Question 1

The market segmentation theory states that interest rates on debt vary dependent upon market segments which are segmented based upon which one of the following?

Accepted Answer

A) time to maturity 
B) principal amount 
C) use of funds 
D) type of lender 
E) type of borrower 
A) time to maturity 
B) principal amount 
C) use of funds 
D) type of lender 
E) type of borrower A

Question 2

The approximate nominal interest rate is computed as the real rate:

Accepted Answer

A) minus the risk-free rate. 
B) minus the inflation rate. 
C) plus the risk-free rate. 
D) plus the inflation rate. 
E) divided by the inflation rate. 
A) minus the risk-free rate. 
B) minus the inflation rate. 
C) plus the risk-free rate. 
D) plus the inflation rate. 
E) divided by the inflation rate. D

Question 3

What is the bond equivalent yield on a 120-day Treasury bill that has a bank discount yield of 3.00%?

Accepted Answer

A) 2.97% 
B) 2.99% 
C) 3.02% 
D) 3.04% 
E) 3.07% 
A) 2.97% 
B) 2.99% 
C) 3.02% 
D) 3.04% 
E) 3.07% E

Question 4

The rate which an investor pays a brokerage firm for a margin loan is based on a negotiated premium which is added to which one of the following rates?

Accepted Answer

A) prime 
B) call 
C) discount 
D) T-bill 
E) Federal funds 
A) prime 
B) call 
C) discount 
D) T-bill 
E) Federal funds

Question 5

The following premiums apply to a 6-month bond: interest rate risk premium = .22%; real rate = 3.50%; default premium = .12%; inflation premium = 1.45%. What is the expected difference in nominal interest rates between a 6-month risky security and a 6-month, default-free security?

Accepted Answer

A) .12% 
B) .34% 
C) .37% 
D) 1.57% 
E) 1.60% 
A) .12% 
B) .34% 
C) .37% 
D) 1.57% 
E) 1.60%

Question 6

Which one of the following statements concerning the modern fixed-income market is correct?

Accepted Answer

A) Pension funds generally have a preference for short maturities. 
B) Current maturity preference theory states that both borrowers and lenders prefer short maturities. 
C) Market segmentation theory does little to explain the modern fixed-income market. 
D) The major borrower in the modern market borrows primarily on a long-term basis. 
E) Institutional investors tend to invest in only one maturity range. 
A) Pension funds generally have a preference for short maturities. 
B) Current maturity preference theory states that both borrowers and lenders prefer short maturities. 
C) Market segmentation theory does little to explain the modern fixed-income market. 
D) The major borrower in the modern market borrows primarily on a long-term basis. 
E) Institutional investors tend to invest in only one maturity range.

Question 7

Which of the following statements are true?
I. Lenders have a preference for shorter maturities.
II. Lenders have a preference for longer maturities.
III. Borrowers have a preference for shorter maturities.
IV. Borrowers have a preference for longer maturities.

Accepted Answer

A) I only 
B) I and III only 
C) I and IV only 
D) II and III only 
E) II and IV only 
A) I only 
B) I and III only 
C) I and IV only 
D) II and III only 
E) II and IV only

Question 8

You invest $3,600 today at a nominal annual rate of 5.5%. This investment will pay one payment five years from now. What will be the amount of that payment?

Accepted Answer

A) $2,754.48 
B) $2,906.16 
C) $4,705.06 
D) $4,818.09 
E) $5,018.62 
A) $2,754.48 
B) $2,906.16 
C) $4,705.06 
D) $4,818.09 
E) $5,018.62

Question 9

Which of the following comprise the nominal interest rate on default-free securities according to the modern view of the term structure of interest rates?
I. liquidity premium
II. real rate
III. interest rate risk premium
IV. inflation premium

Accepted Answer

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

Question 10

Which one of the following debt instruments guarantees investors a positive real rate of return?

Accepted Answer

A) zero coupon bond 
B) default-free, pure discount bond 
C) T-bill 
D) TIPS 
E) T-bond 
A) zero coupon bond 
B) default-free, pure discount bond 
C) T-bill 
D) TIPS 
E) T-bond

Question 11

A one-year STRIPS sells at an interest rate of 3.20% and a two-year STRIPS sells at an interest rate of 3.90%. What is the implied one-year forward rate? Assume the rates are effective annual rates.

Accepted Answer

A) 4.20% 
B) 4.30% 
C) 4.40% 
D) 4.50% 
E) 4.60% 
A) 4.20% 
B) 4.30% 
C) 4.40% 
D) 4.50% 
E) 4.60%

Question 12

An investment will make one payment of $22,500 nine years from now. What is the current value of this investment if the nominal rate of return is 4.8%?

