Question 1

The ________ represents the initial reaction of the interest rate to a change in the money supply.

Accepted Answer

A)  Income effect 
B)  Price expectation effect 
C)  Liquidity effect 
D)  Interest rate effect 
A)  Income effect 
B)  Price expectation effect 
C)  Liquidity effect 
D)  Interest rate effect

Question 2

The ________ should reflect the coupon interest that will be earned plus either (1) any capital gain that will be realized from holding the bond to maturity, or (2) any capital loss that will be realized from holding the bond to maturity.

Accepted Answer

A)  yield on a bond investment 
B)  dividend yield on a bond investment 
C)  bid-ask spread 
D)  yield on a stock investment 
A)  yield on a bond investment 
B)  dividend yield on a bond investment 
C)  bid-ask spread 
D)  yield on a stock investment

Question 3

Suppose a taxable bond issue offers a yield of 6% and is acquired by an investor facing a marginal tax rate of 30%. The after-tax yield would then be 1.80%.

Accepted Answer

A) True 
 B)False

Question 4

The difference between the yield on any two bond issues is called a ________.

Accepted Answer

A)  yield difference 
B)  difference spread 
C)  coupon rate spread 
D)  yield spread 
A)  yield difference 
B)  difference spread 
C)  coupon rate spread 
D)  yield spread

Question 5

The highest-grade bonds are designated by Moody's by the symbol ________.

Accepted Answer

A)  Ba 
B)  A 
C)  Aa 
D)  Aaa 
A)  Ba 
B)  A 
C)  Aa 
D)  Aaa

Question 6

The ________ rate of interest is determined by interaction of the supply and demand functions. As a cost of borrowing and a reward for lending, the rate must reach the point where total supply of savings ________ total demand for borrowing and investment.

Accepted Answer

A)  equilibrium; is greater 
B)  minimum; equals 
C)  equilibrium; equals 
D)  minimum; is greater 
A)  equilibrium; is greater 
B)  minimum; equals 
C)  equilibrium; equals 
D)  minimum; is greater

Question 7

The yield to maturity is determined by a trial-and-error process. The first step in this trial and error process is ________.

Accepted Answer

A)  Compute the present value of each cash flow using the best guess interest rate. 
B)  Total the present value of the cash flows using the best guess interest rate. 
C)  Select an interest rate. 
D)  Compare the total present value using the best guess interest rate with the market price of the bond. 
A)  Compute the present value of each cash flow using the best guess interest rate. 
B)  Total the present value of the cash flows using the best guess interest rate. 
C)  Select an interest rate. 
D)  Compare the total present value using the best guess interest rate with the market price of the bond.

Question 8

The factors that affect the spread include ________.

Accepted Answer

A)  the type of issuer and the expected liquidity of the issue 
B)  the provisions that grant either the issuer or the investor the obligation to do something and the taxability of the interest received by the issuer 
C)  the investor's perceived creditworthiness and the term or maturity of the investor's horizon. 
D)  All of these 
A)  the type of issuer and the expected liquidity of the issue 
B)  the provisions that grant either the issuer or the investor the obligation to do something and the taxability of the interest received by the issuer 
C)  the investor's perceived creditworthiness and the term or maturity of the investor's horizon. 
D)  All of these

Question 9

Explain the distinction between the real rate of interest and the nominal rate of interest.

Accepted Answer

The real rate is the growth in the power

Question 10

By the ________, we mean the rate that would prevail in the economy if the average prices for goods and services were expected to remain constant during the loan's life.

Accepted Answer

A)  risk-free rate 
B)  short term 
C)  real rate 
D)  long term 
A)  risk-free rate 
B)  short term 
C)  real rate 
D)  long term

Question 11

The liquidity preference theory is Keynes's view that the rate of interest is set in the market for money balances.

Accepted Answer

A) True 
 B)False

Question 12

The most recently auctioned Treasury issues for each maturity are referred to as ________.

Accepted Answer

A)  off-the-run issues or current coupon issues. 
B)  minimum interest rate or base interest rate 
C)  on-the- run or current coupon issues. 
D)  benchmark interest rate or minimum interest rate. 
A)  off-the-run issues or current coupon issues. 
B)  minimum interest rate or base interest rate 
C)  on-the- run or current coupon issues. 
D)  benchmark interest rate or minimum interest rate.

Question 13

Which of the below IS considered by Fisher's theory.

Accepted Answer

A)  Fisher's theory takes into account the power of the government (in concert with depository institutions) to create money. 
B)  Fisher's theory considers the government's often large demand for borrowed funds, which is frequently immune to the level of the interest rate 
C)  Fisher's theory takes into account the possibility that individuals and firms might invest in cash balances. 
D)  Fisher's theory considers an interest rate on loans that embodies no premium for default risk because borrowing firms are assumed to meet all obligations. 
A)  Fisher's theory takes into account the power of the government (in concert with depository institutions) to create money. 
B)  Fisher's theory considers the government's often large demand for borrowed funds, which is frequently immune to the level of the interest rate 
C)  Fisher's theory takes into account the possibility that individuals and firms might invest in cash balances. 
D)  Fisher's theory considers an interest rate on loans that embodies no premium for default risk because borrowing firms are assumed to meet all obligations.

