Question 1

Which of the following occurs as the utility derived from an asset purchased with borrowed funds increases?

Accepted Answer

A)  The willingness of market participants to borrow decreases. 
B)  The absolute dollar value borrowed increases. 
C)  At every interest rate the demand for loanable funds decrease. 
A)  The willingness of market participants to borrow decreases. 
B)  The absolute dollar value borrowed increases. 
C)  At every interest rate the demand for loanable funds decrease. B

Question 2

Based on economists' forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: Using the liquidity premium theory, what is the current rate on a four-year Treasury security?
$$\begin{array} { l l } 
R _ { 1 } & = 6.65 \% \
E \left( r _ { 2 } \right) & = 7.75 \% L _ { 2 } = 0.10 \% \
E \left( r _ { 3 } \right) & = 7.85 \% L _ { 3 } = 0.20 \% \
E \left( r _ { 4 } \right) & = 8.15 \% L _ { 4 } = 0.25 \%
\end{array}$$

Accepted Answer

A)  7.736 percent 
B)  7.600 percent 
C)  7.738 percent 
D)  8.400 percent 
A)  7.736 percent 
B)  7.600 percent 
C)  7.738 percent 
D)  8.400 percent A

Question 3

Which of these is the interest rate that is actually observed in financial markets?

Accepted Answer

A)  nominal interest rates 
B)  real interest rates 
C)  real risk-free rate 
D)  market premium 
A)  nominal interest rates 
B)  real interest rates 
C)  real risk-free rate 
D)  market premium A

Question 4

Which of these is NOT a theory that explains the shape of the term structure of interest rates?

Accepted Answer

A)  liquidity theory 
B)  market segmentation theory 
C)  short-term structure of interest rates theory 
D)  unbiased expectations theory 
A)  liquidity theory 
B)  market segmentation theory 
C)  short-term structure of interest rates theory 
D)  unbiased expectations theory

Question 5

Which of the following are demanders of loanable funds?

Accepted Answer

A)  households 
B)  businesses 
C)  governments 
D)  All of these choices are correct. 
A)  households 
B)  businesses 
C)  governments 
D)  All of these choices are correct.

Question 6

Which of these markets trade currencies for immediate or for some future stated delivery?

Accepted Answer

A)  money markets 
B)  primary markets 
C)  foreign exchange markets 
D)  over-the-counter stocks 
A)  money markets 
B)  primary markets 
C)  foreign exchange markets 
D)  over-the-counter stocks

Question 7

The Wall Street Journal states that the yield curve for Treasuries is downward sloping and there is no liquidity premium or maturity risk premium. Given this information, which of the following statements is correct?

Accepted Answer

A)  A 30-year corporate bond must have a higher yield than a five-year corporate bond. 
B)  A five-year corporate bond must have a higher yield than a 30-year Treasury bond. 
C)  A five-year Treasury bond must have a higher yield than a five-year corporate bond. 
D)  All of these choices are correct. 
A)  A 30-year corporate bond must have a higher yield than a five-year corporate bond. 
B)  A five-year corporate bond must have a higher yield than a 30-year Treasury bond. 
C)  A five-year Treasury bond must have a higher yield than a five-year corporate bond. 
D)  All of these choices are correct.

Question 8

The Wall Street Journal reports that the current rate on 5-year Treasury bonds is 6.50 percent and on 10-year Treasury bonds is 6.75 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 5-year Treasury bond purchased five years from today, E(5r1).

Accepted Answer

A)  6.625 percent 
B)  6.75 percent 
C)  7.00 percent 
D)  7.58 percent 
A)  6.625 percent 
B)  6.75 percent 
C)  7.00 percent 
D)  7.58 percent

Question 9

Which of the following occurs as domestic economic conditions experience a period of growth especially relative to other countries?

Accepted Answer

A)  Market participants are willing to borrow more heavily. 
B)  At every interest rate the supply of loanable funds increases. 
C)  At every interest rate the demand for loanable funds increases. 
D)  All of these choices are correct. 
A)  Market participants are willing to borrow more heavily. 
B)  At every interest rate the supply of loanable funds increases. 
C)  At every interest rate the demand for loanable funds increases. 
D)  All of these choices are correct.

Question 10

Which of these does NOT perform vital functions to securities markets of all sorts by channelling funds from those with surplus funds to those with shortages of funds?

Accepted Answer

A)  commercial banks 
B)  secondary markets 
C)  insurance companies 
D)  mutual funds 
A)  commercial banks 
B)  secondary markets 
C)  insurance companies 
D)  mutual funds

Question 11

Which of these is NOT a participant in the shadow banking system?

