Question 1

A downward sloping yield curve is considered normal.

Accepted Answer

A) True 
 B)False

Question 2

In a recent year,interest rates on long-term government and corporate bonds were as follows:
T-bond= 7.72%
A= 9.64%
AAA= 8.72%
BBB= 10.18%
The differences in rates among these issues were caused primarily by

Accepted Answer

A)  Tax effects. 
B)  Default risk differences. 
C)  Maturity risk differences. 
D)  Inflation differences. 
E)  Answers b and d are both correct. 
A)  Tax effects. 
B)  Default risk differences. 
C)  Maturity risk differences. 
D)  Inflation differences. 
E)  Answers b and d are both correct.

Question 3

The market segmentation theory of the term structure is,essentially,the expectations theory with the addition of maturity risk premiums.

Accepted Answer

A) True 
 B)False

Question 4

If the United States is running a deficit trade balance with Great Britain,we would expect the value of the British pound to depreciate against the U.S.dollar.

Accepted Answer

A) True 
 B)False

Question 5

Most experts think that in the United States the real risk-free rate fluctuates between

Accepted Answer

A)  one to two percent. 
B)  two to four percent. 
C)  four to seven percent 
D)  eight to twelve percent 
A)  one to two percent. 
B)  two to four percent. 
C)  four to seven percent 
D)  eight to twelve percent

Question 6

The price of a bond bought at a discount cannot go down in the financial markets.

Accepted Answer

A) True 
 B)False

Question 7

Assume that the expectations theory of term structure holds.If the rate on a two-year Treasury bond is 8% and the rate on a three-year Treasury bond is 7%,what is the expected rate on a one-year Treasury bond in year three?

Accepted Answer

A)  8% 
B)  7% 
C)  6% 
D)  5% 
E)  4% 
A)  8% 
B)  7% 
C)  6% 
D)  5% 
E)  4%

Question 8

As the demand for funds increase,the demand curve will shift to the ____ resulting in ____ market clearing interest rate.

Accepted Answer

A)  right;higher 
B)  left;higher 
C)  right;lower 
D)  left;lower 
A)  right;higher 
B)  left;higher 
C)  right;lower 
D)  left;lower

Question 9

Inflationary pressures are usually strongest during business booms.

Accepted Answer

A) True 
 B)False

Question 10

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 1-year T-bond?

Accepted Answer

A)  The yield on the 10-year bond is less than the yield on a 1-year bond. 
B)  The yield on a 10-year bond will always be higher than the yield on a 1-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 1-year bond. 
B)  The yield on a 10-year bond will always be higher than the yield on a 1-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 11

Which of the following statements is most correct?

Accepted Answer

A)  The maturity premiums embedded in the interest rates on U.S.Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds. 
B)  Reinvestment rate risk is lower,other things held constant,on 30-day T-bills than on 30-year T-bonds. 
C)  According to the market segmentation theory of the term structure of interest rates,we should normally expect the yield curve to have an upward slope. 
D)  The expectations theory of the term structure of interest rates states that borrowers generally prefer to borrow on a long-term basis while savers generally prefer to lend on a short-term basis,and that as a result,the yield curve is normally upward sloping. 
E)  If the maturity risk premium were zero and the rate of inflation were expected to increase in the future,then the yield curve for U.S.Treasury securities would,other things held constant,have an upward slope. 
A)  The maturity premiums embedded in the interest rates on U.S.Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds. 
B)  Reinvestment rate risk is lower,other things held constant,on 30-day T-bills than on 30-year T-bonds. 
C)  According to the market segmentation theory of the term structure of interest rates,we should normally expect the yield curve to have an upward slope. 
D)  The expectations theory of the term structure of interest rates states that borrowers generally prefer to borrow on a long-term basis while savers generally prefer to lend on a short-term basis,and that as a result,the yield curve is normally upward sloping. 
E)  If the maturity risk premium were zero and the rate of inflation were expected to increase in the future,then the yield curve for U.S.Treasury securities would,other things held constant,have an upward slope.

