Contract Rate

### What does the contract rate specify on a bond? - [x] The percentage interest payment on the bond’s face value. - [ ] The total amount paid at bond maturity. - [ ] The penalties for late payments. - [ ] The fees associated with the bond issuance. > **Explanation:** The contract rate specifies the periodic interest payments, usually as a percentage of the bond's face value, that the bond issuer will pay to the bondholder. ### How does a contract rate differ from a market interest rate? - [x] The contract rate is predetermined in the financial contract, whereas the market rate fluctuates. - [ ] The contract rate changes daily while the market rate stays fixed. - [ ] Both rates are always the same. - [ ] The contract rate is only applicable to mortgages. > **Explanation:** The contract rate is pre-specified in the contract for a financial instrument, while the market interest rate fluctuates based on market conditions. ### Can the contract rate be adjusted? - [ ] Never - [ ] Only once - [x] Yes, if it's a variable-rate instrument - [ ] Only in the case of default > **Explanation:** The contract rate can be adjusted if the financial instrument has variable-rate terms, allowing for periodic rate changes based on specific benchmarks or conditions. ### Which term is synonymous with the contract rate? - [ ] Effective interest rate - [x] Face interest rate - [ ] Discount rate - [ ] Yield to maturity > **Explanation:** The face interest rate is another term for the contract rate, indicating the stated interest rate on a financial instrument. ### Why might an investor be interested in the yield instead of just the contract rate? - [ ] The yield accounts for only the face interest rate. - [x] The yield considers market price and actual earnings over the holding period. - [ ] The yield is always higher than the contract rate. - [ ] The yield represents the signing bonus. > **Explanation:** The yield provides a more comprehensive measure by considering not just the interest payments, but also the market price and any capital gains or losses realized over the period. ### What influences the market interest rate? - [ ] Personal preference of the investor - [ ] Legal stipulations in the contract - [x] Economic conditions, supply and demand, monetary policy - [ ] The issuer's choice > **Explanation:** The market interest rate is influenced by economic conditions, the supply and demand for money, and monetary policy set by central banks. ### How does the contract rate impact periodic interest payments in bonds? - [x] Determines the fixed periodic interest payments - [ ] Affects only the principal repayment - [ ] Allows skipping interest payments - [ ] Decides the frequency of coupon payments > **Explanation:** The contract rate directly determines the fixed periodic interest payments made to the bondholder. ### What would likely remain constant for a fixed-rate bond? - [x] Contract rate - [ ] Market rate - [ ] Yield to maturity - [ ] Inflation rate > **Explanation:** For a fixed-rate bond, the contract rate remains constant over the life of the bond. ### How is yield different from the contract rate? - [x] Yield reflects the real return including market price changes, whereas contract rate reflects agreed periodic interest payment. - [ ] Yield only considers coupon payments. - [ ] Contract rate accounts for market fluctuations. - [ ] They are essentially the same. > **Explanation:** Yield reflects the actual return on a financial instrument, including market price changes and overall earnings, whereas the contract rate only measures agreed periodic interest payments. ### For what types of financial instruments is a contract rate most relevant? - [x] Bonds and loans - [ ] Equities - [ ] Commodities - [ ] Derivatives > **Explanation:** The contract rate is most relevant for bonds and loans since it represents the interest payments agreed upon in the financial contract.