Question 1

Discuss the factors that affect the yield spread between a non-Treasury security and a Treasury security with the same maturity.

Accepted Answer

a. Type of issuer.
b. The issuer's perceived creditworthiness.
c. The term to maturity of the security.
d. The embedded options in a bond issue.
e. The taxability of interest income at the federal and municipal levels.
f. The expected liquidity of the issue.

Question 2

The risk that the issuer of a bond may not be able to make timely interest and principal payments is called:

Accepted Answer

A)  Credit risk. 
B)  Default risk. 
C)  Market risk. 
D)  a and b only. 
E)  All of the above. 
A)  Credit risk. 
B)  Default risk. 
C)  Market risk. 
D)  a and b only. 
E)  All of the above. D

Question 3

Bonds trade with the same degrees of liquidity.

Accepted Answer

A) True 
 B)False  False

Question 4

The factors that affect the yield spread between a non-Treasury security and a comparable Treasury security are:

Accepted Answer

A)  The type of issuer. 
B)  The issuer's perceived creditworthiness. 
C)  The maturity of the instrument. 
D)  The expected liquidity of the issue. 
E)  All of the above. 
A)  The type of issuer. 
B)  The issuer's perceived creditworthiness. 
C)  The maturity of the instrument. 
D)  The expected liquidity of the issue. 
E)  All of the above.

Question 5

The optimum rate of investment for a firm is found at the point where:

Accepted Answer

A)  The marginal productivity of capital equals the market gross rate. 
B)  The supply of capital equals the demand for capital. 
C)  Total investment equals total savings. 
D)  The firm's indifference curve is just tangent to the market line. 
E)  None of the above. 
A)  The marginal productivity of capital equals the market gross rate. 
B)  The supply of capital equals the demand for capital. 
C)  Total investment equals total savings. 
D)  The firm's indifference curve is just tangent to the market line. 
E)  None of the above.

Question 6

A large endowment of the current commodity relative to the future will make people:

Accepted Answer

A)  More eager to lend. 
B)  Raise the supply curve for loans. 
C)  Reduce R. 
D)  All of the above. 
E)  a and b only. 
A)  More eager to lend. 
B)  Raise the supply curve for loans. 
C)  Reduce R. 
D)  All of the above. 
E)  a and b only.

Question 7

Explain Fisher's Law.

Accepted Answer

a. Nominal gross rat

Question 8

A "basket" or "bundle" consists of a certain quantity of currency consumption and a certain quantity of future consumption.

Accepted Answer

A) True 
 B)False

Question 9

A provision in a bond issue that grants the issuer the right to retire the debt, fully or partially, before the scheduled maturity date is called:

Accepted Answer

A)  A tax provision. 
B)  A call provision. 
C)  A put provision. 
D)  A conversion provision. 
E)  None of the above. 
A)  A tax provision. 
B)  A call provision. 
C)  A put provision. 
D)  A conversion provision. 
E)  None of the above.

Question 10

The marginal rate of substitution between current and future consumption is the slope of the:

Accepted Answer

A)  Security market line. 
B)  Capital market line. 
C)  Indifference curve. 
D)  Efficient frontier. 
E)  None of the above. 
A)  Security market line. 
B)  Capital market line. 
C)  Indifference curve. 
D)  Efficient frontier. 
E)  None of the above.

Question 11

The yield spread between a non-Treasury security and a Treasury security of comparable maturity is called a:

Accepted Answer

A)  Risk premium. 
B)  Treasury spread. 
C)  Income spread. 
D)  Government option spread. 
E)  None of the above. 
A)  Risk premium. 
B)  Treasury spread. 
C)  Income spread. 
D)  Government option spread. 
E)  None of the above.

Question 12

There is not just one interest rate in any economy, rather there is a structure of interest rates.

Accepted Answer

A) True 
 B)False

Question 13

A most important property resulting from the existence of a perfect loan market is that:

Accepted Answer

A)  It separates the current consumption decision from the current income position by opening the possibility to save and dissave. 
B)  It frees the investment from the saving decision. 
C)  a and b only. 
D)  Borrowing and lending rates are equal. 
E)  All of the above. 
A)  It separates the current consumption decision from the current income position by opening the possibility to save and dissave. 
B)  It frees the investment from the saving decision. 
C)  a and b only. 
D)  Borrowing and lending rates are equal. 
E)  All of the above.

Question 14

In the market for loans, net borrowing is zero.

Accepted Answer

A) True 
 B)False

Question 15

The spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality is referred to as:

Accepted Answer

A)  Risk premium. 
B)  Quality spread. 
C)  Income spread. 
D)  Credit spread. 
E)  b and d only. 
A)  Risk premium. 
B)  Quality spread. 
C)  Income spread. 
D)  Credit spread. 
E)  b and d only.

