1. The New York Stock Exchange (NYSE) is: a. a secondary market. b. a physical asset market. c. a primary market d.
Statements a and b are correct. e. Statements b and c are correct. a. Correct. 2. An example of a primary market transaction is: a. buying 100 shares of Wal-Mart stock from your uncle. b. buying 100 shares of IBM stock through the New York Stock Exchange via an online brokerage firm c. buying 100 shares of a new issue of Home Depot common stock c. Correct. 3. Money markets are: a. markets for long-term debt and common stocks. b. markets for “real” or “tangible” assets. c. markets for short-term, highly liquid debt securities. c. Correct. 4. Investment banking firms: a. facilitate the issue of new securities. b. are secondary market participants. c. are primary market participants. d. a and b are true e. a and c are true e. Correct. 5. Financial intermediaries: a. act as middlemen to facilitate the issuance of new securities by firms and governments. b. literally create new forms of capital (securities). c. facilitate the transfer of funds from savers to demanders of capital d. a and b e. b and c e. Correct. 6. Which of the following are financial intermediaries? a. commercial banks b. mutual funds c. life insurance companies d. all of the above e. none of the above d. Correct.
is always zero d. Correct.” d. a. The real risk-free rate of interest is: a. static. d. b. Correct. Households increase the amount of money they borrow from their local banks. e. Statements a and c are correct. Which of the following is likely to lead to an increase in the cost of funds? a. it does not change over time. 8. 10. 12. False Correct. 11. The NYSE does not exist as a physical location. Statements a and b are correct. none of the above are true b. b. is added to the equilibrium interest rate on a security if the security cannot be converted to cash quickly at close to “fair market value. changes over time depending on economic conditions c. b. leading to a decline in the demand for funds. rather it represents a loose collection of dealers who trade stock electronically. change in response to shifts in supply and demand conditions c. Correct. Statements a and b are correct. 9. are always zero d. c. The default risk premium: a. which is that long-term securities are more price sensitive to interest changes than short-term securities. c. Companies’ production opportunities decline. Statements b and c are correct. True b.7. a physical location auction market. Correct. an over-the-counter market.S. remain stable over time. c. is equal to expected inflation over the life of the security c. c. a primary market. b. b. d. Correct. The NASDAQ is primarily a. Treasury bond and a corporate bond of equal maturity and marketability d. is the difference between the interest rate on a U.
. compensates investors for interest rate risk. none of the above are correct b. e. Prices for capital: a. Households save a larger portion of their income.
both a and b are true d. The yields on the two bonds are equal. b. If the expectations theory holds. the Treasury yield curve must be downward sloping. is required for assets with high default risk d. Which of the following statements is most correct? a. should be an average of the inflation rate experienced in the past. is required for assets that cannot be converted into cash on short notice at a reasonable price. the Treasury yield curve must be upward sloping. Federal Reserve policy rarely affects interest rates. c. Correct. but that the real riskfree rate. Correct 18. b. A large liquidity premium: a. Correct. If the yield curve is downward sloping. c. Investing overseas adds: a. c. c. relative to that on a 1-year T-bond? a. Assume that inflation is expected to steadily decline in the years ahead. Correct. The inflation premium: a. d. b. It is impossible to tell without knowing the coupon rates of the bonds. It is impossible to tell without knowing the relative risks of the two bonds. is required for assets that cannot be converted into cash on short notice at a reasonable price. country risk which refers to the risk that arises from investing or doing business in a particular country b. If the expectations theory holds. True
. d. what is the yield to maturity on a 10-year Treasury coupon bond. reflects interest rate risk. k*. exchange rate risk which is the risk that changes in the relative value of the currencies will reduce the value of the investment in terms of the home currency. is expected to remain constant. a. a. a. 15. is required for assets that can be converted into cash on short notice at a reasonable price. The yield on a 10-year bond will always be higher than the yield on a 1-year bond because of maturity risk premiums. If there is a positive maturity risk premium. d. The yield on the 10-year bond is less than the yield on a 1-year bond. 16. Correct. Statements a and c are correct. should be an average of the inflation rate expected over the life of the security. b. the Treasury yield curve must be upward sloping. b. c.
