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Money and banking > Chapter 6 > Flashcards

Chapter 6 Flashcards

1
Q

Which of the following statements is true about fixed-payment loans?

A

Each payment on a fixed-payment loan pays off some principal and some interest.

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2
Q

In the equation for the price of a coupon bond, to the right of the equal sign, there are two parts. The first part represents ______, while the part on the far right represents ______.

A

the interest; the value of the promise to repay the principal at maturity

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3
Q

Which of the following is true about consols (perpetuities)?

A

The borrower pays only interest, not the principal.

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4
Q

Which of the following is not true about zero-coupon bonds?

A

They pay regular interest payments.

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5
Q

All else equal, the price of a one-year Treasury bill will be ______ than that of a six-month Treasury bill; in other words. the ______ the time to maturity, the more we are willing to pay.

A

lower, shorter

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6
Q

A loan that promises a fixed number of equal payments at regular intervals is called a ______.

A

fixed payment loan

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7
Q

We can value a coupon bond using

A

present value formula

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8
Q

What is the yield to maturity?

A

The yield bondholders receive if they hold the bond until maturity

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9
Q

Why are governments the only borrowers of perpetuities or consols?

A

They are the only borrowers that can credibly promise to make payments forever.

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10
Q

When the price of a bond rises, its yield ______. Therefore, when a bond’s price is lower than its face value, its yield to maturity must be ______ its coupon rate.

A

falls; above

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11
Q

When a bond’s yield to maturity falls below its coupon rate, the bondholder has experienced

A

capital loss

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12
Q

Current yield measures

A

the proceeds a bondholder receives for lending.

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13
Q

The yield bondholders receive if they hold the bond until maturity is called ______.

A

yield to maturity

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14
Q

Because price and yield have _______ relationship, when the price of a bond is greater than its face value, its coupon rate will be _______ the current yield.

A

inverse, above

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15
Q

Consider a coupon bond with a face value of $500. If its price is currently $525, then

A

its yield to maturity must be below its coupon rate, because price and yield have an inverse relationship.

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16
Q

When the price of the bond is below the face value,

A

the return exceeds the coupon rate.

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17
Q

Holding period return is calculated when a bond is sold ____ maturity.

A

before

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18
Q

Current yield has ______ relationship with bond price; when the bond price rises, current yield ______.

A

an inverse; falls

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19
Q

The investment horizon describes the

A

time to bond’s maturity

20
Q

In the market for bonds, when the price of bonds is above the equilibrium price

A

bond sellers will start dropping their prices.

21
Q

All else equal, when the demand for a bond increases

A

price rises, yields fall

22
Q

To calculate the one-year holding period return,

A

add current yield to capital gain

23
Q

Which of the following happens when inflation is expected to increase in an economy?

A

The supply curve for bonds shifts rightward and the price of bonds falls.

24
Q

In the market for bonds, when the price of bonds is below the equilibrium price

A

quantity demanded will be greater than quantity supplied.

25
Q

If interest rates are expected to be higher in the future than they are today, we would now expect

A

the price of bonds to fall and their yield to rise.

26
Q

Which of the following can definitely not cause a curve to shift in the market for a bond?

A

change of bond price

27
Q

When the government wants to spend more relative to the taxes it brings in,

A

the price of bonds falls and their yield rises.

28
Q

As a bond is perceived to provide a higher return, or to be more liquid or less risky than other bonds,

A

its price will rise and its yield will fall.

29
Q

Expected inflation affects

A

both bond supply and demand

30
Q

All else equal, when the demand for a bond increases

A

its price rises and its yield falls.

31
Q

A bondholder’s investment horizon may be shorter than the time to maturity of the bond. This leads to which of the following kinds of risk?

A

interest rate risk

32
Q

Which of the following happens when inflation is expected to increase in an economy?

A

The supply curve for bonds shifts rightward and the price of bonds falls.

33
Q

An increase in expected inflation,

A

shifts bond supply to the right.

shifts bond demand to the left.

34
Q

When financial institutions pool assets that generate payment streams and turn them into tradeable bonds, this is called ______.

A

securitization

35
Q

Even if bond payments are made, increases in overall prices may reduce those payments’ real value. This is referred to as ______.

A

inflation risk

36
Q

risk tends to

A

lower the price an investor is willing to pay.

raises the yield received by investors.

reduce the expected value of a given promise.

37
Q

When general business conditions decline,

A

the price of bonds increases and their yield falls.

38
Q

There is some evidence that increased inflation is associated with ______ nominal interest rates, particularly in nations where inflation is especially _________.

A

higher, unstable

39
Q

Which of the following is not a way securitization uses the efficiency of markets to lower the cost of borrowing?

A

removing systemic risk

40
Q

Interest-rate risk increases as the bond’s __________ increases.

A

time to maturity

41
Q

A bondholder’s investment horizon may be shorter than the time to maturity of the bond. This leads to which of the following kinds of risk?

A

interest rate risk

42
Q

As the default risk of a bond rises, we expect the price of the bond to _____ and its yield to ____.

A

fall, rise

43
Q

Which of the following happens when inflation is expected to increase in an economy?

A

The supply curve for bonds shifts rightward and the price of bonds falls.

44
Q

Which of the following can be considered part of the interest rate?

A

Expected inflation

The real interest rate

Compensation for risk

45
Q

Interest-rate risk arises because of a mismatch between an investor’s _________ and the _______ of the bond.

A

investment horizon, time to maturity

46
Q

Risk tends to

A

reduce the expected value of a given promise.

lower the price an investor is willing to pay.

raises the yield received by investors.

47
Q

As the default risk of a bond rises, we expect the price of the bond to _____ and its yield to ____.

A

fall, rise

Money and banking (9 decks)

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