Question 1

With reference to the data above, what is the expected real rate of return on the 2-year Treasury security?

Accepted Answer

A)  12.6% 
B)  9.1% 
C)  5.4% 
D)  4.2% 
E)  3.5% 
A)  12.6% 
B)  9.1% 
C)  5.4% 
D)  4.2% 
E)  3.5%

Question 2

The yield curve is a plot of

Accepted Answer

A)  maturity changes as risk changes. 
B)  yields of securities with different levels of default risk. 
C)  yields by maturity of securities with similar default risk. 
D)  interest rates over time. 
A)  maturity changes as risk changes. 
B)  yields of securities with different levels of default risk. 
C)  yields by maturity of securities with similar default risk. 
D)  interest rates over time.

Question 3

Applying the expectations theory, a bank depositor chooses between purchasing a one- year CD paying 5 percent and a two-year CD paying 5.5 percent. If indifferent between the two, the depositor must expect one-year CDs one year from now to have a rate of

Accepted Answer

A)  6.5% 
B)  4.5% 
C)  6.0% 
D)  5.0% 
A)  6.5% 
B)  4.5% 
C)  6.0% 
D)  5.0%

Question 4

The yield curves show the relationship between interest rates on bonds similar in terms except for maturity.

Accepted Answer

A) True 
 B)False

Question 5

The term structure of interest rates

Accepted Answer

A)  describes the relationship between maturity and yield for similar securities. 
B)  ranks security yield according to the default risk structure. 
C)  describes how interest rates vary over time. 
D)  describes the pattern of interest rates over the business cycle. 
A)  describes the relationship between maturity and yield for similar securities. 
B)  ranks security yield according to the default risk structure. 
C)  describes how interest rates vary over time. 
D)  describes the pattern of interest rates over the business cycle.

Question 6

The liquidity premium theory of the term structure of interest rates is best supported by what type of yield curve?

Accepted Answer

A)  a decreasing curve over time. 
B)  a flat yield curve. 
C)  an increasing yield curve over time. 
D)  a twisted yield curve 
E)  none of the above. 
A)  a decreasing curve over time. 
B)  a flat yield curve. 
C)  an increasing yield curve over time. 
D)  a twisted yield curve 
E)  none of the above.

Question 7

A downward sloping yield curve is typically seen just before an economic expansion.

Accepted Answer

A) True 
 B)False

Question 8

Contingent Convertible bonds (CoCos) are NOT similar to ordinary convertible bonds because:

Accepted Answer

A)  CoCos are convertible to the firm's preferred stock while the ordinary convertible bonds are convertible to the firm's common stock. 
B)  CoCos offer a higher coupon than ordinary convertible bonds. 
C)  Cocos are convertible into stock only if the firm's stock price hits a certain level. 
D)  Ordinary convertible bonds are converted to the firm's stock if the firm's stock falls below a certain level. 
A)  CoCos are convertible to the firm's preferred stock while the ordinary convertible bonds are convertible to the firm's common stock. 
B)  CoCos offer a higher coupon than ordinary convertible bonds. 
C)  Cocos are convertible into stock only if the firm's stock price hits a certain level. 
D)  Ordinary convertible bonds are converted to the firm's stock if the firm's stock falls below a certain level.

Question 9

Bonds rated BBB would have lower yields than AAA-rated bonds, and higher prices, everything else the same.

Accepted Answer

A) True 
 B)False

Question 10

Bond A is not callable; bond B is callable. Investors will require a higher yield on bond __ and will pay ____ for the bond.

Accepted Answer

A)  A; less 
B)  A; more 
C)  B; less 
D)  B; more 
A)  A; less 
B)  A; more 
C)  B; less 
D)  B; more

Question 11

A convertible bond will generally have a higher market yield relative to similar nonconvertible bonds.

Accepted Answer

A) True 
 B)False

Question 12

With reference to the data above, what is the default risk premium on commercial paper?

Accepted Answer

A)  5.65% 
B)  0.95% 
C)  0.79% 
D)  0.55% 
E)  0% 
A)  5.65% 
B)  0.95% 
C)  0.79% 
D)  0.55% 
E)  0%

Question 13

Explain (a.) liquidity problem in bond market, (b.) default risk, and (c.) maturity risk premiums.

Accepted Answer

a. Liquidity problems exist in infrequen

Question 14

Which of the following is not considered when assigning a bond rating?

Accepted Answer

A)  the variability of earnings 
B)  the expected cash flow 
C)  the rating on the prior issue of securities sold 
D)  the amount of the fixed contractual cash payments 
A)  the variability of earnings 
B)  the expected cash flow 
C)  the rating on the prior issue of securities sold 
D)  the amount of the fixed contractual cash payments

Question 15

With reference to the data above, what is the expected after-tax real rate of return on the one-year Treasury Bill for an investor in the 33 percent marginal tax bracket?

Accepted Answer

A)  1.11% 
B)  3.13% 
C)  0.13% 
D)  -1.11% 
A)  1.11% 
B)  3.13% 
C)  0.13% 
D)  -1.11%

Question 16

Which of the following statements about bonds is NOT true?

Accepted Answer

A)  The greater the default risk, the greater the yield. 
B)  Bonds selling at premium are especially high quality. 
C)  The less marketable a bond, the higher the yield. 
D)  Municipal bonds have lower yields than similar corporate bonds. 
A)  The greater the default risk, the greater the yield. 
B)  Bonds selling at premium are especially high quality. 
C)  The less marketable a bond, the higher the yield. 
D)  Municipal bonds have lower yields than similar corporate bonds.

Question 17

Which of the following statements is true?

