Investments Final Chapter 9

1. Which one of the following is the interest rate that the largest commercial banks charge their most creditworthy corporate customers for short-term loans?

C. prime

53. Treasury STRIPS are:

C. zero-coupon securities.

8. Which one of the following describes a banker's acceptance? .

C. postdated check with payment guaranteed by a bank

9. Which one of the following is defined as U.S. dollar-denominated deposits held in a foreign bank?

A. Eurodollars

57. Inflation-indexed Treasury securities: I. adjust the principal amount on an annual basis. II. are default-free. III. offer a positive real rate of return. IV. have a variable coupon rate.

A. II and III only

50. Which of the following statements are true as applied to U.S. agency debt? I. It is equally as risky as Treasury debt. II. It is frequently subject to state taxes. III. It has the same credit guarantee as U.S. Treasury debt. IV. It generally has a lower yield than U.S. Treasury debt with the same maturity.

A. II only

34. Which one of the following statements is correct concerning large-denomination certificates of deposit?

A. The security can be sold to another investor.

38. The overnight repurchase rate is the rate charged on overnight loans which are collateralized by which one of the following securities?

A. Treasury securities

2. Which one of the following terms applies to a rate that serves as an indicator of future trends?

A. bellwether

33. Assume that a large corporation, such as General Electric, needs money in the short-term. Which one of the following securities is that corporation most likely to issue to meet this need?

A. commercial paper

6. Which one of the following is unsecured debt issued by corporations on a short-term basis?

A. commercial paper

4. Which one of the following rates is the rate a commercial bank must pay the Federal Reserve to borrow reserves overnight?

A. discount

18. Which one of the following rates is the normally quoted rate?

A. nominal

27. Banks are most apt to quote short-term loan rates as:

A. prime plus a spread.

24. The market segmentation theory states that interest rates on debt vary dependent upon market segments which are segmented based upon which one of the following?

A. time to maturity

29. City Bank needs a one-day reserve loan of $2.6 million from Country Bank. Which one of the following interest rates will be charged on this loan?

B. Federal funds

46. Money market rates are generally one or the other of which two rates? I. bank discount rate II. bond equivalent rate III. annual percentage rate IV. effective annual rate

B. I and III only

44. Which one of the following statements is correct concerning a Treasury bill?

B. The asked yield on a Treasury bill is a bond equivalent yield.

37. Which one of the following is the largest market in the world for new debt securities with maturities of one year or less?

B. U.S. Treasury bill

43. Which one of the following is used by Treasury dealers to indicate the price they are willing to pay to purchase a Treasury bill?

B. bid discount

32. The rate which an investor pays a brokerage firm for a margin loan is based on a negotiated premium which is added to which one of the following rates?

B. call

31. Which one of the following actions is the Federal Reserve most likely to take if it is concerned about a slowing economy?

B. lower the discount rate

39. Which one of the following features applies to a U.S. Treasury bill?

B. pure discount security

13. Which one of the following is a basis point?

C. 0.01 percent

25. U.S. Treasury bill rates were the highest during which one of the following time periods?

C. 1979-1981

3. Which one of the following rates is the rate that banks charge each other for overnight loans of $1 million or more?

C. Federal funds

61. Which of the following statements are true? I. Lenders have a preference for shorter maturities. II. Lenders have a preference for longer maturities. III. Borrowers have a preference for shorter maturities. IV. Borrowers have a preference for longer maturities.

C. I and IV only

45. The bond equivalent yield adjusts for leap years by using 366 days starting with:

C. March 1 of the year prior to the leap year and ending with February 29 of the leap year.

63. Which one of the following statements concerning the modern fixed-income market is correct?

C. Market segmentation theory does little to explain the modern fixed-income market.

17. Pure discount bonds which are created by separating the interest and principal payments from U.S. Treasury bonds are called U.S. Treasury:

C. STRIPS.

26. Which one of the following statements is correct concerning U.S. Treasury bill rates for the period 1800 - 2010?

C. T-bill rates were lower than 1 percent for a period of time.

52. Which one of the following statements is correct?

C. The term structure of interest rates is based on default-free, pure discount securities.

12. A pure discount security is an interest-bearing asset that pays:

C. a single payment at maturity.

35. Which one of the following facilitates international trade?

C. banker's acceptance

30. First Bank needs to borrow money overnight from the Federal Reserve in order to meet its reserve requirements. Which one of the following interest rates will be charged on this loan?

