Question 1

On a yield curve, term to maturity is shown

Accepted Answer

A) as downward sloping. 
B) as upward sloping. 
C) on the horizontal axis. 
D) on the vertical axis. 
A) as downward sloping. 
B) as upward sloping. 
C) on the horizontal axis. 
D) on the vertical axis.

Question 2

According to the expectations theory, when the yield curve is falling, market participants expect

Accepted Answer

A) future long-term interest rates to rise above current short-term rates. 
B) future long-term interest rates to fall below current long-term rates. 
C) future short-term interest rates to rise above current short-term rates. 
D) future short-term interest rates to fall below current short-term rates. 
A) future long-term interest rates to rise above current short-term rates. 
B) future long-term interest rates to fall below current long-term rates. 
C) future short-term interest rates to rise above current short-term rates. 
D) future short-term interest rates to fall below current short-term rates.

Question 3

Long-term interest rates are affected by

Accepted Answer

A) interest rate expectations. 
B) preferred habitats. 
C) liquidity premiums. 
D) All of the above are correct. 
A) interest rate expectations. 
B) preferred habitats. 
C) liquidity premiums. 
D) All of the above are correct.

Question 4

-Refer to Figures A, B, and C. According to expectations theory, which of the figures is most likely to be associated with business cycle peaks, including the late part of an expansion and the early part of a recession?

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 5

When market participants see the economy going into an expansion, they most likely expect

Accepted Answer

A) falling interest rates. 
B) stabilizing future interest rates. 
C) rising future interest rates. 
D) falling future interest rates. 
A) falling interest rates. 
B) stabilizing future interest rates. 
C) rising future interest rates. 
D) falling future interest rates.

Question 6

A yield curve graphically depicts the relationship between which of these pairs?

Accepted Answer

A) Term to maturity and interest rates 
B) Term to maturity and structure of stock options 
C) Term to maturity and tax treatment 
D) Term to maturity and credit risk 
A) Term to maturity and interest rates 
B) Term to maturity and structure of stock options 
C) Term to maturity and tax treatment 
D) Term to maturity and credit risk

Question 7

Selling lower-rated issues and then purchasing higher-rated securities is considered a/an

Accepted Answer

A) amortization of intangible assets. 
B) purchasing power gains. 
C) flight to quality. 
D) quality smoothing. 
A) amortization of intangible assets. 
B) purchasing power gains. 
C) flight to quality. 
D) quality smoothing.

Question 8

Treasury notes and bonds are issued with an original maturity of which of the following?

Accepted Answer

A) 1 to 3 months 
B) 3 to 6 months 
C) 6 to 12 months 
D) more than one year 
A) 1 to 3 months 
B) 3 to 6 months 
C) 6 to 12 months 
D) more than one year

Question 9

Changes in the slope of the yield curve

Accepted Answer

A) reflect only changes in the demand for securities, since lenders dominate the securities markets. 
B) reflect only changes in the supply of securities, since borrowers dominate the securities markets. 
C) reflect changes in the supply of and demand for securities which are induced by changes in interest rate expectations. 
D) come about magically. 
A) reflect only changes in the demand for securities, since lenders dominate the securities markets. 
B) reflect only changes in the supply of securities, since borrowers dominate the securities markets. 
C) reflect changes in the supply of and demand for securities which are induced by changes in interest rate expectations. 
D) come about magically.

Question 10

-Refer to Figures A, B, and C. According to expectations theory, which of the figures is most likely to be associated with expected growth in income, expected increases in prices, and slower growth of money supply?

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

The slope and the position of the yield curve depicts

Accepted Answer

A) the term structure of interest rates. 
B) the term structure of tax treatment. 
C) the term structure of stock options. 
D) the term structure of credit risk. 
A) the term structure of interest rates. 
B) the term structure of tax treatment. 
C) the term structure of stock options. 
D) the term structure of credit risk.

Question 12

Which of the factors below affects the position of the yield curve?

Accepted Answer

A) credit risk and expectations of inflation 
B) taxability 
C) maturity 
D) All of the above affect the position of the yield curve. 
A) credit risk and expectations of inflation 
B) taxability 
C) maturity 
D) All of the above affect the position of the yield curve.

Question 13

According to the segmented markets hypothesis, interest rates are determined by _____________________.

Accepted Answer

A) supply and demand factors in various separate markets of different terms to maturity. 
B) the expectations theory modified by preferred habitats theory. 
C) a small segment of the most influential borrowers and lenders in the market. 
D) None of the above are correct. 
A) supply and demand factors in various separate markets of different terms to maturity. 
B) the expectations theory modified by preferred habitats theory. 
C) a small segment of the most influential borrowers and lenders in the market. 
D) None of the above are correct.

