Question 1

Price deflation:

Accepted Answer

A)  Tends to force both real and nominal interest rates lower 
B)  Tends to increase investment spending and the development of new jobs 
C)  Will cause borrowers to gain at the expense of lenders 
D)  All of the above 
E)  None of the above 
A)  Tends to force both real and nominal interest rates lower 
B)  Tends to increase investment spending and the development of new jobs 
C)  Will cause borrowers to gain at the expense of lenders 
D)  All of the above 
E)  None of the above

Question 2

If an upward-sloping yield curve starts to flatten, portfolio managers should try to shorten the maturity of their liabilities.

Accepted Answer

A) True 
 B)False

Question 3

Agreements that fix the time and terms in current dollars under which a business firm will compensate its employees, creditors and other suppliers are known as:

Accepted Answer

A)  Inflation-adjusted agreements 
B)  Purchasing-power contracts 
C)  Nominal contracts 
D)  Inflation-linked contracts 
E)  None of the above 
A)  Inflation-adjusted agreements 
B)  Purchasing-power contracts 
C)  Nominal contracts 
D)  Inflation-linked contracts 
E)  None of the above

Question 4

Duration measures the price elasticity of a debt instrument with respect to changes in the instrument's yield to maturity.

Accepted Answer

A) True 
 B)False

Question 5

The term structure of interest rates plots yield versus:

Accepted Answer

A)  All maturities of a particular risk class of bonds at a point in time 
B)  A single maturity of a particular risk class of bonds over time 
C)  All maturities of one category of bonds (e.g. all corporate bonds) at a point in time 
D)  All risk classes of bonds at a point in time 
E)  All risk classes of a single maturity over time 
A)  All maturities of a particular risk class of bonds at a point in time 
B)  A single maturity of a particular risk class of bonds over time 
C)  All maturities of one category of bonds (e.g. all corporate bonds) at a point in time 
D)  All risk classes of bonds at a point in time 
E)  All risk classes of a single maturity over time

Question 6

If a business firm enters into nominal contracts that fix its revenue at a constant level and inflation turns out to be less than expected the firm's stock price is likely to fall, other factors held constant.

Accepted Answer

A) True 
 B)False

Question 7

What is the relationship between the coupon rate on an asset and the volatility of its price as interest rates change?

Accepted Answer

The coupon effect says that the prices o

Question 8

What are the implications for investors and for public policy of each of the yield-curve ideas mentioned in the preceding question?

Accepted Answer

While the expectations theory holds that

Question 9

The published or quoted rate of interest attached to a loan or security is called the:

Accepted Answer

A)  Interest rate 
B)  Risk-free rate 
C)  Real rate 
D)  Promised rate 
E)  None of the above 
A)  Interest rate 
B)  Risk-free rate 
C)  Real rate 
D)  Promised rate 
E)  None of the above

Question 10

Nominal rates of return decline by less than any given decrease in the expected inflation rate, according to recent research.

Accepted Answer

A) True 
 B)False

Question 11

According to the textbook, studies looking for evidence of the Fisher effect across countries find that nations with faster rates of price inflation generally experience:

Accepted Answer

A)  Higher interest rates 
B)  Lower interest rates 
C)  More volatile interest rates 
D)  Less volatile interest rates 
E)  None of the above 
A)  Higher interest rates 
B)  Lower interest rates 
C)  More volatile interest rates 
D)  Less volatile interest rates 
E)  None of the above

Question 12

The view that financial assets are not perfectly substitutable messes best with the ideas put forth by:

Accepted Answer

A)  Fisher 
B)  Harrod-Keynes 
C)  Darby 
D)  Segmented Markets Hypothesis 
E)  None of the above 
A)  Fisher 
B)  Harrod-Keynes 
C)  Darby 
D)  Segmented Markets Hypothesis 
E)  None of the above

Question 13

Inflation is defined as the percentage increase in the average level of prices for all goods and services.

Accepted Answer

A) True 
 B)False

Question 14

A U.S. Government bond having a par value of $1,000, a coupon rate of 10 percent and a maturity of 10 years is being considered for purchase by an investor. The dealer selling the bond indicates that, based upon its price today, the bond has a yield to maturity of 12 percent. The bond's duration in years must be (to the nearest hundredths place):

Accepted Answer

A)  7.35 years 
B)  7.10 years 
C)  6.85 years 
D)  6.80 years 
E)  None of the above 
A)  7.35 years 
B)  7.10 years 
C)  6.85 years 
D)  6.80 years 
E)  None of the above

Question 15

Convexity measures the rate of change of the elasticity of prices with respect to yield.

