D) all of the above. E) only (A) and (C) of the above. Answer: C 27) (I) Banks are financial intermediaries that accept deposits and make loans. (II) Included under the term banks are firms such as commercial banks, savings and loan associations, mutual savings banks, credit unions, and insurance companies. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C 7 1.2 True/False 1) Money is anything accepted by anyone as payment for services or goods. Answer: FALSE 2) Interest rates are determined in the bond markets. Answer: TRUE 3) A stock is a debt security that promises to make periodic payments for a specific period of time. Answer: FALSE 4) Monetary policy affects interest rates but has little effect on inflation or business cycles. Answer: FALSE 5) The government organization responsible for the conduct of monetary policy in the United States is the U.S. Treasury. Answer: FALSE 6) Interest rates can be accurately described as the rental price of money. Answer: TRUE 7) Holding everything else constant, as the dollar weakens vacations abroad become less attractive. Answer: TRUE 8) In recent years, financial markets have become more stable and less risky. Answer: FALSE 9) Financial innovation has provided more options to both investors and borrowers. Answer: TRUE 10) A financial intermediary borrows funds from people who have saved. Answer: TRUE 8 1.3 Essay 1) Have interest rates been more or less volatile in recent years? Why? 2) Why should consumers be concerned with movements in foreign exchange rates? 3) What is monetary policy and who is responsible for its implementation? 4) What are financial intermediaries and what do they do? 5) What is money? 6) How does a bond differ from a stock? 7) Why is the stock market so important to individuals, firms, and the economy? 9 Chapter 2 Overview of the Financial System 2.1 Multiple Choice Questions 1) Every financial market has the following characteristic: 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 lenders-savers to borrowers-spenders. 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 over-the-counter market. B) People buy shares in a mutual fund. C) A pension fund manager buys commercial paper in the secondary market. D) An insurance company buys shares of common stock in the over-the-counter markets. 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 over-the-counter 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: E 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: D 10 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 (B) and (C) of the above. Answer: A 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) 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 9) Which of the following statements about the characteristics of debt and equity are true? A) They can both be long-term 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 10) Which of the following are long-term financial instruments? A) A negotiable certificate of deposit B) A banker’s acceptance C) A U.S. Treasury bond D) A U.S. Treasury bill Answer: C 11) Which of the following are short-term financial instruments? A) A negotiable certificate of deposit B) A banker’s acceptance C) A U.S. Treasury bond D) Both (A) and (B) of the above E) Both (B) and (C) of the above Answer: D 11 12) Which of the following are short-term financial instruments? A) A banker’s acceptance B) A share of Walt Disney Corporation stock C) A Treasury note with a maturity of 4 years D) All of the above Answer: A 13) Which of the following are primary markets? A) The New York Stock Exchange B) The U.S. government bond market C) The over-the-counter 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 over-the-counter 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 A) in the secondary market by an investment bank. B) in the primary market by an investment bank. C) in the secondary market by a stock exchange broker. D) in the 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 12 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 over-the-counter, 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 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: D 20) Which of the following statements about financial markets and securities are true? A) A bond is a long-term 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) to that instrument’s expiration date. Answer: C 21) Which of the following statements about financial markets and securities are true? A) Few common stocks are traded over-the-counter, although the over-the-counter 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 13 22) Which of the following markets is sometimes organized as an over-the-counter 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) Which of the following instruments is not traded in a money market? A) Banker’s acceptances B) U.S. Treasury Bills C) Eurodollars D) Commercial paper E) None of the above Answer: E 24) Which of the following instruments is not traded in a money market? A) Banker’s acceptances B) U.S. Treasury Bills C) Eurodollars D) Commercial paper E) Residential mortgages Answer: E 25) Which of the following instruments are traded in a capital market? A) U.S. government agency securities B) Negotiable bank CDs C) Repurchase agreements D) Eurodollars E) None of the above Answer: A 26) Which of the following instruments are traded in a capital market? A) Corporate bonds B) U.S. Treasury bills C) Banker’s acceptances D) Repurchase agreements Answer: A 27) 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 14 28) 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 29) 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 30) 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 31) 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 32) 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 15 33) 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) free-riding C) asymmetric information D) costly state verification Answer: C 34) 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 35) 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 36) 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 37) 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 16 38) 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 39) 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) free-rider problem. E) principal-agent problem. Answer: B 40) 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: B 41) 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 42) 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 17 43) The largest depository institution at the end of 2001 was A) life insurance companies. B) pension funds. C) state retirement funds. D) none of the above. Answer: D 44) The value of assets held by commercial banks in 2001 was $6.7 trillion dollars, making commercial banks the A) second most important sector of financial intermediaries after mutual funds. B) second most important sector of financial intermediaries after life insurance companies. C) second most important sector of financial intermediaries after private pension funds. D) largest sector of financial intermediaries. Answer: D 45) 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 46) 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 47) Which of the following are not investment intermediaries? A) A life insurance company B) A pension fund C) A mutual fund D) Only (A) and (B) of the above Answer: D 48) Which of the following are investment intermediaries? A) Finance companies B) Mutual funds C) Pension funds D) All of the above E) Only (A) and (B) of the above Answer: E 18 49) The government regulates financial markets for three main reasons: A) to ensure soundness of the financial system, to improve control of monetary policy, and to increase the information available to investors. B) to improve control of monetary policy, to ensure that financial intermediaries earn a normal rate of return, and to increase the information available to investors. C) to ensure that financial intermediaries do not earn more than the normal rate of return, to ensure soundness of the financial system, and to improve control of monetary policy. D) to ensure soundness of financial intermediaries, to increase the information available to investors, and to prevent financial intermediaries from earning less than the normal rate of return. Answer: A 50) Asymmetric information can lead to widespread collapse of financial intermediaries, referred to as a A) bank holiday. B) financial panic. C) financial disintermediation. D) financial collapse. Answer: B 2.2 True/False 1) Every financial market allows loans to be made. Answer: FALSE 2) An example of direct financing is if you were to lend money to your neighbor. Answer: TRUE 3) The New York Stock Exchange is an example of a primary market. Answer: FALSE 4) Commercial paper is not traded in the capital market. Answer: TRUE 5) Eurodollars are traded in the money market. Answer: TRUE 6) The process of financial intermediation is also known as direct finance. Answer: FALSE 7) A mutual fund is not a depository institution. Answer: TRUE 8) A pension fund is not a contractual savings institution. Answer: FALSE 19 9) Equity represents an ownership interest in a firm and entitles the holder to the residual cash flows. Answer: TRUE 10) Adverse selection refers to those most at risk being most aggressive in their search for funds. Answer: FALSE 2.3 Essay 1) Distinguish between direct financing and indirect financing. 2) Distinguish between primary markets and secondary markets. 3) Why is it so important for an economy to have fully developed financial markets? 4) Why are financial intermediaries so important to an economy? 5) Describe how over-the-counter markets work. 6) What are adverse selection and moral hazard? 20 21 Chapter 3 Understanding Interest Rates 3.1 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) fixed-payment loan. C) discount loan. D) same-payment 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) the face value of the bond plus an interest payment once the maturity date has been reached. C) a fixed interest payment every period and repays the face value at the maturity date. D) the face value at the maturity date. E) none of the above. Answer: C 3) 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) fixed-payment loan. C) coupon bond. D) discount bond. Answer: D 4) (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 22 5) 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 6) 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 long-term 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 7) (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 8) 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 9) 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. [Show Less]