Chapter 3
What Do Interest Rates Mean and What Is Their
Role in Valuation?
Multiple Choice Questions
1. A loan that requires the borrower to make the same payment every period until the maturity date is
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called a
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(a) simple loan.
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(b) fixed-payment loan.
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(c) discount loan.
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(d) same-payment loan.
(e) none of the above. rs e
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Answer: B
2. A coupon bond pays the owner of the bond
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(a) the same amount every month until maturity date.
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(b) a fixed interest payment every period and repays the face value at the maturity date.
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(c) the face value of the bond plus an interest payment once the maturity date has been reached.
(d) the face value at the maturity date.
(e) none of the above.
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Answer: B
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3. A bond’s future payments are called its
(a) cash flows.
(b) maturity values.
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(c) discounted present values.
(d) yields to maturity.
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Answer: A
4. A credit market instrument that pays the owner the face value of the security at the maturity date
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and nothing prior to then is called a
(a) simple loan.
(b) fixed-payment loan.
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(c) coupon bond.
(d) discount bond.
Answer: D
5. (I) A simple loan requires the borrower to repay the principal at the maturity date along with an
interest payment. (II) A discount bond is bought at a price below its face value, and the face value is
repaid at the maturity date.
(a) (I) is true, (II) false.
(b) (I) is false, (II) true.
(c) Both are true.
(d) Both are false.
Answer: C
6. Which of the following are true of coupon bonds?
(a) The owner of a coupon bond receives a fixed interest payment every year until the maturity
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date, when the face or par value is repaid.
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(b) U.S. Treasury bonds and notes are examples of coupon bonds.
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(c) Corporate bonds are examples of coupon bonds.
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(d) All of the above.
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(e) Only (a) and (b) of the above.
Answer: D rs e
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7. Which of the following are generally true of all bonds?
(a) The longer a bond’s maturity, the lower is the rate of return that occurs as a result of the
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increase in an interest rate.
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(b) Even though a bond has a substantial initial interest rate, its return can turn out to be negative if
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interest rates rise.
(c) Prices and returns for long-term bonds are more volatile than those for shorter-term bonds.
(d) All of the above are true.
(e) Only (a) and (b) of the above are true.
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Answer: D
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8. (I) A discount bond requires the borrower to repay the principal at the maturity date plus an interest
payment. (II) A coupon bond pays the lender a fixed interest payment every year until the maturity
date, when a specified final amount (face or par value) is repaid.
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(a) (I) is true, (II) false.
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(b) (I) is false, (II) true.
(c) Both are true.
(d) Both are false.
Answer: B
9. If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is
(a) $650.
(b) $1,300.
(c) $130.
(d) $13.
(e) None of the above.
Answer: A
10. An $8,000 coupon bond with a $400 annual coupon payment has a coupon rate of
(a) 5 percent.
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(b) 8 percent.
(c) 10 percent.
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(d) 40 percent.
Answer: A
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11.
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The concept of _________ is based on the common-sense notion that a dollar paid to you in the
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future is less valuable to you than a dollar today.
(a) present value
(b) future value
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(c) interest
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(d) deflation
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Answer: A
12. Dollars received in the future are worth _________ than dollars received today. The process of
calculating what dollars received in the future are worth today is called _________
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(a) more; discounting.
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(b) less; discounting.
(c) more; inflating.
(d) less; inflating.
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Answer: B
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