Question 12

Assume that the current yield curve is upward sloping,or normal.This implies that

Accepted Answer

A)  Short-term interest rates are more volatile than long-term rates. 
B)  Inflation is expected to subside in the future. 
C)  The economy is at the peak of a business cycle. 
D)  Long-term bonds are a better buy than short-term bonds. 
E)  None of the above statements is necessarily implied by the yield curve given. 
A)  Short-term interest rates are more volatile than long-term rates. 
B)  Inflation is expected to subside in the future. 
C)  The economy is at the peak of a business cycle. 
D)  Long-term bonds are a better buy than short-term bonds. 
E)  None of the above statements is necessarily implied by the yield curve given.

Question 13

Which of the following statements is correct?

Accepted Answer

A)  If different markets existed for long-term and short-term bonds,but lenders and borrowers could move freely between markets, (1)the market segmentation theory could not really be an important determinant of the yield curve,and (2)maturity risk premiums could not be significant. 
B)  Because the default risk premium (DRP)and the liquidity premium (LP)are both essentially zero for U.S.Treasury securities,the Treasury yield curve is influenced more heavily by expected inflation than corporate bonds' yield curves,i.e. ,we can be sure that a given amount of expected inflation will have more effect on the slope of the Treasury yield curve than on the corporate yield curve. 
C)  According to the market segmentation theory,investors prefer to buy debt with short maturities.Therefore,the fundamental conclusion from this theory is that the yield curve normally should slope upwards. 
D)  It is theoretically possible for the yield curve to have a downward slope,and there have been times when such a slope existed.That situation was probably caused by investors' liquidity preferences,i.e. ,by the factors which underlie the liquidity preference theory. 
E)  Yield curves for government and corporate bonds can be constructed from data that exist in the marketplace.If the yield curves for several companies were plotted on a graph,along with the yield curve for U.S.Treasury securities,the company with the largest total of DRP plus LP would have the highest yield curve. 
A)  If different markets existed for long-term and short-term bonds,but lenders and borrowers could move freely between markets, (1)the market segmentation theory could not really be an important determinant of the yield curve,and (2)maturity risk premiums could not be significant. 
B)  Because the default risk premium (DRP)and the liquidity premium (LP)are both essentially zero for U.S.Treasury securities,the Treasury yield curve is influenced more heavily by expected inflation than corporate bonds' yield curves,i.e. ,we can be sure that a given amount of expected inflation will have more effect on the slope of the Treasury yield curve than on the corporate yield curve. 
C)  According to the market segmentation theory,investors prefer to buy debt with short maturities.Therefore,the fundamental conclusion from this theory is that the yield curve normally should slope upwards. 
D)  It is theoretically possible for the yield curve to have a downward slope,and there have been times when such a slope existed.That situation was probably caused by investors' liquidity preferences,i.e. ,by the factors which underlie the liquidity preference theory. 
E)  Yield curves for government and corporate bonds can be constructed from data that exist in the marketplace.If the yield curves for several companies were plotted on a graph,along with the yield curve for U.S.Treasury securities,the company with the largest total of DRP plus LP would have the highest yield curve.

Question 14

In the textbook,the nominal interest rate is defined as being equal to the real risk-free rate,plus an inflation premium,plus a default risk premium,plus a liquidity premium,plus a maturity risk premium.

Accepted Answer

A) True 
 B)False

Question 15

An inverted yield curve

Accepted Answer

A)  Exists when short-term rates exceed long-term rates. 
B)  Exists when long-term rates exceed short-term rates. 
C)  Represents the "normal term structure." 
D)  Signifies that investors can get higher returns by investing in bonds than by investing in stocks. 
E)  Signifies that investors can get higher returns on stocks than on bonds. 
A)  Exists when short-term rates exceed long-term rates. 
B)  Exists when long-term rates exceed short-term rates. 
C)  Represents the "normal term structure." 
D)  Signifies that investors can get higher returns by investing in bonds than by investing in stocks. 
E)  Signifies that investors can get higher returns on stocks than on bonds.

Question 16

Which of the following statements is most correct? Other things held constant,

Accepted Answer

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

Question 17

The ____ premium is compensation for possibility that the borrower will not be able to debt's interest and principal on time.

Accepted Answer

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

Question 18

The liquidity premium reflects the fact that some investments are more easily converted into cash on a short notice at fair market value than other securities.

