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

Suppose we observe the following rates: 1R1 = 12 percent,1R2 = 15 percent.If the unbiased expectations theory of the term structure of interest rates holds,what is the one-year interest rate expected one year from now,E(2r1)?

Accepted Answer

A)  13.5 percent 
B)  14.2 percent 
C)  15.6 percent 
D)  18.0 percent 
A)  13.5 percent 
B)  14.2 percent 
C)  15.6 percent 
D)  18.0 percent

Question 3

A particular security's default risk premium is 3 percent.For all securities,the inflation risk premium is 2 percent and the real interest rate is 2.25 percent.The security's liquidity risk premium is 0.75 percent and maturity risk premium is 0.90 percent.The security has no special covenants.What is the security's equilibrium rate of return?

Accepted Answer

A)  1.78 percent 
B)  3.95 percent 
C)  8.90 percent 
D)  17.8 percent 
A)  1.78 percent 
B)  3.95 percent 
C)  8.90 percent 
D)  17.8 percent

Question 4

Which of the following is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments?

Accepted Answer

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

Question 5

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 = 4.55 percent,
1R2 = 4.75 percent,
1R3 = 5.25 percent,
1R4 = 5.95 percent
Using the unbiased expectations theory,calculate the one-year forward rates on zero-coupon Treasury bonds for years two,three,and four as of May 23,20XX.

Accepted Answer

A)  year 1: 4.95 percent, Year 2: 6.26 percent, Year 3: 8.08 percent 
B)  year 1: 3.75 percent, Year 2: 6.02 percent, Year 3: 9.00 percent 
C)  year 1: 4.95 percent, Year 2: 7.26 percent, Year 3: 8.08 percent 
D)  year 1: 3.65 percent, Year 2: 6.32 percent, Year 3: 11.08 percent 
A)  year 1: 4.95 percent, Year 2: 6.26 percent, Year 3: 8.08 percent 
B)  year 1: 3.75 percent, Year 2: 6.02 percent, Year 3: 9.00 percent 
C)  year 1: 4.95 percent, Year 2: 7.26 percent, Year 3: 8.08 percent 
D)  year 1: 3.65 percent, Year 2: 6.32 percent, Year 3: 11.08 percent

Question 6

Dakota Corporation 15-year bonds have an equilibrium rate of return of 9 percent.For all securities,the inflation risk premium is 1.95 percent and the real interest rate is 3.65 percent.The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent.The security has no special covenants.Calculate the bond's default risk premium.

Accepted Answer

A)  2.10 percent 
B)  3.05 percent 
C)  3.40 percent 
D)  2.45 percent 
A)  2.10 percent 
B)  3.05 percent 
C)  3.40 percent 
D)  2.45 percent

Question 7

A particular security's default risk premium is 3 percent.For all securities,the inflation risk premium is 1.75 percent and the real interest rate is 4.2 percent.The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent.The security has no special covenants.Calculate the security's equilibrium rate of return.

Accepted Answer

A)  8.50 percent 
B)  6.05 percent 
C)  10.25 percent 
D)  9.90 percent 
A)  8.50 percent 
B)  6.05 percent 
C)  10.25 percent 
D)  9.90 percent

Question 8

The theory that argues that individual investors and financial institutions have specific maturity preferences is called the

Accepted Answer

A)  market segmentation theory. 
B)  unbiased expectations theory. 
C)  liquidity preference theory. 
D)  inverted forward theory. 
A)  market segmentation theory. 
B)  unbiased expectations theory. 
C)  liquidity preference theory. 
D)  inverted forward theory.

Question 9

Which of the following occurs as domestic economic conditions experience a period of growth especially relative to other countries?

Accepted Answer

A)  Market participants are willing to borrow more heavily. 
B)  At every interest rate the supply of loanable funds increases. 
C)  At every interest rate the demand for loanable funds increases. 
D)  All of these choices are correct. 
A)  Market participants are willing to borrow more heavily. 
B)  At every interest rate the supply of loanable funds increases. 
C)  At every interest rate the demand for loanable funds increases. 
D)  All of these choices are correct.

Question 10

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 11

Which of the following is the continual increase in the price level of a basket of goods and services?

Accepted Answer

A)  deflation 
B)  inflation 
C)  recession 
D)  stagflation 
A)  deflation 
B)  inflation 
C)  recession 
D)  stagflation

Question 12

Which of these is a comparison of market yields on securities,assuming all characteristics except maturity are the same?

