Question 1

Which of the following is NOT correct with respect to financial institutions?

Accepted Answer

A)  Financial institutions channel funds from those with shortages to those with surplus funds. 
B)  Commercial banks, insurance companies, and mutual funds are examples of financial institutions. 
C)  Financial institutions reduce monitoring costs and liquidity costs. 
D)  Financial institutions reduce price risk. 
A)  Financial institutions channel funds from those with shortages to those with surplus funds. 
B)  Commercial banks, insurance companies, and mutual funds are examples of financial institutions. 
C)  Financial institutions reduce monitoring costs and liquidity costs. 
D)  Financial institutions reduce price risk.

Question 2

One-year Treasury bills currently earn 2.95 percent. You expect that one year from now, one-year Treasury bill rates will increase to 3.15 percent and that two years from now, one-year Treasury bill rates will increase to 3.35 percent. The liquidity premium on two-year securities is 0.05 percent and on three-year securities is 0.15 percent. If the liquidity theory is correct, what should the current rate be on three-year Treasury securities?

Accepted Answer

A)  2.95 percent 
B)  3.15 percent 
C)  3.22 percent 
D)  3.35 percent 
A)  2.95 percent 
B)  3.15 percent 
C)  3.22 percent 
D)  3.35 percent

Question 3

Which of the following is NOT a capital market instrument?

Accepted Answer

A)  U.S. Treasury notes and bonds 
B)  U.S. Treasury bills 
C)  U.S. government agency bonds 
D)  corporate stocks and bonds 
A)  U.S. Treasury notes and bonds 
B)  U.S. Treasury bills 
C)  U.S. government agency bonds 
D)  corporate stocks and bonds

Question 4

Which of the following is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments?

Accepted Answer

A)  default risk 
B)  liquidity risk 
C)  maturity risk 
D)  price risk 
A)  default risk 
B)  liquidity risk 
C)  maturity risk 
D)  price risk

Question 5

All of the following are secondary market transactions EXCEPT

Accepted Answer

A)  GE sells $30 million of new preferred stock. 
B)  Microsoft sells $2 million of IBM preferred stock out of its marketable securities portfolio. 
C)  The Magellan Fund buys $100 million of Apple previously issued bonds. 
D)  Allstate Insurance Co. sells $5 million in IBM bonds. 
A)  GE sells $30 million of new preferred stock. 
B)  Microsoft sells $2 million of IBM preferred stock out of its marketable securities portfolio. 
C)  The Magellan Fund buys $100 million of Apple previously issued bonds. 
D)  Allstate Insurance Co. sells $5 million in IBM bonds.

Question 6

Which of these provide a forum in which demanders of funds raise funds by issuing new financial instruments, such as stocks and bonds?

Accepted Answer

A)  investment banks 
B)  money markets 
C)  primary markets 
D)  secondary markets 
A)  investment banks 
B)  money markets 
C)  primary markets 
D)  secondary markets

Question 7

Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:
1R1 = 5 percent,
E(2r1) = 7 percent,
E(3r1) = 7.5 percent
E(4r1) = 7.85 percent
Using the unbiased expectations theory, calculate the current (long-term) rates for one-year and two-year-maturity Treasury securities.

Accepted Answer

A)  one-year: 5.00 percent,two-year: 5.50 percent 
B)  one-year: 5.00 percent, two-year: 6.00 percent 
C)  one-year: 5.50 percent, two-year: 6.15 percent 
D)  one-year: 5.50 percent, two-year: 5.75 percent 
A)  one-year: 5.00 percent,two-year: 5.50 percent 
B)  one-year: 5.00 percent, two-year: 6.00 percent 
C)  one-year: 5.50 percent, two-year: 6.15 percent 
D)  one-year: 5.50 percent, two-year: 5.75 percent

Question 8

Which of the following statements is correct?

Accepted Answer

A)  The default risk premium of Baa 20-year corporate bonds over Aaa 20-year corporate bonds does not vary. 
B)  The market segmentation theory assumes that borrowers and investors do not want to shift from one maturity sector to another without an interest rate premium. 
C)  Real interest rates are the rates that are quoted in the news. 
D)  All of these choices are correct. 
A)  The default risk premium of Baa 20-year corporate bonds over Aaa 20-year corporate bonds does not vary. 
B)  The market segmentation theory assumes that borrowers and investors do not want to shift from one maturity sector to another without an interest rate premium. 
C)  Real interest rates are the rates that are quoted in the news. 
D)  All of these choices are correct.

Question 9

Which of the following statements is correct?

Accepted Answer

A)  If the unbiased expectations theory is correct, we could see an inverted yield curve. 
B)  If a yield curve is inverted, long-term bonds have higher yields than short-term bonds. 
C)  If the maturity risk premium is zero, the yield curve would be flat. 
D)  If the unbiased expectations theory is correct, the maturity risk premium is zero. 
A)  If the unbiased expectations theory is correct, we could see an inverted yield curve. 
B)  If a yield curve is inverted, long-term bonds have higher yields than short-term bonds. 
C)  If the maturity risk premium is zero, the yield curve would be flat. 
D)  If the unbiased expectations theory is correct, the maturity risk premium is zero.

Question 10

Financial intermediaries provide which of the following?

Accepted Answer

A)  Purchase the financial claims that fund users issue. 
B)  Finance purchases by selling financial claims to household investors and other fund suppliers. 
C)  Both a and b 
D)  None of the above 
A)  Purchase the financial claims that fund users issue. 
B)  Finance purchases by selling financial claims to household investors and other fund suppliers. 
C)  Both a and b 
D)  None of the above

Question 11

All of the following are factors that affect nominal interest rates EXCEPT

Accepted Answer

A)  time to maturity. 
B)  real interest rate. 
C)  convertibility features. 
D)  foreign exchange. 
A)  time to maturity. 
B)  real interest rate. 
C)  convertibility features. 
D)  foreign exchange.

