Function of Financial Markets

4.2 The Distinction Between Interest Rates and Returns

1) The ________ is defined as the payments to the owner plus the change in a security's value expressed as a fraction of the security's purchase price.

A) yield to maturity
B) current yield
C) rate of return
D) yield rate

2) Which of the following are TRUE concerning the distinction between interest rates and returns?

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 difference between 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 during the holding period.
D) The return can be expressed as the sum of the discount yield and the rate of capital gains.

3) The sum of the current yield and the rate of capital gain is called the

A) rate of return.
B) discount yield.
C) perpetuity yield.
D) par value.

4) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?

A) 5 percent
B) 10 percent
C) -5 percent
D) 25 percent

7) 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

13) Which of the following are generally TRUE of all bonds?

A) The longer a bond's maturity, the greater is the rate of return that occurs as a result of the increase in the interest rate.
B) Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise.
C) Prices and returns for short-term bonds are more volatile than those for longer term bonds.
D) A fall in interest rates results in capital losses for bonds whose terms to maturity are longer than the holding period.

15) Interest-rate risk is the riskiness of an asset's returns due to

A) interest-rate changes.
B) changes in the coupon rate.
C) default of the borrower.
D) changes in the asset's maturity.

16) Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant.

A) long-term; long-term
B) long-term; short-term
C) short-term; long-term
D) short-term; short-term

17) There is ________ for any bond whose time to maturity matches the holding period.

A) no interest-rate risk
B) a large interest-rate risk
C) rate-of-return risk
D) yield-to-maturity risk