Finance 3100 5-6 Chapter Test

A real rate of return is defined as a rate that has been adjusted for which one of the following? Inflation
The term structure of interest rates represents the relationship between which of the following? Nominal rates on Treasury Securities and time to maturity
Changes in interest rates affect Bond Prices. What compensates bond investors for this risk Interest rate risk premium
Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected? Default risk premium
Which one of the following premiums is paid on a corporate bond due to its tax status? Taxability premium
Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value? Liquidity premium
Generally speaking, bonds issued in the US pay interest on an ___ basis? Semi-annual
An upward-sloping term structure of interest rates indicates: The nominal rate is increasing even though the real rate is constant as the time to maturity increases
If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be: Downward-sloping
Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk? Interest rate risk premium
Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected Default risk premium
The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities? Maturity
If your nominal rate of return is 8.4% and your real rate of return is 3.2%, what is the inflation rate? 5.04%
Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond? Real rate
You invest 15,000$ today, compounded monthly, with an annual interest rate of 8.25%. What amount of interest will you earn in one year? 1,285.38$
Which one of the following bonds is most apt to have the smallest or no liquidity premium? Treasury bill
T or F: Reducing principal at a faster pace increases the overall interest paid on a loan? False
T or F: Reducing principal at a faster pace reduces the overall interest paid on a loan? True
T or F: The more frequent the payment, the lower the total interest expense over the life of the loan, even though the effective rate of the loan is higher True
T or F: Monthly interest on a loan is equal to the beginning balance times the periodic interest rate? True
What happens if you increase your monthly payment above the required loan payment? You can significantly reduce the number of payments needed to pay off the loan
Nominal interest rates are roughly speaking the sum of two major components. These components are ____ The real interest rate and expected inflation
The Fisher Effect tells us that the true nominal rate is actually made up of three components. These three components are ___ The real rate, the inflation rate, and the product of the real rate and inflation rate
T or F: The longer the loan, the greater the risk of nonpayment and the lower the interest rate the lender demands False
Which of the below is not a major component of the term structure of interest rates? Default risk premium
You have a 30 year fixed rate mortgage at an annual rate of 6.5%. Knowing that your mortgage payments are monthly, compute the effective annual rate that you are being charged on your mortgage 6.7%
Atlanta Markets has a semi-annual bond outstanding with a 9% annual coupon rate and a 9.57% yield to maturity. If the current rate of inflation is 2.3%, what is the real rate of return on this bond? 7.11%

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