Question 12

Suppose we observe the three-year Treasury security rate (1R3) to be 11 percent, the expected one-year rate next year E(2r1) to be 4 percent, and the expected one-year rate the following year E(3r1) to be 5 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year Treasury security rate, 1R1?

Accepted Answer

A)  18.57 percent 
B)  10.19 percent 
C)  23.19 percent 
D)  25.24 percent 
A)  18.57 percent 
B)  10.19 percent 
C)  23.19 percent 
D)  25.24 percent

Question 13

Suppose we observe the following rates: 1R1 = 12 percent, 1R2 = 15 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)  13.5 percent 
B)  14.2 percent 
C)  15.6 percent 
D)  18.0 percent 
A)  13.5 percent 
B)  14.2 percent 
C)  15.6 percent 
D)  18.0 percent

Question 14

The theory that argues that individual investors and financial institutions have specific maturity preferences is called the

Accepted Answer

A)  market segmentation theory. 
B)  unbiased expectations theory. 
C)  liquidity preference theory. 
D)  inverted forward theory. 
A)  market segmentation theory. 
B)  unbiased expectations theory. 
C)  liquidity preference theory. 
D)  inverted forward theory.

Question 15

Which of the following is the risk that an asset's sale price will be lower than its purchase price?

Accepted Answer

A)  default risk 
B)  liquidity risk 
C)  price risk 
D)  trading risk 
A)  default risk 
B)  liquidity risk 
C)  price risk 
D)  trading risk

Question 16

Primary market financial instruments include stock issues from firms allowing their equity shares to be publicly traded on the stock market for the first time. We usually refer to these first-time issues as which of the following?

Accepted Answer

A)  initial public offerings 
B)  direct transfers 
C)  money market transfers 
D)  over-the-counter stocks 
A)  initial public offerings 
B)  direct transfers 
C)  money market transfers 
D)  over-the-counter stocks

Question 17

Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following three years (i.e., years 2, 3, and 4 respectively) are as follows:
1R1 = 5 percent,
E(2r1) = 6 percent,
E(3r1) = 7.5 percent
E(4r1) = 7.85 percent
Using the unbiased expectations theory, calculate the current (long-term) rates for three-year- and four-year-maturity Treasury securities.

Accepted Answer

A)  one-year: 6.16 percent, two-year: 6.58 percent 
B)  one-year: 6.16 percent, two-year: 6.78 percent 
C)  one-year: 6.25 percent, two-year: 6.45 percent 
D)  one-year: 5.95 percent, two-year: 6.45 percent 
A)  one-year: 6.16 percent, two-year: 6.58 percent 
B)  one-year: 6.16 percent, two-year: 6.78 percent 
C)  one-year: 6.25 percent, two-year: 6.45 percent 
D)  one-year: 5.95 percent, two-year: 6.45 percent

Question 18

Dakota Corporation 15-year bonds have an equilibrium rate of return of 9 percent. For all securities, the inflation risk premium is 1.95 percent and the real interest rate is 3.65 percent. The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. The security has no special covenants. Calculate the bond's default risk premium.

Accepted Answer

A)  2.10 percent 
B)  3.05 percent 
C)  3.40 percent 
D)  2.45 percent 
A)  2.10 percent 
B)  3.05 percent 
C)  3.40 percent 
D)  2.45 percent

Question 19

Which of the following occurs as the nonprice restrictions put on borrowers as a condition of borrowing increase?

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 increases. 
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 increases.

Which of the following is NOT correct with respect to financial institutions?

Which of the following is NOT a capital market instrument?

Which of the following is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments?

All of the following are secondary market transactions EXCEPT

Which of these provide a forum in which demanders of funds raise funds by issuing new financial instruments, such as stocks and bonds?

Which of the following statements is correct?

Which of the following statements is correct?

Financial intermediaries provide which of the following?

All of the following are factors that affect nominal interest rates EXCEPT

Suppose we observe the following rates: ₁R₁ = 12 percent, ₁R₂ = 15 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)?

The theory that argues that individual investors and financial institutions have specific maturity preferences is called the

Which of the following is the risk that an asset's sale price will be lower than its purchase price?

Primary market financial instruments include stock issues from firms allowing their equity shares to be publicly traded on the stock market for the first time. We usually refer to these first-time issues as which of the following?

Which of the following occurs as the nonprice restrictions put on borrowers as a condition of borrowing increase?

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 is NOT correct with respect to financial institutions?

Which of the following is NOT a capital market instrument?

Which of the following is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments?

All of the following are secondary market transactions EXCEPT

Which of these provide a forum in which demanders of funds raise funds by issuing new financial instruments, such as stocks and bonds?

Which of the following statements is correct?

Which of the following statements is correct?

Financial intermediaries provide which of the following?

All of the following are factors that affect nominal interest rates EXCEPT

Suppose we observe the following rates: 1R1 = 12 percent, 1R2 = 15 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)?

The theory that argues that individual investors and financial institutions have specific maturity preferences is called the

Which of the following is the risk that an asset's sale price will be lower than its purchase price?

Primary market financial instruments include stock issues from firms allowing their equity shares to be publicly traded on the stock market for the first time. We usually refer to these first-time issues as which of the following?

Which of the following occurs as the nonprice restrictions put on borrowers as a condition of borrowing increase?

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

Suppose we observe the following rates: ₁R₁ = 12 percent, ₁R₂ = 15 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)?