Question 1

When the price of a bond increases

Accepted Answer

A)   Its yield to maturity also increases
B)   Its yield to maturity is unchanged
C)   Its yield to maturity falls
D)   A default has occurred C

Question 2

An amortized financial instrument is one that

Accepted Answer

A)   Enables the lender to acquire an equity position in the collateral
B)   Finances only real estate transactions
C)   Involves regular payments by the borrower that cover both interest and principal
D)   Another term for a zero-coupon security C

Question 3

A 10-year Treasury note with a 2.75 percent coupon is selling at 99. This means that

Accepted Answer

A)   Its current yield is 2.75 percent
B)   Its current yield is above 2.75 percent
C)   Its current yield is below 2.75 percent
D)   There is not enough information to make a determination B

Question 4

A drop in interest rates

Accepted Answer

A)   Affects the prices of short-term securities more than long-term securities
B)   Affects the prices on short-term securities less than long-term securities
C)   Affects the prices of short-term securities the same as long-term securities
D)   Cannot affect prices of securities

Question 5

Under the Fisher effect

Accepted Answer

A)   Lower inflation is associated with lower nominal interest rates
B)   Lower inflation is associated with higher nominal interest rates
C)   Higher inflation is associated with longer duration
D)   All of the above

Question 6

A zero-coupon security's duration

Accepted Answer

A)   Is equal to its maturity
B)   Does not vary with interest rates
C)   Is longer than that of a comparable-maturity coupon security
D)   All of the above

Question 7

The yield on a 10-year Treasury note is 2.74 percent and that on a 10-year TIPS note is 0.50 percent. Inflation compensation (mostly inflation expectations) is

Accepted Answer

A)   2.24 percent
B)   -2.24 percent
C)   3.24 percent
D)   Cannot tell from the above information

Question 8

Interest rate (price) risk occurs when

Accepted Answer

A)   The maturity of an instrument is less than the investor's holding period
B)   The maturity of an instrument is greater than the investor's holding period
C)   The maturity of an instrument is the same as the investor's holding period
D)   The yield curve slopes upward

Question 9

In comparison with a 10-year Treasury coupon note, a 10-year Treasury zero-coupon security has

Accepted Answer

A)   A shorter duration
B)   A longer duration
C)   The same duration
D)   No value to investors

Question 10

Which of the following affect the interest rate used to discount future cash flows?

Accepted Answer

A)   The degree of impatience or time preference on the part of surplus units
B)   The returns that deficit units can earn on investment projects
C)   The interaction of a and b
D)   All of the above

Question 11

The present value formula is used to

Accepted Answer

A)   Determine the current price of an asset when the cash flows and discount rate are known
B)   Determine the amount of regular fixed payments on a loan when the interest rate and loan amount are known
C)   Determine the yield to maturity on a financial instrument when the current price and cash flows are known
D)   All of the above

Question 12

Which of the following cause a coupon security's duration to fall?

Accepted Answer

A)   A shorter maturity
B)   Higher interest rates
C)   Higher bond prices
D)   Both a and b

Exam 4: The Pricing of Financial Assets