1.

A credit market instrument that provides the borrower with an amount of funds
that must be repaid at the maturity date along with an interest payment is known as a

A. simple loan B. fixed-payment loan. C. coupon bond

2. Three factors explain the risk structure of interest rates:

A. liquidity, default risk, and the income tax treatment of a security
B. maturity, default risk, and the income tax treatment of a security
C. maturity, liquidity, and the income tax treatment of a security.
D. maturity, default risk, and the liquidity of a security

3. The term structure of interest rates is

A. the relationship among interest rates of different bonds with the same maturity.
B. the structure of how interest rates move over time.
C. the relationship among the term to maturity of different bonds.
D. the relationship among interest rates on bonds with different maturities.

4. The price of a coupon bond and the yield to maturity are________ related; that is,
as the yield to maturity________, the price of the bond________
A. positively; rises; rises
B. negatively; falls; falls
C. positively; rises; falls
D. negatively; rises: falls

5. The present value of an expected future payment as the interest rate increases
A. falls
B. rises
C. is constant
D. is unaffected

6. If the probability of a bond default increases because corporations begin to suffer

large losses,
then the default risk on corporate bonds will ________and the expected return on these
bonds will ________, everything else held constant.
A: decrease; increase
B. decrease; decrease
C. increase; increase
D. increase; decrease

7. If 1-year interest rates for the next three years are expected to be 5, 3, and 4
percent, and the 3-year term premium is 1 percent, then the 3-year bond rate will be
A. 1 percent
B. 2 percent
C. 4 percent
D. 5 percent
8. Municipal bonds have default risk, yet their interest rates are lower than the rates
on default-free Treasury bonds. This suggests that
A. the benefit from the tax-exempt status of municipal bonds is less than their default risk.
B. the benefit from the tax-exempt status of municipal bonds equals their default risk.
C. the benefit from the tax-exempt status of municipal bonds exceeds their default risk.
D. Treasury bonds are not default-free.

9. If a bond pays $10 coupon each year until maturity and repay $200 face value in
next five years, its present value is $180 if the yield to maturity is

A. 5 percent
B. 7,5 percent
C. 10 percent
D. 12,5 percent

10. A key assumption in the segmented markets theory is that bonds of different
maturities
A. are not substitutes at all.
B. are perfect substitutes.
C. are substitutes only if the investor is given a premium incentive.
D. are substitutes but not perfect substitutes

11. Which of the following is not a money market security?

A. Treasury bill
B. negotiable certificate of deposit
C. common stock
D. banker’s acceptance

12. At any given time, the yield on commercial paper is ________ the yield on a T-
bill with the same maturity
A. slightly less than
B. slightly higher than.
C. equal to
D. A and B both occur with about equal Frequency

13. A call provision normally

A. allows the firm to call bonds at par value.
B. gives the firm the option to call bonds at market value.
C. allows the firm to call bonds at a price below par value
D. requires the firm to call bonds at a price above par value

14. An investor buys T-bill with $1.000.000.000 par value, I 80 days- maturity.
After 80 days. he sells the 'l'-bill for $980.000. Caculate the yield to maturity?
A. 4,7% 13. 5,7% C. 5,2%

15. A repurchase agreement calls for an investor to buy securities for $4.925,000
in 60 days for $5,000,000. What is the yield?
A. 9.43 % 13. 9.28 % C. 9.14 %
16. There are two major types of participants in futures and forward markets:
A. Brokers and dealers
B. Hedgers and speculators
C. Investors and speculators
D. Sellers and traders

17. When yield curves are downward sloping,

A. long-term interest rates are above short-term interest rates.
B.short-term interest rates are above long-term interest rates.
C.short-term interest rates arc about the same as long-term interest rates.
D.medium-term interest rates arc above both short-term and long-term interest rates.

18 A call option:
A. is the same as a put option
B. gives the owner a right to buy a financial instrument at the exercise price within a
specific period of time
C. gives the owner a right to sell a financial instrument at the exercise price within a
specific period of time
D. is the same as an American option.

19. The longer the time to maturity, the ____________the call option premium and the
put option premium
A. higher; lower B. lower; higher C. higher; higher D. lower; lower

20. ___________ are commonly used by firms to hedge their exposure to interest rate
fluctuations.
A. Interest rateB. Option contract C. Future swaps D. Currency Swaps
Swaps

21. The buyers of option contracts have gain and ________loss as futures prices vary.
A. Unlimited, limited
B. Limited, limited
C. Unlimited, unlimited
D. None of above

22.The investor sells a future contract of 1.000 stocks with a future price of $45/stocks. If
the market price of security on a day before maturity is $35, on that day, he will:
A. Gain $5.000 B. Gain $10.000 C. Loss $10.000 D. Loss $5.000

23. The investor buys a call option on 200 securities with a strike price of $50/stock
and a premium of $5/stock. If the market price of security at maturity is $57, he will
A. Exerice the call option and gain $400
B. Exerice the call option and loss $400
C. Do not exerice the call option and gain $400
D. Do not exerice the call option and loss $400
24. The investor sells a put option on 200 securities with a strike price of $30/stock
and a premium of $2/stock. if the market price of security at maturity is $26, he will
B. Loss $400 C. Gain $300 D. Loss $300

25. The ________interest rate more accurately reflects the true cost of borrowing
A. nominal B. real C. discount D. market