Question : 21) An analyst considering the purchase of a Government of : 1384454

21) An analyst is considering the purchase of a Government of Canada bond that will pay its face value of $10 000 in one year’s time, but pay no direct interest. The market interest rate is 4% and the bond is being offered for sale at a price of $9400. The analyst should recommend

A) purchasing the bond because the purchase price is more than its present value and is therefore profitable.

B) purchasing the bond because the purchase price is less than its present value and is therefore profitable.

C) not purchasing the bond because the buyer could earn an additional $224 by investing the $9400 elsewhere.

D) not purchasing the bond because the buyer could earn an additional $376 by investing the $9400 elsewhere.

E) not purchasing the bond because the purchase price is less than its present value.

22) In order to calculate the present value of the sum of future payments due from a bond, we use the interest rate to ________ those future payments.

A) adjust

B) correct

C) discount

D) inflate

E) maximize

23) When the market price of a bond falls, ceteris paribus, then

A) the term to maturity of the bond increases.

B) the term to maturity of the bond decreases.

C) the yield on that bond rises.

D) the yield on that bond also falls.

E) the market interest rate rises.

24) Suppose the market interest rate rises from 3% to 4%. This will lead to ________ in bond prices and ________ in bond yields.

A) a fall; a fall

B) a fall; a rise

C) a rise; a fall

D) a rise; a rise

E) no change; no change

25) Suppose the market interest rate falls from 3% to 2%. This will lead to ________ in bond prices and ________ in bond yields.

A) a fall; a fall

B) a fall; a rise

C) a rise; a fall

D) a rise; a rise

E) no change; no change

26) Suppose the market interest rate is stable at 4% and we see a decline in bond prices (and thus a rise in bond yields). One explanation for this is that

A) bond issuers are facing an excess demand for their bonds.

B) bond purchasers perceive a reduction in riskiness and thus a higher expected present value from those bonds.

C) there is no causal relationship between market interest rates and bond prices.

D) bond purchasers perceive an increase in riskiness and thus a lower expected present value from those bonds.

E) there is a positive relationship between interest rates and bond prices.

27) Suppose a Government of Canada bond is being offered in financial markets at a price that is higher than its present value. We can expect that

A) the price of the bond will rise further.

B) the face value of the bond will be adjusted to a lower value.

C) the relatively high demand for the bond will cause its present value to rise.

D) the lack of demand for this bond will cause its price to fall.

E) the face value of the bond will be adjusted to a lower value.

28) Suppose a Government of Canada bond is being offered in financial markets at a price that is lower than its present value. We can expect that

A) the lack of demand for this bond will cause its present value to fall.

B) the price of the bond will fall further.

C) the relatively high demand for this bond will cause its price to rise.

D) the face value of the bond will be adjusted to a lower value.

E) the face value of the bond will be adjusted to a higher value.

29) The term “demand for money” usually refers to the

A) aggregate demand for money balances in the economy.

B) average person’s desire to hold cash.

C) cash and deposits actually held by firms.

D) sum of all desired holdings of cash.

E) sum of all desired assets, including cash, bonds, and real property.

30) The opportunity cost of holding money rather than bonds is

A) the rate of interest earned on bonds.

B) the price level.

C) forgone consumption.

D) forgone liquidity.

E) zero — there is no opportunity cost of holding money.