Chapters 1, 2, 3

From 1992 through 2019 , U.S. investors ' holdings of foreign financial market debt securities increased by a factor of about

13x .

True or false : All else being equal , the higher the coupon rate , the lower the price of the bond .

False

True or false : Duration is the weighted average time to maturity on a financial security using the coupon payments as weights .

False

True or false : The equilibrium interest rate is permanent , since it does not change over time .

False

True or false : The realized rate of return can be calculated at any time up to the final maturity date of the security .

False

_______ are sold in secondary financial markets by _______.

Financial instruments ; agents in need of funds

As the rate of return on a bond _____ the duration ______.

•increases ; decreases •decreases ; increases

if the fair present value of a security is _____ its market price , it is _____ and investors will want to _____.

•less than ; overvalued ; sell it •greater than ; undervalued ; buy more of it

The _____ the interest rate " r " , the _____ the present value of the annuity .

•lower ; higher •higher ; lower

Which of the following is the equation for valuing a stock with a dividend growth rate of zero ?

PO = DIV / RS

If you are given the most recent dividend , DIVO ( but not DIV1 ) , the growth rate , g , and the return , Rs , the correct equation for valuing a constant dividend growth stock is which of the following ?

PO = DIVO ( 1 + g ) / ( Rs - g )

Which of the following is the correct equation for calculating the present value of a lump sum received " n " periods in the future given interest rate " r " ?

PV = FV / ( 1 + r ) ^ n

The passage of the Securities Act of 1934 designated that the _______ would be the regulator of financial markets and exchanges in the U.S.

Securities and Exchange Commission ( SEC )

A series of equal cash flows received at fixed intervals over an entire finite investment period are

annuity payments .

Regulation is an attempt to enhance the social welfare _____ and mitigate the _____ of the provision of Fl services .

benefits ; costs .

A security which can be retired by the issuer before its maturity date is referred to as a _____ security .

callable

Convexity is good because the _______ of large interest rate increases tends to be smaller than the ________ of large interest rate decreases .

capital loss effect ; capital gain effect

Duration provides a direct relationship between the _____ for a _____.

change in security price ; small change in interest rates

The total return on a bond instrument incorporates both the ______ and _______.

coupon payments ; repayment of principal

For a bond instrument , the periodic cash flow that the bond issuer contractually promises to pay the bond holder is called the

coupon rate .

The _______ of the stock is calculated by discounting the expected dividends and future sale price of the stock at the expected rate of return .

current market price

When new bonds are issued , their coupon rate is generally set to the

current required rate of return .

When government monetary policy is expansive and the money supply is expanded , interest rates will

decrease

The demand for loanable funds _____ as interest rates increase .

decreases

As interest rates increase , the price of a bond ______ at a ( n ) ______ rate .

decreases ; decreasing

Price sensitivity to interest rate changes increases with increasing maturity at a ______ rate .

decreasing

A primary conduit through which monetary policy actions of the Federal Reserve are transmitted to the economy are

depository institutions .

A significant component of the money supply that is under the supervision of financial institutions is

deposits at commercial banks and thrifts .

A financial institution's average cost of monitoring is lower than the individual investor's due to

economies of scale .

Economically speaking , the duration is the ______ of a security's value to small interest rate changes .

elasticity

The passage of the Securities Act of 1933 stated that the main emphasis of SEC regulations should be focused on

ensuring the full and fair disclosure of securities information .

The dividend pattern for a stock with supernormal dividend growth can be most correctly described as

experiencing a period of nonconstant growth followed by constant growth forever .

For a given set of project cash flows and investment time period , the required rate of return is related to the _______ and the expected rate of return is related to the _____ of the security .

fair present value ; current market price .

The largest net supplier of loanable funds in the U.S. is

households

The equity valuation model assumes that the stream of dividend cash flows produced by an equity instrument is

infinite and varying .

A real risk - free interest rate is what an investor could earn in a world without

inflation

There exists a ( n ) _____ relationship between interest rates and the present value of a security .

inverse

The relationship between bond prices and changes in interest rate is _____ leading to a _____ sign for duration in the elasticity equation ,

inverse ; negative

Most primary market transactions in the U.S. are arranged through ______ who help reduce the cost and risk of the seller creating a market for its securities on its own .

investment banks

A long maturity bond will have a ______ decrease in price for a unit increase in interest rates than a short maturity bond would have .

larger

Higher coupon bonds return a _____ portion of the investor's required rate of return in the form of coupon payments compared to lower coupon bonds ,

larger

The financial sector of U.S. business is the _____ provider of loanable funds and the _____ user of loanable funds .

largest ; largest

Short - term securities have a more active secondary market and hence are more _____ than long - term securities .

liquid

A single payment received at the beginning or end of an investment period is called a

lump sum payment .

