Question 1

Which one of the following rates is generally considered the bellwether rate for bank loans to business firms?

Accepted Answer

A) money market 
B) Fed funds 
C) discount 
D) prime 
E) call money 
A) money market 
B) Fed funds 
C) discount 
D) prime 
E) call money

Question 2

Modern term structure theory supports the contention that the term structure of interest rates will:

Accepted Answer

A) be upward sloping. 
B) be downward sloping. 
C) be upward sloping in the short term and relatively flat in the long term. 
D) be constant over time. 
E) change over time. 
A) be upward sloping. 
B) be downward sloping. 
C) be upward sloping in the short term and relatively flat in the long term. 
D) be constant over time. 
E) change over time.

Question 3

Which one of the following features applies to a U.S. Treasury bill?

Accepted Answer

A) U.S. agency debt 
B) pure discount security 
C) taxable at the state level 
D) semi-annual interest payments 
E) annual interest payments 
A) U.S. agency debt 
B) pure discount security 
C) taxable at the state level 
D) semi-annual interest payments 
E) annual interest payments

Question 4

Treasury STRIPS are:

Accepted Answer

A) zero coupon bonds issued by the U.S. Treasury with maturities of one year or less. 
B) currently quoted in 32nds of a dollar. 
C) created by separating principal payments and coupons of Treasury notes and bonds. 
D) a type of mortgage bond. 
E) coupon securities created from the interest and principal payments of Treasury bonds. 
A) zero coupon bonds issued by the U.S. Treasury with maturities of one year or less. 
B) currently quoted in 32nds of a dollar. 
C) created by separating principal payments and coupons of Treasury notes and bonds. 
D) a type of mortgage bond. 
E) coupon securities created from the interest and principal payments of Treasury bonds.

Question 5

Which one of the following statements is correct concerning a Treasury bill?

Accepted Answer

A) The asked discount indicates the amount a bond dealer is willing to pay to purchase a Treasury bill. 
B) The asked yield on a Treasury bill is a bond equivalent yield. 
C) The asked discount for a Treasury bill is greater than the bid discount. 
D) The asked yield for a Treasury bill is computed based on a 360-day year. 
E) The bid price on a Treasury bill is computed based on a 365-, or 366-day year. 
A) The asked discount indicates the amount a bond dealer is willing to pay to purchase a Treasury bill. 
B) The asked yield on a Treasury bill is a bond equivalent yield. 
C) The asked discount for a Treasury bill is greater than the bid discount. 
D) The asked yield for a Treasury bill is computed based on a 360-day year. 
E) The bid price on a Treasury bill is computed based on a 365-, or 366-day year.

Question 6

A one-year STRIPS sells at an interest rate of 3.15% and a two-year STRIPS sells at an interest rate of 3.88%. What is the implied one-year forward rate? Assume the rates are effective annual rates.

Accepted Answer

A) 4.44% 
B) 4.50% 
C) 4.54% 
D) 4.57% 
E) 4.62% 
A) 4.44% 
B) 4.50% 
C) 4.54% 
D) 4.57% 
E) 4.62%

Question 7

Inflation-indexed Treasury securities:
I. adjust the principal amount on an annual basis.
II. are default free.
III. offer a positive real rate of return.
IV. have a variable principal amount.

Accepted Answer

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

Question 8

A $5,000 face value bond is quoted at a bank discount yield of 2.8%. What is the current value of the bond if it matures in 36 days?

Accepted Answer

A) $4,972 
B) $4,978 
C) $4,982 
D) $4,986 
E) $4,991 
A) $4,972 
B) $4,978 
C) $4,982 
D) $4,986 
E) $4,991

Question 9

A two-year STRIPS sells at an interest rate of 3.84% and a three-year STRIPS sells at a rate of 3.97%. What is the implied one-year interest rate two years from now? Assume the rates are effective annual rates.

Accepted Answer

A) 4.23% 
B) 4.36% 
C) 4.41% 
D) 4.45% 
E) 4.50% 
A) 4.23% 
B) 4.36% 
C) 4.41% 
D) 4.45% 
E) 4.50%

Question 10

Which one of the following borrowers will pay the rates depicted on a Treasury yield curve?

Accepted Answer

A) large corporation 
B) municipal government 
C) bank's best customer 
D) high-risk borrower 
E) default-free borrower 
A) large corporation 
B) municipal government 
C) bank's best customer 
D) high-risk borrower 
E) default-free borrower

Question 11

A Treasury bill matures in 68 days and has a bond equivalent yield of 4.05%. What is the effective annual rate?

Accepted Answer

A) 4.12% 
B) 4.14% 
C) 4.15% 
D) 4.17% 
E) 4.18% 
A) 4.12% 
B) 4.14% 
C) 4.15% 
D) 4.17% 
E) 4.18%

Question 12

Pure discount bonds, which are created by separating the interest and principal payments from U.S. Treasury bonds, are called U.S. Treasury:

Accepted Answer

A) notes. 
B) bills. 
C) STRIPS. 
D) SWAPS. 
E) tax-exempts. 
A) notes. 
B) bills. 
C) STRIPS. 
D) SWAPS. 
E) tax-exempts.

