Question 1

The degree to which the Treasury's debt management policy could affect the term structure of interest rates is greatest if

Accepted Answer

A) most debt is financed by foreign investors. 
B) the Treasury's debt level is small. 
C) maturity markets are segmented. 
D) A and B 
A) most debt is financed by foreign investors. 
B) the Treasury's debt level is small. 
C) maturity markets are segmented. 
D) A and B

Question 2

If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting ____ in interest rates.

Accepted Answer

A) no changes 
B) a slight decrease 
C) a slight increase 
D) a large increase 
A) no changes 
B) a slight decrease 
C) a slight increase 
D) a large increase

Question 3

If all other characteristics are similar, ____ would have to offer ____.

Accepted Answer

A) taxable securities; a higher after-tax yield than tax-exempt securities 
B) taxable securities; a higher before-tax yield than tax-exempt securities 
C) tax-exempt securities; a higher after-tax yield than taxable securities 
D) tax-exempt securities; a higher before-tax yield than taxable securities 
A) taxable securities; a higher after-tax yield than tax-exempt securities 
B) taxable securities; a higher before-tax yield than tax-exempt securities 
C) tax-exempt securities; a higher after-tax yield than taxable securities 
D) tax-exempt securities; a higher before-tax yield than taxable securities

Question 4

If shorter term securities have higher annualized yields than longer term securities, the yield curve

Accepted Answer

A) is horizontal. 
B) is upward sloping. 
C) is downward sloping. 
D) cannot be determined unless we know additional information (such as the level of market interest rates). 
A) is horizontal. 
B) is upward sloping. 
C) is downward sloping. 
D) cannot be determined unless we know additional information (such as the level of market interest rates).

Question 5

Investors will always prefer the purchase of risk-free Treasury securities, since other securities have a higher level of risk.

Accepted Answer

A) True 
 B)False

Question 6

A firm in the 35 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7 percent.To match this yield, taxable securities must offer a before-tax yield of

Accepted Answer

A) 7.0 percent. 
B) 10.8 percent. 
C) 20.0 percent. 
D) none of the above 
A) 7.0 percent. 
B) 10.8 percent. 
C) 20.0 percent. 
D) none of the above

Question 7

If a security can easily be converted to cash without a loss in value, it

Accepted Answer

A) is liquid. 
B) has a high after-tax yield. 
C) has high default risk. 
D) is illiquid. 
A) is liquid. 
B) has a high after-tax yield. 
C) has high default risk. 
D) is illiquid.

Question 8

Yield curves are always upward sloping.

Accepted Answer

A) True 
 B)False

Question 9

A theory states that while investors and borrowers may normally concentrate on a particular natural maturity market, conditions may cause them to change maturity markets.This theory is called the

Accepted Answer

A) liquidity premium theory. 
B) efficient markets theory. 
C) pure expectations theory. 
D) preferred habitat theory. 
A) liquidity premium theory. 
B) efficient markets theory. 
C) pure expectations theory. 
D) preferred habitat theory.

Question 10

Assume that a yield curve is influenced by interest rate expectations and a liquidity premium.Assume the yield curve is initially flat.If liquidity suddenly was no longer important, the yield curve would now have a ____ (assuming no other changes).

Accepted Answer

A) slight downward slope 
B) slight upward slope 
C) steep upward slope 
D) steep downward slope 
A) slight downward slope 
B) slight upward slope 
C) steep upward slope 
D) steep downward slope

Question 11

An upward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.

Accepted Answer

A) longer; lower 
B) longer; higher 
C) shorter; lower 
D) shorter; higher 
E) B and C 
A) longer; lower 
B) longer; higher 
C) shorter; lower 
D) shorter; higher 
E) B and C

Question 12

If liquidity influences the yield curve, the forward rate underestimates the market's expectation of the future interest rate.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is not true with respect to debt securities?

Accepted Answer

A) Some types of debt securities always offer a higher yield than others. 
B) Debt securities offer different yields because they exhibit different characteristics that influence the offered yield. 
C) In general, securities with favorable characteristics will offer higher yields to entice investors. 
D) All of the above are true with respect to debt securities. 
A) Some types of debt securities always offer a higher yield than others. 
B) Debt securities offer different yields because they exhibit different characteristics that influence the offered yield. 
C) In general, securities with favorable characteristics will offer higher yields to entice investors. 
D) All of the above are true with respect to debt securities.

Question 14

Within the category of capital market securities, municipal bonds have the ____ before-tax yield, and their after-tax yield is typically ____ of Treasury bonds from the perspective of investors in high tax brackets.

Accepted Answer

A) highest; below that 
B) lowest; above that 
C) highest; above that 
D) lowest; below that 
A) highest; below that 
B) lowest; above that 
C) highest; above that 
D) lowest; below that

Question 15

Assume investors are indifferent among security maturities.Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent.What is the forward rate according to the pure expectations theory?

Accepted Answer

A) 15.08 percent 
B) 3.00 percent 
C) 12.00 percent 
D) 12.62 percent 
E) 11.41 percent 
A) 15.08 percent 
B) 3.00 percent 
C) 12.00 percent 
D) 12.62 percent 
E) 11.41 percent

Question 16

The preference for more liquid short-term securities places downward pressure on the slope of the yield curve.

Accepted Answer

A) True 
 B)False

Exam 3: Structure of Interest Rates

The degree to which the Treasury's debt management policy could affect the term structure of interest rates is greatest if

If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting ____ in interest rates.

If all other characteristics are similar, ____ would have to offer ____.

If shorter term securities have higher annualized yields than longer term securities, the yield curve

Investors will always prefer the purchase of risk-free Treasury securities, since other securities have a higher level of risk.

A firm in the 35 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7 percent.To match this yield, taxable securities must offer a before-tax yield of

If a security can easily be converted to cash without a loss in value, it

Yield curves are always upward sloping.

A theory states that while investors and borrowers may normally concentrate on a particular natural maturity market, conditions may cause them to change maturity markets.This theory is called the

Assume that a yield curve is influenced by interest rate expectations and a liquidity premium.Assume the yield curve is initially flat.If liquidity suddenly was no longer important, the yield curve would now have a ____ (assuming no other changes).

An upward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.

If liquidity influences the yield curve, the forward rate underestimates the market's expectation of the future interest rate.

Which of the following statements is not true with respect to debt securities?

Within the category of capital market securities, municipal bonds have the ____ before-tax yield, and their after-tax yield is typically ____ of Treasury bonds from the perspective of investors in high tax brackets.

Assume investors are indifferent among security maturities.Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent.What is the forward rate according to the pure expectations theory?

The preference for more liquid short-term securities places downward pressure on the slope of the yield curve.

Role of Financial Markets and Institutions

Determination of Interest Rates

Functions of the Fed

Monetary Policy

Money Markets

Bond Markets

Bond Valuation and Risk

Mortgage Markets

Stock Offerings and Investor Monitoring

Stock Valuation and Risk

Market Microstructure and Strategies

Financial Futures Markets

Options Markets

Swap Markets

Foreign Exchange Derivative Markets

Commercial Bank Operations

Bank Regulation

Bank Management

Bank Performance

Thrift Operations

Finance Operations

Mutual Fund Operations

Securities Operations

Insurance and Pension Fund Operations

Filters

If all other characteristics are similar, would have to offer .

An upward-sloping yield curve indicates that Treasury securities with maturities offer annualized yields.

Within the category of capital market securities, municipal bonds have the before-tax yield, and their after-tax yield is typically of Treasury bonds from the perspective of investors in high tax brackets.