Chapter 4

Interest Rate Measurement and Behavior

NOTE TO INSTRUCTOR: QUESTIONS MARKED WITH AN ASTERISK (*) REQUIRE A FINANCIAL CALCULATOR

D2Factual
1. Which of the following is the correct formula for calculating simple interest? A) Interest = Principal Rate Time B) Interest = Principal Rate Time C) Interest = Principal Time ! Rate) ") Interest = Principal 1 ! Rate) Answer# B

D2Applied
$. The total amount of interest collecte% after two &ears from a '()*** loan with a simple annual interest rate of ( percent is e+ual to A) ',(*. B) '-$*. C) '1$),(*. ") '(),(*. Answer# B

D2Applied
,. Pat Bos.& /ust pai% '01, to repa& the principal an% interest for a si23month) '0** loan. Pat pai% a simple annual interest rate of 444444444444444444 percent. A) 1., B) 0.( C) 1*.0 ") 1(.0 Answer# C

36

37Ritter56il7er58%ell Money, Bank n!, an" F nan# a$ Ma%ke&' ) 9le:enth 9%ition

D3Applied
1. The total amount of cash inflows a len%er woul% recei:e on a '(** two3&ear loan with an annual interest rate of 0 percent is e+ual to A) '10. B) ';(. C) '(10. ") '(;(. Answer# "

D2Applied
<. If an in%i:i%ual recei:e% a total of '1** in simple interest pa&ments on a '1)*** loan o:er four &ears) the annual simple interest rate was A) 1< percent. B) < percent. C) 1 percent. ") 1* percent. Answer# "

D2Applied
(. A 1**3&ear) '1)*** loan that pa&s a ( percent simple annual interest rate pa&s a total amount of interest of A) '(*. B) '(**. C) '()***. ") '(*)***. Answer# C

D3Applied
-. A '1*)***) one3month loan pa&s an annuali=e% interest rate of 1* percent. The %ollar amount of interest recei:e% from the loan is A) largest if simple interest is pai%. B) largest if interest is compoun%e% monthl&. C) largest if interest is compoun%e% +uarterl&. ") the same whether interest is simple) compoun%e% monthl&) or compoun%e% +uarterl&. Answer# "

D1Interpretive
0. The %ollar amount of interest is largest for a loan if the interest is compoun%e% A) %ail&. B) monthl&. C) annuall&. ") once e:er& two &ears. Answer# A

Chapter 1Interest Rate >easurement an% Beha:ior 38

D2Applied
;. The total amount of interest collecte% after two &ears from a '()*** loan with an annual interest rate of ( percent compoun%e% annuall& is e+ual to A) '-$*.**. B) '-11.(*. C) ',(*.**. ") '()-$*.**. Answer# B

D3Applied
1*. A '1)***) - percent %eposit pa&s interest compoun%e% monthl&. After si2 months) the %eposit 7alance is '444444444444444444. A) 1)*,( B) 1)<*1 C) 1),<* ") 1)1$* Answer# A

D3Applied
11. Bu%%& Boll& /ust recei:e% his annual 7an. statement. ?ne &ear ago) Bu%%& %eposite% '1*)*** in a sa:ings account. To%a&) his 7alance is '1*)<*;.1<. Bu%%&@s sa:ings account interest is compoun%e% +uarterl&. Bu%%& recei:e% an annuali=e% interest rate of 444444444444444444 percent. A) ( B) < C) 1 ") , Answer# B

D3Applied
1$. Auther 6chwar= currentl& has a 7alance of '0,0.<< in his sa:ings account. 444444444444444444 &ears ago) Auther %eposite% '<** in his sa:ings account) which pa&s an annual interest rate of ; percent) compoun%e% annuall&. A) 0 B) C) ( ") < Answer# C

D2Applied
1,. The present :alue of ';** to 7e recei:e% in three &ears) with an annual interest rate of 1* percent) compoun%e% annuall&) is e+ual to '444444444444444444. A) --$ B) (-( C) 01( ") 01* Answer# B

39Ritter56il7er58%ell Money, Bank n!, an" F nan# a$ Ma%ke&' ) 9le:enth 9%ition

D1Factual
11. The present :alue of an asset can 7e foun% 7& 444444444444444444 the future :alue. A) stripping B) %iscounting C) compoun%ing ") annuali=ing Answer# B

D1Factual
1<. The most wi%el& use% measure of interest rates in 7on% mar.ets is the A) coupon rate. B) %iscount rate. C) &iel% to maturit&. ") current &iel%. Answer# C

