Question 1

Typically, during an expansion the spread between the best quality and medium grade rated municipal bonds

Accepted Answer

A) narrows. 
B) remains the same. 
C) overlaps. 
D) widens. 
A) narrows. 
B) remains the same. 
C) overlaps. 
D) widens. A

Question 2

According to the expectations theory, if the 1-year rate is 2.5% and the 2-year rate is 3.64%, the expected 1-year rate would be

Accepted Answer

A) 3.80%. 
B) 4.80%. 
C) 5.80%. 
D) 6.80%. 
A) 3.80%. 
B) 4.80%. 
C) 5.80%. 
D) 6.80%. B

Question 3

The term structure of interest rates is determined by

Accepted Answer

A) interest rate expectations. 
B) the supply of securities. 
C) the demand for securities. 
D) All of the above are correct. 
A) interest rate expectations. 
B) the supply of securities. 
C) the demand for securities. 
D) All of the above are correct. D

Question 4

Which of the following is a measure of the credit worthiness of the issuer of a security?

Accepted Answer

A) the liquidity premium 
B) the discount from par 
C) the money illusion 
D) the credit risk 
A) the liquidity premium 
B) the discount from par 
C) the money illusion 
D) the credit risk

Question 5

The theory that short and long term securities are not substitutes for each other but rather that there are separate markets for each is

Accepted Answer

A) the preferred habitat theory. 
B) the modified expectations theory. 
C) the segmented markets hypothesis. 
D) the expectations theory modified by the preferred habitats theory. 
A) the preferred habitat theory. 
B) the modified expectations theory. 
C) the segmented markets hypothesis. 
D) the expectations theory modified by the preferred habitats theory.

Question 6

If Maureen lives in a country where no taxes are levied on the first $20,000 of income and a 10% tax is levied on all income above $20,000, what is her marginal tax rate if she has an average tax rate of 5%?

Accepted Answer

A) 5% 
B) 10% 
C) 15% 
D) 25% 
A) 5% 
B) 10% 
C) 15% 
D) 25%

Question 7

When the yield curve is flat, this means which of the following?

Accepted Answer

A) Short-term securities yield more than long-term securities. 
B) Short-term securities yield less than long-term securities. 
C) Short-term securities yield the same as long-term securities. 
D) None of the above is correct. 
A) Short-term securities yield more than long-term securities. 
B) Short-term securities yield less than long-term securities. 
C) Short-term securities yield the same as long-term securities. 
D) None of the above is correct.

Question 8

Which of the following is false?

Accepted Answer

A) Credit risk refers to the probability of a debtor not paying the principal or interest due on an outstanding debt. 
B) Since investors are risk averse, they must be offered the "bonus" of extra interest to accept more risk; the extra return or interest is called a liquidity premium, and its size increases with the riskiness of the borrower. 
C) Financial investors care about the after-tax return on their investments more than the pre-tax return. 
D) Since the interest earned on municipal securities is exempt from the federal income tax, the yields on municipal securities are typically well below the yields on other (taxable) securities with similar credit ratings and similar terms to maturity. 
A) Credit risk refers to the probability of a debtor not paying the principal or interest due on an outstanding debt. 
B) Since investors are risk averse, they must be offered the "bonus" of extra interest to accept more risk; the extra return or interest is called a liquidity premium, and its size increases with the riskiness of the borrower. 
C) Financial investors care about the after-tax return on their investments more than the pre-tax return. 
D) Since the interest earned on municipal securities is exempt from the federal income tax, the yields on municipal securities are typically well below the yields on other (taxable) securities with similar credit ratings and similar terms to maturity.

Question 9

According to the expectations theory, a negatively sloped yield curve usually reflects

Accepted Answer

A) an increase in expected income. 
B) an increase in expected future prices. 
C) a decrease in expected future prices. 
D) a decrease in the money supply. 
A) an increase in expected income. 
B) an increase in expected future prices. 
C) a decrease in expected future prices. 
D) a decrease in the money supply.

Question 10

-Refer to Figures A, B, and C. According to expectations theory, which of the figures reflects expectations that the short-term interest rate is expected to remain constant in the future but that borrowers and lenders also must be compensated with a liquidity premium for lending long?

Accepted Answer

A) Figure A 
B) Figure B 
C) Figure C 
D)  Both a and b 
A) Figure A 
B) Figure B 
C) Figure C 
D)  Both a and b

Question 11

Which of the following best describes the type of relationship between the term to maturity and interest rates in the last 20 years?

Accepted Answer

A) inverse 
B) direct 
C) negative 
D) There is no consistent relationship. 
A) inverse 
B) direct 
C) negative 
D) There is no consistent relationship.

Question 12

Ratings of state and local governments are determined by the

Accepted Answer

A) outstanding debt level. 
B) growth in spending. 
C) tax base. 
D) All of the above are correct. 
A) outstanding debt level. 
B) growth in spending. 
C) tax base. 
D) All of the above are correct.

Question 13

According to the expectations theory, a negatively sloped yield curve usually reflects

Accepted Answer

A) an increase in expected income. 
B) an increase in expected future prices. 
C) a decrease in expected future prices. 
D) a decrease in the money supply. 
A) an increase in expected income. 
B) an increase in expected future prices. 
C) a decrease in expected future prices. 
D) a decrease in the money supply.

Question 14

If the slope of the yield curve is positive, this means which of the following?

Accepted Answer

A) Yields decline as the term to maturity increases. 
B) Yields decline as the term to maturity decreases. 
C) Yields rise as the term to maturity increases. 
D) Yields rise as the term to maturity decreases. 
A) Yields decline as the term to maturity increases. 
B) Yields decline as the term to maturity decreases. 
C) Yields rise as the term to maturity increases. 
D) Yields rise as the term to maturity decreases.

