Question 1

This is the interest rate that is actually observed in financial markets.

Accepted Answer

A)  nominal interest rates 
B)  real interest rates 
C)  real risk free rate 
D)  market premium 
A)  nominal interest rates 
B)  real interest rates 
C)  real risk free rate 
D)  market premium

Question 2

Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following 3 years (i.e., years 2, 3 and 4, respectively) are as follows: 1R1 = 5%, E(2r1) = 7%, E(3r1) = 7.5% E(4r1) = 7.85%
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%; Two-year: 5.50% 
B)  One-year: 5.00%; Two-year: 6.00% 
C)  One-year: 5.50%; Two-year: 6.15% 
D)  One-year: 5.50%; Two-year: 5.75% 
A)  One-year: 5.00%; Two-year: 5.50% 
B)  One-year: 5.00%; Two-year: 6.00% 
C)  One-year: 5.50%; Two-year: 6.15% 
D)  One-year: 5.50%; Two-year: 5.75%

Question 3

Classify the following financial instruments as money market securities or capital market securities:
a. Common Stock
b. Corporate Bonds
c. Mortgages
d. U.S. Treasury Bills
e. U.S. Treasury Notes
f. U.S. Treasury Bonds
g. State and Government Bonds

Accepted Answer

a. capital market security
b.

Question 4

George Washington wants to invest in one of two corporate bonds issued by separate firms. One bond yields 7% with a 10-year maturity; the other offers a 10% yield with a 9-year maturity. George thinks the 9-year bond is the better deal since the rate is higher. Is this necessarily so? Explain what factors George should consider before making a choice.

Accepted Answer

George should consider factors that affe

Question 5

Liquidity Premium Hypothesis Suppose we observe the following rates: 1R1 = 8%, 1R2 = 10%, and E(2r1) = 8%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L2?

Accepted Answer

A)  1.02% 
B)  4.04% 
C)  6.15% 
D)  12.03% 
A)  1.02% 
B)  4.04% 
C)  6.15% 
D)  12.03%

Question 6

What does the "term structure of interest rates" mean?

Accepted Answer

It compares interest rates on

Question 7

Forecasting Interest Rates Assume the current interest rate on a one-year Treasury bond (1R1) is 5.00 percent, the current rate on a two-year Treasury bond (1R2) is 5.75 percent, and the current rate on a three-year Treasury bond (1R3) is 6.25 percent. If the unbiased expectations theory of the term structure of interest rates is correct, what is the one-year interest rate expected on Treasury bills during year 3, 3f1?

Accepted Answer

A)  5.00% 
B)  5.67% 
C)  7.26% 
D)  8.00% 
A)  5.00% 
B)  5.67% 
C)  7.26% 
D)  8.00%

Question 8

The Wall Street Journal states that the yield curve for Treasuries is downward sloping and there is no liquidity premium or maturity risk premium. Given this information, which of the following statements is correct?

Accepted Answer

A)  A 30-year corporate bond must have a higher yield than a 5-year corporate bond. 
B)  A 5-year corporate bond must have a higher yield than a 30-year Treasury bond. 
C)  A 5-year Treasury bond must have a higher yield than a 5-year corporate bond. 
D)  All of these statements are correct. 
A)  A 30-year corporate bond must have a higher yield than a 5-year corporate bond. 
B)  A 5-year corporate bond must have a higher yield than a 30-year Treasury bond. 
C)  A 5-year Treasury bond must have a higher yield than a 5-year corporate bond. 
D)  All of these statements are correct.

Question 9

Unbiased Expectations Theory 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:   Using the unbiased expectations theory, what is the current (long-term) rate for four-year-maturity Treasury securities?

Accepted Answer

A)  6.00% 
B)  6.33% 
C)  6.75% 
D)  7.00% 
A)  6.00% 
B)  6.33% 
C)  6.75% 
D)  7.00%

Question 10

The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 6.25%, on 20-year Treasury bonds is 7.95%, and on a 20-year corporate bond is 10.75%. Assume that the maturity risk premium is zero. If the default risk premium and liquidity risk premium on a 10-year corporate bond is the same as that on the 20-year corporate bond, calculate the current rate on a 10-year corporate bond.

Accepted Answer

A)  9.05% 
B)  6.15% 
C)  7.60% 
D)  8.70% 
A)  9.05% 
B)  6.15% 
C)  7.60% 
D)  8.70%

Question 11

Interest rates A corporation's 10-year bonds are currently yielding a return of 7.75 percent. The expected inflation premium is 3.0 percent annually and the real interest rate is expected to be 3.00 percent annually over the next 10 years. The liquidity risk premium on the corporation's bonds is 0.50 percent. The maturity risk premium is 0.25 percent on 2-year securities and increases by 0.10 percent for each additional year to maturity. What is the default risk premium on the corporation's 10-year bonds?