Question 14

There are several interesting points about the relationship among the coupon rate, market price, and yield to maturity. Briefly explain these relationships.

Accepted Answer

Three interesting relationships involvin

Question 15

By the ________, we mean the rate on a loan that has one year to maturity.

Accepted Answer

A)  risk-free rate 
B)  short term 
C)  real rate 
D)  long term 
A)  risk-free rate 
B)  short term 
C)  real rate 
D)  long term

Question 16

Within the corporate market sector, issuers are classified as ________.

Accepted Answer

A)  (1) utilities, (2) industrials, (3) finance, and (4) banks. 
B)  (1) high-risk, (2) medium-risk, (3) low-risk, and (4) no-risk. 
C)  (1) foreign, (2) domestic, (3) European, and (4) Asian. 
D)  (1) intramarket, (2) extramarket, (3) ultramarket, and (4) intermarket. 
A)  (1) utilities, (2) industrials, (3) finance, and (4) banks. 
B)  (1) high-risk, (2) medium-risk, (3) low-risk, and (4) no-risk. 
C)  (1) foreign, (2) domestic, (3) European, and (4) Asian. 
D)  (1) intramarket, (2) extramarket, (3) ultramarket, and (4) intermarket.

Question 17

The loanable funds theory is an extension of Fisher's theory and proposes that the equilibrium rate of interest reflects the demand and supply of funds, which depend on savers' willingness to save, borrowers' expectations regarding the profitability of investing, and the government's action regarding money supply.

Accepted Answer

A) True 
 B)False

Question 18

By the ________, we mean the rate on a loan whose borrower will not default on any obligation.

Accepted Answer

A)  risk-free rate 
B)  short term 
C)  real rate 
D)  long term. 
A)  risk-free rate 
B)  short term 
C)  real rate 
D)  long term.

Question 19

The relationship between the swap rate and maturity of a swap is called the maturity rate yield curve, or more commonly referred to as the maturity curve.

Accepted Answer

A) True 
 B)False

Question 20

In the absence of inflation, the nominal rate ________ the real rate.

Accepted Answer

A)  equals 
B)  is greater than 
C)  is less than 
D)  greater than or equal to 
A)  equals 
B)  is greater than 
C)  is less than 
D)  greater than or equal to

Exam 10: The Level and Structure of Interest Rates

The ________ represents the initial reaction of the interest rate to a change in the money supply.

The ________ should reflect the coupon interest that will be earned plus either (1) any capital gain that will be realized from holding the bond to maturity, or (2) any capital loss that will be realized from holding the bond to maturity.

Suppose a taxable bond issue offers a yield of 6% and is acquired by an investor facing a marginal tax rate of 30%. The after-tax yield would then be 1.80%.

The difference between the yield on any two bond issues is called a ________.

The highest-grade bonds are designated by Moody's by the symbol ________.

The ________ rate of interest is determined by interaction of the supply and demand functions. As a cost of borrowing and a reward for lending, the rate must reach the point where total supply of savings ________ total demand for borrowing and investment.

The yield to maturity is determined by a trial-and-error process. The first step in this trial and error process is ________.

The factors that affect the spread include ________.

Explain the distinction between the real rate of interest and the nominal rate of interest.

By the ________, we mean the rate that would prevail in the economy if the average prices for goods and services were expected to remain constant during the loan's life.

The liquidity preference theory is Keynes's view that the rate of interest is set in the market for money balances.

The most recently auctioned Treasury issues for each maturity are referred to as ________.

Which of the below IS considered by Fisher's theory.

There are several interesting points about the relationship among the coupon rate, market price, and yield to maturity. Briefly explain these relationships.

By the ________, we mean the rate on a loan that has one year to maturity.

Within the corporate market sector, issuers are classified as ________.

By the ________, we mean the rate on a loan whose borrower will not default on any obligation.

The relationship between the swap rate and maturity of a swap is called the maturity rate yield curve, or more commonly referred to as the maturity curve.

In the absence of inflation, the nominal rate ________ the real rate.

Introduction

Financial Institutions, Financial Intermediaries, and Asset Management Firms

Depository Institutions: Activities and Characteristics

The U.S. Federal Reserve and the Creation of Money

Monetary Policy in the United States

Insurance Companies

Investment Companies and Exchange Traded Funds

Pension Funds

Properties and Pricing of Financial Assets

The Term Structure of Interest Rates

Risk/Return and Asset Pricing Models

Primary Markets and the Underwriting of Securities

Secondary Markets

Treasury and Agency Securities Markets

Municipal Securities Markets

Markets for Common Stock: The Basic Characteristics

Markets for Common Stock: Structure and Organization

Markets for Corporate Senior Instruments: I

Markets for Corporate Senior Instruments: II

The Markets for Bank Obligations

The Residential Mortgage Market

Mortgage-Backed Securities Market

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

Market for Asset-Backed Securities

Financial Futures Markets

Options Markets

Pricing of Futures and Options Contracts

The Applications of Futures and Options Contracts

OTC Interest Rate Derivatives: Forward Rate Agreements, Swaps, Caps, and Floors

Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized Debt Obligations

The Market for Foreign Exchange and Risk Control Instruments

Filters

The rate of interest is determined by interaction of the supply and demand functions. As a cost of borrowing and a reward for lending, the rate must reach the point where total supply of savings total demand for borrowing and investment.