Series 65 Unit 8

In the investment industry, the term spread has many different meanings. When used in a discussion about bonds, which of the following would be most appropriate? A) Inverse spread B) Credit spread C) Debit spread D) Calendar spread

B. credit think bonds

All of the following are leading indicators for economic growth EXCEPT A) stock prices as measured by the S&P 500 index B) average weekly initial claims for state unemployment compensation C) average prime rate D) orders for durable goods

C.

A bond analyst is plotting a yield curve and notices that short-term maturities have higher yields than intermediate and long-term maturities. This is an example of A) a normal yield curve B) an inverted yield curve C) an algorithmic yield curve D) a positive yield curve

B. An inverted, or negative, yield curve is one that results when debt with short-term maturities has higher yields than those with maturities that are longer. A positive, or normal, yield curve results when the yields increase as maturities do.

Over time, a country's trade deficit will lead to a decline in the value of its currency because A) the money supply will decrease B) the country's exports will exceed its imports C) the country's imports will exceed exports creating selling pressure on its currency D) domestic goods will become too expensive for foreigners to buy

C.

A frequently-used metric by analysts is the yield, or credit spread. Common methods of computing this would be comparing bonds of similar quality and similar maturities. bonds of similar quality and different maturities. bonds of different quality and different maturities. bonds of different quality and similar maturities. A) I and III B) II and III C) II and IV D) I and IV

C. The term spread, always signifies a difference. Therefore, the correct choices have to reflect some kind of difference. One way is when the quality (rating) of the bonds is the same, but the length to maturity is different. A very common example of this is the U.S. 2-year Treasury note plotted against the 10-year Treasury note. The other method is to take bonds of different quality (ratings) having the same maturities. An example might be comparing two bonds with a 20-year maturity: one has a AAA rating and the other a BBB rating. *spread think different*

Which of the following industries would be least cyclical? A) Automobile manufacturing B) Leisure products C) Heavy equipment D) Supermarket chain

D. cyclical ind-most affected by economic change, like automobile ind. this asks for LEAST cyclical countercyclical-moves in the opposite direction of the economy. (gold)

The Conference Board releases information about the economy on a monthly basis. Included are a number of different indicators. Economic indicators can be leading, lagging, or coincidental, which indicates the timing of their changes relative to how the economy as a whole changes. Which of the following is a coincident economic indicator? A) Industrial production B) Stock market prices as measured by the S&P 500 C) Machine tool orders D) Agricultural employment

A.

When discussing employment and production, which of the following industries are typically more affected by a recession? Capital goods Consumer durable goods Consumer nondurable goods Services A) I and III B) I and II C) III and IV D) II and IV

B. Durable goods and capital goods are more affected by a recession than are nondurable goods and services. This is primarily because they are larger items, last for a longer period, and are somewhat discretionary.

A securities analyst's approach is to look at the overall economy and try to forecast which industry will outperform. Then, the analyst searches for those individual companies within that industry that appear to have the best expected return and add those to the recommended list. In so doing, this analyst is using A) the top-down approach. B) the business cycle approach. C) the bottom-up approach. D) the optimal portfolio approach

A. Start with the big picture, and narrow down to individual

Which of the following statements reflects the monetarist economic position? A) The amount of money in the economy determines the overall price level over time and, therefore, the Federal Reserve should control the growth in the amount of money in the economy in a gradual and predictable way. B) The best way to control the money supply is to raise taxes, which, in turn, will reduce the amount of money in the economy and lower prices. C) The total amount of money in the economy is the result of the level of interest rates. D) The amount of money in the economy is not significant because economic activity reflects the value of real goods and services and, therefore, the Federal Reserve should not attempt to manage the money supply.

A. *management of money supply is a monetarist position*

An inverted yield curve results in part by A) declining interest rates B) investors buying long-term bonds and selling short-term bonds C) rising interest rates D) investors buying short-term bonds and selling long-term bonds

B. The demand for longer-term bonds is higher than that of short-term bonds and causes a negative slope in the yield curve. If investors were buying short-term bonds in greater demand, the rates of short-term bonds would decline rather than rise.

Which of the following statements regarding the economics of fixed-income securities are TRUE? Short-term interest rates are more volatile than long-term rates. Long-term interest rates are more volatile than short-term rates. Short-term bond prices react more than long-term bond prices given a change in interest rates. Long-term bond prices react more than short-term bond prices given a change in interest rates. A) II and IV B) I and IV C) I and III D) II and III

B. There are two separate issues in this question: the volatility of rates and the volatility of bond prices. Short-term rates are more volatile than long-term rates and move more quickly than long-term rates. Often the most volatile interest rate is the federal funds rate, which is an overnight rate of interest. Given a change in rates, long-term bond prices move more than short-term bond prices because of the compounding effect over a much longer period.