17.13. is required for assets when inflation was high in the past b. 14. neither a nor b are true c. e.
c. 7% c. c. Federal budget deficits: a. b. Foreign trade deficits: a. True Correct. a. b. 20% e. According to the expectations theory. If the annual rate of interest on a 2-year Treasury bond is 9 percent and the rate on a 1-year Treasury bond is 11 percent. what should be the interest rate on 3-year. 20. 30% b. 10% d. 8% d. Correct. jump to 6 percent next year. Correct. The real risk-free rate of interest is 3 percent. Correct. have no effect on interest rates.and short-term debt and equity. risk-free securities today? a. have no effect on interest rates. 9% e. b. and that liquidity and maturity risk premiums are zero. 3% b. a.b. push interest rates up. 10% d. Correct. False 22. 2% b. Assume that the expectations theory holds. and increase to 7 percent the following year (Year 3). what rate of interest should you expect on a 1-year Treasury bond one year from now? a. 21. 6% c. sound corporate financial policy generally calls for using a mix of long. 23. push interest rates down. False Correct. Inflation is expected to be 5 percent this coming year. b. Because of the lack of predictability of interest rates. can help drive interest rates down.
. can help drive interest rates up. 19.
.1%(t .5% c.7 percent and is assumed to be constant. 13% e. If the average inflation rate is expected to be 5 percent for years 5. Correct. One-year Treasury securities yield 6 percent. what is the yield on a 7-year bond for Drongo Corporation? a. If the expectations theory is correct. and that the real risk-free rate of interest is 3 percent. 8. 8. 7% d. 6% d. 8.0 percent. Correct. what does the market believe will be the interest rate on 5-year bonds. 27.9 percent and are believed to be the same for all bonds issued by this company. 10 years from now? a. 5% c. 6.5 percent. 6% b.5% e. is 2. The maturity risk premium (MRP) is estimated to be 0. 8% c. 4% b. Drongo Corporation’s 4-year bonds currently yield 8. Assume that a 3-year Treasury note has no maturity risk premium. while 15-year bonds have an interest rate of 7.4 percent. what is the implied expected inflation rate during Year 3? a. The real risk-free rate of interest. and 3-year Treasury securities yield 7 percent. k*. Correct.1).91% e. 8% b. and 7. 25. 15% b. If the T-note carries a yield to maturity of 10 percent. 2-year Treasury securities yield 6. 8.5% d.71% c.24.90% d. Ten-year bonds have an interest rate of 7. where t is equal to the time to maturity.22% b. Correct.5 percent. What does the market expect will be the yield on 1-year Treasury securities two years from now? a. 7% b. 8% a. and if the expected average inflation rate over the next 2 years is 8 percent. 7. 7% e. 26. Assume that the expectations theory holds. The default risk and liquidity premiums for this company’s bonds total 0.95% d. 12. 7.
2. 31.9% a. 6. where t = number of years to maturity. 4.6% e.8% b. Correct. 13.8% each year thereafter. 5.7% d. 1% d. Correct.28.2% c.4%. and 3.3%.5% c.5% e. what is the default risk premium on Bonanza’s bonds? a.1% c.2% e. 3.
. 5. and the maturity risk premium takes the form: MRP=0. Assume that the default risk and liquidity premiums on all Treasury securities equal zero. Based on this data.8% b.1%. 4.3% c. 0. 3. You are told by a friend who works for an investment firm that the best estimates of the current interest rate premiums for relatively safe corporate firms is as follows: inflation premium = 2. The inflation rate is expected to be 4 percent a year for the next three years and then 5 percent a year thereafter. default risk premium = 1. What is the difference in the maturity risk premium on the two bonds? a. 4.5% e. 2.5% d.5% a. 4. are yielding 9.1 percent.5% in year 1. 6. Correct. The 5-year bonds of Bonanza Inc. 3. Correct. If the liquidity premium is 1. 3.5%.6%. 2.2 percent per year. 30.4% b.4% e. What should the inflation premium be for a three-year bond? a. 0.2% in year 2. You see that the current 30-day T-bill rate is 4. The real risk-free rate has not changed in recent years and is 2.3% c.2% d. 5. 1% b. what is the real risk-free rate of return? a. The real risk-free rate is 3 percent. 29. You observe that 10-year Treasury bonds yield 1 percent more than the yield on 5-year Treasury bonds. An investor in Treasury securities expects inflation to be 5. The average inflation premium is 2.1%(t – 1).