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# Practice Mid-Term Examination - page 2 / 12

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6. The current yield on a \$6,000, 10 percent coupon bond selling for \$5,000 is

a.  5 percent.

b.  10 percent.

c.  12 percent.

d.  15 percent.

7.  The yield on a discount basis of a 90day, \$1,000 Treasury bill selling for \$950 is

a.  5 percent.

b.  10 percent.

c.  15 percent.

d.  20 percent.

e.  none of the above.

8.  If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding?

a.  A bond with one year to maturity

b.  A bond with five years to maturity

c.  A bond with ten years to maturity

d.  A bond with twenty years to maturity

9.  If you expect the inflation rate to be 15 percent next year and a oneyear bond has a yield to maturity of 7 percent, then the real interest rate on this bond is

a.  7 percent.

b.  22 percent.

c.  15 percent.

d.  8 percent.

e.  none of the above.

10. In which of the following situations would you prefer to be borrowing?

a.  The interest rate is 9 percent and the expected inflation rate is 7 percent.

b.  The interest rate is 4 percent and the expected inflation rate is 1 percent.

c.  The interest rate is 13 percent and the expected inflation rate is 15 percent.

d.  The interest rate is 25 percent and the expected inflation rate is 50 percent.

11. The nominal interest rate minus the expected rate of inflation

a.  defines the real interest rate.

b.  is a better measure of the incentives to borrow and lend than is the nominal interest rate.

c.  is a more accurate indicator of the tightness of credit market conditions than is the nominal interest rate.

d.  indicates all of the above.

e.  indicates only (a) and (b) of the above.

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