Chapter 6 Flashcards
Which of the following statements is true about fixed-payment loans?
Each payment on a fixed-payment loan pays off some principal and some interest.
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 ______.
the interest; the value of the promise to repay the principal at maturity
Which of the following is true about consols (perpetuities)?
The borrower pays only interest, not the principal.
Which of the following is not true about zero-coupon bonds?
They pay regular interest payments.
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.
lower, shorter
A loan that promises a fixed number of equal payments at regular intervals is called a ______.
fixed payment loan
We can value a coupon bond using
present value formula
What is the yield to maturity?
The yield bondholders receive if they hold the bond until maturity
Why are governments the only borrowers of perpetuities or consols?
They are the only borrowers that can credibly promise to make payments forever.
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.
falls; above
When a bond’s yield to maturity falls below its coupon rate, the bondholder has experienced
capital loss
Current yield measures
the proceeds a bondholder receives for lending.
The yield bondholders receive if they hold the bond until maturity is called ______.
yield to maturity
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.
inverse, above
Consider a coupon bond with a face value of $500. If its price is currently $525, then
its yield to maturity must be below its coupon rate, because price and yield have an inverse relationship.
When the price of the bond is below the face value,
the return exceeds the coupon rate.
Holding period return is calculated when a bond is sold ____ maturity.
before
Current yield has ______ relationship with bond price; when the bond price rises, current yield ______.
an inverse; falls
The investment horizon describes the
time to bond’s maturity
In the market for bonds, when the price of bonds is above the equilibrium price
bond sellers will start dropping their prices.
All else equal, when the demand for a bond increases
price rises, yields fall
To calculate the one-year holding period return,
add current yield to capital gain
Which of the following happens when inflation is expected to increase in an economy?
The supply curve for bonds shifts rightward and the price of bonds falls.
In the market for bonds, when the price of bonds is below the equilibrium price
quantity demanded will be greater than quantity supplied.
If interest rates are expected to be higher in the future than they are today, we would now expect
the price of bonds to fall and their yield to rise.
Which of the following can definitely not cause a curve to shift in the market for a bond?
change of bond price
When the government wants to spend more relative to the taxes it brings in,
the price of bonds falls and their yield rises.
As a bond is perceived to provide a higher return, or to be more liquid or less risky than other bonds,
its price will rise and its yield will fall.
Expected inflation affects
both bond supply and demand
All else equal, when the demand for a bond increases
its price rises and its yield falls.
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?
interest rate risk
Which of the following happens when inflation is expected to increase in an economy?
The supply curve for bonds shifts rightward and the price of bonds falls.
An increase in expected inflation,
shifts bond supply to the right.
shifts bond demand to the left.
When financial institutions pool assets that generate payment streams and turn them into tradeable bonds, this is called ______.
securitization
Even if bond payments are made, increases in overall prices may reduce those payments’ real value. This is referred to as ______.
inflation risk
risk tends to
lower the price an investor is willing to pay.
raises the yield received by investors.
reduce the expected value of a given promise.
When general business conditions decline,
the price of bonds increases and their yield falls.
There is some evidence that increased inflation is associated with ______ nominal interest rates, particularly in nations where inflation is especially _________.
higher, unstable
Which of the following is not a way securitization uses the efficiency of markets to lower the cost of borrowing?
removing systemic risk
Interest-rate risk increases as the bond’s __________ increases.
time to maturity
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?
interest rate risk
As the default risk of a bond rises, we expect the price of the bond to _____ and its yield to ____.
fall, rise
Which of the following happens when inflation is expected to increase in an economy?
The supply curve for bonds shifts rightward and the price of bonds falls.
Which of the following can be considered part of the interest rate?
Expected inflation
The real interest rate
Compensation for risk
Interest-rate risk arises because of a mismatch between an investor’s _________ and the _______ of the bond.
investment horizon, time to maturity
Risk tends to
reduce the expected value of a given promise.
lower the price an investor is willing to pay.
raises the yield received by investors.
As the default risk of a bond rises, we expect the price of the bond to _____ and its yield to ____.
fall, rise
