Question 1

An example of an illiquid asset is

Accepted Answer

A)  U.S. Treasury bill. 
B)  bonds issued by GM. 
C)  common stock issued by Apple Inc. 
D)  common stock issued by a small but financially strong firm. 
A)  U.S. Treasury bill. 
B)  bonds issued by GM. 
C)  common stock issued by Apple Inc. 
D)  common stock issued by a small but financially strong firm.

Question 2

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 choices 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 choices are correct.

Question 3

According to this theory of term structure of interest rates,at any given point in time,the yield curve reflects the market's current expectations of future short-term rates.

Accepted Answer

A)  expectations theory 
B)  future short-term rates theory 
C)  term structure of interest rates theory 
D)  unbiased expectations theory 
A)  expectations theory 
B)  future short-term rates theory 
C)  term structure of interest rates theory 
D)  unbiased expectations theory

Question 4

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: 1R1 = 5 percent,
E(2r1)= 6 percent,
E(3r1)= 7.5 percent
E(4r1)= 7.85 percent
Using the unbiased expectations theory,calculate the current (long-term)rates for three-year- and four-year-maturity Treasury securities.

Accepted Answer

A)  one-year: 6.16 percent, two-year: 6.58 percent 
B)  one-year: 6.16 percent, two-year: 6.78 percent 
C)  one-year: 6.25 percent, two-year: 6.45 percent 
D)  one-year: 5.95 percent, two-year: 6.45 percent 
A)  one-year: 6.16 percent, two-year: 6.58 percent 
B)  one-year: 6.16 percent, two-year: 6.78 percent 
C)  one-year: 6.25 percent, two-year: 6.45 percent 
D)  one-year: 5.95 percent, two-year: 6.45 percent

Question 5

Primary market financial instruments include stock issues from firms allowing their equity shares to be publicly traded on the stock market for the first time.We usually refer to these first-time issues as which of the following?

Accepted Answer

A)  initial public offerings 
B)  direct transfers 
C)  money market transfers 
D)  over-the-counter stocks 
A)  initial public offerings 
B)  direct transfers 
C)  money market transfers 
D)  over-the-counter stocks

Question 6

Which of the following occurs as the utility derived from an asset purchased with borrowed funds increases?

Accepted Answer

A)  The willingness of market participants to borrow decreases. 
B)  The absolute dollar value borrowed increases. 
C)  At every interest rate the demand for loanable funds decrease. 
A)  The willingness of market participants to borrow decreases. 
B)  The absolute dollar value borrowed increases. 
C)  At every interest rate the demand for loanable funds decrease.

Question 7

The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 3.25 percent and on 20-year Treasury bonds is 5.50 percent.Assume that the maturity risk premium is zero.Calculate the expected rate on a 10-year Treasury bond purchased 10 years from today,E(10r10).

Accepted Answer

A)  2.25 percent 
B)  4.38 percent 
C)  7.80 percent 
D)  8.75 percent 
A)  2.25 percent 
B)  4.38 percent 
C)  7.80 percent 
D)  8.75 percent

Question 8

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 9

The Wall Street Journal reports that the rate on three-year Treasury securities is 7.00 percent,and the six-year Treasury rate is 6.20 percent.From discussions with your broker,you have determined that the expected inflation premium will be 2.25 percent next year,2.50 percent in year 2,and 2.50 percent in year 3 and beyond.Further,you expect that real interest rates will be 4.4 percent annually for the foreseeable future.Calculate the maturity risk premium on the 3-year Treasury security.

Accepted Answer

A)  0.00 percent 
B)  0.10 percent 
C)  4.50 percent 
D)  2.60 percent 
A)  0.00 percent 
B)  0.10 percent 
C)  4.50 percent 
D)  2.60 percent

Question 10

Which of the following is NOT a money market instrument?

Accepted Answer

A)  treasury bills 
B)  commercial paper 
C)  corporate bonds 
D)  bankers' acceptances 
A)  treasury bills 
B)  commercial paper 
C)  corporate bonds 
D)  bankers' acceptances

Question 11

One-year Treasury bills currently earn 2.55 percent.You expect that one year from now,one-year Treasury bill rates will increase to 2.85 percent and that two years from now,one-year Treasury bill rates will increase to 3.15 percent.If the unbiased expectations theory is correct,what should the current rate be on 3-year Treasury securities?

Accepted Answer

A)  2.55 percent 
B)  2.85 percent 
C)  2.93 percent 
D)  3.15 percent 
A)  2.55 percent 
B)  2.85 percent 
C)  2.93 percent 
D)  3.15 percent

Question 12

On May 23,20XX,the existing or current (spot)one-year,two-year,three-year,and four-year zero-coupon Treasury security rates were as follows: 1R1 = 5.25%, 1R2 = 5.75%, 1R3 = 6.25%, 1R4 = 6.45%
Using the unbiased expectations theory,what is the one-year forward rate on zero-coupon Treasury bonds for year 4 as of May 23,20XX?