The theory that argues that investors have specific maturity preferences and must be paid a premium to hold securities of a different maturity is the

market segmentation theory .

Both the unbiased expectations theory and the liquidity premium theory ignore investor preferences regarding the _____ of the securities they hold .

maturity

The difference between the required yield on long and short - term securities of the same characteristics except maturity is called the

maturity premium .

Greater early payment of returns makes larger coupon bonds _____ valuable and _____ price variable .

more ; less

The relationship between bond price sensitivity and maturity is

not linear .

The risk incurred by financial institutions by holding contingent assets and liabilities off balance sheet is called

off balance sheet risk .

The problem that arises when individual investors leave it to each other to collect information and monitor the fund users is called

the free rider problem .

The term structure of interest rates represents the market's current expectations of future short - term interest rates , so the _______ can be used to forecast forward rates .

unbiased expectations theory

The theory that asserts that the yield curve at a given point in time reflects the market's current expectations of future short - term interest rates is the

unbiased expectations theory .

The current market price of a security can temporarily diverge from its fair market value due to

unexpected events .

To determine the contribution of the nonconstant dividends to the current stock price assuming the rate of return is Rs , you must

use Rs to discount each dividend to the present and add them together .

A risk - free investment is one in which the return is

certain

A risk - free investment is one in which the return is

certain ,

The exact bond price / interest rate relationship is _____ while duration is _____.

convex ; linear

The risk that a security issuer will fail to make interest and principal payment on the security is called _____ risk .

default

The firm's earnings can be either paid out to investors as _____ or reinvested as _____ to produce future income and dividends for the firm and its investors .

dividends ; retained earnings

If an investor buys a share of stock today at the current market price , receives all expected dividends over the life of the investment , and sells the stock at the end of the investment period , they will earn the

expected rate of return .

The return that investors anticipate earning if they buy the security at the current market price and earn all of the projected cash flows over the life of the investment is the

expected rate of return .

Other than residential mortgages , another area in which U.S. financial institutions have been encouraged by government policy to provide financing is

farming .

In primary markets , fund users raise new capital through the sale of

financial securities .

A _____ rate is an expected or " implied " rate on a short - term security that is to be originated at some point in the future .

forward

For large interest rate increases , duration _____ the fall in bond price .

over predicts

When the required rate of return is equal to the coupon rate , the bond will sell at

par .

Financial institutions reduce individual investor's monitoring costs by

pooling their funds and hiring employees to monitor the fund users .

Over time , the most common shape of the yield curve is _______ indicating that on average , the maturity premium is _____.

positively sloped ; positive

Nominal interest rates are important because they affect the _____ of most securities traded in the money and capital markets at home and abroad .

price

Duration relates the percentage change in bond _____ to _____ changes in interest rates .

price ; small

Investors may demand a liquidity risk premium for longer - maturity securities to compensate them for the greater ______ they are exposed to compared to shorter - maturity securities .

price risk

The risk that the price of a security may change between the time it is purchased and the time it is sold is called

price risk .

The equilibrium interest rate for a security is the interest rate where the _______ and _______ intersect .

supply curve ; demand curve :

As the ______ of financial market participants increases , the absolute dollar value available for investments purposes increases , and the supply curve shifts to the _____.

wealth ; right

The return that the bondholder will earn on a bond if he or she buys it at its current market price , receives all coupon and principal payments as promised , and holds the bond to maturity is the

yield to maturity .

An increase in which of the following factors will cause households to decrease their supply of loanable funds provided ?

•Immediate consumption needs •Riskiness of investments

The _____ the annuity payment " PMT " , the _____ the present value of the annuity .

•higher ; higher •lower , lower

The _____ the default risk of a security , the _____ the interest rate demanded by the buyer .

•higher ; higher •lower ; lower

When a U.S. corporation or investor receives foreign currency cash flows , the U.S. dollar value of those cash flows will _____ if the foreign currency _____ against the U.S. dollar .

•increase ; appreciates •decrease ; depreciates

The decline of the share of assets held by commercial banks between 1948 and 2019 is due to

•low interest rates •regulations imposed during the financial crisis •strict capital regulations

The _____ the interest rate " r " , the _____ the value of present value .