Accepted Answer

A) $11,980.86 
B) $12,124.29 
C) $12,390.08 
D) $13,515.46 
E) $14,754.72 
A) $11,980.86 
B) $12,124.29 
C) $12,390.08 
D) $13,515.46 
E) $14,754.72

Question 13

Which one of the following is a method used to quote interest rates on money market instruments?

Accepted Answer

A) short basis 
B) floating rate basis 
C) call rate method 
D) bank discount basis 
E) prime rate method 
A) short basis 
B) floating rate basis 
C) call rate method 
D) bank discount basis 
E) prime rate method

Question 14

Which one of the following is defined as U.S. dollar-denominated deposits held in a foreign bank?

Accepted Answer

A) Eurodollars 
B) foreign funds 
C) certificates of deposits 
D) banker's acceptances 
E) T-bills 
A) Eurodollars 
B) foreign funds 
C) certificates of deposits 
D) banker's acceptances 
E) T-bills

Question 15

Assume that a large corporation, such as General Electric, needs money in the short term. Which one of the following securities is that corporation most likely to issue to meet this need?

Accepted Answer

A) commercial paper 
B) prime rate loan 
C) corporate bond 
D) secured bill 
E) banker's acceptance 
A) commercial paper 
B) prime rate loan 
C) corporate bond 
D) secured bill 
E) banker's acceptance

Question 16

Which one of the following statements is correct?

Accepted Answer

A) All real interest rates will be positive as long as the inflation rate is positive. 
B) Real rates must exceed inflation rates. 
C) Short-term interest rates are affected by future inflation expectations. 
D) Treasury bill returns tend to vary in direct relation to inflation rates. 
E) The Fisher hypothesis advocates that real interest rates follow inflation rates. 
A) All real interest rates will be positive as long as the inflation rate is positive. 
B) Real rates must exceed inflation rates. 
C) Short-term interest rates are affected by future inflation expectations. 
D) Treasury bill returns tend to vary in direct relation to inflation rates. 
E) The Fisher hypothesis advocates that real interest rates follow inflation rates.

Question 17

Which of the following statements is/are true as applied to U.S. agency debt?
I. It is equally as risky as Treasury debt.
II. It is frequently subject to state taxes.
III. It has the same credit guarantee as U.S. Treasury debt.
IV. It generally has a lower yield than U.S. Treasury debt with the same maturity.

Accepted Answer

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

Question 18

Which one of the following describes a banker's acceptance?

Accepted Answer

A) agreement to loan money in exchange for an agreement by the borrower to offer an asset as collateral 
B) written agreement to loan funds in the future once the loan terms have been accepted 
C) postdated check with payment guaranteed by a bank 
D) agreement by a bank to provide short-term funds for the construction phase of a project 
E) the sale of a security by a bank accompanied by an agreement to repurchase the security the following day 
A) agreement to loan money in exchange for an agreement by the borrower to offer an asset as collateral 
B) written agreement to loan funds in the future once the loan terms have been accepted 
C) postdated check with payment guaranteed by a bank 
D) agreement by a bank to provide short-term funds for the construction phase of a project 
E) the sale of a security by a bank accompanied by an agreement to repurchase the security the following day

Question 19

A Treasury bill has 40 days left to maturity. The bank discount yield on the bill is 3.75%. What is the effective annual rate?

Accepted Answer

A) 3.55% 
B) 3.66% 
C) 3.77% 
D) 3.82% 
E) 3.99% 
A) 3.55% 
B) 3.66% 
C) 3.77% 
D) 3.82% 
E) 3.99%

Question 20

Which one of the following rates is the rate a commercial bank must pay the Federal Reserve to borrow reserves overnight?

Accepted Answer

A) discount 
B) Fed funds 
C) financial overnight 
D) daily 
E) institutional 
A) discount 
B) Fed funds 
C) financial overnight 
D) daily 
E) institutional

The market segmentation theory states that interest rates on debt vary dependent upon market segments which are segmented based upon which one of the following?

The approximate nominal interest rate is computed as the real rate:

What is the bond equivalent yield on a 120-day Treasury bill that has a bank discount yield of 3.00%?

The rate which an investor pays a brokerage firm for a margin loan is based on a negotiated premium which is added to which one of the following rates?

The following premiums apply to a 6-month bond: interest rate risk premium = .22%; real rate = 3.50%; default premium = .12%; inflation premium = 1.45%. What is the expected difference in nominal interest rates between a 6-month risky security and a 6-month, default-free security?

