Question 1

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.

Question 2

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

Question 3

Which of the following do foreign suppliers of funds in the U.S. financial market assess?

Accepted Answer

A) interest rates offered on financial securities 
B) their total wealth 
C) foreign investors 
D) All of these choices are correct.

Question 4

All of the following special provisions benefit security holders EXCEPT

Accepted Answer

A) tax-free status. 
B) convertibility. 
C) callability. 
D) All of these choices are correct.

Question 5

Which of these money market instruments are short-term funds transferred between financial institutions, usually for no more than one day?

Accepted Answer

A) treasury bills 
B) federal funds 
C) commercial paper 
D) banker acceptances

Question 6

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

Question 7

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

Question 8

In 20XX, the 10-year Treasury rate was 4.5 percent while the average 10-year Aaa corporate bond debt carried an interest rate of 6.0 percent. What is the average default risk premium on Aaa corporate bonds?

Accepted Answer

A) 0.75 percent 
B) 1.5 percent 
C) 1.95 percent 
D) 2.25 percent

Question 9

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

Question 10

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

Question 11

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.

Question 12

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.

Question 13

Which of the following factors cause the demand for funds curve to shift?

Accepted Answer

A) utility derived from asset purchased with borrowed funds 
B) restrictiveness of nonprice conditions of borrowing 
C) domestic and foreign economic conditions 
D) All of these choices are correct.

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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 bond 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 20

Which of the following statements is correct?

Accepted Answer

A) A flat yield curve occurs when the yield-to-maturity is virtually unaffected by the term-to-maturity. 
B) Real interest rates are generally lower than nominal interest rates. 
C) Liquidity risk is the risk that a security may be difficult to sell on short notice for its true value. 
D) All of these choices are correct.

Exam 6: Understanding Financial Markets and Institutions

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

Which of the following do foreign suppliers of funds in the U.S. financial market assess?

All of the following special provisions benefit security holders EXCEPT

Which of these money market instruments are short-term funds transferred between financial institutions, usually for no more than one day?

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

In 20XX, the 10-year Treasury rate was 4.5 percent while the average 10-year Aaa corporate bond debt carried an interest rate of 6.0 percent. What is the average default risk premium on Aaa corporate bonds?

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

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

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

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

Which of the following factors cause the demand for funds curve to shift?

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) .

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.

Which of the following statements is correct?

Which of the following statements is correct?

Exam 6: Understanding Financial Markets and Institutions

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

Which of the following do foreign suppliers of funds in the U.S. financial market assess?

All of the following special provisions benefit security holders EXCEPT

Which of these money market instruments are short-term funds transferred between financial institutions, usually for no more than one day?

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

In 20XX, the 10-year Treasury rate was 4.5 percent while the average 10-year Aaa corporate bond debt carried an interest rate of 6.0 percent. What is the average default risk premium on Aaa corporate bonds?

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

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

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

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

Which of the following factors cause the demand for funds curve to shift?

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) .

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.

Which of the following statements is correct?

Which of the following statements is correct?

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) .