Which kinds of bonds tend to offer the highest yields?

Suppose that market expectations change, and investors now expect the yield on 1-year T-bills to rise substantially over the next 20 years. We expect this change to have what immediate effect?

Question 1 options:

	The current yield on 1-year T-bills falls.
	The current yield on 1-year T-bills rises.
	The current yield on 20-year Treasury bonds falls.
	The current yield on 20-year Treasury bonds rises.
	There is no clear immediate effect.

Question 2 (1 point)

 

When corporate bond yields generally rise, the demand for a typical U.S. Treasury bond will ______, causing the price to ______ and its yield to ______.

Question 2 options:

	increase; fall; fall
	increase; fall; rise
	increase; rise; fall
	increase; rise; rise
	decrease; fall; fall
	decrease; fall; rise
	decrease; rise; fall
	decrease; rise; rise

Question 3 (1 point)

 

Which kinds of bonds tend to offer the highest yields? (Mark all that apply.)

Question 3 options:

	Corporate bonds.
	Bonds that mature quickly.
	Bonds that have high ratings.
	Bonds traded in large volume, in the daily bond markets.
	Bonds that can be called back by the borrower.

Question 4 (1 point)

 

Stocks are generally riskier investments than corporate bonds, because:

Question 4 options:

	There is more speculative trading of stocks.
	The government insures bonds but not stocks.
	Defaulting on a bond payment exposes management to criminal charges.
	A bond includes a promise to make payments at certain dates but a stock includes no such promise.

Question 5 (1 point)

 

A diversified portfolio of investments is generally considered ______, because ______:

Question 5 options:

	Good; it can reduce risk without affecting expected return.
	Bad; it is hard to pay attention to many different investments.
	Bad; it is more likely that at least one of your investments will do badly.
	Good; it reduces both risk and expected return, but this tradeoff is generally considered better than having extreme exposure to several firms.

Question 6 (1 point)

 

Which kinds of stocks tend to have low beta values? Stocks (mark all that apply):

Question 6 options:

	Of large firms.
	Of firms with high bond ratings.
	Of firms that sell products with demand that is relatively insensitive to the business cycle.
	That are especially sensitive to random events unrelated to the business cycle.

Question 7 (1 point)

 

Match each stock to a description of its beta value.

Question 7 options:

Applied Materials Barrick Gold Duke Power Wynn Resorts

1. Exceptionally low beta value (below zero). 2. Exceptionally high beta value (above two). 3. Beta value falls within the general range of many other stocks.

Question 8 (1 point)

 

Which characteristics of an asset tend to be associated with a higher rate of return?

Question 8 options:

	High beta (for stocks).
	High risk.
	High liquidity.
	High holding costs (e.g. insurance, security, property taxes)’
	Favorable tax treatment.
	Asset is fun to own.

Question 9 (1 point)

 

Historically, art prices have increased more rapidly than the prices of most other investment assets. Which properties of art help to explain these high average returns?

Question 9 options:

	Art is expensive to store and protect.
	Selling art is a costly, time-consuming, and unpredictable process.
	There is a tax break for owning art designated “historically significant.”
	The price increases for specific works of art tend to be steady and predictable.
	Many investors get pleasure or pride from owning art, aside from any financial returns.

Question 10 (1 point)

 

Different assets have different advantages, which are more important to some persons than others. Match each kind of asset to the kind of person who would be most likely to find that asset attractive.

Question 10 options:

Persons who have high incomes. Persons who foresee that they may need cash soon to pursue an entrepreneurial opportunity. Persons who are relatively accepting of risk. Single persons who are confident that they are in good health and secure in their jobs.

1. 1- year T-bills. 2. 20-year T-bonds. 3. Real estate. 4. Municipal bonds.

Question 11 (1 point)

 

If bond prices fall, then we generally expect the rate of return on stock investments to ____ and the rate of return on real estate investments to ______.

Question 11 options:

	Rise; rise
	Rise; fall
	Fall; rise
	Fall; fall
	Rise; show no consistent tendency to rise or fall.
	Fall; show no consistent tendency to rise or fall.
	Show no consistent tendency to rise or fall; rise.
	Show no consistent tendency to rise or fall; fall.

Question 12 (1 point)

 

Question 12 options:

Suppose the Treasury auctions a 30-year $10,000 bond. Assume that time has passed, all interest payments have been made, and the bond matures in ten days, when it will return $10,000 to the current bondholder. If the current price is $9,950, then the bond’s current yield, to the nearest tenth of a percent, is

%. (For the purpose of this question, assume that a year is exactly 365 days long.)

For the next seven questions, assume that the Treasury auctions a block of one-year $1,000 Treasury bills on January 1.

Question 13 (1 point)

 

Question 13 options:

If the bond’s auction price is $991, then at that time its yield to the nearest hundredth of a percent is

%.

Question 14 (1 point)

 

Question 14 options:

If the bond’s price on July 1 is $970, then at that time its yield to the nearest hundredth of a percent is

%.

Question 15 (1 point)

 

Question 15 options:

If the bond’s price on November 1 is $970, then at that time its yield to the nearest hundredth of a percent is

%.

Question 16 (1 point)

 

Question 16 options:

If on January 1  the yield based on the auction price is 1.6%, then to the nearest dollar that price is $

.

Question 17 (1 point)

 

Question 17 options:

If on July 1 the annualized yield based on the market price is 1.6%, then to the nearest dollar that price is $

.

Question 18 (1 point)

 

Question 18 options:

If on October 1 the annualized yield based on the market price is 1.6%, then to the nearest dollar that price is $

.

Question 19 (1 point)

 

In what situation could the buyer lose money by buying this T-bill?

Question 19 options:

	The yield on T-bills falls between the date it is sold and the date that it matures, one year later.
	The yield on T-bills rises between the date it is sold and the date that it matures, one year later.
	The buyer sells the bill before it matures, to raise cash, and in the meantime interest rates have generally risen.
	The buyer sells the bill before it matures, to raise cash, and in the meantime interest rates have generally fallen.

Question 20 (1 point)

 

Consider a bond that makes only one payment, at maturity. What happens to the market price and yield of that bond as the maturity date approaches?

Question 20 options:

	Both will increase.
	At least one, and possibly both, will increase.
	Price will increase but yield could increase or decrease.
	Yield will increase but price could increase or decrease.
	One will increase while the other decreases or remains the same.
	It is possible that none of these things happen.