BUSN 323 Test 2

T/F One of the four most fundamental factors that affect the cost of money as discussed in the text is the expected rate of inflation. If inflation is expected to be relatively high, then interest rates will tend to be relatively low, other things held constant.

False

T/F Suppose the federal deficit increased sharply from one year to the next, and the Federal Reserve kept the money supply constant. Other things held constant, we would expect to see interest rates decline.

False

T/F Typically, companies call bonds if interest rates rise and do not call them if interested rates decline.

False

T/F One of the four most fundamental factors that affect the cost of money as discussed in the text is the current states of the weather. If the weather is dark and stormy, the cost of money will be higher than if it is bright and sunny, other things held constant.

False

T/F A downward-sloping yield curve indicated that interest rates are expected to decline in the future.

True

T/F Because the maturity risk premium is normally positive, the yield curve is normally upward sloping.

True

T/F During periods when inflation is increasing, interest rates tend to increase, while interest rates tends to fall when inflation is declining.

True

T/F If investors expect the rate of inflation to increase sharply in the future, then we should not be surprised to see an upward-sloping yield curve.

True

T/F Junk bonds are high-risk, high-yield debt instruments. They are often used to provide financing to companies of questionable financial strength.

True

T/F There is an inverse relationship between bonds' quality ratings an their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.

True

Mary just purchased a bond which pays $60 a year in interest. What is this $60 called? a. coupon b. face value c. discount d. call premium e. yield

a. coupon

Which of the following would be most likely to lead to a higher level of interest rates in the economy? a. Households start saving a larger percentage of their income b. Corporations step up their expansion plans and thus increase their demand for capital c. The level of inflation begins to decline d. The economy moves from a boom to a recession e. The Federal Reserve decided to try to stimulate the economy

b. Corporations step up their expansion plans and thus increase their demand for capital

Which of the following statements is CORRECT, other things held constant? a. If companies have fewer good investment opportunities, interest rates are likely to increase b. If expected inflation increase, interest rates are likely to increase c. Interest rates on all debt securities tend to rise during recessions because recession increase the possibility of bankruptcy, hence the riskiness of all debt securities. e. Interes rates on long-term bonds are more volatile than interest rates on short-term debt securities like T-bills.

b. If expected inflation increase, interest rates are likely to increase

Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called? a. coupon b. face value c. discount d. yield e. dirty price

b. face value

Which of the following events would make it more likely that a company would call its outstanding callable bonds? a. The company's bonds are downgraded b. Market interest rates rise sharply c. Market interest rates decline sharply d. The company's financial situation deteriorates significantly e. Inflation increases significantly

c. Market interest rates decline sharply

Which of the following statements is CORRECT? a. The higher the maturity risk premium, the higher the probability that the yield curve will be inverted. b. The most likely explanation for an inverted yield curve is that investors expect inflation to increase. c. The most likely explanation for an inverted yield curve is that investors expect inflation to decrease. d. If the yield curve is inverted, short-term bonds have lower yields than long-term bonds. e. Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve can never be inverted.

c. The most likely explanation for an inverted yield curve is that investors expect inflation to decrease.

Assume that the current corporate bond yield curve is upward sloping, or normal. Under this condition, we could be sure that a. Long-term interest rates are more volatile than short-term rates b. Inflation is expected to decline in the future c. The economy is not in a recession d. Long-term bonds are a better buy than short-term bonds e. Maturity risk premiums could help to explain the yield curve's upward slope

d. Long-term bonds are a better buy than short-term bonds