D2Applied
1(. 6uppose an in%i:i%ual pa&s '1)*** for a '<)*** face3:alue) coupon37earing 7on% that pa&s '1** per &ear in interest an% will 7e hel% until it matures in ten &ears. The coupon rate on this 7on% is A) 1* percent. B) 0 percent. C) ( percent. ") < percent. Answer# B

D3Applied
1-. Paul ?l%& /ust purchase% a '$)*** face :alue 7on% with. The 7on% pa&s '1< in interest semiannuall&. Paul coul% sell the 7on% to%a& for '$)*<*. The current &iel% on this 7on% is 444444 percent. A) $.$< B) $.$* C) 1.<* ") 1.,; Answer# "

D2Applied
10. An in%i:i%ual pa&s '1)*** for a '<)*** face :alue) coupon37earing 7on% that pa&s '1** per &ear an% will 7e hel% until it matures in ten &ears. The current &iel% on this 7on% is A) 1* percent. B) 0 percent. C) ( percent. ") < percent. Answer# A

Chapter 1Interest Rate >easurement an% Beha:ior 40

D1Factual
1;. The coupon rate is e+ual to the A) &iel% to maturit& for all 7on%s. B) present :alue of the 7on%. C) real rate of return. ") interest rate printe% on the face of the 7on%. Answer# "

D2Interpretive
$*. If an in:estor pa&s '1)*$< for a 7on% with a face :alue of '1)*** an% annual pa&ments) it follows that A) the current &iel% an% coupon rate are e+ual. B) the coupon rate is greater than the current &iel%. C) the current &iel% is greater than the coupon rate. ") Insufficient information is pro:i%e% to answer this +uestion. Answer# B

D2Interpretive
$1. If an in:estor pa&s ';$< for a 7on% with a face :alue of '1)*** an% annual pa&ments) it follows that A) the current &iel% an% coupon rate are e+ual. B) the coupon rate is greater than the current &iel%. C) the current &iel% is greater than the coupon rate. ") Insufficient information is pro:i%e% to answer this +uestion. Answer# C

D3Interpretive
$$. If an in:estor pa&s '1)*$< for a 7on% with a face :alue of '1)***) it follows that the current &iel% is 444444444444444444 than the coupon rate) an% the in:estor will reali=e a capital 444444444444444444 if he hol%s the 7on% until maturit&. A) greaterB gain B) lessB gain C) greaterB loss ") lessB loss Answer# "

D2Applied
$,. Assume that an in:estor pa&s ';** for a 7on% with a face :alue of '1)***. If the 7on% pa&s 1* percent interest annuall&) the current &iel% is e+ual to A) ;.< percent. B) ;.1 percent. C) 1*.* percent. ") 11.1 percent. Answer# "

41Ritter56il7er58%ell Money, Bank n!, an" F nan# a$ Ma%ke&' ) 9le:enth 9%ition

D2Applied
$1. Cuinc& Ritter pa&s '1)1** for a 7on% with a face :alue of '1)***. The coupon rate is 1* percent) an% pa&ments are ma%e annuall&. The current &iel% is e+ual to A) ;.< percent. B) ;.1 percent. C) 1* percent. ") 11.1 percent. Answer# B

D3Applied
$<. If an in:estor pai% ';** for a 7on% with a '1)*** face :alue an% a current &iel% of 1* percent) then the coupon rate is A) ; percent. B) 1* percent. C) 1$ percent. ") 1< percent. Answer# A

D2Applied
$(. The annual %ollar interest pa&ment of a securit& is e+ual to '(*) an% the securit& currentl& sells for '1**. The current &iel% of this securit& is e+ual to A) - percent. B) 1* percent. C) 1< percent. ") $1 percent. Answer# C

D1Factual
$-. The 444444444444444444 is the interest rate that ma.es the sum of present :alues for all future pa&ments e+ual to a securit&@s purchase price. A) &iel% to maturit& B) current &iel% C) coupon rate ") capital gain Answer# A

D1Factual
$0. The &iel% to maturit& on a 7on% is the A) coupon rate. B) annual interest pa&ment %i:i%e% 7& the purchase price. C) coupon pa&ment multiplie% 7& the num7er of pa&ments. ") rate of %iscount that ma.es the sum of present :alues for all future pa&ments e+ual to the purchase price. Answer# "

Chapter 1Interest Rate >easurement an% Beha:ior 42

D2Interpretive
$;. The impact of capital gains an% losses is reflecte% in the A) current &iel%. B) coupon rate. C) &iel% to maturit&. ") face :alue. Answer# C

