Problem 1 (MCQs, 30 points) Choose the one right answer.
1. If the bank pays you an interest rate of 5% and the inflation rate is 2%, then your real rate is
(a) 3.00%.
(b) 7.00%
(c) 2.94%.
(d) 7.10%.
2. The NPV and IRR criteria for comparing cash flows give the same result
(a) Always.
(b) When the cash flows repeat indefinitely in a cyclical manner.
(c) For one-time only projects.
(d) For short-term projects.
3. If the interest rate is 12% per year, compounded continuously, the effective quarterly interest rate is
(a) 3.045%.
(b) 3.00%.
(c) 2.956%.
(d) 2.833%.
4. Lebanese treasury bonds pay higher yield than US treasury bonds of the same maturity because of
(a) Higher country instability and higher interest rate risks.
(b) Higher country instability and lower interest rate risks.
(c) Higher country instability and higher inflation rate risks.
(d) Higher country instability and lower inflation rate risks.
5. Consider three bonds with the same maturity and face value, and coupon rates of 3%, 4%, and 5%. If
the interest rate increases by 1%, which bond price will decrease the most?
(a) That of the 3% coupon bond.
(b) That of the 4% coupon bond.
(c) That of the 5% coupon bond.
(d) Cannot tell.
6. When the interest rate increases significantly and stays high until a bond's maturity, bond buyers who
hold the bond till maturity will achieve a yield which is
(a) Lower than what they were promised when they bought the bond.
(b) Higher than what they were promised when they bought the bond.
(c) The same as what they were promised when they bought the bond.
(d) Sometimes lower, sometimes higher, than what they were promised when they bought the bond.
