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1 | | If the nominal interest rate is 8% per year and the expected inflation rate is 3% per year, calculate the real rate of interest: |
| | A) | 8% |
| | B) | 5% |
| | C) | 2.86% |
| | D) | 4.85% |
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2 | | A 5-year bond with a 6% coupon rate and $1000 face value is selling for $852.10. Calculate the yield to maturity of the bond (Assume annual interest payments.) |
| | A) | 9.23% |
| | B) | 4.91% |
| | C) | 8.78% |
| | D) | 9.89% |
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3 | | Consider a bond with a face value of $1,000, a coupon rate of 6%, a yield to maturity of 6%, and three years to maturity. This bond's duration is: |
| | A) | 2.6 years |
| | B) | 2.8 years |
| | C) | 3.0 years |
| | D) | 3.2 years |
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4 | | The term structure of interest rates can be described as the: |
| | A) | Relationship between the spot interest rates and the bond prices |
| | B) | Relationship between spot interest rates and stock prices |
| | C) | Relationship between short-term interest rates and long-term interest rates |
| | D) | None of these options |
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5 | | Comparing a 1-year bond and a 5-year bond, which will experience a larger price change in price if interests rate rise? Assume equivalent risk and identical coupons. |
| | A) | 1-year bond |
| | B) | 5-year bond |
| | C) | Both will change equally |
| | D) | More information is needed to answer this question |
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6 | | The expectations theory states that the forward interest rate is the: |
| | A) | Expected future spot rate |
| | B) | Always greater than the spot rate |
| | C) | Yield to maturity |
| | D) | None of these options |
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7 | | If the yield to maturity is higher than the coupon rate, the bond price will be |
| | A) | Below par |
| | B) | Above par |
| | C) | At par |
| | D) | Cannot be determined |
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8 | | Duration tells you |
| | A) | When you receive the final payment |
| | B) | When you receive the first payment |
| | C) | The average time to each payment |
| | D) | The average change in interest rates |
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9 | | Arbitrage is: |
| | A) | A surefire money machine |
| | B) | The price investors need to buy a bond |
| | C) | The profit the dealer makes when selling a bond |
| | D) | None of these options |
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10 | | Which of the following statements is most consistent with expectations theory? |
| | A) | If short-term rates are equal to long-term rates, then investors must be expecting short-term rates to rise. |
| | B) | If short-term rates are higher than long-term rates, then investors must be expecting short-term rates to rise. |
| | C) | If short-term rates are lower than long-term rates, then investors must be expecting short-term rates to rise. |
| | D) | None of these options |
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11 | | A 5-year $1,000 par value bond pays a 6.50% annual coupon. Given a YTM of 8.0%, what is the price of the bond today? |
| | A) | $780 |
| | B) | $860 |
| | C) | $940 |
| | D) | $1000 |
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12 | | What is the expected YTM on a bond that pays a $15 coupon annually, has a $1,000 par value, and matures in 6 years, if the current price of the bond is $978? |
| | A) | 1.89% |
| | B) | 3.67% |
| | C) | 9.78% |
| | D) | 15.00% |
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13 | | Volatility is ________ at lower interest rates, and _________ at higher interest rates. |
| | A) | higher; lower |
| | B) | lower; higher |
| | C) | unchanged; lower |
| | D) | higher; unchanged |
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14 | | The value of any bond is equal to: |
| | A) | The cash payments discounted at the forward rates |
| | B) | The cash payments discounted at the spot rates |
| | C) | The cash payments discounted at the duration rates |
| | D) | The par value discounted at the spot rates |
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15 | | Payments promised to bondholders represent a best-case scenario. |
| | A) | True |
| | B) | False |
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