Question 1

According to the liquidity premium theory of interest rates,

Accepted Answer

A) long-term spot rates are totally unrelated to expectations of future short-term rates. 
B) the term structure must always be upward sloping. 
C) investors prefer certain maturities and will not normally switch out of those maturities. 
D) long-term spot rates are higher than the average of current and expected future short-term rates. 
E) investors are indifferent between different maturities if the long-term spot rates are equal to the average of current and expected future short-term rates. 
A) long-term spot rates are totally unrelated to expectations of future short-term rates. 
B) the term structure must always be upward sloping. 
C) investors prefer certain maturities and will not normally switch out of those maturities. 
D) long-term spot rates are higher than the average of current and expected future short-term rates. 
E) investors are indifferent between different maturities if the long-term spot rates are equal to the average of current and expected future short-term rates.

Question 2

The term structure of interest rates is upward sloping for all bond types. A certain AAA rated non-callable 10-year corporate bond has been issued at a 6.15 percent promised yield. Which one of the following bonds probably has a higher promised yield?

Accepted Answer

A) A similar quality municipal bond. 
B) A non-callable AAA rated corporate bond with a five-year maturity. 
C) A callable AAA rated corporate bond with a 15-year maturity. 
D) A non-callable AAA rated convertible corporate bond with a 10-year maturity. 
E) All of the options would have a higher promised yield. 
A) A similar quality municipal bond. 
B) A non-callable AAA rated corporate bond with a five-year maturity. 
C) A callable AAA rated corporate bond with a 15-year maturity. 
D) A non-callable AAA rated convertible corporate bond with a 10-year maturity. 
E) All of the options would have a higher promised yield.

Question 3

The risk that a security cannot be sold at a predictable price with low transaction costs at short notice is called liquidity risk.

Accepted Answer

A) True 
 B)False

Question 4

YIELD CURVE FOR ZERO COUPON BONDS RATED AA   Assume that there are no liquidity premiums. You just bought a 15-year maturity Xerox corporate bond rated AA with a 0 percent coupon. You expect to sell the bond in eight years. Find the expected interest rate at the time of sale (watch out for rounding error).

Accepted Answer

A) 8.85 percent 
B) 11.00 percent 
C) 12.80 percent 
D) 13.92 percent 
E) 12.49 percent 
A) 8.85 percent 
B) 11.00 percent 
C) 12.80 percent 
D) 13.92 percent 
E) 12.49 percent

Question 5

According to the market segmentation theory,short-term investors will not normally switch to intermediate- or long-term investments.

Accepted Answer

A) True 
 B)False

Question 6

An investor wants to be able to buy 4 percent more goods and services in the future in order to induce her to invest today. During the investment period prices are expected to rise by 2 percent. Which statement(s)below is/are true?
I. 4 percent is the desired real risk-free interest rate.
II. 6 percent is the approximate nominal rate of interest required.
III. 2 percent is the expected inflation rate over the period.

Accepted Answer

A) I only 
B) II only 
C) III only 
D) I and II only 
E) I,II,and III are true 
A) I only 
B) II only 
C) III only 
D) I and II only 
E) I,II,and III are true

Question 7

The relationship between maturity and yield to maturity is called the __________________.

Accepted Answer

A) Fisher effect 
B) DRP structure 
C) bond indenture 
D) term structure 
E) loan covenant 
A) Fisher effect 
B) DRP structure 
C) bond indenture 
D) term structure 
E) loan covenant

Question 8

An investor earned a 5 percent nominal risk-free rate over the year. However,over the year,prices increased by 2 percent. The investor's real risk-free rate was less than his nominal rate of return.

Accepted Answer

A) True 
 B)False

Question 9

Everything else equal,the interest rate required on a callable bond will be less than the interest rate on a convertible bond.

Accepted Answer

A) True 
 B)False

Question 10

An investment pays $400 in one year,X amount of dollars in two years,and $500 in three years. The total present value of all the cash flows (including X)is equal to $1,500. If i is 6 percent,what is X?

Accepted Answer

A) $749.67 
B) $789.70 
C) $600.00 
D) $822.41 
E) $702.83 
A) $749.67 
B) $789.70 
C) $600.00 
D) $822.41 
E) $702.83

Question 11

You go to the Wall Street Journal and notice that yields on almost all corporate and Treasury bonds have decreased. The yield decreases may be explained by which one of the following?

Accepted Answer

A) Newly expected decline in the value of the dollar 
B) Increases in the U.S. government budget deficit 
C) Decreased Japanese purchases of U.S. Treasury bills/bonds 
D) An increase in current and expected future returns of real corporate investments 
E) A decrease in U.S. inflationary expectations 
A) Newly expected decline in the value of the dollar 
B) Increases in the U.S. government budget deficit 
C) Decreased Japanese purchases of U.S. Treasury bills/bonds 
D) An increase in current and expected future returns of real corporate investments 
E) A decrease in U.S. inflationary expectations

Question 12

An individual actually earned a 4 percent nominal return last year. Prices went up by 3 percent over the year. Given that the investment income was subject to a federal tax rate of 28 percent and a state and local tax rate of 6 percent,what was the investor's actual real after-tax rate of return?

Accepted Answer

A) -0.36 percent 
B) 0.66 percent 
C) 2.64 percent 
D) 0.72 percent 
E) 1.45 percent 
A) -0.36 percent 
B) 0.66 percent 
C) 2.64 percent 
D) 0.72 percent 
E) 1.45 percent

Question 13

When the quantity of a financial security supplied or demanded changes at every given interest rate in response to a change in a factor,this causes a shift in the supply or demand curve.