D2Interpretive
,*. The &iel% to maturit& 444444444444444444 capital gainsB the current &iel% 444444444444444444 capital gains. A) reflectsB reflects B) reflectsB %oes not reflect C) %oes not reflectB reflects ") %oes not reflectB %oes not reflect Answer# B

D1Interpretive
,1. To calculate the &iel% to maturit& on a 7on%) it is necessar& to .now the A) inflation rate. B) T37ill rate. C) coupon pa&ments. ") =ero3coupon rate. Answer# C

D2Applied*
,$. A 7on% has an annual coupon rate of - percent) a '1)*** face :alue) an% ten &ears remaining until maturit&. The 7on% currentl& sells for '1)1,0. The &iel% to maturit& for this 7on% is 444444444444444444 percent. A) -.* B) <.$ C) 1,.0 ") 1*.* Answer# B

D2Applied*
,,. An in:estor pa&s '1)$,* for a 7on% with a face :alue of '1)*** an% an annual coupon rate of ; percent. The in:estor plans to hol% the 7on% until its maturit& %ate in eight &ears. The 7on% has a &iel% to maturit& of A) <.,; percent. B) <.(- percent. C) 1*.;1 percent. ") ;.** percent. Answer# A

43Ritter56il7er58%ell Money, Bank n!, an" F nan# a$ Ma%ke&' ) 9le:enth 9%ition

D3Applied*
,1. Dulia Chen /ust purchase% a '1)*** face :alue 7on% for ';0-. The 7on% pa&s '<* in interest e:er& si2 months an% matures in fi:e &ears. The &iel% to maturit& for this 7on% is A) 1*.* percent. B) 1*.$ percent. C) 1*., percent. ") 1*.( percent. Answer# C

D1Applied
,<. A lotter& winner recei:es '$* million in e+ual pa&ments sprea% out o:er $* &ears. The present :alue of the winnings is A) e+ual to '$* million. B) greater than '$* million. C) less than '$* million. ") either greater than or less than '$* million) %epen%ing on the %iscount rate use% for the calculation. Answer# C

D2Interpretive
,(. The &iel% to maturit& of a =ero3coupon 7on% is %etermine% 7& the 7on%Es face :alue an% its A) purchase price. B) current &iel%. C) coupon rate. ") real rate. Answer# A

D2Applied
,-. The &iel% to maturit& of a =ero3coupon 7on% with a one3&ear maturit&) a face :alue of '1)***) an% a purchase price of ';** is e+ual to A) 1* percent. B) 11 percent. C) ; percent. ") < percent. Answer# A

D3Applied
,0. If a one &ear =ero3coupon 7on% has a face :alue of '1)*** an% a %iscount rate of 0.- percent) its original selling price is A) ';**. B) ';$*. C) ';<*. ") ';(*. Answer# B

Chapter 1Interest Rate >easurement an% Beha:ior 44

D3Factual
,;. The onl& %ifference 7etween Treasur& notes an% 7on%s is A) the fre+uenc& of coupon pa&ments. B) that notes are issue% on a %iscount 7asis an% 7on%s ma.e coupon pa&ments. C) maturit&. ") the agenc& issuing the securit&. Answer# C

D1Factual
1*. Bon% prices are A) e+ual to the face :alue of the 7on%. B) e+ual to the real interest rate. C) e+ual to the nominal interest rate. ") in:ersel& relate% to the interest rate. Answer# "

D2Interpretive
11. A 444444444444444444 &iel% to maturit& implies a 444444444444444444 7on% price. A) lowerB lower B) higherB lower C) higherB higher ") Fone of the a7o:e Answer# B

D2Applied
1$. Paul woul% li.e to 7u& a consol promising an interest rate of 0 percent an% pa&ing ';* annuall&. Paul shoul% not pa& more than '444444444444444444 for the consol. A) ;* B) 1)*** C) 1)1$< ") ;** Answer# C

D2Applied
1,. A consol has an annual coupon pa&ment of '1** an% a price of '0**. The &iel% on this securit& is e+ual to A) ( percent. B) 1* percent. C) 1$.< percent. ") 11 percent. Answer# C

45Ritter56il7er58%ell Money, Bank n!, an" F nan# a$ Ma%ke&' ) 9le:enth 9%ition

D2Applied
11. A consol has an annual coupon pa&ment of '<*. If the price of the consol rose from '1** to '<**) the &iel% on the consol woul% A) fall from 1* percent to 0 percent. B) fall from 1$.< percent to 1* percent. C) rise from 1* percent to 1$.< percent. ") rise from 0 percent to 1* percent. Answer# B

