Question 1

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 2

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 3

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 4

The Wall Street Journal reports that the rate on three-year Treasury securities is 6.25 percent and the rate on five-year Treasury securities is 6.45 percent.According to the unbiased expectations hypothesis,what does the market expect the two-year Treasury rate to be three years from today,E(4r2)?

Accepted Answer

A)  6.35 percent 
B)  6.75 percent 
C)  7.25 percent 
D)  7.45 percent 
A)  6.35 percent 
B)  6.75 percent 
C)  7.25 percent 
D)  7.45 percent

Question 5

Which of these formalizes an agreement between two parties to exchange a standard quantity of an asset at a predetermined price on a specified date in the future?

Accepted Answer

A)  derivative security 
B)  initial public offering 
C)  liquidity asset 
D)  trading volume 
A)  derivative security 
B)  initial public offering 
C)  liquidity asset 
D)  trading volume

Question 6

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 7

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

Question 8

Nikki G's Corporation's 10-year bonds are currently yielding a return of 9.25 percent.The expected inflation premium is 2.0 percent annually and the real interest rate is expected to be 3.10 percent annually over the next 10 years.The liquidity risk premium on Nikki G's bonds is 0.1 percent.The maturity risk premium is 0.10 percent on two-year securities and increases by 0.05 percent for each additional year to maturity.Calculate the default risk premium on Nikki G's 10-year bonds.

Accepted Answer

A)  2.55 percent 
B)  5.65 percent 
C)  3.55 percent 
D)  1.85 percent 
A)  2.55 percent 
B)  5.65 percent 
C)  3.55 percent 
D)  1.85 percent

Question 9

If the yield curve is downward sloping,what is the yield to maturity on a 30-year Treasury bond relative to a 10-year Treasury bond?

Accepted Answer

A)  The yield on the 10-year bond must be greater than the yield on the 30-year bond. 
B)  The yield on the 10-year bond must be less than the yield on the 30-year bond. 
C)  The yields on the two bonds are equal. 
D)  We need to know the other risk premiums to answer this question. 
A)  The yield on the 10-year bond must be greater than the yield on the 30-year bond. 
B)  The yield on the 10-year bond must be less than the yield on the 30-year bond. 
C)  The yields on the two bonds are equal. 
D)  We need to know the other risk premiums to answer this question.

Question 10

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 11

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%, E(2r1)= 5.5%, E(3r1)= 6.5%, E(4r1)= 7.0%
Using the unbiased expectations theory,what is the current (long-term)rate for four-year-maturity Treasury securities?

Accepted Answer

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

Question 12

The Wall Street Journal reports that the current rate on five-year Treasury bonds is 2.85 percent and on 10-year Treasury bonds is 4.35 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)  3.60 percent 
B)  5.85 percent 
C)  7.20 percent 
D)  8.28 percent 
A)  3.60 percent 
B)  5.85 percent 
C)  7.20 percent 
D)  8.28 percent

Question 13

Once firms issue financial instruments in primary markets,these same stocks and bonds are then traded in which of these?

Accepted Answer

A)  initial public offerings 
B)  direct transfers 
C)  secondary markets 
D)  over-the-counter stocks 
A)  initial public offerings 
B)  direct transfers 
C)  secondary markets 
D)  over-the-counter stocks

Question 14

One-year Treasury bill rates in 20XX averaged 5.15 percent and inflation for the year was 7.3 percent.If investors had expected the same inflation rate as that realized,calculate the real interest rate for 20XX according to the Fisher effect.

Accepted Answer

A)  0.00 percent 
B)  −2.15 percent 
C)  2.15 percent 
D)  3.95 percent 
A)  0.00 percent 
B)  −2.15 percent 
C)  2.15 percent 
D)  3.95 percent

Question 15

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)= 7 percent,
E(3r1)= 7.5 percent
E(4r1)= 7.85 percent
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 percent,two-year: 5.50 percent 
B)  one-year: 5.00 percent, two-year: 6.00 percent 
C)  one-year: 5.50 percent, two-year: 6.15 percent 
D)  one-year: 5.50 percent, two-year: 5.75 percent 
A)  one-year: 5.00 percent,two-year: 5.50 percent 
B)  one-year: 5.00 percent, two-year: 6.00 percent 
C)  one-year: 5.50 percent, two-year: 6.15 percent 
D)  one-year: 5.50 percent, two-year: 5.75 percent

Question 16

Which of the following is NOT correct with respect to derivative securities?

Accepted Answer

A)  They are among the riskiest of securities in the financial securities markets. 
B)  They can be used for hedging purposes. 
C)  Examples of derivatives include futures, options, and swaps. 
D)  All of these choices are correct. 
A)  They are among the riskiest of securities in the financial securities markets. 
B)  They can be used for hedging purposes. 
C)  Examples of derivatives include futures, options, and swaps. 
D)  All of these choices are correct.

