Question 1

Which of the following best describes a coupon bond?

Accepted Answer

A bond that pays fixed interest payments periodically and repays the face value at maturity.

Question 2

Which formula correctly calculates the present value (PV) of a future cash flow $$CF$$ received in $$n$$ years at an interest rate $$i$$?

Accepted Answer

$$PV = CF \div (1 + i)^n$$

Question 3

A simple loan of $1,000 is made for 2 years at an annual interest rate of 5%. What is the total amount to be repaid at maturity?

Accepted Answer

$$1,102.50$$

Question 4

Which of the following is a key reason why present value is used to compare different credit market instruments?

Accepted Answer

It enables direct comparison of payments made at different times by converting them to today's value.

Question 5

A discount bond is purchased for $$950 and will pay 1$$,000 at maturity in one year. What is the yield to maturity (YTM)?

Accepted Answer

$$YTM = \frac{1,000 - 950}{950} = 0.0526 or$$ $$5.26\%$$

Question 6

Which of the following statements about interest rates is FALSE?

Accepted Answer

Interest rates have no impact on government borrowing costs.

Question 7

A fixed payment loan requires the borrower to:

Accepted Answer

Make equal payments every period, each including both principal and interest.

Question 8

If the present value of $1,000 to be received in 3 years at an interest rate of 6% is calculated, which formula should be used?

Accepted Answer

$$PV = 1,000 \div (1 + 0.06)^3$

Question 9

Which instrument is also known as a zero-coupon bond?

Accepted Answer

Discount bond

Question 10

Why is a pound received today more valuable than a pound received one year from now?

Accepted Answer

Because money today can be invested to earn interest.

Question 11

Which of the following best describes the yield to maturity (YTM)?

Accepted Answer

The interest rate that equates the present value of future cash flows with the current price of the instrument.

Question 12

A $$1,000 coupon bond pays 50 $$annually and matures in 5 years. If the market price is $950, which of the following is true?

Accepted Answer

The yield to maturity is higher than the coupon rate.

Question 13

Which of the following is NOT a type of credit market instrument discussed in the materials?

Accepted Answer

Equity share

Question 14

If a government wants to reduce inflation, what is the most likely action regarding interest rates?

Accepted Answer

Raise interest rates to reduce demand.

Question 15

Which of the following best explains the time value of money?

Accepted Answer

Money today is worth more than the same amount in the future because it can earn interest.

Question 16

A borrower takes a fixed payment loan of $10,000 at 8% annual interest for 3 years. Which formula would you use to calculate the annual payment?

Accepted Answer

$$FP = \frac{PV 	imes i}{1 - (1 + i$$)^{-n}$$}$$

Question 17

Which of the following is TRUE about the payment schedules of credit market instruments?

Accepted Answer

Simple loans and discount bonds make payments only at maturity.

Measuring Interest Rates and Credit Market Instruments

Study Guide - Practice Questions