Accepted Answer

A) True 
 B)False

Question 19

Assume that r* = 2.0%;the maturity risk premium is found as MRP = 0.1%(t − 1)where t = years to maturity;the default risk premium for corporate bonds is found as DRP = 0.05%(t − 1);the liquidity premium is 1.0% for corporate bonds only;and inflation is expected to be 3%,4%,and 5% during the next three years and then 6% thereafter.What is the difference in interest rates between 10-year corporate and Treasury bonds?

Accepted Answer

A)  0.45% 
B)  1.45% 
C)  2.20% 
D)  2.75% 
E)  3.25% 
A)  0.45% 
B)  1.45% 
C)  2.20% 
D)  2.75% 
E)  3.25%

Question 20

Default risk premiums

Accepted Answer

A)  are unrelated to the issuer of the security. 
B)  are higher for U.S.Treasury securities than for most corporate securities. 
C)  are higher for AAA bonds than for CCC bonds. 
D)  vary somewhat over time. 
A)  are unrelated to the issuer of the security. 
B)  are higher for U.S.Treasury securities than for most corporate securities. 
C)  are higher for AAA bonds than for CCC bonds. 
D)  vary somewhat over time.

A downward sloping yield curve is considered normal.

In a recent year,interest rates on long-term government and corporate bonds were as follows: T-bond= 7.72% A= 9.64% AAA= 8.72% BBB= 10.18% The differences in rates among these issues were caused primarily by

The market segmentation theory of the term structure is,essentially,the expectations theory with the addition of maturity risk premiums.

If the United States is running a deficit trade balance with Great Britain,we would expect the value of the British pound to depreciate against the U.S.dollar.

Most experts think that in the United States the real risk-free rate fluctuates between

The price of a bond bought at a discount cannot go down in the financial markets.

Assume that the expectations theory of term structure holds.If the rate on a two-year Treasury bond is 8% and the rate on a three-year Treasury bond is 7%,what is the expected rate on a one-year Treasury bond in year three?

As the demand for funds increase,the demand curve will shift to the resulting in market clearing interest rate.

Inflationary pressures are usually strongest during business booms.

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 1-year T-bond?

Which of the following statements is most correct?

Assume that the current yield curve is upward sloping,or normal.This implies that

Which of the following statements is correct?

In the textbook,the nominal interest rate is defined as being equal to the real risk-free rate,plus an inflation premium,plus a default risk premium,plus a liquidity premium,plus a maturity risk premium.

An inverted yield curve

Which of the following statements is most correct? Other things held constant,

The ____ premium is compensation for possibility that the borrower will not be able to debt's interest and principal on time.

The liquidity premium reflects the fact that some investments are more easily converted into cash on a short notice at fair market value than other securities.

Default risk premiums

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

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Exam 5: The Cost of Money Interest Rates

A downward sloping yield curve is considered normal.

In a recent year,interest rates on long-term government and corporate bonds were as follows: T-bond= 7.72% A= 9.64% AAA= 8.72% BBB= 10.18% The differences in rates among these issues were caused primarily by

The market segmentation theory of the term structure is,essentially,the expectations theory with the addition of maturity risk premiums.

If the United States is running a deficit trade balance with Great Britain,we would expect the value of the British pound to depreciate against the U.S.dollar.

Most experts think that in the United States the real risk-free rate fluctuates between

The price of a bond bought at a discount cannot go down in the financial markets.

Assume that the expectations theory of term structure holds.If the rate on a two-year Treasury bond is 8% and the rate on a three-year Treasury bond is 7%,what is the expected rate on a one-year Treasury bond in year three?

As the demand for funds increase,the demand curve will shift to the ____ resulting in ____ market clearing interest rate.

Inflationary pressures are usually strongest during business booms.

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 1-year T-bond?

Which of the following statements is most correct?

Assume that the current yield curve is upward sloping,or normal.This implies that

Which of the following statements is correct?

In the textbook,the nominal interest rate is defined as being equal to the real risk-free rate,plus an inflation premium,plus a default risk premium,plus a liquidity premium,plus a maturity risk premium.

An inverted yield curve

Which of the following statements is most correct? Other things held constant,

The ____ premium is compensation for possibility that the borrower will not be able to debt's interest and principal on time.

The liquidity premium reflects the fact that some investments are more easily converted into cash on a short notice at fair market value than other securities.

Default risk premiums

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

Filters

As the demand for funds increase,the demand curve will shift to the resulting in market clearing interest rate.