Question 17

The Wall Street Journal reports that the current rate on 5-year Treasury bonds is 6.50 percent and on 10-year Treasury bonds is 6.75 percent.Assume that the maturity risk premium is zero.Calculate the expected rate on a 5-year Treasury bond purchased five years from today,E(5r1).

Accepted Answer

A)  6.625 percent 
B)  6.75 percent 
C)  7.00 percent 
D)  7.58 percent 
A)  6.625 percent 
B)  6.75 percent 
C)  7.00 percent 
D)  7.58 percent

Question 18

A corporation's 10-year bonds have an equilibrium rate of return of 7 percent.For all securities,the inflation risk premium is 1.50 percent and the real interest rate is 3.0 percent.The security's liquidity risk premium is 0.15 percent and maturity risk premium is 0.70 percent.The security has no special covenants.What is the bond's default risk premium?

Accepted Answer

A)  1.40 percent 
B)  1.65 percent 
C)  5.35 percent 
D)  9.35 percent 
A)  1.40 percent 
B)  1.65 percent 
C)  5.35 percent 
D)  9.35 percent

Question 19

Which of the following factors cause the supply of funds curve to shift?

Accepted Answer

A)  total wealth risk of the financial security 
B)  future spending needs 
C)  All of these choices are correct. 
A)  total wealth risk of the financial security 
B)  future spending needs 
C)  All of these choices are correct.

Question 20

Which of the following occurs as the nonprice restrictions put on borrowers as a condition of borrowing increase?

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 increases. 
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 increases.

Which of the following statements is incorrect?

Which of these formalizes an agreement between two parties to exchange a standard quantity of an asset at a predetermined price on a specified date in the future?

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).

If the yield curve is downward sloping,what is the yield to maturity on a 30-year Treasury bond relative to a 10-year Treasury bond?

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

The Wall Street Journal reports that the current rate on five-year Treasury bonds is 2.85 percent and on 10-year Treasury bonds is 4.35 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).

Once firms issue financial instruments in primary markets,these same stocks and bonds are then traded in which of these?

One-year Treasury bill rates in 20XX averaged 5.15 percent and inflation for the year was 7.3 percent.If investors had expected the same inflation rate as that realized,calculate the real interest rate for 20XX according to the Fisher effect.

Which of the following is NOT correct with respect to derivative securities?

The Wall Street Journal reports that the current rate on 5-year Treasury bonds is 6.50 percent and on 10-year Treasury bonds is 6.75 percent.Assume that the maturity risk premium is zero.Calculate the expected rate on a 5-year Treasury bond purchased five years from today,E(₅r₁).

Which of the following factors cause the supply of funds curve to shift?

Which of the following occurs as the nonprice restrictions put on borrowers as a condition of borrowing increase?

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 the following statements is incorrect?

The Wall Street Journal reports that the rate on three-year Treasury securities is 6.25 percent and the rate on five-year Treasury securities is 6.45 percent.According to the unbiased expectations hypothesis,what does the market expect the two-year Treasury rate to be three years from today,E(4r2)?

Which of these formalizes an agreement between two parties to exchange a standard quantity of an asset at a predetermined price on a specified date in the future?

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).

If the yield curve is downward sloping,what is the yield to maturity on a 30-year Treasury bond relative to a 10-year Treasury bond?

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

The Wall Street Journal reports that the current rate on five-year Treasury bonds is 2.85 percent and on 10-year Treasury bonds is 4.35 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).

Once firms issue financial instruments in primary markets,these same stocks and bonds are then traded in which of these?

One-year Treasury bill rates in 20XX averaged 5.15 percent and inflation for the year was 7.3 percent.If investors had expected the same inflation rate as that realized,calculate the real interest rate for 20XX according to the Fisher effect.

Which of the following is NOT correct with respect to derivative securities?

The Wall Street Journal reports that the current rate on 5-year Treasury bonds is 6.50 percent and on 10-year Treasury bonds is 6.75 percent.Assume that the maturity risk premium is zero.Calculate the expected rate on a 5-year Treasury bond purchased five years from today,E(5r1).

Which of the following factors cause the supply of funds curve to shift?

Which of the following occurs as the nonprice restrictions put on borrowers as a condition of borrowing increase?

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 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 reports that the current rate on five-year Treasury bonds is 2.85 percent and on 10-year Treasury bonds is 4.35 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 reports that the current rate on 5-year Treasury bonds is 6.50 percent and on 10-year Treasury bonds is 6.75 percent.Assume that the maturity risk premium is zero.Calculate the expected rate on a 5-year Treasury bond purchased five years from today,E(₅r₁).