C. discount

15. The Treasury yield curve is a graph which plots Treasury yields against which one of the following?

C. maturities

48. Which two of the following are the largest categories of fixed-income securities in the U.S.? I. U.S. government debt II. corporate debt III. municipal government debt IV. real estate mortgage debt

D. I and IV only

64. Which of the following comprise the nominal interest rate on default-free securities according to the modern view of the term structure of interest rates? I. liquidity premium II. real rate III. interest rate risk premium IV. inflation premium

D. II, III, and IV only

36. You notice that the interest rate on your credit card is set at LIBOR plus 8.9 percent. Given this, the rate you will pay is primarily influenced by the money market rates in which one of the following?

D. London, England

11. Which one of the following is a short-term debt instrument issued by the U.S. Treasury?

D. T-bill

56. Which one of the following debt instruments guarantees investors a positive real rate of return?

D. TIPS

41. Which one of the following is correct when computing the price of a debt security when using a discount yield?

D. The computation will be based on a 360-day year.

55. Which one of the following statements is correct?

D. Treasury bill returns tend to vary in direct relation to inflation rates.

14. Which one of the following is the method used to quote interest rates on money market instruments?

D. bank discount basis

59. The variable f1,1 as used in the expectations theory is interpreted as the forward rate for one year:

D. commencing in one year.

21. Which one of the following theories states that the term structure of interest rates reveals the financial market's projections of future interest rates?

D. expectations theory

23. Which one of the following proposes that lenders must be financially rewarded for loaning funds on a long-term versus a short-term basis?

D. maturity preference theory

20. Which one of the following best describes the Fisher hypothesis?

D. nominal interest rates tend to be relatively constant over time

19. Which one of the following best describes a real interest rate?

D. nominal rate minus inflation

54. The approximate nominal interest rate is computed as the real rate:

D. plus the inflation rate.

28. Which one of the following rates is generally considered the bellwether rate for bank loans to business firms?

D. prime

16. Which one of the following is defined as the relationship between the interest rate on default-free, pure discount bonds and the time to maturity?

D. term structure of interest rates

58. Based on expectations theory, the term structure of interest rates will be _____ anytime investors believe that interest rates will be higher in the future than they are today.

D. upward sloping

40. The market rate on a bond fell from 8.76 percent to 8.73 percent. This is a decline of how many basis points?

E. 3

42. Which of the following will increase the price of a money market instrument computed using a discount yield? I. increase in discount yield II. decrease in discount yield III. increase in days to maturity IV. decrease in days to maturity

E. II and IV only

47. Consider a money market instrument with 48 days to maturity and a quoted ask price of 99. Which two of the following statements are correct as they relate to this instrument? I. The bond equivalent yield is an effective annual rate. II. The bank discount rate is lower than the bond equivalent yield. III. The bank discount rate is an effective annual rate. IV. The bond equivalent yield is lower than the effective annual rate.

E. II and IV only

60. According to the expectations theory and the Fisher hypothesis, a downward-sloping term structure is indicative of which of the following based on market expectations? I. nominal interest rates are expected to increase II. nominal interest rates are expected to decline III. inflation rates are expected to increase IV. inflation rates are expected to decrease

E. II and IV only

10. Which one of the following abbreviations is the interest rate that international banks charge one another for overnight Eurodollar loans?

E. LIBOR

5. Which one of the following rates is used by brokerage firms as the basis for determining margin loan rates?

E. call money

7. A $100,000 or more term deposit at a bank is called which one of the following?

E. certificate of deposit

65. Modern term structure theory supports the contention that the term structure of interest rates will:

E. change over time.

49. Which one of the following borrowers will pay the rates depicted on a Treasury yield curve?

E. default-free borrower

22. Which one of the following is defined as a forward rate?

E. expected future interest rate implied by current interest rates

51. Which one of the following applies to "Yankee bonds"?

E. foreign-issued bonds sold in the U.S.

62. Based solely on the maturity preference theory, long-term interest rates:

E. should be higher than short-term rates.