Question 13

Southern Bank needs to borrow money overnight from the Federal Reserve in order to meet its reserve requirements. Which one of the following interest rates will be charged on this loan?

Accepted Answer

A) money market 
B) Federal funds 
C) discount 
D) prime 
E) Treasury 
A) money market 
B) Federal funds 
C) discount 
D) prime 
E) Treasury

Question 14

Which one of the following is a basis point?

Accepted Answer

A) 1% 
B) .1% 
C) .01% 
D) .001% 
E) .0001% 
A) 1% 
B) .1% 
C) .01% 
D) .001% 
E) .0001%

Question 15

You notice that the interest rate on your credit card is set at LIBOR plus 8.9%. Given this, the rate you will pay is primarily influenced by the money market rates in which one of the following?

Accepted Answer

A) Lisbon, Portugal 
B) New York, USA 
C) Frankfort, Germany 
D) London, England 
E) Chicago, USA 
A) Lisbon, Portugal 
B) New York, USA 
C) Frankfort, Germany 
D) London, England 
E) Chicago, USA

Question 16

Which two of the following are the largest categories of fixed-income securities in the U.S.?
I. U.S. government debt
II. corporate debt
III. municipal government debt
IV. real estate mortgage debt

Accepted Answer

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

Question 17

Which one of the following theories states that the term structure of interest rates reveals the financial market's projections of future interest rates?

Accepted Answer

A) market rate theory 
B) market yield theory 
C) Fisher hypothesis 
D) expectations theory 
E) rational rate hypothesis 
A) market rate theory 
B) market yield theory 
C) Fisher hypothesis 
D) expectations theory 
E) rational rate hypothesis

Question 18

Based on expectations theory, the term structure of interest rates will be ________ anytime investors believe that interest rates will be higher in the future than they are today.

Accepted Answer

A) volatile 
B) flat 
C) downward sloping 
D) upward sloping 
E) vertical 
A) volatile 
B) flat 
C) downward sloping 
D) upward sloping 
E) vertical

Question 19

A Treasury bill matures in 120 days and has a bond equivalent yield of 3.74%. What is the effective annual rate?

Accepted Answer

A) 3.79% 
B) 3.82% 
C) 3.85% 
D) 3.88% 
E) 3.91% 
A) 3.79% 
B) 3.82% 
C) 3.85% 
D) 3.88% 
E) 3.91%

Question 20

Banks are most apt to quote short-term loan rates as:

Accepted Answer

A) prime plus a spread. 
B) prime plus inflation. 
C) prime minus inflation. 
D) Federal funds plus prime. 
E) prime minus the discount. 
A) prime plus a spread. 
B) prime plus inflation. 
C) prime minus inflation. 
D) Federal funds plus prime. 
E) prime minus the discount.

Exam 9: Interest Rates

Which one of the following rates is generally considered the bellwether rate for bank loans to business firms?

Modern term structure theory supports the contention that the term structure of interest rates will:

Which one of the following features applies to a U.S. Treasury bill?

Treasury STRIPS are:

Which one of the following statements is correct concerning a Treasury bill?

A one-year STRIPS sells at an interest rate of 3.15% and a two-year STRIPS sells at an interest rate of 3.88%. What is the implied one-year forward rate? Assume the rates are effective annual rates.

Inflation-indexed Treasury securities: I. adjust the principal amount on an annual basis. II. are default free. III. offer a positive real rate of return. IV. have a variable principal amount.

A $5,000 face value bond is quoted at a bank discount yield of 2.8%. What is the current value of the bond if it matures in 36 days?

A two-year STRIPS sells at an interest rate of 3.84% and a three-year STRIPS sells at a rate of 3.97%. What is the implied one-year interest rate two years from now? Assume the rates are effective annual rates.

Which one of the following borrowers will pay the rates depicted on a Treasury yield curve?

A Treasury bill matures in 68 days and has a bond equivalent yield of 4.05%. What is the effective annual rate?

Pure discount bonds, which are created by separating the interest and principal payments from U.S. Treasury bonds, are called U.S. Treasury:

Southern Bank needs to borrow money overnight from the Federal Reserve in order to meet its reserve requirements. Which one of the following interest rates will be charged on this loan?

Which one of the following is a basis point?

You notice that the interest rate on your credit card is set at LIBOR plus 8.9%. Given this, the rate you will pay is primarily influenced by the money market rates in which one of the following?

Which two of the following are the largest categories of fixed-income securities in the U.S.? I. U.S. government debt II. corporate debt III. municipal government debt IV. real estate mortgage debt

Which one of the following theories states that the term structure of interest rates reveals the financial market's projections of future interest rates?

Based on expectations theory, the term structure of interest rates will be ________ anytime investors believe that interest rates will be higher in the future than they are today.

A Treasury bill matures in 120 days and has a bond equivalent yield of 3.74%. What is the effective annual rate?

Banks are most apt to quote short-term loan rates as:

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

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