Chapter 27.1

Question 1

Other things being equal, bond prices
A) are unaffected by changes in the demand for money.
B) are unaffected by interest-rate changes.
C) vary directly with interest rates.
D) vary inversely with interest rates.
E) vary proportionally with interest rates.

Answer 1

D

Question 2

The present value of a financial asset is
A) the most someone would be willing to pay upon maturity of the asset.
B) the most someone would be willing to pay today for the asset.
C) equivalent to the face value of the asset.
D) the amount someone would pay in the future to have the asset today.
E) the amount someone would pay in the future for the current stream of payments from the asset.

Answer 2

B

Question 3

The present value of a bond is determined by the
A) face value and the date of maturity.
B) rate of inflation.
C) market rate of interest only.
D) market rate of interest, the date of maturity, and the face value.
E) marginal rate of income tax.

Answer 3

D

Question 4

If Robert expects interest rates to fall in the near future, he will probably be willing to
A) buy bonds now, and hold less money.
B) buy bonds now, but only if their price falls.
C) sell bonds now, and hold less money.
D) put his money under his mattress rather than buy bonds.
E) maintain only the current holding of bonds.

Answer 4

A

Question 5

When Janet expects interest rates to rise in the near future, she will probably be willing to
A) buy bonds now, and hold less money.
B) buy bonds now, but only if their price falls.
C) sell bonds now, and hold more money.
D) put her money under her mattress rather than in a bank account.
E) maintain only the current holding of bonds.

Answer 5

C

Question 6

What is the present value of a bond that pays $121.00 one year from today if the interest rate is 10% per year?
A) $100.00
B) $110.00
C) $121.00
D) $133.10
E) $221.00

Answer 6

B

Question 7

When i is the annual interest rate, the formula for calculating the present value of a bond with a face value of R dollars, receivable in one year is
A) PV = (1 + i)/R.
B) PV = i(R + i).
C) PV = R (1 + i).
D) PV = R/i.
E) PV = R/(1 + i).

Answer 7

E

Question 8

If the annual market rate of interest is 5%, an asset that promises to pay $100 after each of the next two years has a present value of
A) $90.70.
B) $95.24.
C) $181.40.
D) $185.94.
E) $200.00.

Answer 8

D

Question 9

If the annual interest rate is 8%, an asset that promises to pay $160 after each of the next two years has a present value of
A) $178.32.
B) $285.32.
C) $296.30.
D) $300.00.
E) $320.00.

Answer 9

B

Question 10

If the annual interest rate is 10%, $5.00 received today has the same present value as 
A) $4.00 received one year from now.
B) $4.50 received one year from now.
C) $5.00 received one year from now.
D) $5.50 received one year from now.
E) $6.00 received one year form now.

Answer 10

D

Question 11

If the annual interest rate is 3%, $10 000 received today has the same present value as \_\_\_\_\_\_\_\_ received one year from now. 
A) $10 000
B) $13 000
C) $300
D) $9707.74
E) $10 300

Answer 11

E

Question 12

Consider a bond with a face value of $10 000, a three-year term and a coupon payment of 6% made at the end of each year. The face value of the bond is repaid at the end of the term. Which of the following equations will correctly calculate the present value of the bond?
A) PV = 600/1.06 + 600/1.1236 + 10600/1.1910
B) PV = 600/1.06 + 600/1.1236 + 600/1.1910
C) PV = 600/1.06 + 600/1.106 + 10000/1.06
D) PV = 600/1.6 + 600/2.56 + 10000/4.096
E) PV = 600/1.06 + 600/1.06 + 9400/1.1910

Answer 12

A

Question 13

In a competitive financial market, the equilibrium price of an asset will equal the
A) present value of the asset.
B) future value of the asset.
C) sum of present value of the asset multiplied by the interest rate.
D) future value of the asset multiplied by the interest rate.
E) issue price of the asset.

