the economics of money, banking, and financial markets

105 #

© 2014 Pearson Canada Inc.#

16. 
    

    Bonds whose term-to-maturity is longer than the holding period are subject to ____.
    A) interest rate risk
    B) exchange-rate risk
    C) inflation
    D) deflation
    Answer: A
    Diff: 2 Type: MC Page Ref: 77
    Skill: Recall
    Objective List: 4.2 Discern among the ways of measuring the interest rate

    
    


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
    Answer: A
    Diff: 1 Type: MC Page Ref: 77
    Skill: Recall
    Objective List: 4.2 Discern among the ways of measuring the interest rate

    
    


18. 
    

    Your favorite uncle advises you to purchase long-term bonds because their interest rate is 10
    percent. Should you follow his advice?
    Answer: It depends on where you think interest rates are headed in the future. If you think
    interest rates will be going up, you should not follow your uncle's advice because you would then
    have to discount your bond if you needed to sell it before the maturity date. Long-term bonds
    have a greater interest-rate risk.
    Diff: 2 Type: SA Page Ref: 77
    Skill: Applied
    Objective List: 4.2 Discern among the ways of measuring the interest rate

    
    


19. 
    

    Your friend tells you that she bought a 10-year to maturity discount bond that she plans to
    hold until maturity in order to finance her daughter's university education. She also tells you that
    she is worried that due to interest-rate-risk she may suffer significant capital losses if interest
    rates increase. Are her fears justified?
    Answer: No, her fear of significant capital losses from future increases in the interest rates for
    bonds are not justified as she is planning to hold the 10-year bond until maturity when she is
    guaranteed to receive the face value of the bond back. There is no interest-rate-risk associated
    with this investment as the time to maturity matches the holding period and any increase in
    interest rates can have no effect on the price at the end of the holding period.
    Diff: 2 Type: SA Page Ref: 77
    Skill: Applied
    Objective List: 4.2 Discern among the ways of measuring the interest rate