Question Details

How could 1995 returns on bonds be as high as 30 percent 



"Thanks to a sharp cut in interest rates engineered by the Fed, many economists expect the economy to be growing again, albeit slowly, by spring, which is the soonest any of President Bush's legislative proposals are likely to be enacted." 
1. What major advantage of monetary policy over fiscal policy does this clipping underline? 
a) monetary policy is more effective b) monetary policy is less discriminatory 
c) monetary policy can influence interest rates 
d) monetary policy can be undertaken more quickly 
2. If this policy is so good, why isn't it done more vigorously, more often? 
a) because of the superiority of fiscal policy 
b) because of the danger of inflation creation 
c) because it suffers from diminishing marginal returns 
d) because politicians don't trust the Fed with this power 
3. "According to Ibbotson Associates, 20-year government bonds are on track to post annual returns of 30 percent by the end of 1995. That would lag only the 40 percent returns of 1982 and the 31 percent returns of 1985." In 1995 the interest rate was far below 30 percent. How could 1995 returns on bonds be as high as 30 percent ? 
a) the interest rate must have risen a lot b) the interest rate must have fallen a lot 
c) there was a large compensation for risk d) bond coupons were extraordinarily high 
4. Suppose the current interest rate is 6 percent. What price should one expect to pay for a 3-month Treasury bill with face value $10,000 that is one month old? 
a) $9850 or less b) more than $9850 but not more than $9900 
c) more than $9900 but not more than $9950 d) more than $9950 
5. A bond due to mature and pay $1000 in one year's time has a coupon of $65 and a current price of $1015. The interest rate is 
a) less than 5% b) 5% or more, but less than 6.5% 
c) 6.5% or more, but less than 8% d) 8% or more


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