Question 1

Which of the following rates indicate the rate that will exist in an inflation-free world?

Accepted Answer

A)   Maturity risk-free rate
B)   Real risk-free rate
C)   Default risk-free rate
D)   Liquidity risk-free rate
E)   Target risk-free rateF) D) and E)
G) A) and C)

Question 2

Production opportunity is one of the four fundamental factors that affect the:

Accepted Answer

A)   creditworthiness of investors.
B)   cost of money.
C)   liquidity of securities.
D)   inflation of an economy.
E)   maturity of an investment.F) A) and D)
G) A) and E)

Question 3

Other things held constant,:

Accepted Answer

A)   the "liquidity preference theory" would generally lead to an upward sloping yield curve.
B)   the "market segmentation theory" would generally lead to an upward sloping yield curve.
C)   the "expectations theory" would generally lead to an upward sloping yield curve.
D)   the yield curve under "normal" conditions would be horizontal (i.e., flat) .
E)   a downward sloping yield curve would suggest that investors expect interest rates to increase in the future.F) A) and B)
G) A) and C) A

Question 4

_____ can be negative if the value of the investment decreases during the period it is held.

Accepted Answer

A)   Risk
B)   Dividends
C)   Maturity
D)   Interests
E)   Capital gainsF) A) and B)
G) B) and C)

Question 5

If the expectations theory of the term structure of interest rates is correct, and if the other term structure theories are invalid, and we observe a downward sloping yield curve, which of the following is a true statement?

Accepted Answer

A)   Investors expect interest rates to be constant over time.
B)   Investors expect interest rates to increase in the future.
C)   Investors expect interest rates to decrease in the future.
D)   Investors require a positive maturity risk premium.
E)   The maturity risk premium must be positive.F) All of the above
G) C) and D)

Question 6

You read in The Wall Street Journal that 30-day T-bills are currently yielding 8 percent. Your brother-in-law, a broker at Kyoto Securities, has given you the following estimates of current interest rate premiums:
Inflation premium 5%
Liquidity premium 1%
Maturity risk premium 2%
Default risk premium 2%
Based on these data, the real risk-free rate of return is:

Accepted Answer

A)   0%.
B)   1%.
C)   2%.
D)   3%.
E)   4%.F) All of the above
G) C) and E)

Question 7

If you have information that a recession is ending, and the economy is about to enter a boom, and your firm needs to borrow money, it should probably issue long-term rather than short-term debt.

Accepted Answer

A) True 
 B)False

Question 8

The real rate of interest is composed of a risk-free rate of interest plus the default premium and liquidity premium that reflects the riskiness of the security

Accepted Answer

A) True 
 B)False

Question 9

During or near peaks of business activity, yield curves that are flat or downward sloping (possibly with humps) are prevalent.

Accepted Answer

A) True 
 B)False

Question 10

If a stock pays a dividend of $10 and the investors need 8% return on their investment, then the investors should pay _____ for the stock.

Accepted Answer

A)   $150
B)   $200
C)   $350
D)   $125
E)   $75F) A) and B)
G) A) and C)

Question 11

Which of the following bonds have the highest default risk for a given return?

Accepted Answer

A)   A U.S Treasury bond with a 2-year maturity.
B)   An AAA corporate bond with a 7-year maturity.
C)   A BBB corporate bond with a 3-year maturity.
D)   A CCC corporate bond with a 10-year maturity.
E)   An AAA corporate bond with a 3-year maturity.F) B) and E)
G) D) and E)

Question 12

Assume that the real risk-free rate, r*, is 4 percent, and that inflation is expected to be 9% in Year 1, 6% in Year 2, and 4% thereafter. Also, assume that all Treasury bonds are highly liquid and free of default risk. If 2-year and 5-year Treasury bonds both yield 12%, what is the difference in the maturity risk premiums (MRPs)  on the two bonds, i.e., what is MRP5 - MRP2?

Accepted Answer

A)   2.1%
B)   1.8%
C)   5.0%
D)   3.0%
E)   2.5%F) A) and B)
G) D) and E)

Question 13

Interest rates on 1-year, 2-year, and 3-year Treasury bills are 5%, 6%, and 7% respectively. Assume that the pure expectations theory holds and that the market is in equilibrium. Which of the following statements is correct?

Accepted Answer

A)   The maturity risk premium is positive.
B)   Interest rates are expected to fall over the next two years.
C)   The market expects one-year rates to be 7% one year from today.
D)   The default risk premium is highest for Year 2.
E)   The liquidity risk premium is highest for Year 1.F) A) and C)
G) All of the above

Question 14

_____ is the tendency of prices to increase over time.

Accepted Answer

A)   Maturity
B)   Recession
C)   Inflation
D)   Risk
E)   LiquidityF) C) and D)
G) All of the above

Question 15

A foreign trade deficit occurs when a country's:

Accepted Answer

A)   imports are greater than its exports.
B)   tax revenue is greater than its expenditure.
C)   savings rate is higher than its borrowing rate.
D)   purchase of Treasury securities is more than sale of Treasury securities.
E)   cash reserves are higher than the expenses.F) A) and B)
G) B) and D)

Question 16

Bonds with higher liquidity have to offer higher interest rates in the market since they can be easily converted into cash on short notice at or near the fair market value for that bond.

Accepted Answer

A) True 
 B)False

Question 17

Assume that the current interest rate on a 1-year bond is 8 percent, the current rate on a 2-year bond is 10 percent, and the current rate on a 3-year bond is 12 percent. If the expectations theory of the term structure is correct, what is the 1-year interest rate expected during Year 3? (Base your answer on an arithmetic rather than geometric average.)

