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Money, Banking, and Financial Markets Practice Test: The Basics of Interest Rates
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Market interest rates are the rates at which borrowers pay lenders for the use of their money. They are the price of borrowing in the financial market and are expressed as a percentage rate over a period of time. Interest rates are determined by the interaction of the supply and demand for funds in the money market.  Economists generally agree that the interest rates yielded by any investment take into account: The risk-free cost of capital and Inflational expectations.  There are seven standard types of interest rates that you'll see among various financial products: Simple interest,... Show more
Money, Banking, and Financial Markets Practice Test: The Basics of Interest Rates
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25 Questions

1. The yield to maturity for a one-year discount bond equals the increase in price over the year, divided by the
2. The ________ is the final amount that will be paid to the holder of a coupon bond.
3. What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?
4. If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200?
5. The riskiness of an assetʹs returns due to changes in interest rates is
6. If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is
7. A ________ is bought at a price below its face value, and the ________ value is repaid at the maturity date.
8. The price of a consol equals the coupon payment
9. A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of
10. All else equal, when interest rates ________, the duration of a coupon bond ________.
11. Which of the following are true for a coupon bond?
12. If a $5,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is
13. Duration is
14. Which of the following are generally true of all bonds?
15. For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is
16. Which of the following are true concerning the distinction between interest rates and returns?
17. The ________ interest rate more accurately reflects the true cost of borrowing.
18. A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a
19. The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bondʹs
20. The present value of an expected future payment ________ as the interest rate increases.
21. If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is
22. The interest rate on a consol equals the
23. For simple loans, the simple interest rate is ________ the yield to maturity.
24. A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid.
25. In Japan in 1998 and in the U.S. in 2008, interest rates were negative for a short period of time because investors found it convenient to hold six-month bills as a store of value because

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