Accepted Answer

A) True 
 B)False

Question 16

Inflation is the percentage increase in the average level of prices for

Accepted Answer

A)  Land 
B)  All goods 
C)  All services 
D)  Automobiles 
E)  All of the above 
A)  Land 
B)  All goods 
C)  All services 
D)  Automobiles 
E)  All of the above

Question 17

Using each of the descriptions given below, identify the key term or concept that goes with them.
a. Nominal interest rates change one-for-one with changes in the inflation premium. 
b. The published rate of interest on a loan or security. 
c. The purchasing power rate of return on a loan or security. 
d. The expected rate of inflation as viewed by investors in the market.
e. A rise in the average level of prices for goods and services.

Accepted Answer

a. Fisher effect.
b. Nominal i

Question 18

A debt security with a low coupon rate compared to one with a high coupon rate, both having the same maturity date, will behave as though it has a longer maturity than the high-coupon security.

Accepted Answer

A) True 
 B)False

Question 19

The greater the price elasticity of a security the greater its price change for any given change in market interest rates.

Accepted Answer

A) True 
 B)False

Question 20

According to the textbook nations with faster rates of price inflation generally experience higher interest rates.

Accepted Answer

A) True 
 B)False

Exam 7: Effects of Inflation and Yield Curves on Stock Prices and Investments

Price deflation:

If an upward-sloping yield curve starts to flatten, portfolio managers should try to shorten the maturity of their liabilities.

Agreements that fix the time and terms in current dollars under which a business firm will compensate its employees, creditors and other suppliers are known as:

Duration measures the price elasticity of a debt instrument with respect to changes in the instrument's yield to maturity.

The term structure of interest rates plots yield versus:

If a business firm enters into nominal contracts that fix its revenue at a constant level and inflation turns out to be less than expected the firm's stock price is likely to fall, other factors held constant.

What is the relationship between the coupon rate on an asset and the volatility of its price as interest rates change?

What are the implications for investors and for public policy of each of the yield-curve ideas mentioned in the preceding question?

The published or quoted rate of interest attached to a loan or security is called the:

Nominal rates of return decline by less than any given decrease in the expected inflation rate, according to recent research.

According to the textbook, studies looking for evidence of the Fisher effect across countries find that nations with faster rates of price inflation generally experience:

The view that financial assets are not perfectly substitutable messes best with the ideas put forth by:

Inflation is defined as the percentage increase in the average level of prices for all goods and services.

Convexity measures the rate of change of the elasticity of prices with respect to yield.

Inflation is the percentage increase in the average level of prices for

A debt security with a low coupon rate compared to one with a high coupon rate, both having the same maturity date, will behave as though it has a longer maturity than the high-coupon security.

The greater the price elasticity of a security the greater its price change for any given change in market interest rates.

According to the textbook nations with faster rates of price inflation generally experience higher interest rates.

Understanding the Financial System and Its Impact on the Economy and Markets

Financial Systems, Monetary Units, and the Role of Money in the Economy

Financial Indices, Market Information, and Economic Data

The Financial Crisis and Its Impact on the Mortgage Market and Economy

Understanding Interest Rates, Savings, and the Wealth Effect

Financial Concepts and Interest Rates

Understanding Risk and Market Factors in Financial Securities

Exploring Financial Markets and Hedging Strategies

Factors Affecting the Volume of CDs

Exploring the Reserve Accounting System, Money Markets, and Financial Instruments

Exploring Central Banks and Their Impact on the Economy and Financial System

Central Banking and Monetary Policy: Exploring Tools and Strategies

Banking and Financial Services: Regulations, Operations, and Trends

Comparative Analysis of Financial Institutions and Their Operations

Exploring Various Aspects of Pension Funds, Finance Companies, and Insurance Industry

The Impact of Deregulation and Regulation on Financial Institutions and Banking Industry in the United States

Treasury Auctions, Public Debt, and Government Borrowing: Exploring the Us Treasury System

Corporate Bond Pricing, Market Development, and Financing Strategies

The Truth About Regulation Fd and Stock Holdings: Debunking Common Myths in the Financial Market

Flexible Savings Account Options

Mortgage Market and Mortgage Instruments

International Financial Transactions and Balance of Payments

International Banking and Financial Regulations

Exploring the Complexities of Financial Services and Regulation

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