Question 14

The pattern among interest rates and their maturity is generally referred to as which of the following?

Accepted Answer

A) Nominal interest rates 
B) Term structure of interest rates 
C) Implicit interest rates 
D) Effective structure of rates 
A) Nominal interest rates 
B) Term structure of interest rates 
C) Implicit interest rates 
D) Effective structure of rates

Question 15

The__________ takes into account the effects of compounding; it is used to calculate the long-term rate from the short rate and the short-term rates expected to prevail over the term to maturity of the long-term security.

Accepted Answer

A) marginal average rate 
B) marginal rate 
C) average marginal rate 
D) geometric average 
A) marginal average rate 
B) marginal rate 
C) average marginal rate 
D) geometric average

Question 16

The fraction of an additional dollar that is paid in taxes is called which of the following?

Accepted Answer

A) the average tax rate 
B) the marginal tax rate 
C) the capital gains tax 
D) the taxable gains tax 
A) the average tax rate 
B) the marginal tax rate 
C) the capital gains tax 
D) the taxable gains tax

Question 17

Expectations about future short-term interest rates depend on expectations about which of the following?

Accepted Answer

A) future income 
B) the money supply and inflation 
C) long-term interest rates 
D) both a and b are true 
A) future income 
B) the money supply and inflation 
C) long-term interest rates 
D) both a and b are true

Question 18

The __________ is the extra return required to induce lenders to lend long term rather than short term.

Accepted Answer

A) risk premium 
B) liquidity premium 
C) credit risk 
D) liquidity risk 
A) risk premium 
B) liquidity premium 
C) credit risk 
D) liquidity risk

Question 19

According to Moody's, the lowest credit rating that can be presented is

Accepted Answer

A)  Daa. 
B)  C. 
C)  Ca. 
D)  Caa. 
A)  Daa. 
B)  C. 
C)  Ca. 
D)  Caa.

Question 20

Which of the following is false?

Accepted Answer

A) The buying and selling by investors results in the yield on municipals being approximately equal to the yield on similarly rated taxable securities, such as corporate bonds, minus the portion of the yield that is taxed away. 
B) Taxpayers, depending on their individual incomes, are in different marginal tax brackets, some high and some low, and there is an average marginal tax rate somewhere between the high and the low marginal tax brackets. 
C) The interest rate on municipal securities will gravitate to the rate that makes the "average" taxpayer (in the average marginal tax bracket) indifferent between municipals and similarly rated corporate securities. 
D) Banks and rich individuals are attracted to municipals because they are subject to a tax rate equal to the average marginal rate. 
A) The buying and selling by investors results in the yield on municipals being approximately equal to the yield on similarly rated taxable securities, such as corporate bonds, minus the portion of the yield that is taxed away. 
B) Taxpayers, depending on their individual incomes, are in different marginal tax brackets, some high and some low, and there is an average marginal tax rate somewhere between the high and the low marginal tax brackets. 
C) The interest rate on municipal securities will gravitate to the rate that makes the "average" taxpayer (in the average marginal tax bracket) indifferent between municipals and similarly rated corporate securities. 
D) Banks and rich individuals are attracted to municipals because they are subject to a tax rate equal to the average marginal rate.

Exam 6: The Structure of Interest Rates

On a yield curve, term to maturity is shown

According to the expectations theory, when the yield curve is falling, market participants expect

Long-term interest rates are affected by

-Refer to Figures A, B, and C. According to expectations theory, which of the figures is most likely to be associated with business cycle peaks, including the late part of an expansion and the early part of a recession?

When market participants see the economy going into an expansion, they most likely expect

A yield curve graphically depicts the relationship between which of these pairs?

Selling lower-rated issues and then purchasing higher-rated securities is considered a/an

Treasury notes and bonds are issued with an original maturity of which of the following?

Changes in the slope of the yield curve

-Refer to Figures A, B, and C. According to expectations theory, which of the figures is most likely to be associated with expected growth in income, expected increases in prices, and slower growth of money supply?

The slope and the position of the yield curve depicts

Which of the factors below affects the position of the yield curve?

According to the segmented markets hypothesis, interest rates are determined by _____________________.

The pattern among interest rates and their maturity is generally referred to as which of the following?

The__________ takes into account the effects of compounding; it is used to calculate the long-term rate from the short rate and the short-term rates expected to prevail over the term to maturity of the long-term security.

The fraction of an additional dollar that is paid in taxes is called which of the following?

Expectations about future short-term interest rates depend on expectations about which of the following?

The __________ is the extra return required to induce lenders to lend long term rather than short term.

According to Moody's, the lowest credit rating that can be presented is

Which of the following is false?

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

Filters