Which one of the following statements concerning the modern fixed-income market is correct?

Which of the following statements are true? I. Lenders have a preference for shorter maturities. II. Lenders have a preference for longer maturities. III. Borrowers have a preference for shorter maturities. IV. Borrowers have a preference for longer maturities.

You invest $3,600 today at a nominal annual rate of 5.5%. This investment will pay one payment five years from now. What will be the amount of that payment?

Which of the following comprise the nominal interest rate on default-free securities according to the modern view of the term structure of interest rates? I. liquidity premium II. real rate III. interest rate risk premium IV. inflation premium

Which one of the following debt instruments guarantees investors a positive real rate of return?

A one-year STRIPS sells at an interest rate of 3.20% and a two-year STRIPS sells at an interest rate of 3.90%. What is the implied one-year forward rate? Assume the rates are effective annual rates.

An investment will make one payment of $22,500 nine years from now. What is the current value of this investment if the nominal rate of return is 4.8%?

Which one of the following is a method used to quote interest rates on money market instruments?

Which one of the following is defined as U.S. dollar-denominated deposits held in a foreign bank?

Assume that a large corporation, such as General Electric, needs money in the short term. Which one of the following securities is that corporation most likely to issue to meet this need?

Which one of the following statements is correct?

Which one of the following describes a banker's acceptance?

A Treasury bill has 40 days left to maturity. The bank discount yield on the bill is 3.75%. What is the effective annual rate?

Which one of the following rates is the rate a commercial bank must pay the Federal Reserve to borrow reserves overnight?

A Brief History of Risk and Return

The Investment Process

Overview of Security Tips

Mutual Funds and Other Investment Companies

The Stock Market

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Bond Prices and Yields

Diversification and Risky Asset Allocation

Return, Risk, and the Security Market Line

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Option Valuation

Alternative Investments

Corporate and Government Bonds

Projecting Cash Flow and Earnings

Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

Filters

Exam 9: Interest Rates

The market segmentation theory states that interest rates on debt vary dependent upon market segments which are segmented based upon which one of the following?

The approximate nominal interest rate is computed as the real rate:

What is the bond equivalent yield on a 120-day Treasury bill that has a bank discount yield of 3.00%?

The rate which an investor pays a brokerage firm for a margin loan is based on a negotiated premium which is added to which one of the following rates?

The following premiums apply to a 6-month bond: interest rate risk premium = .22%; real rate = 3.50%; default premium = .12%; inflation premium = 1.45%. What is the expected difference in nominal interest rates between a 6-month risky security and a 6-month, default-free security?

Which one of the following statements concerning the modern fixed-income market is correct?

Which of the following statements are true? I. Lenders have a preference for shorter maturities. II. Lenders have a preference for longer maturities. III. Borrowers have a preference for shorter maturities. IV. Borrowers have a preference for longer maturities.

You invest $3,600 today at a nominal annual rate of 5.5%. This investment will pay one payment five years from now. What will be the amount of that payment?

Which of the following comprise the nominal interest rate on default-free securities according to the modern view of the term structure of interest rates? I. liquidity premium II. real rate III. interest rate risk premium IV. inflation premium

Which one of the following debt instruments guarantees investors a positive real rate of return?

A one-year STRIPS sells at an interest rate of 3.20% and a two-year STRIPS sells at an interest rate of 3.90%. What is the implied one-year forward rate? Assume the rates are effective annual rates.

An investment will make one payment of $22,500 nine years from now. What is the current value of this investment if the nominal rate of return is 4.8%?

Which one of the following is a method used to quote interest rates on money market instruments?

Which one of the following is defined as U.S. dollar-denominated deposits held in a foreign bank?

Assume that a large corporation, such as General Electric, needs money in the short term. Which one of the following securities is that corporation most likely to issue to meet this need?

Which one of the following statements is correct?

Which one of the following describes a banker's acceptance?

A Treasury bill has 40 days left to maturity. The bank discount yield on the bill is 3.75%. What is the effective annual rate?

Which one of the following rates is the rate a commercial bank must pay the Federal Reserve to borrow reserves overnight?

A Brief History of Risk and Return

The Investment Process

Overview of Security Tips

Mutual Funds and Other Investment Companies

The Stock Market

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Bond Prices and Yields

Diversification and Risky Asset Allocation

Return, Risk, and the Security Market Line

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Option Valuation

Alternative Investments

Corporate and Government Bonds

Projecting Cash Flow and Earnings

Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

Filters