Question 1

Everything else equal, if the United States runs a large foreign trade deficit, the financing of the deficit will:

Accepted Answer

A) decrease sales of Treasury securities. 
B) increase interest rates. 
C) increase government subsidies. 
D) increase the money supply. 
E) decrease tax revenue. 
A) decrease sales of Treasury securities. 
B) increase interest rates. 
C) increase government subsidies. 
D) increase the money supply. 
E) decrease tax revenue. B

Question 2

During or near peaks of business activity, yield curves generally are either flat or downward sloping.

Accepted Answer

A) True 
 B)False  False

Question 3

Which of the following statements is correct?

Accepted Answer

A) Other things held constant, the "liquidity preference theory" would generally lead to an upward sloping yield curve. 
B) Other things held constant, the "market segmentation theory" would generally lead to an upward sloping yield curve. 
C) Other things held constant, the "expectations theory" would generally lead to an upward sloping yield curve. 
D) Other things held constant, the yield curve under "normal" conditions would be horizontal (i.e., flat). 
E) Other things held constant, a downward sloping yield curve would suggest that investors expect interest rates to increase in the future. 
A) Other things held constant, the "liquidity preference theory" would generally lead to an upward sloping yield curve. 
B) Other things held constant, the "market segmentation theory" would generally lead to an upward sloping yield curve. 
C) Other things held constant, the "expectations theory" would generally lead to an upward sloping yield curve. 
D) Other things held constant, the yield curve under "normal" conditions would be horizontal (i.e., flat). 
E) Other things held constant, a downward sloping yield curve would suggest that investors expect interest rates to increase in the future. A

Question 4

Which of the following bonds has the greatest default risk?

Accepted Answer

A) A U.S Treasury bond with a two-year maturity 
B) An AAA corporate bond with a seven-year maturity 
C) A BBB corporate bond with a three-year maturity 
D) A CCC corporate bond with a 10-year maturity 
E) An AAA corporate bond with a 10-year maturity 
A) A U.S Treasury bond with a two-year maturity 
B) An AAA corporate bond with a seven-year maturity 
C) A BBB corporate bond with a three-year maturity 
D) A CCC corporate bond with a 10-year maturity 
E) An AAA corporate bond with a 10-year maturity

Question 5

The current interest rate on a one-year bond is 4 percent and the current rate on a two-year bond is 4.4 percent. If the expectations theory of the term structure is correct, what is the one-year interest rate expected during Year 2? That is, compute the rate that is expected to exist only during Year 2. (Base your answer on an arithmetic average rather than a geometric average.)

Accepted Answer

A) 4.8% 
B) 4.2% 
C) 4.4% 
D) 0.4% 
E) 8.4% 
A) 4.8% 
B) 4.2% 
C) 4.4% 
D) 0.4% 
E) 8.4%

Question 6

Which of the following factors will lead to an increase in interest rates?

Accepted Answer

A) Deflation 
B) Federal deficit 
C) Contraction 
D) Recession 
E) Trade surplus 
A) Deflation 
B) Federal deficit 
C) Contraction 
D) Recession 
E) Trade surplus

Question 7

The Federal Reserve purchases U.S. Treasury securities to:

Accepted Answer

A) increase the money supply. 
B) reduce credit availability. 
C) increase interest rates. 
D) decrease expected inflation. 
E) increase tax rates. 
A) increase the money supply. 
B) reduce credit availability. 
C) increase interest rates. 
D) decrease expected inflation. 
E) increase tax rates.

Question 8

During _____, both the demand for money and the rate of inflation tend to fall, which prompts the Fed to take actions to decrease interest rates.

Accepted Answer

A) expansions 
B) a fiscal deficit occurrence 
C) recessions 
D) economic booms 
E) a foreign trade deficit occurrence 
A) expansions 
B) a fiscal deficit occurrence 
C) recessions 
D) economic booms 
E) a foreign trade deficit occurrence

Question 9

Everything else the same, if the yield curve is downward sloping, what is the yield to maturity on a 10-year Treasury coupon bond, relative to that on a one-year Treasury bond (T-bond)?