Question 16

The transformation curve or production function:

Accepted Answer

A)  Rises from the left to the right. 
B)  Assumes that the more is invested, the more will be the resulting future output. 
C)  Assumes decreasing returns to scale. 
D)  Has a slope, which measures the marginal productivity of capital. 
E)  All of the above. 
A)  Rises from the left to the right. 
B)  Assumes that the more is invested, the more will be the resulting future output. 
C)  Assumes decreasing returns to scale. 
D)  Has a slope, which measures the marginal productivity of capital. 
E)  All of the above.

Question 17

Investment-grade bonds are bond issues that are assigned a rating:

Accepted Answer

A)  In the top four rating categories. 
B)  Below the top four rating categories. 
C)  Of zero. 
D)  Junk. 
E)  None of the above. 
A)  In the top four rating categories. 
B)  Below the top four rating categories. 
C)  Of zero. 
D)  Junk. 
E)  None of the above.

Question 18

Within the corporate market sector, issuers are classified as:

Accepted Answer

A)  Utilities. 
B)  Industrials. 
C)  Finance. 
D)  Banks. 
E)  All of the above. 
A)  Utilities. 
B)  Industrials. 
C)  Finance. 
D)  Banks. 
E)  All of the above.

Question 19

The consumer has several decisions to make regarding:

Accepted Answer

A)  How much to invest. 
B)  How much to lend. 
C)  How much to consume now and later. 
D)  a and b only. 
E)  All of the above. 
A)  How much to invest. 
B)  How much to lend. 
C)  How much to consume now and later. 
D)  a and b only. 
E)  All of the above.

Question 20

The market-clearing interest rate is found:

Accepted Answer

A)  At the intersection of the saving and investment function. 
B)  At the intersection of supply and demand. 
C)  At the point where borrowing and saving take place. 
D)  At the point where the transformation curve has a slope equal to R. 
E)  None of the above. 
A)  At the intersection of the saving and investment function. 
B)  At the intersection of supply and demand. 
C)  At the point where borrowing and saving take place. 
D)  At the point where the transformation curve has a slope equal to R. 
E)  None of the above.

Exam 17: The Theory and Structure of Interest Rates

Discuss the factors that affect the yield spread between a non-Treasury security and a Treasury security with the same maturity.

The risk that the issuer of a bond may not be able to make timely interest and principal payments is called:

Bonds trade with the same degrees of liquidity.

The factors that affect the yield spread between a non-Treasury security and a comparable Treasury security are:

The optimum rate of investment for a firm is found at the point where:

A large endowment of the current commodity relative to the future will make people:

Explain Fisher's Law.

A "basket" or "bundle" consists of a certain quantity of currency consumption and a certain quantity of future consumption.

A provision in a bond issue that grants the issuer the right to retire the debt, fully or partially, before the scheduled maturity date is called:

The marginal rate of substitution between current and future consumption is the slope of the:

The yield spread between a non-Treasury security and a Treasury security of comparable maturity is called a:

There is not just one interest rate in any economy, rather there is a structure of interest rates.

A most important property resulting from the existence of a perfect loan market is that:

In the market for loans, net borrowing is zero.

The spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality is referred to as:

The transformation curve or production function:

Investment-grade bonds are bond issues that are assigned a rating:

Within the corporate market sector, issuers are classified as:

The consumer has several decisions to make regarding:

The market-clearing interest rate is found:

Introduction

Overview of Market Participants and Financial Innovation

Depository Institutions

Insurance Companies

Asset Management Firms

Investment Banking Firms

Primary and Secondary Markets

Risk and Return Theories: I

Risk and Return Theories: II

Introduction to Financial Futures Markets

Introduction to Options Markets

Introduction to the Swaps, Caps, and Floors Markets

Common Stock Market: I

Common Stock Market: II

Stock Options Market

The Market for Stock Index Products and Other Equity Derivatives

Valuation of Debt Contracts and Their Price Volatility Characteristics

The Term Structure of Interest Rates

Money Markets

Treasury and Agency Securities Markets

Corporate Senior Instruments Markets: I

Corporate Senior Instruments Markets: II

Municipal Securities Markets

The Residential Mortgage Market

The Market for Residential Mortgage-Backed Securities

Market for Asset-Backed Securities

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

International Bond Markets

International Bond Markets

Market for Interest Rate Risk Transfer Vehicles: OTC Instruments

The Market for Foreign Exchange and Risk Control Instruments

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