Deck 19: Financial markets and asset prices

Question 1

If short-term interest rates over the next three years are assumed to be i? = 4%, i? = 5.5%, and i? = 4%, what do you expect the three-year rate to be under the expectations theory?

A)5)5%
B)5)0%
C)4)0%
D)4)5% plus a term premium
E)5)5% minus a term premium

Answer 1

4)5% plus a term premium

Question 2

The expectations theory of the term structure says that an upward-sloping yield curve means that financial markets expect

A)yields on corporate bonds to be higher than yields on government bonds
B)stock market values to increase drastically
C)interest rates to go up in the future
D)the economy to go into a recession
E)none of the above

Answer 2

interest rates to go up in the future

Question 3

The concept of arbitrage is very important to the understanding of financial markets since

A)it can explain why U.S. government securities are much more desirable than securities from some foreign governments
B) it explains why we are unable to predict future stock market swings
C)it explains why the stock market reacts slowly to new information
D)it says that, in equilibrium, asset prices will make financial investors equally willing to buy or sell an asset
E)it says that future behavior of stock prices can be extrapolated from past behavior

Answer 3

it says that, in equilibrium, asset prices will make financial investors equally willing to buy or sell an asset

Question 4

If we look at the interest rates on three-month Treasury bills and ten-year government bonds over the last four decades, we can see that

A)there is no clear pattern
B)they are both volatile but follow similar patterns
C)ten-year bonds have always had a lower yield than three-month Treasury bills
D)interest rates on average were lower in the 1980s than they were after 2000
E)interest rates were at their highest around 2010

Question 5

Assume you put $2,000 in a bank account that pays a compounded yearly interest of 4%.Approximately how much would your savings be worth after four years?

A)$2,380
B)$2,340
C)$2,320
D)$2,300
E)$2,280

Question 6

Assume you are promised that $40,000 will be paid to you three years from now.If the market interest rates remains i = 10% over these three years, what is the present discounted value of the $40,000?

A)roughly $44,000
B)roughly $38,240
C)roughly $36,330
D)roughly $32,550
E)roughly $30,050

Question 7

If a previously upward-sloping yield curve starts to flatten out and eventually becomes downward sloping, what would you expect?

A)stock values are likely to go up
B)interest rates are likely to go up
C)the economy is likely to enter a boom
D)the economy is likely to enter a recession
E)none of the above

Question 8

If your bank pays you a nominal interest rate of 2.5% on funds in your savings account and the rate of inflation is 4%, what is the real rate of return on your savings?

A)+6.5%
B)+2.5%
C)+1.5%
D)-1.5%
E)-4.0%

Question 9

A downward-sloping yield curve is often seen as an indication that

A)a recession may be imminent
B)a boom will soon be underway
C)stock market values are about to increase
D)bond values are about to decrease
E)there is a high demand for short-term bonds

Question 10

The concept of arbitrage implies that

A)stock market prices cannot be accurately predicted
B)financial markets are inefficient
C)international interest rate differentials persist over the long run
D)long-term bonds and short-term bonds have the same yield
E)none of the above

Question 11

The expectations theory of the term structure asserts that

A)short-term interest rates are always lower than long-term interest rates, since they have less risk
B)long-term interest rates are always higher than short-term interest rates because you should always expect some inflation
C)long-term interest rates are determined by the average of the current and future short-term interest rates
D)the lower the liquidity of a security, the higher the yield it has to pay to attract financial investors
E)foreign securities often have to pay a risk premium to compensate for exchange rate uncertainties

Question 12

If we compare the yield curve in January, 1981 with the yield curve in January, 2013, we see that

A)they are both downward-sloping, since both were years in which we had a recession
B)they were both upward-sloping since both years had strong growth
C)interest rates were expected to go up in 1981 due to high inflation
D)interest rates were expected to go down in 2010 due to low inflation
E)1981 was an unusual year, showing a downward-sloping yield curve

Question 13

The relationship between the yields of government securities with different terms to maturity is called

A)yield to maturity
B)interest rate risk
C)term structure of interest rates
D)interest rate differential
E)uncovered interest parity

Question 14

The term structure of interest rates

A)is the relationship between interest rates on bonds of different maturities
B)specifies the terms of a bank loan
C)specifies the yield on stock holdings
D)is the same as compounded interest
E)is the same as yield to maturity

Question 15

The concept of arbitrage

A)applies to the stock, bond, and foreign currency markets
B)only applies to the stock market
C)only applies to the stock and bond markets
D)only applies to the foreign currency market
E)doesn't apply to any of these markets

Question 16

Generally one can expect the yield of a corporate bond to be higher

A)if the maturity of a bond is shorter
B)if the bond is more liquid
C)if the bond is less liquid
D)if the corporation has a better rating
E)if the earnings of the corporation are higher

Question 17

If the current market interest rate rises from 4% to 5%, the price of a ten-year maturity bond will

A)fall more than the price of a two-year maturity bond
B)fall less than the price of a two-year maturity bond
C)rise more than the price of a two-year maturity bond
D)rise less than the price of a two-year maturity bond
E)not be affected, and neither will the price of a two-year maturity bond

Question 18

Assume you put $8,000 in a savings account and leave it there for four years.If you get a compounded yearly interest rate of 5% the first two years but only 4% the last two years, how much will be in the account after the four years?