Accepted Answer

A) The yield on the 10-year bond is less than the yield on a one-year bond. 
B) The yield on a 10-year bond will always be higher than the yield on a one-year bond because of maturity premiums. 
C) It is impossible to tell without knowing the coupon rates of the bonds. 
D) The yields on the two bonds are equal. 
E) It is impossible to tell without knowing the relative risks of the two bonds. 
A) The yield on the 10-year bond is less than the yield on a one-year bond. 
B) The yield on a 10-year bond will always be higher than the yield on a one-year bond because of maturity premiums. 
C) It is impossible to tell without knowing the coupon rates of the bonds. 
D) The yields on the two bonds are equal. 
E) It is impossible to tell without knowing the relative risks of the two bonds.

Question 10

The expectations theory postulates that the term structure of interest rates is based on expectations regarding future inflation rates.

Accepted Answer

A) True 
 B)False

Question 11

The production opportunities that exist in the economy represents one of the four fundamental factors that affect the:

Accepted Answer

A) creditworthiness of investors. 
B) cost of money. 
C) liquidity of securities. 
D) political risk that is inherent in an economy. 
E) maturity of an investment. 
A) creditworthiness of investors. 
B) cost of money. 
C) liquidity of securities. 
D) political risk that is inherent in an economy. 
E) maturity of an investment.

Question 12

The yield curve is downward sloping, or inverted, if the inflation rates are expected to increase.

Accepted Answer

A) True 
 B)False

Question 13

If the Federal Reserve loosens the money supply to control growth in the economy, _____.

Accepted Answer

A) inflation will decrease 
B) interest rates will decrease 
C) sale of Treasury securities will increase 
D) credit supply will decrease 
E) economic activity will decrease 
A) inflation will decrease 
B) interest rates will decrease 
C) sale of Treasury securities will increase 
D) credit supply will decrease 
E) economic activity will decrease

Question 14

Everything else equal, which of the following actions would tend to increase interest rates in the financial markets?

Accepted Answer

A) Investors' time preferences for consumption increase. 
B) Investors are exposed to fewer economic risks. 
C) Production opportunities decrease throughout the economy. 
D) The overall creditworthiness of borrowers improves significantly. 
E) The default probabilities of corporations decline substantially. 
A) Investors' time preferences for consumption increase. 
B) Investors are exposed to fewer economic risks. 
C) Production opportunities decrease throughout the economy. 
D) The overall creditworthiness of borrowers improves significantly. 
E) The default probabilities of corporations decline substantially.

Question 15

Which of the following is true of federal deficit?

Accepted Answer

A) Other things held constant, the larger the federal deficit, the lower the level of government expenses. 
B) Other things held constant, the larger the federal deficit, the higher the level of the national income. 
C) Other things held constant, the larger the federal deficit, the more taxes the government collects. 
D) Other things held constant, the larger the federal deficit, the lower the inflation rate in the economy of a country. 
E) Other things held constant, the larger the federal deficit, the higher the level of interest rates on borrowings. 
A) Other things held constant, the larger the federal deficit, the lower the level of government expenses. 
B) Other things held constant, the larger the federal deficit, the higher the level of the national income. 
C) Other things held constant, the larger the federal deficit, the more taxes the government collects. 
D) Other things held constant, the larger the federal deficit, the lower the inflation rate in the economy of a country. 
E) Other things held constant, the larger the federal deficit, the higher the level of interest rates on borrowings.

Question 16

Which of the following is true of the market segmentation theory?

Accepted Answer

A) According to the market segmentation theory, the shape of the yield curve depends on investors' expectations about future inflation rates. 
B) According to the market segmentation theory, the yield curve can only be upward sloping at any given time. 
C) According to the market segmentation theory, lenders prefer to make short-term loans rather than long-term loans. 
D) According to the market segmentation theory, the yield curve can only be flat at any given time. 
E) According to the market segmentation theory, the slope of the yield curve depends on supply/demand conditions of a security in the long- and short-term markets. 
A) According to the market segmentation theory, the shape of the yield curve depends on investors' expectations about future inflation rates. 
B) According to the market segmentation theory, the yield curve can only be upward sloping at any given time. 
C) According to the market segmentation theory, lenders prefer to make short-term loans rather than long-term loans. 
D) According to the market segmentation theory, the yield curve can only be flat at any given time. 
E) According to the market segmentation theory, the slope of the yield curve depends on supply/demand conditions of a security in the long- and short-term markets.

Question 17

You read in The Wall Street Journal that 30-day T-bills are currently yielding 8 percent. Your brother-in-law, a broker at Kyoto Securities, has given you the following estimates of current interest rate premiums:
​
Inflation premium           5%
Liquidity premium          1%
Maturity risk premium    2%
Default risk premium      2%
​
Based on these data, the real risk-free rate of return is:

Accepted Answer

A) 0 percent. 
B) 1 percent. 
C) 2 percent. 
D) 3 percent. 
E) 4 percent. 
A) 0 percent. 
B) 1 percent. 
C) 2 percent. 
D) 3 percent. 
E) 4 percent.