D2Interpretive
1<. A rise in interest rates will cause short3term 7on% prices to A) fall less than long3term 7on% prices. B) fall more than long3term 7on% prices. C) rise more than long3term 7on% prices. ") rise less than long3term 7on% prices. Answer# A

D2Interpretive
1(. A fall in interest rates will cause long3term 7on% prices to A) fall less than short3term 7on% prices. B) fall more than short3term 7on% prices. C) rise less than short3term 7on% prices. ") rise more than short3term 7on% prices. Answer# "

D2Interpretive
1-. Aong3term 7on%s are 444444444444444444 than short3term 7on%s) an% long3term 7on%s often ha:e a 444444444444444444 &iel% than short3term 7on%s. A) less ris.&B lower B) more ris.&B lower C) less ris.&B higher ") more ris.&B higher Answer# "

D2Applied
10. If the inflation rate is e2pecte% to 7e $ percent an% cre%itors will len% onl& if the real interest rate is , percent) the nominal interest rate will 7e A) 1 percent. B) < percent. C) - percent. ") 1$ percent. Answer# B

Chapter 1Interest Rate >easurement an% Beha:ior 46

D1Applied
1;. If the inflation rate is e2pecte% to 7e < percent an% nominal interest rate is ; percent) then the real interest rate will 7e A) 11 percent. B) ; percent. C) < percent. ") 1 percent. Answer# "

D3Factual
<*. The e2 ante real interest rate is 444444444444444444) while the e2 post real rate is . A) the nominal interest rate minus e2pecte% inflationB the nominal interest rate minus actual inflation B) the nominal interest rate minus actual inflationB the nominal interest rate minus e2pecte% inflation C) the real interest rate plus e2pecte% inflationB the real interest rate plus actual inflation ") the real interest rate plus actual inflationB the real interest rate plus e2pecte% inflation Answer# A

D2Applied
<1. At the 7eginning of the &ear an in:estor pa&s '1)1** for a 7on% with a face :alue of '1)***. The 7on% pa&s a coupon pa&ment of '(*) an% the in:estor sells it for '1)1<* at the en% of the &ear. The return is A) <.< percent. B) (.* percent. C) 1*.* percent. ") 1*.< percent. Answer# C

D2Applied
<$. The return on an asset with a purchase price of ';1* an% a selling price of ';** an% coupon pa&ments of '1** is A) (.1 percent. B) (.- percent. C) 11.; percent. ") 1<.( percent. Answer# A

D1Factual
<,. Interest rates are %etermine% 7& the suppl& of an% %eman% for A) financial ser:ices. B) loana7le fun%s. C) currenc&. ") consols. Answer# B

47Ritter56il7er58%ell Money, Bank n!, an" F nan# a$ Ma%ke&' ) 9le:enth 9%ition

D2Interpretive
<1. An increase in interest rates causes 444444444444444444 the %eman%3for3loana7le fun%s cur:e A) a rightwar% shift in B) a leftwar% shift in C) a mo:ement %own along ") a mo:ement up along Answer# "

D2Factual
<<. The suppl& of loana7le fun%s is e+ui:alent to the A) %eman% for loana7le fun%s. B) suppl& of securities. C) %eman% for securities. ") suppl& of 7on%s. Answer# C

D2Factual
<(. The %eman% for loana7le fun%s is e+ui:alent to the A) suppl& of loana7le fun%s. B) suppl& of securities. C) %eman% for securities. ") suppl& of 7on%s. Answer# B

D2Interpretive
<-. An increase in the %eman% for loana7le fun%s causes A) the price of securities to rise. B) interest rates to rise. C) the suppl& of securities to shift to the left. ") the %eman% for securities to shift to the right. Answer# B

D2Interpretive
<0. Which of the following woul% not cause an increase in the %eman% for loana7le fun%s? A) An increase in 7usiness 7orrowing B) An increase in consumer 7orrowing C) An increase in the pu7lic %e7t ") A %ecrease in interest rates Answer# "

D2Interpretive
<;. 444444444444444444 will cause a mo:ement up along the %eman% for loana7le fun%s cur:e. A) A rise in interest rates B) A %ecline in interest rates C) An increase in 7usiness 7orrowing ") A %ecrease in 7usiness 7orrowing Answer# A