•lower ; higher •higher ; lower

The _____ the level of actual or expected inflation , the _____ the level of interest rates .

•lower ; lower •higher ; higher

Two important characteristics of money market securities are

•maturity of one year or less •low interest rate risk

In the equation for valuing a constant dividend growth stock , if we use the _______ we will solve for the _______ of the stock .

•required rate of return ; fair present value •expected rate of return ; current market price

In the equation for valuing a zero dividend growth stock , if we use the _______ we will solve for the _______ of the stock .

•required rate of return ; fair present value •expected rate of return ; current market price

The _____ the coupon on the bond , the _____ its duration .

•smaller ; longer •larger ; shorter

Which of the following bonds will have the highest fair present value at every required rate of return ? ( Assume all other characteristics of these bonds are identical . )

12 percent coupon

Financial institutions are required to maintain a deposit insurance cap of _____ per person per bank .

$ 250,000

Which country has the greatest number of banks among the list of top 10 global banks by size ?

China

True or false : Market forces react to disequilibrium with a change in the equilibrium interest rate .

True

When the required rate of return is less than the coupon rate , the bond will sell at

a premium .

After hitting bottom in March 2009 , the Dow Jones Industrial Average did not recover to its pre - crisis levels for

about four years .

In the " originate and hold " model , financial institutions issue loans then

hold the loans to maturity .

The speed with which security prices adjust to unexpected news is referred to as

market efficiency

The loanable funds theory views the level of interest rates as being determined by

supply and demand for funds .

Nominal interest rates tend to _____ over time .

vary

In the " originate and hold " model , financial institutions are exposed to risks , including which of the following ?

•Interest rate risk •Liquidity risk •Credit risk

An increase in which of the following factors will cause households to increase their supply of loanable funds provided ?

•Interest rates •Household wealth

Which of the following statements is true regarding derivative securities ?

Their value is linked to the value of another previously issued security .

True or false : The unbiased expectations theory posits that current long - term interest rates are geometric averages of current and expected future short - term interest rates .

True

True or false : In the U.S. , most money market securities are traded " over the counter " rather than on organized exchanges .

True

The cash flows from a coupon bond consist of a lump sum repayment of principal at maturity , plus

an annuity of fixed interest payments paid over the life of the bond .

If the rate of interest is set below the equilibrium rate , there will be _______ loanable funds .

a deficit of

The non - financial sectors of U.S. business _____ far more loanable funds than they _____.

demand ; supply

The fair price of an equity instrument today is based on the present value of the current and expected future ______ it will pay to investors .

dividends

" Appreciation " of a foreign currency relative to the U.S. dollar means that

each unit of foreign currency is worth more U.S. dollars .

In addition to commercial banks , _____ also showed a decline in their share of total Fl assets between 1948 and 2019 .

thrifts

The yield to maturity calculation implicitly assumes that all coupon payments received by the bond holder can be reinvested at the

yield to maturity .

Investors in callable securities generally require _____ interest compared to non - callable securities .

higher

The higher the level of actual or expected inflation , the _____ will be the prices of good and services in the future .

higher

The mismatch of maturities between liabilities and assets of financial institutions exposes them to

interest rate risk .

The preference of fund suppliers to choose to hold cash versus investing in long - term securities increases the cost of long - term borrowing . This cost . can best be described as

liquidity cost .

The theory that investors must be compensated for the higher price risk and lower liquidity inherent in longer - term securities is called the

liquidity premium theory .

One model that is commonly used to explain interest rates and interest rate movements is called the

loanable funds theory .

A financial institution's average cost of monitoring fund users is ______ than the individual investor's cost .

lower

A security whose returns are tax - free can pay _____ interest than a taxable security and still be attractive to investors .

lower

The prices of securities with longer maturities are _____ sensitive to changes in interest rates when compared to shorter maturity securities .

more

The decrease in funds demanded with increasing interest rates will lead to a demand curve that is _____ sloped .

negatively

The financial crisis of 2008 was triggered by

problems in the subprime mortgage market .

The interest rate actually earned on a financial security is called the

realized rate of return .

The interest rate used to determine the fair present value of a financial security is called the

required rate of return .

In the U.S. , savings banks and savings associations have been directed to provide financing primarily for

residential mortgages .

A short maturity bond will have a ______ decrease in price for a unit increase in interest rates than a long maturity bond would have .

smaller

When the required rate of return is greater than the coupon rate , the bond will sell at

a discount .

Which of the following is NOT specified in the derivative security contract ?

The final purpose for which the asset exchanged will be used .