FIN 200 CHAPTER 3 EXAM QUESTIONS
WITH 100% CORRECT ANSWERS
What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for
$900 one year later?
A) 5 percent
B) 10 percent
C) -5 percent
D) -10 percent
E) None of the above - Answer- C
The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100
one year later is
A) 5 percent.
B) 10 percent.
C) 14 percent.
D) 15 percent. - Answer- D
The return on a 10 percent coupon bond that initially sells for $1,000 and sells for $900
one year later is
A) -10 percent.
B) -5 percent.
C) 0 percent.
D) 5 percent. - Answer- C
Which of the following are generally true of all bonds?
A) The only bond whose return equals the initial yield to maturity is one whose time to
maturity is the same as the holding period.
B) A rise in interest rates is associated with a fall in bond prices, resulting in capital
losses on bonds whose term to maturities are longer than the holding period.
C) The longer a bond's maturity, the greater is the price change associated with a given
interest rate change.
D) All of the above are true.
E) Only A and B of the above are true. - Answer- D
Which of the following are true concerning the distinction between interest rates and
return?
A) The rate of return on a bond will not necessarily equal the interest rate on that bond.
B) The return can be expressed as the sum of the current yield and the rate of capital
gains.
, C) The rate of return will be greater than the interest rate when the price of the bond
falls between time t and time t + 1.
D) All of the above are true.
E) Only A and B of the above are true. - Answer- E
If the interest rates on all bonds rise from 5 to 6 percent over the course of the year,
which bond would you prefer to have been holding?
A) A bond with one year to maturity
B) A bond with five years to maturity
C) A bond with ten years to maturity
D) A bond with twenty years to maturity - Answer- A
Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to
maturity of 15 percent. If the interest rate on one-year bonds rises from 15 percent to 20
percent over the course of the year, what is the yearly return on the bond you are
holding?
A) 5 percent
B) 10 percent
C) 15 percent
D) 20 percent - Answer- C
(I) Prices of longer-maturity bonds respond more dramatically to changes in interest
rates.
(II) Prices and returns for long-term bonds are less volatile than those for short-term
bonds.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false. - Answer- A
(I) Prices of longer-maturity bonds respond less dramatically to changes in interest
rates.
(II) Prices and returns for long-term bonds are less volatile than those for shorter-term
bonds.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false. - Answer- D
The riskiness of an asset's return that results from interest rate changes is called
A) interest-rate risk.
B) coupon-rate risk.
C) reinvestment risk.
D) yield-to-maturity risk. - Answer- A
WITH 100% CORRECT ANSWERS
What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for
$900 one year later?
A) 5 percent
B) 10 percent
C) -5 percent
D) -10 percent
E) None of the above - Answer- C
The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100
one year later is
A) 5 percent.
B) 10 percent.
C) 14 percent.
D) 15 percent. - Answer- D
The return on a 10 percent coupon bond that initially sells for $1,000 and sells for $900
one year later is
A) -10 percent.
B) -5 percent.
C) 0 percent.
D) 5 percent. - Answer- C
Which of the following are generally true of all bonds?
A) The only bond whose return equals the initial yield to maturity is one whose time to
maturity is the same as the holding period.
B) A rise in interest rates is associated with a fall in bond prices, resulting in capital
losses on bonds whose term to maturities are longer than the holding period.
C) The longer a bond's maturity, the greater is the price change associated with a given
interest rate change.
D) All of the above are true.
E) Only A and B of the above are true. - Answer- D
Which of the following are true concerning the distinction between interest rates and
return?
A) The rate of return on a bond will not necessarily equal the interest rate on that bond.
B) The return can be expressed as the sum of the current yield and the rate of capital
gains.
, C) The rate of return will be greater than the interest rate when the price of the bond
falls between time t and time t + 1.
D) All of the above are true.
E) Only A and B of the above are true. - Answer- E
If the interest rates on all bonds rise from 5 to 6 percent over the course of the year,
which bond would you prefer to have been holding?
A) A bond with one year to maturity
B) A bond with five years to maturity
C) A bond with ten years to maturity
D) A bond with twenty years to maturity - Answer- A
Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to
maturity of 15 percent. If the interest rate on one-year bonds rises from 15 percent to 20
percent over the course of the year, what is the yearly return on the bond you are
holding?
A) 5 percent
B) 10 percent
C) 15 percent
D) 20 percent - Answer- C
(I) Prices of longer-maturity bonds respond more dramatically to changes in interest
rates.
(II) Prices and returns for long-term bonds are less volatile than those for short-term
bonds.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false. - Answer- A
(I) Prices of longer-maturity bonds respond less dramatically to changes in interest
rates.
(II) Prices and returns for long-term bonds are less volatile than those for shorter-term
bonds.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false. - Answer- D
The riskiness of an asset's return that results from interest rate changes is called
A) interest-rate risk.
B) coupon-rate risk.
C) reinvestment risk.
D) yield-to-maturity risk. - Answer- A
