Inflation affects the equilibrium yield on bonds due to its impact on: A. the demand for bonds. B. the supply and demand for bonds. C. Inflation has no effect on bond yields. D. the supply of bonds. 2. Which of the following factors could explain difference in yields on bonds with the same time to maturity? A. default risk B. interest rate risk C. credit risk D. all of the above 3. Ratings from Moody’s and S&P measure: A. liquidity risk. B. interest rate risk. C. default risk. D. all of the above. 4. Junk bonds tend to have: A. higher risk premia. B. higher yields. C. higher default risk. D. all of the above. 5. If the Federal Reserve wants to increase the equilibrium interest rate, it will _____ the _____ money. A. decrease, supply of B. increase, demand for C. increase, supply of D. decrease, demand for 6. A bond is bought at par and market yields rise after purchase. If the bond is held to maturity, the rate of return at maturity will be _____ the yield at purchase. A. greater than B. less than C. equal to D. Cannot be determined. 7. Municipal bonds tend to have lower yields than other bonds, ceteris paribus, due to: A. higher default risk. B. lower taxes. C. higher liquidity. D. None of the above. 8. Which of the following shifts the demand for bonds to the right? A. An increase in the price level B. A decrease in GDP C. An increase in the interest rate D. None of the above. 9. For a coupon bond, if the yield to maturity is greater than the coupon rate, then the price must be greater than the face value. True False 10. An increase in the expected return on bonds causes the _____ bonds to shift and equilibrium interest rates to _____. A. supply of, rise B. demand for, fall C. demand for, rise D. supply of, fall 11. The Federal Reserve controls the demand for bonds, so it is vertical. True False 12. An AAA bond has lower default risk than a BBB bond. True False 13. A three-year coupon bond has a face value of $1,000, a coupon rate of 7%, and a yield to maturity of 10%. The price of the bond must be _____ $1,000. A. greater than B. less than C. equal to D. Cannot be determined. 14. A change in the risk of a bond affects the bond’s risk premium. True False 15. If yields on one-year bonds are expected to rise and the liquidity premium is zero, the yield curve will be: A. upward-sloping. B. flat. C. downward-sloping. D. Cannot be determined. 16. The opportunity cost of money is: A. growth rate of prices B. real GDP C. interest rate D. None of the above. 17. The price of a bond is inversely related to: A. the time to maturity. B. the yield to maturity. C. both of the above. D. neither of the above. 18. What are the reasons for the general fall in interest rates between 1920 and World War II? A. An increase in the demand for bonds B. An increase in the supply of bonds C. Poor business conditions and low confidence in public policies D. High taxes and stringent government regulations 19. The present value of a discount bond with one year to maturity, face value $1,000, and yield to maturity 5% is: A. $1,050.00 B. $1,000.00 C. $1,005.00 D. $952.38 20. After 100 years, a deposit of $1 that compounds annually at 1% returns: A. $2 B. $2.70 C. $100 D. None of the above.
