Question 1

Which of these is the expected or "implied" rate on a short-term security that will originate at some point in the future?

Accepted Answer

A) Current yield 
B) Forward rate 
C) Spot rate 
D) Yield to maturity 
A) Current yield 
B) Forward rate 
C) Spot rate 
D) Yield to maturity

Question 2

The Wall Street Journal reports that the rate on three-year Treasury securities is 7.25 percent and the rate on four-year Treasury securities is 8.50 percent. The one-year interest rate expected in three years is E(4r1), 4.10 percent. According to the liquidity premium theory, what is the liquidity premium on the four-year Treasury security, L4?

Accepted Answer

A) 6.7 percent 
B) 7.1 percent 
C) 8.2 percent 
D) 9.6 percent 
A) 6.7 percent 
B) 7.1 percent 
C) 8.2 percent 
D) 9.6 percent

Question 3

All of the following are factors that affect nominal interest rates EXCEPT:

Accepted Answer

A) time to maturity. 
B) real interest rate. 
C) convertibility features. 
D) foreign exchange. 
A) time to maturity. 
B) real interest rate. 
C) convertibility features. 
D) foreign exchange.

Question 4

You note the following yield curve in The Wall Street Journal. According to the unbiased expectations hypothesis, what is the one-year forward rate for the period beginning one year from today, 2f1? $$\begin{array} { l l } 
\text { Maturity } & \text { Yield } \
\text { One day } & 2.00 \% \
\text { One year } & 6.00 \
\text { Two years } & 7.50 \
\text { Three years } & 9.00
\end{array}$$

Accepted Answer

A) 7.6 percent 
B) 8.6 percent 
C) 9.0 percent 
D) 10.2 percent 
A) 7.6 percent 
B) 8.6 percent 
C) 9.0 percent 
D) 10.2 percent

Question 5

The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 6.25 percent, on 20-year Treasury bonds is 7.95 percent, and on a 20-year corporate bond is 10.75 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, calculate the current rate on a 10-year corporate bond.

Accepted Answer

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

Question 6

A two-year Treasury security currently earns 5.25 percent. Over the next two years, the real interest rate is expected to be 3.00 percent per year and the inflation premium is expected to be 2.00 percent per year. What is the maturity risk premium on the two-year Treasury security?

Accepted Answer

A) 0.25 percent 
B) 1.00 percent 
C) 1.05 percent 
D) 5.00 percent 
A) 0.25 percent 
B) 1.00 percent 
C) 1.05 percent 
D) 5.00 percent

Question 7

Which of the following statements is correct?

Accepted Answer

A) According to the unbiased expectations theory, the return for holding a two-year bond to maturity is equal to the nominal rate divided by the real interest rate. 
B) The rate on a 10-year Corporate can never be less than the rate on a 10-year Treasury. 
C) We usually observe the inverted yield curve. 
D) The rate on a three-year Treasury can never be less than the rate on a 15-year Treasury. 
A) According to the unbiased expectations theory, the return for holding a two-year bond to maturity is equal to the nominal rate divided by the real interest rate. 
B) The rate on a 10-year Corporate can never be less than the rate on a 10-year Treasury. 
C) We usually observe the inverted yield curve. 
D) The rate on a three-year Treasury can never be less than the rate on a 15-year Treasury.

Question 8

Which of the following statements is incorrect?

Accepted Answer

A) Governments affect foreign exchange rates indirectly by altering prevailing interest rates within their own countries. 
B) Foreign currency exchange rates vary with the day-to-day demand and supply of the two foreign currencies. 
C) Central governments can intervene in foreign exchange markets directly and value their currency at high rates relative to another currency. 
D) All of these statements are correct. 
A) Governments affect foreign exchange rates indirectly by altering prevailing interest rates within their own countries. 
B) Foreign currency exchange rates vary with the day-to-day demand and supply of the two foreign currencies. 
C) Central governments can intervene in foreign exchange markets directly and value their currency at high rates relative to another currency. 
D) All of these statements are correct.

Question 9

The real interest rate is:

Accepted Answer

A) the rate charged to the corporations with the best credit rating or least amount of default risk. 
B) the rate that a security would pay if no inflation were expected over its holding period. 
C) the rate that a security would pay if the security had no maturity risk. 
D) None of these statements is a correct definition. 
A) the rate charged to the corporations with the best credit rating or least amount of default risk. 
B) the rate that a security would pay if no inflation were expected over its holding period. 
C) the rate that a security would pay if the security had no maturity risk. 
D) None of these statements is a correct definition.

Question 10

Suppose we observe the three-year Treasury security rate (1R3) to be 6 percent, the expected one-year rate next year E(2r1) to be 3 percent, and the expected one-year rate the following year E(3r1) to be 5 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year Treasury security rate, 1R1?

Accepted Answer

A) 3.00 percent 
B) 10.13 percent 
C) 14.00 percent 
D) 19.88 percent 
A) 3.00 percent 
B) 10.13 percent 
C) 14.00 percent 
D) 19.88 percent

Question 11

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.

Question 12

One-year Treasury bills currently earn 4.5 percent. You expect that one year from now, one-year Treasury bill rates will increase to 6.65 percent. The liquidity premium on two-year securities is 0.05 percent. If the liquidity theory is correct, what should the current rate be on two-year Treasury securities?