Accepted Answer

A)  liquidity risk 
B)  market risk 
C)  maturity risk 
D)  term structure of interest rates 
A)  liquidity risk 
B)  market risk 
C)  maturity risk 
D)  term structure of interest rates

Question 13

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

Question 14

You are considering an investment in 30-year bonds issued by a corporation.The bonds have no special covenants.The Wall Street Journal reports that one-year T-bills are currently earning 3.50 percent.Your broker has determined the following information about economic activity and the corporation bonds: Real interest rate = 2.50 percent
Default risk premium = 1.75 percent
Liquidity risk premium = 0.70 percent
Maturity risk premium = 1.50 percent
What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds?

Accepted Answer

A)  1 percent and 1.49 percent, respectively 
B)  1 percent and 6.45 percent, respectively 
C)  1 percent and 7.45 percent, respectively 
D)  3.50 percent and 9.95 percent, respectively 
A)  1 percent and 1.49 percent, respectively 
B)  1 percent and 6.45 percent, respectively 
C)  1 percent and 7.45 percent, respectively 
D)  3.50 percent and 9.95 percent, respectively

Question 15

Which of these is the interest rate that would exist on a default-free security if no inflation were expected?

Accepted Answer

A)  nominal interest rate 
B)  real interest rate 
C)  default premium 
D)  market premium 
A)  nominal interest rate 
B)  real interest rate 
C)  default premium 
D)  market premium

Question 16

The Wall Street Journal reports that the rate on four-year Treasury securities is 7.50 percent and the rate on five-year Treasury securities is 9.15 percent.According to the unbiased expectations hypothesis,what does the market expect the one-year Treasury rate to be four years from today,E(5r1)?

Accepted Answer

A)  16.0 percent 
B)  18.4 percent 
C)  15.9 percent 
D)  13.7 percent 
A)  16.0 percent 
B)  18.4 percent 
C)  15.9 percent 
D)  13.7 percent

Question 17

Which of these capital market instruments are long-term loans to individuals or businesses to purchase homes,pieces of land,or other real property?

Accepted Answer

A)  treasury notes and bonds 
B)  mortgages 
C)  mortgage-backed securities 
D)  corporate bonds 
A)  treasury notes and bonds 
B)  mortgages 
C)  mortgage-backed securities 
D)  corporate bonds

Question 18

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 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

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 two-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 percent 
B)  0.20 percent 
C)  0.22 percent 
D)  0.27 percent 
A)  0.18 percent 
B)  0.20 percent 
C)  0.22 percent 
D)  0.27 percent

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

Suppose we observe the following rates: ₁R₁ = 12 percent,₁R₂ = 15 percent.If the unbiased expectations theory of the term structure of interest rates holds,what is the one-year interest rate expected one year from now,E(₂r₁)?

Which of the following is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments?

The theory that argues that individual investors and financial institutions have specific maturity preferences is called the

Which of the following occurs as domestic economic conditions experience a period of growth especially relative to other countries?

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 is the continual increase in the price level of a basket of goods and services?

Which of these is a comparison of market yields on securities,assuming all characteristics except maturity are the same?

Which of these is the interest rate that would exist on a default-free security if no inflation were expected?

Which of these capital market instruments are long-term loans to individuals or businesses to purchase homes,pieces of land,or other real property?

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

Which of the following is NOT a capital market instrument?

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?

Suppose we observe the following rates: 1R1 = 12 percent,1R2 = 15 percent.If the unbiased expectations theory of the term structure of interest rates holds,what is the one-year interest rate expected one year from now,E(2r1)?

Which of the following is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments?

The theory that argues that individual investors and financial institutions have specific maturity preferences is called the

Which of the following occurs as domestic economic conditions experience a period of growth especially relative to other countries?

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 is the continual increase in the price level of a basket of goods and services?

Which of these is a comparison of market yields on securities,assuming all characteristics except maturity are the same?

Which of these is the interest rate that would exist on a default-free security if no inflation were expected?

The Wall Street Journal reports that the rate on four-year Treasury securities is 7.50 percent and the rate on five-year Treasury securities is 9.15 percent.According to the unbiased expectations hypothesis,what does the market expect the one-year Treasury rate to be four years from today,E(5r1)?

Which of these capital market instruments are long-term loans to individuals or businesses to purchase homes,pieces of land,or other real property?

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

Which of the following is NOT a capital market instrument?

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

Suppose we observe the following rates: ₁R₁ = 12 percent,₁R₂ = 15 percent.If the unbiased expectations theory of the term structure of interest rates holds,what is the one-year interest rate expected one year from now,E(₂r₁)?