Accepted Answer

A)  structured investment vehicles (SIVs) 
B)  special purpose vehicles (SPVs) 
C)  limited-purpose finance companies 
D)  credit unions 
A)  structured investment vehicles (SIVs) 
B)  special purpose vehicles (SPVs) 
C)  limited-purpose finance companies 
D)  credit unions

Question 12

Which of the following statements is correct?

Accepted Answer

A)  A flat yield curve occurs when the yield-to-maturity is virtually unaffected by the term-to-maturity. 
B)  Real interest rates are generally lower than nominal interest rates. 
C)  Liquidity risk is the risk that a security may be difficult to sell on short notice for its true value. 
D)  All of these choices are correct. 
A)  A flat yield curve occurs when the yield-to-maturity is virtually unaffected by the term-to-maturity. 
B)  Real interest rates are generally lower than nominal interest rates. 
C)  Liquidity risk is the risk that a security may be difficult to sell on short notice for its true value. 
D)  All of these choices are correct.

Question 13

The Wall Street Journal reports that the current rate on five-year Treasury bonds is 6.45 percent and on 10-year Treasury bonds is 7.75 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a five-year Treasury bond purchased five years from today, E(5r5).

Accepted Answer

A)  7.25 percent 
B)  8.12 percent 
C)  9.07 percent 
D)  10.16 percent 
A)  7.25 percent 
B)  8.12 percent 
C)  9.07 percent 
D)  10.16 percent

Question 14

The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 3.25 percent and on 20-year Treasury bonds is 5.50 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 10-year Treasury bond purchased 10 years from today, E(10r10).

Accepted Answer

A)  2.25 percent 
B)  4.38 percent 
C)  7.80 percent 
D)  8.75 percent 
A)  2.25 percent 
B)  4.38 percent 
C)  7.80 percent 
D)  8.75 percent

Question 15

Which of these statements is true?

Accepted Answer

A)  The higher the default risk, the higher the interest rate that securities buyers will demand. 
B)  The lower the default risk, the higher the interest rate that securities buyers will demand. 
C)  The higher the default risk, the lower the interest rate that securities buyers will demand. 
D)  The default risk does not impact the interest rate that securities buyers will demand. 
A)  The higher the default risk, the higher the interest rate that securities buyers will demand. 
B)  The lower the default risk, the higher the interest rate that securities buyers will demand. 
C)  The higher the default risk, the lower the interest rate that securities buyers will demand. 
D)  The default risk does not impact the interest rate that securities buyers will demand.

Question 16

A two-year Treasury security currently earns 5.25 percent. Over the next two years, the real interest rate is expected to be 3.00 percent per year and the inflation premium is expected to be 2.00 percent per year. What is the maturity risk premium on the two-year Treasury security?

Accepted Answer

A)  0.25 percent 
B)  1.00 percent 
C)  1.05 percent 
D)  5.00 percent 
A)  0.25 percent 
B)  1.00 percent 
C)  1.05 percent 
D)  5.00 percent

Question 17

Which of the following is the continual increase in the price level of a basket of goods and services?

Accepted Answer

A)  deflation 
B)  inflation 
C)  recession 
D)  stagflation 
A)  deflation 
B)  inflation 
C)  recession 
D)  stagflation

Question 18

Which of the following statements is correct?

Accepted Answer

A)  An IPO is an example of a primary market transaction. 
B)  Money markets are subject to wider price fluctuations and are therefore more risky than capital market instruments. 
C)  A direct transfer of funds is more efficient than utilizing financial institutions. 
D)  The market segmentation theory argues that the different investors have different risk preferences which determine the shape of the yield curve. 
A)  An IPO is an example of a primary market transaction. 
B)  Money markets are subject to wider price fluctuations and are therefore more risky than capital market instruments. 
C)  A direct transfer of funds is more efficient than utilizing financial institutions. 
D)  The market segmentation theory argues that the different investors have different risk preferences which determine the shape of the yield curve.

Question 19

Once firms issue financial instruments in primary markets, these same stocks and bonds are then traded in which of these?

Accepted Answer

A)  initial public offerings 
B)  direct transfers 
C)  secondary markets 
D)  over-the-counter stocks 
A)  initial public offerings 
B)  direct transfers 
C)  secondary markets 
D)  over-the-counter stocks

Question 20

Suppose we observe the following rates: 1R1 = 6 percent, 1R2 = 7.5 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now, E(2r1)?

Accepted Answer

A)  6.75 percent 
B)  7.50 percent 
C)  9.02 percent 
D)  13.5 percent 
A)  6.75 percent 
B)  7.50 percent 
C)  9.02 percent 
D)  13.5 percent

Which of the following occurs as the utility derived from an asset purchased with borrowed funds increases?