Answer 13

A

Question 14

Consider a bond that promises to make coupon payments of $100 each year for three years (beginning in one year's time) and also repays the face value of $2000 at the end of the third year. If the market interest rate is 6%, what is the present value of this bond? 
A) $267.30
B) $283.02
C) $1763.22
D) $1854.67
E) $1946.53

Answer 14

E

Question 15

Consider a bond that promises to make coupon payments of $100 each year for three years (beginning in one year's time) and also repays the face value of $2000 at the end of the third year. If the market interest rate is 4%, what is the present value of this bond? 
A) $288.45
B) $1866.67
C) $1941.57
D) $1966.39
E) $2055.50

Answer 15

E

Question 16

When considering the present value of any financial asset that makes a stream of payments in the future, we know that if the market interest rate falls,
A) the present value of the asset will rise.
B) the future value of the asset will rise.
C) the current value of the asset will fall.
D) the present value of the asset will fall.
E) the present value of the asset is unaffected.

Answer 16

A

Question 17

Consider a Government of Canada bond with a face value of $1000, and a present value of $925. If this bond is offered for sale at $960, then
A) the excess demand for the bond at $960 will drive the price up to the face value of the bond.
B) individuals will purchase the bond at the offer price which will drive the market rate of interest up.
C) individuals will purchase the bond at the offer price which will drive the market rate of interest down.
D) the equilibrium market price of this bond has been achieved.
E) the lack of demand for this bond will drive the price down until it reaches its equilibrium market price of $925.

Answer 17

E

Question 18

Consider a Hydro Quebec bond with a face value of $1000, and a present value of $1175. If this bond is offered for sale at $1025, then
A) excess supply of this bond will drive the price down until it reaches its face value.
B) individuals will purchase the bond at the offer price which will drive down the price further.
C) excess demand for this bond will drive the price up until it reaches its equilibrium market price of $1175.
D) the equilibrium market price of this bond has been achieved.
E) Hydro Quebec will be forced to change the face value of the bond.

Answer 18

C

Question 19

If the current market price of a bond is less than the present value of the income stream the bond will produce, the price will \_\_\_\_\_\_\_\_ due to excess \_\_\_\_\_\_\_\_ of/for the bond.
A) rise; supply
B) fall; supply
C) rise; demand
D) fall; demand

Answer 19

C

Question 20

An analyst is considering the purchase of a Government of Canada bond that will pay its face value of $10 000 in one year’s time, but pay no direct interest. The market interest rate is 4% and the bond is being offered for sale at a price of $9800. The analyst should recommend
A) purchasing the bond because the buyer will earn a profit of $185.
B) purchasing the bond because the bond price is equal to its present value.
C) not purchasing the bond because the price is lower than its present value.
D) not purchasing the bond because the buyer could earn an additional $192 by investing the $9800 elsewhere.
E) not purchasing the bond because the buyer could earn an additional $392 by investing the $9800 elsewhere.

Answer 20

D

Question 21

An analyst is considering the purchase of a Government of Canada bond that will pay its face value of $10 000 in one year’s time, but pay no direct interest. The market interest rate is 4% and the bond is being offered for sale at a price of $9400. The analyst should recommend
A) purchasing the bond because the purchase price is more than its present value and is therefore profitable.
B) purchasing the bond because the purchase price is less than its present value and is therefore profitable.
C) not purchasing the bond because the buyer could earn an additional $224 by investing the $9400 elsewhere.
D) not purchasing the bond because the buyer could earn an additional $376 by investing the $9400 elsewhere.
E) not purchasing the bond because the purchase price is less than its present value.

Answer 21

B

Question 22

In order to calculate the present value of the sum of future payments due from a bond, we use the interest rate to \_\_\_\_\_\_\_\_ those future payments.
A) adjust
B) correct
C) discount
D) inflate
E) maximize

Answer 22

C

Question 23

When the market price of a bond falls, ceteris paribus, then
A) the term to maturity of the bond increases.
B) the term to maturity of the bond decreases.
C) the yield on that bond rises.
D) the yield on that bond also falls.
E) the market interest rate rises.