Chapter 1Interest Rate >easurement an% Beha:ior 48

D2Interpretive
(*. If in%i:i%uals sa:e 444444444444444444) there is usuall& 444444444444444444 pressure on interest rates. A) lessB upwar% B) moreB upwar% C) lessB %ownwar% ") Fone of the a7o:e Answer# A

D2Interpretive
(1. Which of these will cause the e+uili7rium interest rate to rise? A) A %ecrease in the suppl& of loana7le fun%s B) A %ecrease in the %eman% for loana7le fun%s C) An increase in the suppl& of loana7le fun%s ") A %ecrease in the +uantit& of loana7le fun%s %eman%e% Answer# A

D2Interpretive
($. Which of these will cause the e+uili7rium interest rate to rise? A) The sa:ings rate %ecreases B) Business 7orrowing %ecreases C) The fe%eral %eficit %ecreases ") Gousehol% 7orrowing increases Answer# "

D2Applied
(,. An increase in sa:ing 7& househol%s will A) result in a lower e+uili7rium interest rate. B) raise the e+uili7rium interest rate. C) ha:e no effect on the e+uili7rium interest rate. ") lower the price of securities. Answer# A

D2Applied
(1. The e+uili7rium interest rate will fall if the A) suppl& of loana7le fun%s %ecreases. B) %eman% for loana7le fun%s %ecreases. C) %eman% for securities %ecreases. ") inflation rate increases. Answer# B

49Ritter56il7er58%ell Money, Bank n!, an" F nan# a$ Ma%ke&' ) 9le:enth 9%ition

D3Interpretive
(<. An increase in inflationar& e2pectations will cause a n) 444444444444444444 in the %eman% for loana7le fun%s an% a n) 444444444444444444 in the suppl& of loana7le fun%s. A) increaseB increase B) increaseB %ecrease C) %ecreaseB increase ") %ecreaseB %ecrease Answer# B

D2Interpretive
((. An increase in the e2pecte% rate of inflation causes A) a %ecrease in the %eman% for loana7le fun%s. B) an increase in the suppl& of loana7le fun%s. C) interest rates to rise. ") interest rates to fall. Answer# C

D2Interpretive
(-. A change in inflationar& e2pectations will influence A) the suppl& of loana7le fun%s onl&. B) the %eman% for loana7le fun%s onl&. C) neither the suppl& nor %eman% for loana7le fun%s. ") 7oth the suppl& an% %eman% for loana7le fun%s. Answer# "

D2Interpretive
(0. Aen%ers e2pecting lower inflation will A) suppl& more loana7le fun%s at each nominal interest rate. B) suppl& less loana7le fun%s at each nominal interest rate. C) suppl& more loana7le fun%s at each real interest rate. ") suppl& less loana7le fun%s at each real interest rate. Answer# A

D2Interpretive
(;. The e+uili7rium interest rate rises when A) inflationar& e2pectations increase. B) the econom& enters a recession. C) the suppl& of cre%it increases. ") the %eman% for cre%it %ecreases. Answer# A

D2Interpretive
-*. "uring the e2pansion phase of the 7usiness c&cle A) the %eman% for loana7le fun%s ten%s to fall. B) interest rates ten% to rise. C) 7on% prices ten% to rise. ") inflationar& e2pectations ten% to fall. Answer# B

Chapter 1Interest Rate >easurement an% Beha:ior 50

D3Interpretive
-1. The le:el of interest rates ten%s to 444444444444444444 %uring perio%s of 7usiness c&cle e2pansion an% 444444444444444444 %uring perio%s of c&clical recession. A) riseB rise B) fallB rise C) riseB fall ") fallB fall Answer# C

D2Interpretive
-$. When the He% tightens monetar& polic& %uring 7usiness e2pansions) the 444444444444444444 loana7le fun%s shifts to the 444444444444444444. A) %eman% forB right B) %eman% forB left C) suppl& ofB left ") suppl& ofB right Answer# C

D2Interpretive
-,. A rightwar% shift in the suppl& of loana7le fun%s cur:e coul% 7e cause% 7& A) an easing of monetar& polic&. B) a tightening of monetar& polic&. C) increase% go:ernment 7orrowing. ") %ecrease% go:ernment 7orrowing. Answer# A

D2Interpretive
-1. Interest rates ha:e fallen since the earl& 1;0*s 7ecause the A) fe%eral %eficit has %ecline%. B) fe%eral %eficit has increase%. C) inflation rate has %ecline%. ") inflation rate has increase%. Answer# C