Question 15

Some researchers believe the expectations theory needs to be modified in order to reflect

Accepted Answer

A) liquidity premiums. 
B) that lenders may have some preference for either long- or short-term securities and hence not be indifferent between the two. 
C) the tendency of borrowers to prefer longer term securities so they don't have to issue and reissue short term securities. 
D) All of the above are true. 
A) liquidity premiums. 
B) that lenders may have some preference for either long- or short-term securities and hence not be indifferent between the two. 
C) the tendency of borrowers to prefer longer term securities so they don't have to issue and reissue short term securities. 
D) All of the above are true.

Question 16

The expectations theory posits that

Accepted Answer

A) the long-term rate is the geometric average of the current short-term rate and short-term rates expected to prevail over the term to maturity of the long-term security. 
B) the short-term rate is the geometric average of the current long-term rate and long-term rates expected to prevail over the term to maturity of the short-term security. 
C) the long-term rate is the geometric average of the current long-term rate and short-term rates expected to prevail over the term to maturity of the long-term security. 
D) the long-term rate is the geometric average of the current short-term rate and the rate of inflation expected to prevail over the term to maturity of the long-term security. 
A) the long-term rate is the geometric average of the current short-term rate and short-term rates expected to prevail over the term to maturity of the long-term security. 
B) the short-term rate is the geometric average of the current long-term rate and long-term rates expected to prevail over the term to maturity of the short-term security. 
C) the long-term rate is the geometric average of the current long-term rate and short-term rates expected to prevail over the term to maturity of the long-term security. 
D) the long-term rate is the geometric average of the current short-term rate and the rate of inflation expected to prevail over the term to maturity of the long-term security.

Question 17

-According to expectations theory, which of the figures above reflects expectations of a rise in the interest rate on short-term securities?

Accepted Answer

A) Figure A 
B) Figure B 
C) Figure C 
D) Both a and b 
A) Figure A 
B) Figure B 
C) Figure C 
D) Both a and b

Question 18

If expected future short-term interest rates are equal to current short-term rates, the liquidity premium will

Accepted Answer

A) make long-term rates lower than current short-term rates. 
B) make long-term rates higher than current short-term rates. 
C) make long-term rates equal to current short-term rates. 
D) make have no effect. 
A) make long-term rates lower than current short-term rates. 
B) make long-term rates higher than current short-term rates. 
C) make long-term rates equal to current short-term rates. 
D) make have no effect.

Question 19

A graphic representation of the relationship between interest rates on a particular security and different terms to maturity for that security is called the

Accepted Answer

A) term structure of interest rates. 
B) yield curve. 
C) geometric average. 
D) discount basis. 
A) term structure of interest rates. 
B) yield curve. 
C) geometric average. 
D) discount basis.

Question 20

The rate paid on the last dollar of income the tax payer earns is called

Accepted Answer

A) the after-tax yield 
B) the average tax rate 
C) the marginal tax rate 
D) the marginal after-tax yield 
A) the after-tax yield 
B) the average tax rate 
C) the marginal tax rate 
D) the marginal after-tax yield

Exam 6: The Structure of Interest Rates

Typically, during an expansion the spread between the best quality and medium grade rated municipal bonds

According to the expectations theory, if the 1-year rate is 2.5% and the 2-year rate is 3.64%, the expected 1-year rate would be

The term structure of interest rates is determined by

Which of the following is a measure of the credit worthiness of the issuer of a security?

The theory that short and long term securities are not substitutes for each other but rather that there are separate markets for each is

If Maureen lives in a country where no taxes are levied on the first $20,000 of income and a 10% tax is levied on all income above $20,000, what is her marginal tax rate if she has an average tax rate of 5%?

When the yield curve is flat, this means which of the following?

Which of the following is false?

According to the expectations theory, a negatively sloped yield curve usually reflects

-Refer to Figures A, B, and C. According to expectations theory, which of the figures reflects expectations that the short-term interest rate is expected to remain constant in the future but that borrowers and lenders also must be compensated with a liquidity premium for lending long?

Which of the following best describes the type of relationship between the term to maturity and interest rates in the last 20 years?

Ratings of state and local governments are determined by the

According to the expectations theory, a negatively sloped yield curve usually reflects

If the slope of the yield curve is positive, this means which of the following?

Some researchers believe the expectations theory needs to be modified in order to reflect

The expectations theory posits that

-According to expectations theory, which of the figures above reflects expectations of a rise in the interest rate on short-term securities?

If expected future short-term interest rates are equal to current short-term rates, the liquidity premium will

A graphic representation of the relationship between interest rates on a particular security and different terms to maturity for that security is called the

The rate paid on the last dollar of income the tax payer earns is called

Introduction and Overview

Money and Its Role in the Economy

The Overseer: the Federal Reserve System

Financial Markets, Instruments, and Market Makers

Interest Rates and Bond Prices

Market Efficiency and the Flow of Funds Among Sectors

An Introduction to Financial Intermediaries and Risk

Commercial Banking Structure, Regulation, and Performance

Financial Innovation

Financial Instability and Strains on the Financial System

Regulation of the Banking System and the Financial Services Industry

The Debt Markets

The Stock Market

Securities Firms, Mutual Funds, and Financial Conglomerates

How Exchange Rates Are Determined

Forward, Futures, and Options Agreements

The International Financial System

The Fed, Depository Institutions, and the Money Supply Process

The Demand for Real Money Balances and Market Equilibrium

Financial Aspects of the Household, Business, Government, and Rest-Of-The-World Sectors

Aggregate Demand and Aggregate Supply

The Challenges of Monetary Policy

The Process of Monetary Policy Formation

Policy Implementation

Monetary Policy in a Globalized Financial System

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