Answer 23

C

Question 24

Suppose the market interest rate rises from 3% to 4%. This will lead to \_\_\_\_\_\_\_\_ in bond prices and \_\_\_\_\_\_\_\_ in bond yields.
A) a fall; a fall
B) a fall; a rise
C) a rise; a fall
D) a rise; a rise
E) no change; no change

Answer 24

B

Question 25

Suppose the market interest rate falls from 3% to 2%. This will lead to \_\_\_\_\_\_\_\_ in bond prices and \_\_\_\_\_\_\_\_ in bond yields.
A) a fall; a fall
B) a fall; a rise
C) a rise; a fall
D) a rise; a rise
E) no change; no change

Answer 25

C

Question 26

Suppose the market interest rate is stable at 4% and we see a decline in bond prices (and thus a rise in bond yields). One explanation for this is that
A) bond issuers are facing an excess demand for their bonds.
B) bond purchasers perceive a reduction in riskiness and thus a higher expected present value from those bonds.
C) there is no causal relationship between market interest rates and bond prices.
D) bond purchasers perceive an increase in riskiness and thus a lower expected present value from those bonds.
E) there is a positive relationship between interest rates and bond prices.

Answer 26

D

Question 27

Suppose a Government of Canada bond is being offered in financial markets at a price that is higher than its present value. We can expect that
A) the price of the bond will rise further.
B) the face value of the bond will be adjusted to a lower value.
C) the relatively high demand for the bond will cause its present value to rise.
D) the lack of demand for this bond will cause its price to fall.
E) the face value of the bond will be adjusted to a lower value.

Answer 27

D

Question 28

Suppose a Government of Canada bond is being offered in financial markets at a price that is lower than its present value. We can expect that
A) the lack of demand for this bond will cause its present value to fall.
B) the price of the bond will fall further.
C) the relatively high demand for this bond will cause its price to rise.
D) the face value of the bond will be adjusted to a lower value.
E) the face value of the bond will be adjusted to a higher value.

Answer 28

C

Question 29

Consider two bonds, Bond A and Bond B, offered for sale in the same market for financial assets:
- Bond A has a face value of $1000, a market price of $971, and matures in one year.
- Bond B has a face value of $1000, a market price of $926, and matures in one year.
Which of the following statements about Bonds A and B are correct?
A) Bond A is perceived as a riskier asset than Bond B.
B) Bond B is perceived as a riskier asset than Bond A.
C) Bond B has a higher present value than Bond A.
D) There is a disequilibrium in this market for financial assets.

Answer 29

B

Question 30

Consider two bonds, Bond A and Bond B, offered for sale in the same market for financial assets:
- Bond A has a face value of $1000, a market price of $971, and matures in one year.
- Bond B has a face value of $1000, a market price of $926, and matures in one year.
Which of the following statements about Bonds A and B are correct?
A) Bond B has a higher present value than Bond A.
B) Bond A has a lower present value than Bond B.
C) Bond B has a higher yield than Bond A.
D) Bond A has a higher yield than Bond B.
E) There is a disequilibrium in this market for financial assets.

Answer 30

C

Question 31

Consider two bonds, Bond A and Bond B, offered for sale in the same market for financial assets:
- Bond A has a face value of $1000, a market price of $971, and matures in one year.
- Bond B has a face value of $1000, a market price of $926, and matures in one year.
Which of the following statements about Bonds A and B are correct?
A) Bond B has a higher present value than Bond A.
B) Bond A has a lower present value than Bond B.
C) The yield on Bond B is 3%; the yield on Bond A is 3%.
D) The yield on Bond A is 3%; the yield on Bond B is 8%.
E) There is a disequilibrium in this market for financial assets.

Answer 31

D