Which of these is the interest rate that is actually observed in financial markets?

Which of these is NOT a theory that explains the shape of the term structure of interest rates?

Which of the following are demanders of loanable funds?

Which of these markets trade currencies for immediate or for some future stated delivery?

The Wall Street Journal states that the yield curve for Treasuries is downward sloping and there is no liquidity premium or maturity risk premium. Given this information, which of the following statements is correct?

The Wall Street Journal reports that the current rate on 5-year Treasury bonds is 6.50 percent and on 10-year Treasury bonds is 6.75 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 5-year Treasury bond purchased five years from today, E(₅r₁).

Which of the following occurs as domestic economic conditions experience a period of growth especially relative to other countries?

Which of these does NOT perform vital functions to securities markets of all sorts by channelling funds from those with surplus funds to those with shortages of funds?

Which of these is NOT a participant in the shadow banking system?

Which of the following statements is correct?

The Wall Street Journal reports that the current rate on five-year Treasury bonds is 6.45 percent and on 10-year Treasury bonds is 7.75 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a five-year Treasury bond purchased five years from today, E(₅r₅).

The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 3.25 percent and on 20-year Treasury bonds is 5.50 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 10-year Treasury bond purchased 10 years from today, E(₁₀r₁₀).

Which of these statements is true?

A two-year Treasury security currently earns 5.25 percent. Over the next two years, the real interest rate is expected to be 3.00 percent per year and the inflation premium is expected to be 2.00 percent per year. What is the maturity risk premium on the two-year Treasury security?

Which of the following is the continual increase in the price level of a basket of goods and services?

Which of the following statements is correct?

Once firms issue financial instruments in primary markets, these same stocks and bonds are then traded in which of these?

Suppose we observe the following rates: ₁R₁ = 6 percent, ₁R₂ = 7.5 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now, E(₂r₁)?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters

Exam 6: Understanding Financial Markets and Institutions

Which of the following occurs as the utility derived from an asset purchased with borrowed funds increases?

Which of these is the interest rate that is actually observed in financial markets?

Which of these is NOT a theory that explains the shape of the term structure of interest rates?

Which of the following are demanders of loanable funds?

Which of these markets trade currencies for immediate or for some future stated delivery?

The Wall Street Journal states that the yield curve for Treasuries is downward sloping and there is no liquidity premium or maturity risk premium. Given this information, which of the following statements is correct?

The Wall Street Journal reports that the current rate on 5-year Treasury bonds is 6.50 percent and on 10-year Treasury bonds is 6.75 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 5-year Treasury bond purchased five years from today, E(5r1).

Which of the following occurs as domestic economic conditions experience a period of growth especially relative to other countries?

Which of these does NOT perform vital functions to securities markets of all sorts by channelling funds from those with surplus funds to those with shortages of funds?

Which of these is NOT a participant in the shadow banking system?

Which of the following statements is correct?

The Wall Street Journal reports that the current rate on five-year Treasury bonds is 6.45 percent and on 10-year Treasury bonds is 7.75 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a five-year Treasury bond purchased five years from today, E(5r5).

The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 3.25 percent and on 20-year Treasury bonds is 5.50 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 10-year Treasury bond purchased 10 years from today, E(10r10).

Which of these statements is true?

A two-year Treasury security currently earns 5.25 percent. Over the next two years, the real interest rate is expected to be 3.00 percent per year and the inflation premium is expected to be 2.00 percent per year. What is the maturity risk premium on the two-year Treasury security?

Which of the following is the continual increase in the price level of a basket of goods and services?

Which of the following statements is correct?

Once firms issue financial instruments in primary markets, these same stocks and bonds are then traded in which of these?

Suppose we observe the following rates: 1R1 = 6 percent, 1R2 = 7.5 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now, E(2r1)?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters

The Wall Street Journal reports that the current rate on 5-year Treasury bonds is 6.50 percent and on 10-year Treasury bonds is 6.75 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 5-year Treasury bond purchased five years from today, E(₅r₁).

The Wall Street Journal reports that the current rate on five-year Treasury bonds is 6.45 percent and on 10-year Treasury bonds is 7.75 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a five-year Treasury bond purchased five years from today, E(₅r₅).

The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 3.25 percent and on 20-year Treasury bonds is 5.50 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 10-year Treasury bond purchased 10 years from today, E(₁₀r₁₀).

Suppose we observe the following rates: ₁R₁ = 6 percent, ₁R₂ = 7.5 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now, E(₂r₁)?