Reference no: EM131095637

Handout 2-

[Q1] Everything else held constant, if income tax rates were lowered, then ______.

A) The interest rate on municipal bonds would fall.

B) The interest rate on municipal bonds would rise.

C) The price of Treasury bonds would fall.

D) The interest rate on Treasury bonds would rise.

[Q2] When the price of a bond is above the equilibrium price, there is an excess ______ bonds and price will ______.

A) Demand for; fall

B) Supply of; rise

C) Supply of; fall

D) Demand for; rise

[Q3] A situation in which the quantity of bonds supplied exceeds the quantity of bonds demanded is called a condition of excess supply; because people want to sell ______ bonds than others want to buy, the price of bonds will ______.

A) More; fall

B) Fewer; fall

C) More; rise

D) Fewer; rise

[Q4] A factor that could cause the supply of bonds to increase (shift to the right) is:

A) A decrease in expected inflation.

B) A decrease in government budget deficits.

C) Expectations of more profitable investment opportunities.

D) A business cycle recession.

[Q5] If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is____________.

A. 5 percent.

B. 10 percent.

C. 12.5 percent.

D. 15 percent.

[Q6] If you own a $1,000 face value bond with one year remaining to maturity and a five percent coupon rate and new bonds are paying 12 percent, what is the most you can get for your old bond?

A. $1,200

B. $1,100

C. $937.50

D. $1157.60

E. $867.99

[Q7] Which of the following bonds would you prefer to be buying?

A) A $10,000 face-value security with a 10 percent coupon selling for $10,000

B) A $10,000 face-value security with a 9 percent coupon selling for $10,000

C) A $10,000 face-value security with a 10 percent coupon selling for $9,000

D) A $10,000 face-value security with a 7 percent coupon selling for $10,000

[Q8] Which of the following are true for a coupon bond?

A) The yield to maturity is greater than the coupon rate when the bond price is above the par value.

B) The yield is less than the coupon rate when the bond price is below the par value.

C) The price of a coupon bond and the yield to maturity are positively related.

D) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.

[Q9] Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ______ and the demand curve for Treasury bonds to the ______.

A) left; left

B) left; right

C) right; right

D) right; left

[Q10] If the price of bonds is set _____ the equilibrium price, the quantity of bonds demanded exceeds the quantity of bonds supplied, a condition called excess _____.

A) below; supply

B) above; supply

C) above; demand

D) below; demand

[Q11] Everything else held constant, if the expected return on U.S. Treasury bonds falls from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected return of corporate bonds ______ relative to U.S. Treasury bonds and the demand for corporate bonds ______.

A) rises; falls

B) falls; falls

C) rises; rises

D) falls; rises

[Q12] During a recession, the supply of bonds _______ and the supply curve shifts to the ______, everything else held constant.

A) increases; left

B) increases; right

C) decreases; right

D) decreases; left