Accepted Answer

A)  Interest rates always rise before recessions. 
B)  Default risk premiums vary inversely with economic activity. 
C)  Municipal bond yields are usually higher than similar risk corporate yields. 
D)  Treasury bond yields are always higher than Treasury bill yields. 
A)  Interest rates always rise before recessions. 
B)  Default risk premiums vary inversely with economic activity. 
C)  Municipal bond yields are usually higher than similar risk corporate yields. 
D)  Treasury bond yields are always higher than Treasury bill yields.

Question 18

The call price of a bond is usually below the bond's par value.

Accepted Answer

A) True 
 B)False

Question 19

The source of data for a yield curve might be

Accepted Answer

A)  bond yield by issuers over time. 
B)  historical Treasury security yields. 
C)  realized Treasury security yields by time. 
D)  outstanding Treasury security yields by maturity. 
A)  bond yield by issuers over time. 
B)  historical Treasury security yields. 
C)  realized Treasury security yields by time. 
D)  outstanding Treasury security yields by maturity.

Question 20

According to the expectations theory, if the market believes that interest rates are likely to decrease in the near future,

Accepted Answer

A)  borrowers would immediately increase their supply of short-term securities. 
B)  investors would immediately increase their demand for long-term securities. 
C)  borrowers would immediately increase their supply of long-term securities. 
D)  neither borrowers nor investors would do anything until the interest rates actually increase. 
E)  both a and b 
A)  borrowers would immediately increase their supply of short-term securities. 
B)  investors would immediately increase their demand for long-term securities. 
C)  borrowers would immediately increase their supply of long-term securities. 
D)  neither borrowers nor investors would do anything until the interest rates actually increase. 
E)  both a and b

With reference to the data above, what is the expected real rate of return on the 2-year Treasury security?

The yield curve is a plot of

Applying the expectations theory, a bank depositor chooses between purchasing a one- year CD paying 5 percent and a two-year CD paying 5.5 percent. If indifferent between the two, the depositor must expect one-year CDs one year from now to have a rate of

The yield curves show the relationship between interest rates on bonds similar in terms except for maturity.

The term structure of interest rates

The liquidity premium theory of the term structure of interest rates is best supported by what type of yield curve?

A downward sloping yield curve is typically seen just before an economic expansion.

Contingent Convertible bonds (CoCos) are NOT similar to ordinary convertible bonds because:

Bonds rated BBB would have lower yields than AAA-rated bonds, and higher prices, everything else the same.

Bond A is not callable; bond B is callable. Investors will require a higher yield on bond and will pay __ for the bond.

A convertible bond will generally have a higher market yield relative to similar nonconvertible bonds.

With reference to the data above, what is the default risk premium on commercial paper?

Explain (a.) liquidity problem in bond market, (b.) default risk, and (c.) maturity risk premiums.

Which of the following is not considered when assigning a bond rating?

With reference to the data above, what is the expected after-tax real rate of return on the one-year Treasury Bill for an investor in the 33 percent marginal tax bracket?

Which of the following statements about bonds is NOT true?

Which of the following statements is true?

The call price of a bond is usually below the bond's par value.

The source of data for a yield curve might be

According to the expectations theory, if the market believes that interest rates are likely to decrease in the near future,

An Overview of Financial Markets and Institutions

The Federal Reserve and Its Powers

The Fed and Interest Rates

The Level of Interest Rates

Bond Prices and Interest Rate Risk

Money Markets

Bond Markets

Mortgage Markets

Equity Markets

Derivatives Markets

International Markets

Commercial Bank Operations

International Banking

Regulation of Financial Institutions

Thrift Institutions and Finance Companies

Insurance Companies and Pension Funds

Investment Banking

Investment Companies

Risk Management in Financial Institutions

Filters

Exam 6: The Structure of Interest Rates

With reference to the data above, what is the expected real rate of return on the 2-year Treasury security?

The yield curve is a plot of

Applying the expectations theory, a bank depositor chooses between purchasing a one- year CD paying 5 percent and a two-year CD paying 5.5 percent. If indifferent between the two, the depositor must expect one-year CDs one year from now to have a rate of

The yield curves show the relationship between interest rates on bonds similar in terms except for maturity.

The term structure of interest rates

The liquidity premium theory of the term structure of interest rates is best supported by what type of yield curve?

A downward sloping yield curve is typically seen just before an economic expansion.

Contingent Convertible bonds (CoCos) are NOT similar to ordinary convertible bonds because:

Bonds rated BBB would have lower yields than AAA-rated bonds, and higher prices, everything else the same.

Bond A is not callable; bond B is callable. Investors will require a higher yield on bond __ and will pay ____ for the bond.

A convertible bond will generally have a higher market yield relative to similar nonconvertible bonds.

With reference to the data above, what is the default risk premium on commercial paper?

Explain (a.) liquidity problem in bond market, (b.) default risk, and (c.) maturity risk premiums.

Which of the following is not considered when assigning a bond rating?

With reference to the data above, what is the expected after-tax real rate of return on the one-year Treasury Bill for an investor in the 33 percent marginal tax bracket?

Which of the following statements about bonds is NOT true?

Which of the following statements is true?

The call price of a bond is usually below the bond's par value.

The source of data for a yield curve might be

According to the expectations theory, if the market believes that interest rates are likely to decrease in the near future,

An Overview of Financial Markets and Institutions

The Federal Reserve and Its Powers

The Fed and Interest Rates

The Level of Interest Rates

Bond Prices and Interest Rate Risk

Money Markets

Bond Markets

Mortgage Markets

Equity Markets

Derivatives Markets

International Markets

Commercial Bank Operations

International Banking

Regulation of Financial Institutions

Thrift Institutions and Finance Companies

Insurance Companies and Pension Funds

Investment Banking

Investment Companies

Risk Management in Financial Institutions

Filters

Bond A is not callable; bond B is callable. Investors will require a higher yield on bond and will pay __ for the bond.