Accepted Answer

A) True 
 B)False

Question 14

If you earn 0.5 percent a month in your bank account,this would be the same as earning a 6 percent annual interest rate with annual compounding.

Accepted Answer

A) True 
 B)False

Question 15

If M > 1 and you solve the following equation to find i: PV * (1 + (i/M))M*N= FV,the i you get will be

Accepted Answer

A) the rate per compounding period. 
B) the EYE. 
C) the bond equivalent yield. 
D) the TOE. 
E) the EAR. 
A) the rate per compounding period. 
B) the EYE. 
C) the bond equivalent yield. 
D) the TOE. 
E) the EAR.

Question 16

The real risk-free rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption.

Accepted Answer

A) True 
 B)False

Question 17

Investment A pays 8 percent simple interest for 10 years. Investment B pays 7.75 percent compound interest for 10 years. Both require an initial $10,000 investment. The future value of A minus the future value of B is equal to ______________ (to the nearest penny).

Accepted Answer

A) -$3,094.67 
B) $3,094.67 
C) $1,643.32 
D) $2,500.00 
E) -$2,500.00 
A) -$3,094.67 
B) $3,094.67 
C) $1,643.32 
D) $2,500.00 
E) -$2,500.00

According to the liquidity premium theory of interest rates,

The term structure of interest rates is upward sloping for all bond types. A certain AAA rated non-callable 10-year corporate bond has been issued at a 6.15 percent promised yield. Which one of the following bonds probably has a higher promised yield?

The risk that a security cannot be sold at a predictable price with low transaction costs at short notice is called liquidity risk.

According to the market segmentation theory,short-term investors will not normally switch to intermediate- or long-term investments.

The relationship between maturity and yield to maturity is called the __________________.

An investor earned a 5 percent nominal risk-free rate over the year. However,over the year,prices increased by 2 percent. The investor's real risk-free rate was less than his nominal rate of return.

Everything else equal,the interest rate required on a callable bond will be less than the interest rate on a convertible bond.

An investment pays $400 in one year,X amount of dollars in two years,and $500 in three years. The total present value of all the cash flows (including X)is equal to $1,500. If i is 6 percent,what is X?

You go to the Wall Street Journal and notice that yields on almost all corporate and Treasury bonds have decreased. The yield decreases may be explained by which one of the following?

An individual actually earned a 4 percent nominal return last year. Prices went up by 3 percent over the year. Given that the investment income was subject to a federal tax rate of 28 percent and a state and local tax rate of 6 percent,what was the investor's actual real after-tax rate of return?

When the quantity of a financial security supplied or demanded changes at every given interest rate in response to a change in a factor,this causes a shift in the supply or demand curve.

If you earn 0.5 percent a month in your bank account,this would be the same as earning a 6 percent annual interest rate with annual compounding.

If M > 1 and you solve the following equation to find i: PV * (1 + (i/M))M*N= FV,the i you get will be

The real risk-free rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption.

Investment A pays 8 percent simple interest for 10 years. Investment B pays 7.75 percent compound interest for 10 years. Both require an initial $10,000 investment. The future value of A minus the future value of B is equal to ______________ (to the nearest penny).

Introduction

Interest Rates and Security Valuation

The Federal Reserve System, Monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, Credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Liquidity Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Filters

Exam 2: Determinants of Interest Rates

According to the liquidity premium theory of interest rates,

The term structure of interest rates is upward sloping for all bond types. A certain AAA rated non-callable 10-year corporate bond has been issued at a 6.15 percent promised yield. Which one of the following bonds probably has a higher promised yield?

The risk that a security cannot be sold at a predictable price with low transaction costs at short notice is called liquidity risk.

According to the market segmentation theory,short-term investors will not normally switch to intermediate- or long-term investments.

The relationship between maturity and yield to maturity is called the __________________.

An investor earned a 5 percent nominal risk-free rate over the year. However,over the year,prices increased by 2 percent. The investor's real risk-free rate was less than his nominal rate of return.

Everything else equal,the interest rate required on a callable bond will be less than the interest rate on a convertible bond.

An investment pays $400 in one year,X amount of dollars in two years,and $500 in three years. The total present value of all the cash flows (including X)is equal to $1,500. If i is 6 percent,what is X?

You go to the Wall Street Journal and notice that yields on almost all corporate and Treasury bonds have decreased. The yield decreases may be explained by which one of the following?

An individual actually earned a 4 percent nominal return last year. Prices went up by 3 percent over the year. Given that the investment income was subject to a federal tax rate of 28 percent and a state and local tax rate of 6 percent,what was the investor's actual real after-tax rate of return?

When the quantity of a financial security supplied or demanded changes at every given interest rate in response to a change in a factor,this causes a shift in the supply or demand curve.

If you earn 0.5 percent a month in your bank account,this would be the same as earning a 6 percent annual interest rate with annual compounding.

If M > 1 and you solve the following equation to find i: PV * (1 + (i/M))M*N= FV,the i you get will be

The real risk-free rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption.

Investment A pays 8 percent simple interest for 10 years. Investment B pays 7.75 percent compound interest for 10 years. Both require an initial $10,000 investment. The future value of A minus the future value of B is equal to ______________ (to the nearest penny).

Introduction

Interest Rates and Security Valuation

The Federal Reserve System, Monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, Credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Liquidity Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Filters