Accepted Answer

A) 5.24 percent 
B) 5.59 percent 
C) 5.65 percent 
D) 5.95 percent 
A) 5.24 percent 
B) 5.59 percent 
C) 5.65 percent 
D) 5.95 percent

Question 13

All of the following are benefits that financial institutions provide to our economy EXCEPT:

Accepted Answer

A) increased liquidity. 
B) increased monitoring. 
C) increased dollar amount of funds flowing from suppliers to fund users. 
D) increased price risk. 
A) increased liquidity. 
B) increased monitoring. 
C) increased dollar amount of funds flowing from suppliers to fund users. 
D) increased price risk.

Question 14

Which of these statements is true?

Accepted Answer

A) The higher the default risk, the higher the interest rate that security buyers will demand. 
B) The lower the default risk, the higher the interest rate that security buyers will demand. 
C) The higher the default risk, the lower the interest rate that security buyers will demand. 
D) The default risk does not impact the interest rate that security buyers will demand. 
A) The higher the default risk, the higher the interest rate that security buyers will demand. 
B) The lower the default risk, the higher the interest rate that security buyers will demand. 
C) The higher the default risk, the lower the interest rate that security buyers will demand. 
D) The default risk does not impact the interest rate that security buyers will demand.

Question 15

Which of 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 these refer to 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 17

Which of the following is the risk that an asset's sale price will be lower than its purchase price?

Accepted Answer

A) Default risk 
B) Liquidity risk 
C) Price risk 
D) Trading risk 
A) Default risk 
B) Liquidity risk 
C) Price risk 
D) Trading risk

Question 18

The Wall Street Journal reports that the current rate on five-year Treasury bonds is 6.45 percent and on 10-year Treasury bonds is 7.75 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a five-year Treasury bond purchased five years from today, E(5r5).

Accepted Answer

A) 7.25 percent 
B) 8.12 percent 
C) 9.07 percent 
D) 10.16 percent 
A) 7.25 percent 
B) 8.12 percent 
C) 9.07 percent 
D) 10.16 percent

Question 19

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

Question 20

Which of the following statements is correct?

Accepted Answer

A) If the unbiased expectations theory is correct, we could see an inverted yield curve. 
B) If a yield curve is inverted, long-term bonds have higher yields than short-term bonds. 
C) If the maturity risk premium is zero, the yield curve would be flat. 
D) If the unbiased expectations theory is correct, the maturity risk premium is zero. 
A) If the unbiased expectations theory is correct, we could see an inverted yield curve. 
B) If a yield curve is inverted, long-term bonds have higher yields than short-term bonds. 
C) If the maturity risk premium is zero, the yield curve would be flat. 
D) If the unbiased expectations theory is correct, the maturity risk premium is zero.

Which of these is the expected or "implied" rate on a short-term security that will originate at some point in the future?

All of the following are factors that affect nominal interest rates EXCEPT:

You note the following yield curve in The Wall Street Journal. According to the unbiased expectations hypothesis, what is the one-year forward rate for the period beginning one year from today, ₂f₁? Maturity Yield One day 2.00\% One year 6.00 Two years 7.50 Three years 9.00

A two-year Treasury security currently earns 5.25 percent. Over the next two years, the real interest rate is expected to be 3.00 percent per year and the inflation premium is expected to be 2.00 percent per year. What is the maturity risk premium on the two-year Treasury security?

Which of the following statements is correct?

Which of the following statements is incorrect?

The real interest rate is:

Which of the following statements is correct?

All of the following are benefits that financial institutions provide to our economy EXCEPT:

Which of these statements is true?

Which of these feature debt securities or instruments with maturities of one year or less?

Which of these refer to the ease with which an asset can be converted into cash?

Which of the following is the risk that an asset's sale price will be lower than its purchase price?

The Wall Street Journal reports that the current rate on five-year Treasury bonds is 6.45 percent and on 10-year Treasury bonds is 7.75 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a five-year Treasury bond purchased five years from today, E(₅r₅).

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 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

Filters

Exam 6: Understanding Financial Markets and Institutions

Which of these is the expected or "implied" rate on a short-term security that will originate at some point in the future?

All of the following are factors that affect nominal interest rates EXCEPT:

You note the following yield curve in The Wall Street Journal. According to the unbiased expectations hypothesis, what is the one-year forward rate for the period beginning one year from today, 2f1? Maturity Yield One day 2.00\% One year 6.00 Two years 7.50 Three years 9.00

A two-year Treasury security currently earns 5.25 percent. Over the next two years, the real interest rate is expected to be 3.00 percent per year and the inflation premium is expected to be 2.00 percent per year. What is the maturity risk premium on the two-year Treasury security?

Which of the following statements is correct?

Which of the following statements is incorrect?

The real interest rate is:

Which of the following statements is correct?

All of the following are benefits that financial institutions provide to our economy EXCEPT:

Which of these statements is true?

Which of these feature debt securities or instruments with maturities of one year or less?

Which of these refer to the ease with which an asset can be converted into cash?

Which of the following is the risk that an asset's sale price will be lower than its purchase price?

The Wall Street Journal reports that the current rate on five-year Treasury bonds is 6.45 percent and on 10-year Treasury bonds is 7.75 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a five-year Treasury bond purchased five years from today, E(5r5).

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 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

Filters

You note the following yield curve in The Wall Street Journal. According to the unbiased expectations hypothesis, what is the one-year forward rate for the period beginning one year from today, ₂f₁? Maturity Yield One day 2.00\% One year 6.00 Two years 7.50 Three years 9.00

The Wall Street Journal reports that the current rate on five-year Treasury bonds is 6.45 percent and on 10-year Treasury bonds is 7.75 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a five-year Treasury bond purchased five years from today, E(₅r₅).