Question 18

Suppose you have information that a recession is ending and the economy is about to enter a boom. If your firm must borrow money, it should probably issue long-term rather than short-term debt.

Accepted Answer

A) True 
 B)False

Question 19

The change in the market value of an asset over a particular time period is called the _____.

Accepted Answer

A) yield 
B) maturity 
C) capital gain 
D) interest income 
E) dividend income 
A) yield 
B) maturity 
C) capital gain 
D) interest income 
E) dividend income

Question 20

Following is information about three bonds:
?
? $\begin{array} { l l c } 
 { \text { Issuer } } & \text { Yield } & \text { Time to Maturity } \\hline
\text { Treasury } & 2.0 \% & 6 \text { months } \
\text { Company A } & 5.0 & 5 \text { years } \
\text { Company B } & 5.3 & 8 \text { years }
\end{array}$
?
Although none of the bonds has a liquidity premium, any bond with a maturity equal to one year or greater has a maturity risk premium (MRP). Except for their terms to maturity, the characteristics of the Company A and Company B bonds are the same (including their default risk). The average inflation rate is expected to remain constant during the next 10 years. What is the annual MRP?

Accepted Answer

A) 0.1% 
B) 1.1% 
C) 1.0% 
D) 0.7% 
E) 4.1% 
A) 0.1% 
B) 1.1% 
C) 1.0% 
D) 0.7% 
E) 4.1%

Everything else equal, if the United States runs a large foreign trade deficit, the financing of the deficit will:

During or near peaks of business activity, yield curves generally are either flat or downward sloping.

Which of the following statements is correct?

Which of the following bonds has the greatest default risk?

Which of the following factors will lead to an increase in interest rates?

The Federal Reserve purchases U.S. Treasury securities to:

During _____, both the demand for money and the rate of inflation tend to fall, which prompts the Fed to take actions to decrease interest rates.

Everything else the same, if the yield curve is downward sloping, what is the yield to maturity on a 10-year Treasury coupon bond, relative to that on a one-year Treasury bond (T-bond)?

The expectations theory postulates that the term structure of interest rates is based on expectations regarding future inflation rates.

The production opportunities that exist in the economy represents one of the four fundamental factors that affect the:

The yield curve is downward sloping, or inverted, if the inflation rates are expected to increase.

If the Federal Reserve loosens the money supply to control growth in the economy, _____.

Everything else equal, which of the following actions would tend to increase interest rates in the financial markets?

Which of the following is true of federal deficit?

Which of the following is true of the market segmentation theory?

Suppose you have information that a recession is ending and the economy is about to enter a boom. If your firm must borrow money, it should probably issue long-term rather than short-term debt.

The change in the market value of an asset over a particular time period is called the _____.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

Bonds Debt Characteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters

Exam 5: The Cost of Money Interest Rates

Everything else equal, if the United States runs a large foreign trade deficit, the financing of the deficit will:

During or near peaks of business activity, yield curves generally are either flat or downward sloping.

Which of the following statements is correct?

Which of the following bonds has the greatest default risk?

Which of the following factors will lead to an increase in interest rates?

The Federal Reserve purchases U.S. Treasury securities to:

During _____, both the demand for money and the rate of inflation tend to fall, which prompts the Fed to take actions to decrease interest rates.

Everything else the same, if the yield curve is downward sloping, what is the yield to maturity on a 10-year Treasury coupon bond, relative to that on a one-year Treasury bond (T-bond)?

The expectations theory postulates that the term structure of interest rates is based on expectations regarding future inflation rates.

The production opportunities that exist in the economy represents one of the four fundamental factors that affect the:

The yield curve is downward sloping, or inverted, if the inflation rates are expected to increase.

If the Federal Reserve loosens the money supply to control growth in the economy, _____.

Everything else equal, which of the following actions would tend to increase interest rates in the financial markets?

Which of the following is true of federal deficit?

Which of the following is true of the market segmentation theory?

Suppose you have information that a recession is ending and the economy is about to enter a boom. If your firm must borrow money, it should probably issue long-term rather than short-term debt.

The change in the market value of an asset over a particular time period is called the _____.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

Bonds Debt Characteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters