B | 1. The diagram below is a diagram of the A. secondary markets B. primary markets C. money markets D. derivatives markets |
A | 2. Which of the following is a money market instrument? A. Negotiable CDs B. Common stock C. T-bonds D. 4-year maturity corporate bond |
C | 3. Money markets trade securities that: I. Mature in one year or less; II. Have little chance of loss of principal; III. Must be guaranteed by the federal government. A. I only B. II only C. I and II only D. I and III only |
D | 4. An investor wants to be able to buy 4% more goods and services in the future in order to induce her to invest today. During the investment period prices are expected to rise by 2%. Which statement(s) below is/are true? I. 4% is the desired real rate of interest; II. 6% is the approximate nominal rate of interest required; III. 2% is the expected inflation rate over the period. A. I only B. II only C. III only D. I, II, and III are true |
B | 5. The relationship between maturity and yield to maturity is called the __________________. A. loan covenant B. term structure C. bond indenture D. Fisher effect |
D | 6. Classify each of the following in terms of their effect on interest rates (increase or decrease): I. Covenants on borrowing become more restrictive; II. The Federal Reserve increases the money supply; III. Total household wealth increases. A. I increases; II increases; III increases B. I increases; II decreases; III decreases C. I decreases; II increases; III increases D. I decreases; II decreases; III decreases |
A | 7. According to the liquidity premium theory of interest rates, A. long-term spot rates are higher than the average of current and expected future short-term rates B. investors prefer certain maturities and will not normally switch out of those maturities C. investors are indifferent between different maturities if the long-term spot rates are equal to the average of current and expected future short-term rates D. the term structure must always be upward sloping |
C | 8. A security has an expected return less than its required return. This security is A. selling at a premium to par. B. selling at a discount to par. C. selling for more than its PV. D. selling for less than its PV. |
D | 9. According to the unbiased expectations theory, A. markets are segmented and buyers stay in their own segment B. liquidity premiums are negative and time varying C. the term structure will most often be upward sloping D. the long-term spot rate is an average of the current and expected future short-term interest rates |
B | 10. Duration is A. the elasticity of a security's value to small coupon changes. B. the weighted average time to maturity of the bond's cash flows. C. the time until the investor recovers the price of the bond in today's dollars. D. greater than maturity for deep discount bonds and less than maturity for premium bonds. |
D | 11. Which of the following bond terms are generally positively related to bond price volatility? I. Coupon rate; II. Maturity; III. ytm (yield to maturity). IV. Payment frequency A. II and IV only B. I and III only C. II and III only D. II only |
D | 12. A decrease in reserve requirements could lead to an A. increase in bank lending. B. increase in the money supply. C. increase in the discount rate. D. both A and B.. |
C | 13. You would want to purchase a security if P ____________ PV or Err(expected rate of return) ____________ rrr (required rate of return). A. ; B. ; C. ; D. ; |
D | 14. A 10-year annual payment corporate coupon bond has an expected return of 11% and a required return of 10%. The bond's market price is A. greater than its PV. B. less than par. C. less than its Err (expected rate of return). D. less than its PV. |
B | 15. For large interest rate increases, duration _____________ the fall in security prices, and for large interest rate decreases, duration ______________ the rise in security prices. A. overpredicts; overpredicts B. overpredicts; underpredicts C. underpredicts; overpredicts D. underpredicts; underpredicts |
A | 16. If the Fed wishes to stimulate the economy it could: I. buy U.S. government securities; II. raise the discount rate; III. lower reserve requirements. A. I and III only B. II and III only C. I and II only D. II only |
D | 19rrr17. For the purposes for which they are used, money market securities should have which of the following characteristics? I. Low trading costs; II. Little price risk; III. High rate of return; IV. Life greater than one year. A. I and III B. II and IV C. III and IV D. I and II |
C | 18. When an investment banker purchases an offering from a bond issuer and then resells it to the public this is known as a A. rights offering. B. private placement. C. firm commitment. D. best efforts. |
C | 19. You buy a stock for $34 per share and sell it for $36 after you collect a $1.00 per share dividend. Your pre-tax capital gain yield is ________________ and your pre-tax dividend yield is ________________. A. 2.94%; 2.78% B. 8.82%; 0.00% C. 5.88%; 2.94% D. 5.56%; 2.78% |
B | 20. A T-Bond with a $1000 par is quoted at a bid of 105:7 and an ask of 105:9. If you sell the bond you will receive A. $1,052.81. B. $1,052.19. C. $1,057.22. D. $1,059.22. |
D | 21. You buy a stock for $30 per share and sell it for $33 after holding it for slightly over a year and collecting a $0.75 per share dividend. Your ordinary income tax rate is 28% and your capital gains tax rate is 20%. Your after-tax rate of return is ___________________. A. 8.00% B. 10.25% C. 12.50% D. 9.80% |
C | 22. You purchase a $1000 face value convertible bond for $975. The bond can be converted into 150 shares of stock. The stock is currently priced at $5.25. At what minimum stock price would you be willing to convert? A. $4.50 B. $5.26 C. $6.50 D. $7.10 |
C | 23. A T-Bond with a $10,000 par is quoted at a bid of 92:11 and an ask of 92:17. If you bought the bond and then immediately sold it at the same quotes, how much money would you gain or lose (ignore commissions)? A. $12.50 B. -$12.50 C. -$18.75 D. $18.75 |
C | 24. A U.S. investor has borrowed pounds, converted them to dollars, and invested the dollars in the United States to take advantage of interest rate differentials. To cover the currency risk, the investor should A. sell pounds forward. B. buy dollars forward. C. buy pounds forward. D. sell pounds spot. |
C | 25. Which of the following conditions may lead to a decline in the value of a country's currency? I. Low interest rates; II. High inflation; III. Large current account deficit. A. I only B. I and II only C. II and III only D. II only |
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