A)$9,640
B)$9,540
C)$9.340
D)$9,240
E)$9,040

Question 19

About how much should a financial investment of $10,000 be worth after six years if it earns a compounded yearly interest of 5%?

A)$10,500
B)$12,500
C)$13,000
D)$13,400
E)$15,000

Question 20

Payments made on government bonds in periodic instances (once a year, for example) are called

A)face values
B)par values
C)dividends
D)coupon payments
E)none of the above

Question 21

Assume you have to make payments of $44,000 one year from now, another $48,400 in two years, and a final $39,930 in three years.If a bank paid a fixed interest rate of i = 10% over the next three years, how much money would you have to put into the bank now to be able to makes these payments?

A)$132,330
B)$120,300
C)$120,000
D)$110,000
E)$100,000

Question 22

Assume a five-year maturity bond that pays a coupon valued at $80 each year and has a face value of $1,000.If the market interest rate is i = 8%, the current price of this bond is

A)exactly $1,250
B)exactly $1,000
C)less than $1,000
D)more than $1,000
E)somewhere between $1,000 and $1,250

Question 23

Assume you own a consol (a perpetual bond) and a five-year maturity bond, each with the same current yield.What will happen if the market interest rate decreases from 10% to 8%?

A)the value of the consol will decrease less than the value of the five-year bond
B)the value of the consol will decrease more than the value of the five-year bond
C)the value of the consol and the five-year bond will increase by the same amount
D)the value of the consol will increase more than the value of the five-year bond
E)the value of the consol will increase less than the value of the five-year bond

Question 24

Assume you bought rental property for $100,000.Approximately how much would you have to charge in monthly rent to get a 9% rate of return?

A)$1,000
B)$900
C)$750
D)$600
E)$450

Question 25

Assume the market interest rates stays at 10% over the next two years.What is the present discounted value of a two-year maturity bond that has a coupon rate of 10% and a face value of $2,000?

A)$1,760
B)$1,800
C)$2,000
D)$2,200
E)$2,440

Question 26

Suppose a consol (a perpetual bond) that sells for $2,000 promises to pay $80 a year forever.What is its yield?

A)12%
B)8%
C)6%
D)4%
E)it cannot be determined with this data

Question 27

Assume a two-year maturity bond with a face value of $1,000 and a coupon rate of 10%.If the current market interest rate is i = 8%, we know that the price of this bond will be

A)$1,210
B)$1,124
C)$1,036
D)$984
E)$920

Question 28

If you paid $6,000 for a two-year maturity bond with a face value of $8,640 and a zero percent coupon rate, what would be your rate of return?

A)25%
B)20%
C)15%
D)12%
E)8%

Question 29

If a consol (perpetual bond) pays $250 a year and yields 5%, what is its present discounted value?

A)$5,000
B)$2,500
C)$1,250
D)$1,000
E)it cannot be determined with this information

Question 30

A booming stock market is good for capital investment since

A)higher stock values now imply even higher stock values in the future
B)an increase in wealth increases investment spending
C)firms have an easier time raising equity capital
D)whenever stock market values go up, the economy is sure to follow
E)foreign capital will be attracted, raising interest rates

Question 31

Assume the market interest rate is 5% and a one-year maturity bond pays a coupon valued of $420.If the current price of the bond were $4,400, what would the face value of this bond have to be?

A)$4,000
B)$4,200
C)$4,400
D)$4,620
E)$4,820

Question 32

If the market interest rate is 10%, what is the price of a one-year maturity bond with a 15% coupon rate and a face value of $4,400?

A)$4,000
B)$4,400
C)$4,600
D)$4,840
E)$5,060

Question 33

Which of the following statements is FALSE?

A)returns on stocks tend to be highly volatile
B)a small rise in long-term interest rates can cause a huge drop in stock values
C)the timing of stock market swings is unpredictable
D)on average returns on stocks tend to be lower than returns on bonds
E)the fact that stock market behavior is well understood makes future stock prices hard to predict

Question 34

Assume a relative has promised to pay you $10,000 exactly ten years from today.If you estimate that the market interest rate will average about 6% over the next ten years, approximately how much would the $10,000 be worth to you in today's money, assuming there were no inflation?