Accepted Answer

A)  0.18% 
B)  0.20% 
C)  0.22% 
D)  0.27% 
A)  0.18% 
B)  0.20% 
C)  0.22% 
D)  0.27%

Question 12

Interest rates The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 6.75 percent, on 20-year Treasury bonds is 7.25 percent, and on a 20-year corporate bond is 8.50 percent. Assume that the maturity risk premium is zero. If the default risk premium and liquidity risk premium on a 10-year corporate bond is the same as that on the 20-year corporate bond, what is the current rate on a 10-year corporate bond.

Accepted Answer

A)  7.50% 
B)  8.00% 
C)  8.50% 
D)  8.75% 
A)  7.50% 
B)  8.00% 
C)  8.50% 
D)  8.75%

Question 13

Which of the following statements is incorrect?

Accepted Answer

A)  The over-the-counter market operates in a fixed location to conduct trades for local stocks. 
B)  Liquidity is the ease with which an asset can be converted into cash. 
C)  An initial public offering is an example of a primary market transaction. 
D)  Money market instruments have maturities of less than one year. 
A)  The over-the-counter market operates in a fixed location to conduct trades for local stocks. 
B)  Liquidity is the ease with which an asset can be converted into cash. 
C)  An initial public offering is an example of a primary market transaction. 
D)  Money market instruments have maturities of less than one year.

Question 14

This is the ease with which an asset can be converted into cash.

Accepted Answer

A)  direct transfer 
B)  liquidity 
C)  primary market 
D)  secondary market 
A)  direct transfer 
B)  liquidity 
C)  primary market 
D)  secondary market

Question 15

These feature debt securities or instruments with maturities of one year or less.

Accepted Answer

A)  money markets 
B)  primary markets 
C)  secondary markets 
D)  over-the-counter stocks 
A)  money markets 
B)  primary markets 
C)  secondary markets 
D)  over-the-counter stocks

Question 16

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 17

Liquidity Premium Hypothesis One-year Treasury bills currently earn 5.50 percent. You expect that one year from now, one-year Treasury bill rates will increase to 5.75 percent. The liquidity premium on two-year securities is 0.075 percent. If the liquidity theory is correct, what should the current rate be on two-year Treasury securities?

Accepted Answer

A)  3.775% 
B)  5.625% 
C)  5.662% 
D)  11.325% 
A)  3.775% 
B)  5.625% 
C)  5.662% 
D)  11.325%

Question 18

Which of the following statements is correct?

Accepted Answer

A)  An IPO is an example of a primary market transaction. 
B)  Money markets are subject to wider price fluctuations and are therefore more risky than capital market instruments. 
C)  A direct transfer of funds is more efficient than utilizing financial institutions. 
D)  The market segmentation theory argues that the different investors have different risk preferences which determine the shape of the yield curve. 
A)  An IPO is an example of a primary market transaction. 
B)  Money markets are subject to wider price fluctuations and are therefore more risky than capital market instruments. 
C)  A direct transfer of funds is more efficient than utilizing financial institutions. 
D)  The market segmentation theory argues that the different investors have different risk preferences which determine the shape of the yield curve.

Question 19

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 20

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 statements 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 statements are correct.

This is the interest rate that is actually observed in financial markets.

Classify the following financial instruments as money market securities or capital market securities: a. Common Stock b. Corporate Bonds c. Mortgages d. U.S. Treasury Bills e. U.S. Treasury Notes f. U.S. Treasury Bonds g. State and Government Bonds

Liquidity Premium Hypothesis Suppose we observe the following rates: ₁R₁ = 8%, ₁R₂ = 10%, and E(₂r₁) = 8%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L₂?

What does the "term structure of interest rates" mean?

The Wall Street Journal states that the yield curve for Treasuries is downward sloping and there is no liquidity premium or maturity risk premium. Given this information, which of the following statements is correct?

Which of the following statements is incorrect?

This is the ease with which an asset can be converted into cash.

These feature debt securities or instruments with maturities of one year or less.

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

Which of the following statements is correct?

Which of the following is NOT a capital market instrument?

Which of the following statements is correct?

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

This is the interest rate that is actually observed in financial markets.

Classify the following financial instruments as money market securities or capital market securities: a. Common Stock b. Corporate Bonds c. Mortgages d. U.S. Treasury Bills e. U.S. Treasury Notes f. U.S. Treasury Bonds g. State and Government Bonds

Liquidity Premium Hypothesis Suppose we observe the following rates: 1R1 = 8%, 1R2 = 10%, and E(2r1) = 8%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L2?

What does the "term structure of interest rates" mean?

The Wall Street Journal states that the yield curve for Treasuries is downward sloping and there is no liquidity premium or maturity risk premium. Given this information, which of the following statements is correct?

Which of the following statements is incorrect?

This is the ease with which an asset can be converted into cash.

These feature debt securities or instruments with maturities of one year or less.

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

Which of the following statements is correct?

Which of the following is NOT a capital market instrument?

Which of the following statements is correct?

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

Liquidity Premium Hypothesis Suppose we observe the following rates: ₁R₁ = 8%, ₁R₂ = 10%, and E(₂r₁) = 8%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L₂?