Accepted Answer

A)  5.925 percent 
B)  6.45 percent 
C)  7.05 percent 
D)  10.32 percent 
A)  5.925 percent 
B)  6.45 percent 
C)  7.05 percent 
D)  10.32 percent

Question 13

Suppose we observe the three-year Treasury security rate (1R3)to be 11 percent,the expected one-year rate next year E(2r1)to be 4 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)  18.57 percent 
B)  10.19 percent 
C)  23.19 percent 
D)  25.24 percent 
A)  18.57 percent 
B)  10.19 percent 
C)  23.19 percent 
D)  25.24 percent

Question 14

Which of these provide a forum in which demanders of funds raise funds by issuing new financial instruments,such as stocks and bonds?

Accepted Answer

A)  investment banks 
B)  money markets 
C)  primary markets 
D)  secondary markets 
A)  investment banks 
B)  money markets 
C)  primary markets 
D)  secondary markets

Question 15

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

Question 16

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.

Question 17

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 18

The Wall Street Journal reports that the rate on three-year Treasury securities is 7.00 percent,and the six-year Treasury rate is 7.25 percent.From discussions with your broker,you have determined that the expected inflation premium will be 1.75 percent next year,2.25 percent in year 2,and 2.40 percent in year 3 and beyond.Further,you expect that real interest rates will be 3.75 percent annually for the foreseeable future.What is the maturity risk premium on the six-year Treasury security?

Accepted Answer

A)  0.83 percent 
B)  0.983 percent 
C)  1.10 percent 
D)  1.233 percent 
A)  0.83 percent 
B)  0.983 percent 
C)  1.10 percent 
D)  1.233 percent

Question 19

Assume that you observe the following rates on long-term bonds: U.S.Treasury bonds = 4.15 percent AAA
Corporate bonds = 6.2 percent BBB
Corporate bonds = 7.15 percent
The main reason for the differences in the interest rates is:

Accepted Answer

A)  maturity risk premium 
B)  inflation premium 
C)  default risk premium 
D)  convertibility premium 
A)  maturity risk premium 
B)  inflation premium 
C)  default risk premium 
D)  convertibility premium

Question 20

How is the shadow banking system the same as the traditional banking system?

Accepted Answer

A)  It intermediates the flow of funds between net savers and net borrowers. 
B)  It serves as a middle man. 
C)  The complete credit intermediation is performed through a series of steps involving many nonbank financial service firms. 
D)  The complete credit intermediation is performed by a single bank. 
A)  It intermediates the flow of funds between net savers and net borrowers. 
B)  It serves as a middle man. 
C)  The complete credit intermediation is performed through a series of steps involving many nonbank financial service firms. 
D)  The complete credit intermediation is performed by a single bank.

An example of an illiquid asset is

Which of the following statements is correct?

According to this theory of term structure of interest rates,at any given point in time,the yield curve reflects the market's current expectations of future short-term rates.

Primary market financial instruments include stock issues from firms allowing their equity shares to be publicly traded on the stock market for the first time.We usually refer to these first-time issues as which of the following?

Which of the following occurs as the utility derived from an asset purchased with borrowed funds increases?

The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 3.25 percent and on 20-year Treasury bonds is 5.50 percent.Assume that the maturity risk premium is zero.Calculate the expected rate on a 10-year Treasury bond purchased 10 years from today,E(₁₀r₁₀).

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

Which of the following is NOT a money market instrument?

Which of these provide a forum in which demanders of funds raise funds by issuing new financial instruments,such as stocks and bonds?

Which of the following statements is correct?

Assume that you observe the following rates on long-term bonds: U.S.Treasury bonds = 4.15 percent AAA Corporate bonds = 6.2 percent BBB Corporate bonds = 7.15 percent The main reason for the differences in the interest rates is:

How is the shadow banking system the same as the traditional banking system?

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

An example of an illiquid asset is

Which of the following statements is correct?

According to this theory of term structure of interest rates,at any given point in time,the yield curve reflects the market's current expectations of future short-term rates.

Primary market financial instruments include stock issues from firms allowing their equity shares to be publicly traded on the stock market for the first time.We usually refer to these first-time issues as which of the following?

Which of the following occurs as the utility derived from an asset purchased with borrowed funds increases?

The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 3.25 percent and on 20-year Treasury bonds is 5.50 percent.Assume that the maturity risk premium is zero.Calculate the expected rate on a 10-year Treasury bond purchased 10 years from today,E(10r10).

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

Which of the following is NOT a money market instrument?

Which of these provide a forum in which demanders of funds raise funds by issuing new financial instruments,such as stocks and bonds?

Which of the following statements is correct?

Assume that you observe the following rates on long-term bonds: U.S.Treasury bonds = 4.15 percent AAA Corporate bonds = 6.2 percent BBB Corporate bonds = 7.15 percent The main reason for the differences in the interest rates is:

How is the shadow banking system the same as the traditional banking system?

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

The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 3.25 percent and on 20-year Treasury bonds is 5.50 percent.Assume that the maturity risk premium is zero.Calculate the expected rate on a 10-year Treasury bond purchased 10 years from today,E(₁₀r₁₀).