Chapter 4 Practice QuizMultiple Choice. Choose the one alternative that best completes the statement or answers the question.1. If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest isa. 2 percent.b. 8 percent.c. 10 percent.d. 12 percent.2. The price of a coupon bond and the yield to maturity are ___________ related; that is, as the yield to maturity ____________, the price of the bond __________.a. negatively; falls; fallsb. negatively; rises; fallsc. positively; rises; fallsd. positively; rises; rises3. Which of the following are generally true of bonds?a. Prices and returns for short-term bonds are more volatile than those for longer-term bonds.b. The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period.c. A rise in interest rates is associated with a fall in bond prices, resulting in capital gains on bonds whose terms to maturity are longer than the holding periods.d. The longer a bond's maturity, the smaller is the size of the price change associated with an interest rate change.4. The __________ is the final amount that will be paid to the holder of a coupon bond.a. coupon valueb. face valuec. discount valued. present value5. An increase in the time to the promised future payment _________ the present value of the payment.a. is irrelevant to b. increasesc. has no effect ond. decreases6. An equal decrease in all bond interest ratesa. increases the price of a ten-year bond more than the price of a five-year bond.b. decreases the price of a five-year bond more than the price of a ten-year bond.c. increases the price of a five year bond more than the price of a ten-year bond.d. decreases the price of a ten-year bond more than the price of a five-year bond.7. A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity ofa. 8 percent.b. 10 percent.c. 12 percent.d. 14 percent.8. If you expect the inflation rate to be 12 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond isa. -5 percent.b. -2 percent.c. 2 percent.d. 12 percent.9. Interest-rate risk is the riskiness of an asset's returns due toa. default of the borrower.b. changes in the asset's maturity.c. changes in the coupon rate.d. interest-rate changes.10. A discount bonda. pays all interest and the face value at maturity.b. pays the bondholder a fixed amount every period and the face value at maturity.c. pays the face value at maturity plus any capital gain.d. pays the bondholder the face value at maturity.Answers on the next page.Answers to Chapter 4 Practice Quiz1. D2. B3. B4. B5. D6. A7. A8. A9. D10.
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