Fundamentals Of Investing 13th Edition By Scott B. Smart – Test Bank

Chapter 11 Bond Valuation

11.1 Learning Goal 1

1) The interest rate on the 10 year Treasury Bond has rarely fallen below the rate of inflation.
Answer: TRUE
Learning Outcome: F-05 Explain what determines interest rates and how changes in rates influence investment choices
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 1

2) The risk premium component of a bond’s market interest rate is related to the characteristics of the particular bond and its issuer.
Answer: TRUE
Learning Outcome: F-05 Explain what determines interest rates and how changes in rates influence investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1

3) The risk-free rate of return considers the expected rate of inflation.
Answer: TRUE
Learning Outcome: F-05 Explain what determines interest rates and how changes in rates influence investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1

4) Actions by the Federal Reserve can keep the risk-free rate below the rate of inflation, at least temporarily.
Answer: TRUE
Learning Outcome: F-05 Explain what determines interest rates and how changes in rates influence investment choicesAACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1

5) Municipal bonds usually have higher yields than bonds issued by the U. S. Government.
Answer: FALSE
Learning Outcome: F-05 Explain what determines interest rates and how changes in rates influence investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1

6) The higher a bond’s Moody’s or Standard & Poor’s rating, the higher its yield.
Answer: FALSE
Learning Outcome: F-05 Explain what determines interest rates and how changes in rates influence investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
7) Changes in the inflation rate have a direct and pronounced effect on market interest rates.
Answer: TRUE
Learning Outcome: F-05 Explain what determines interest rates and how changes in rates influence investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1

8) The required return on a bond is equal to
A) the real rate of return plus a risk premium plus an expected inflation premium.
B) the real rate of return plus the coupon rate plus an inflation rate.
C) the risk-free rate plus a risk premium plus an expected inflation premium.
D) the real rate plus a risk premium.
Answer: A
Learning Outcome: F-05 Explain what determines interest rates and how changes in rates influence investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1

9) The risk-free rate of return is equal to the
A) real rate plus a risk premium.
B) required return minus the inflation premium.
C) real rate plus the inflation premium.
D) required return minus the real rate.
Answer: C
Learning Outcome: F-05 Explain what determines interest rates and how changes in rates influence investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1

10) Which of the following tend to raise interest rates?

I. an increase in the money supply
II. an increase in the expected rate of inflation
III. Federal Reserve actions taken to lower expected rates of inflation
IV. an increase in investing activities by businesses

A) I, II, III only
B) II, III, IV only
C) I, II and IV only
D) I, III, and IV only
Answer: B
Learning Outcome: F-05 Explain what determines interest rates and how changes in rates influence investment choices
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 1