Accepted Answer

A)   12.0%
B)   16.0%
C)   13.5%
D)   10.5%
E)   14.0%F) B) and E)
G) A) and B) B

Question 18

Andrew purchased a stock for $175 and sold it for $250. If he earned a dividend income of $30, the stock's yield is:

Accepted Answer

A)   45%
B)   53%
C)   81%
D)   60%
E)   72%F) A) and B)
G) A) and C) D

Question 19

A normal yield curve that is upward sloping implies that:

Accepted Answer

A)   the returns on short-term securities are higher than the returns on long-term securities of similar risk.
B)   the returns on long-term securities are equal to the returns on short-term securities of similar risk.
C)   the returns on short-term securities are lower than the returns on long-term securities of similar risk.
D)   the returns on bonds with higher maturity risks are lower than the returns on bonds with lower maturity risks.
E)   the returns on bonds with a lower default risks are higher than the returns on bonds with higher default risks.F) C) and D)
G) A) and B)

Question 20

The change in the market value of an asset over some time period is called the _____.

Accepted Answer

A)   yield
B)   maturity
C)   capital gain
D)   interest income
E)   dividend incomeF) A) and B)
G) A) and C)

Exam 5: The Cost of Money Interest Rates

Which of the following rates indicate the rate that will exist in an inflation-free world?

Correct Answer
verified

Production opportunity is one of the four fundamental factors that affect the:

Correct Answer
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Other things held constant,:

Correct Answer
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A

_____ can be negative if the value of the investment decreases during the period it is held.

Correct Answer
verified

If the expectations theory of the term structure of interest rates is correct, and if the other term structure theories are invalid, and we observe a downward sloping yield curve, which of the following is a true statement?

Correct Answer
verified

Correct Answer
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If you have information that a recession is ending, and the economy is about to enter a boom, and your firm needs to borrow money, it should probably issue long-term rather than short-term debt.

Correct Answer
verified

The real rate of interest is composed of a risk-free rate of interest plus the default premium and liquidity premium that reflects the riskiness of the security

Correct Answer
verified

During or near peaks of business activity, yield curves that are flat or downward sloping (possibly with humps) are prevalent.

Correct Answer
verified

If a stock pays a dividend of $10 and the investors need 8% return on their investment, then the investors should pay _____ for the stock.

Correct Answer
verified

Which of the following bonds have the highest default risk for a given return?

Correct Answer
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Correct Answer
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Interest rates on 1-year, 2-year, and 3-year Treasury bills are 5%, 6%, and 7% respectively. Assume that the pure expectations theory holds and that the market is in equilibrium. Which of the following statements is correct?

Correct Answer
verified

_____ is the tendency of prices to increase over time.

Correct Answer
verified

A foreign trade deficit occurs when a country's:

Correct Answer
verified

Bonds with higher liquidity have to offer higher interest rates in the market since they can be easily converted into cash on short notice at or near the fair market value for that bond.

Correct Answer
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Correct Answer
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B

Andrew purchased a stock for $175 and sold it for $250. If he earned a dividend income of $30, the stock's yield is:

Correct Answer
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D

A normal yield curve that is upward sloping implies that:

Correct Answer
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The change in the market value of an asset over some time period is called the _____.

Correct Answer
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Exam 5: The Cost of Money Interest Rates

Which of the following rates indicate the rate that will exist in an inflation-free world?

Correct AnswerverifiedShow Answer

Production opportunity is one of the four fundamental factors that affect the:

Correct AnswerverifiedShow Answer

Other things held constant,:

Correct AnswerverifiedA

_____ can be negative if the value of the investment decreases during the period it is held.

Correct AnswerverifiedShow Answer

If the expectations theory of the term structure of interest rates is correct, and if the other term structure theories are invalid, and we observe a downward sloping yield curve, which of the following is a true statement?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If you have information that a recession is ending, and the economy is about to enter a boom, and your firm needs to borrow money, it should probably issue long-term rather than short-term debt.

Correct AnswerverifiedShow Answer

The real rate of interest is composed of a risk-free rate of interest plus the default premium and liquidity premium that reflects the riskiness of the security

Correct AnswerverifiedShow Answer

During or near peaks of business activity, yield curves that are flat or downward sloping (possibly with humps) are prevalent.

Correct AnswerverifiedShow Answer

If a stock pays a dividend of $10 and the investors need 8% return on their investment, then the investors should pay _____ for the stock.

Correct AnswerverifiedShow Answer

Which of the following bonds have the highest default risk for a given return?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Interest rates on 1-year, 2-year, and 3-year Treasury bills are 5%, 6%, and 7% respectively. Assume that the pure expectations theory holds and that the market is in equilibrium. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

_____ is the tendency of prices to increase over time.

Correct AnswerverifiedShow Answer

A foreign trade deficit occurs when a country's:

Correct AnswerverifiedShow Answer

Bonds with higher liquidity have to offer higher interest rates in the market since they can be easily converted into cash on short notice at or near the fair market value for that bond.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedB

Andrew purchased a stock for $175 and sold it for $250. If he earned a dividend income of $30, the stock's yield is:

Correct AnswerverifiedD

A normal yield curve that is upward sloping implies that:

Correct AnswerverifiedShow Answer

The change in the market value of an asset over some time period is called the _____.

Correct AnswerverifiedShow Answer

Correct Answer
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A

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B

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D

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