A)$9,400
B)$8,800
C)$7,200
D)$5,600
E)$4,200

Question 35

Assume you would like to buy a stock that promises to pay a fixed dividend of $120 per year.If the current market interest rate is 6%, how much would you pay for this stock?

A)$7,720
B)$7,200
C)$4,800
D)$2,000
E)$720

Question 36

Assume a consol, that is, a bond without maturity date that pays $800 for each year you own it.What is the current price of this consol, if the market interest rate is i = 8%?

A)$10,000
B)$6,400
C)$4,000
D)$1,000
E)the price would depend on how long you plan to own this consol

Question 37

Assume an investment costs you $8,800 right now and promises to pay back $5,500 after one year and another $4,840 after the second year.What is the highest market interest rate at which this investment project is still profitable?

A)15%
B)13%
C)11%
D)9%
E)7%

Question 38

If a consol that pays $200 for each year you own it currently costs $5,000, what is the current market interest rate?

A)8)0%
B)6)0%
C)4)0%
D)2)5%
E)2)0%

Question 39

If the market interest rate stays at i = 10% over the next four years, what is the net present discounted value of a bond that pays $100 in coupon payments for each of the next four years and has a face value of $1,000?

A)$1,100
B)$1,000
C)$980
D)$900
E)$800

Question 40

Security A is a one-year maturity bond with a coupon rate of 10% and a face value of $2,000; Security B is a consol that pays $200 for each year you own it.If the market interest rate falls from 10% to 5%, by how much do the values of these two securities change?

A)the value of A increases by $95; the value of B increases by $2,000
B)the value of A increases by $95; the value of B increases by $1,000
C)the value of A increases by $100; the value of B increases by $100
D)the value of A increases by $200; the value of B increases by $1,000
E)the value of A increases by $200; the value of B increases by $2,000

Question 41

Which of the following statements is FALSE?

A)the timing of large stock market swings can often be predicted
B)changes in stock values tend to affect the value of pensions for many people
C)rates of return in financial markets feed back into goods markets
D)asset prices and interest rates are inversely related
E)many people see stock market volatility as a sign of market efficiency

Question 42

The relation between international interest rate differentials and changes in exchange rates is called

A)uncovered interest parity
B)purchasing power parity
C)the term structure of interest rates
D)the yield curve
E)none of the above

Question 43

If interest rates in the U.S.increase but they stay the same in the rest of the world, then

A)the exchange rate of foreign currency to U.S. dollars will increase
B)the exchange rate of U.S. dollars to foreign currency will increase
C)the U.S. dollar will depreciate
D)U)S. bond prices are likely to increase
E)U)S. stock market values are likely to increase sharply

Question 44

Which of the following is generally TRUE for the stock market?

A)it takes time for new information to be reflected in new stock values
B)a stock's dividend is the net present value of the stock's price
C)stock market returns tend to be lower on average than the returns on Treasury bills
D)stock market prices tend to fall when long-term interest rates rise
E)stock market prices can be accurately predicted by carefully observing their long-term trend

Question 45

The fact that stock prices follow a random walk implies that

A)stock markets are not efficient
B)stock markets are efficient
C)financial investors react very slowly to new information
D)financial investors often ignore new information
E)stock markets are not affected by changes in interest rates

Question 46

Assume U.S.interest rates decrease but interest rates in other countries remain the same.Which of the following is FALSE?

A)the value of the U.S. dollar will decrease
B)the exchange rate of foreign currency to U.S. dollars will increase
C)the U.S. will experience an outflow of funds
D)U)S. stock values will increase
E)U)S. bond prices will increase

Question 47

What would be true if stock prices did NOT follow a random walk?

A)stock markets would work much more efficiently
B)stock markets would outperform bond markets
C)bond markets would outperform stock markets
D)financial investors would not be able to outperform the stock market
E)some financial investors could benefit by taking advantage of opportunities that have not been realized by others

Question 48

The term "uncovered interest parity" refers to

A)corporate stocks that pay a fixed dividend
B)the inverse relationship between bond prices and interest rates
C)the differential between stock returns and bond returns
D)a downward-sloping yield curve
E)the relation between exchange rate changes and international interest rate differentials

Question 49

The efficient-markets hypothesis states that

A)you can consistently outperform the stock market by efficient use of information
B)financial markets are much more efficient than goods markets
C)stock markets are only efficient if experts manage people's portfolios
D)stock prices rarely change significantly based on unexpected new information
E)none of the above

Question 50

Which of the following statements is NOT accurate?

A)financial markets are forward-looking
B)new surprise information about firms changes the value of their stock
C)if stocks did well last quarter they are likely to do well this quarter
D)a random walk is a sign of market efficiency
E)interest rate differentials between two countries are reflected in exchange rate movements