Financial Markets Lesson 8 Quiz Answer

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Week-3

Lesson #8 Quiz

Q1) Which of the following describes current short term interest rates?

They are very high
They are strongly negative
They are approximately equal to zero
They are changing for the first time in the last 100 years

Q2) What is the Federal Funds Rate and how long does it take to mature?

The longest term interest rate in the federal government, which takes one year to mature.
The shortest term interest rate in the federal government, which takes one hour to mature.
The shortest term interest rate in the federal government, which takes one month to mature.
The shortest term interest rate in the federal government, which takes one day to mature.

Q3) If you put $1000 into an account with a 20% interest rate, how much money will you have at the end of the year if interest is compounded ONCE per year?

200
1210
1200
1440

Q4) How do coupon bonds work?

You purchase a bond for the same price you eventually sell it for, but if you have a “coupon”, you may buy it for less money.

You purchase a bond for the same price you eventually sell it for, but bond owners are eligible for special offers from the federal government, also known as “coupons”, which incentivize the purchase of the bonds.

You purchase a bond for one price, but the final price you may sell it for depends on the type of “coupons” that are released to account for inflation.

You purchase a bond for the same price you eventually sell it for, but while it reaches maturity, you may clip “coupons” off the bond and exchange them for money.

Q5) What is the main difference between a consol and an annuity ?

The consol has a fixed price of $1 at inception whereas the annuity price is given by the market.

A consol pays a constant quantity (coupon) forever, whereas the annuity also pays a constant quantity but only until a fixed time T called the maturity date.

An annuity pays a constant quantity (coupon) forever, whereas the consol also pays a constant quantity but only until a fixed time T called the maturity date.