Chapter 6

Which one of the following tends to occur when financial intermediaries are provided additional liquidity? Decline in the credit quality of loans Increased standards for obtaining loans Increased interest rates Tightening of credit markets

Decline in the credit quality of loans

Which term is used to designate an economic agent appointed to act on behalf of smaller investors in collecting information? Delegated monitor Security issuer Free agent Asset transformer

Delegated monitor

The spot rates on the 4-, 5-, and 6-year zero coupon Treasury securities are 3.68%, 4.12%, and 4.23%, respectively. What is the 1-year forward rate for year 6? 4.78% 0.42% 5.90% 4.67%

4.78%

What was the approximate range for the prime rate, or the rate a bank offers to its very best customers, for the period 1972-2010? Approximately 3 to 9 percent Approximately 5 to 12 percent Approximately 3 to 21 percent Approximately 5 to 15 percent

Approximately 3 to 21 percent

What was the approximate range for mortgage rates during the period 1972-2013? Approximately 6 to 10 percent Approximately 7 to 14 percent Approximately 4 to 12 percent Approximately 4 to 19 percent

Approximately 4 to 19 percent

The United States government is a large borrower - partly to finance past deficits. The national debt, as of 2018, is $2.05 trillion $5.02 trillion $21.05 trillion $32.05 trillion

$21.05 trillion

Which three of the following are key factors that limit direct investment in financial claims?

Monitoring costs, liquidity costs, price risk

The Dow Jones Industrial Average (DJIA) fell in value by approximately what percent over the one and a half year period ending in mid-March 2009? 28 percent 54 percent 20 percent 36 percent

54 percent

By approximately what percentage did stock prices rise in value between March 2009 and April 2010? 42 percent 63 percent 98 percent 71 percent

71

What is the definition of a capital market? A) A capital market is a market that deals only with primary issues. B) A capital market is a market that trades securities with maturities in excess of one year. C) A capital market is a market that trades only securities issued by governmental entities. D) A capital market is a market that trades securities amongst financial institutions.

A capital market is a market that trades securities with maturities in excess of one year.

What is a forward rate? A forward rate is a real rate that has been adjusted for all the risks associated with an individual security j. A forward rate is an implied rate on a short-term security that will originate sometime in the future. A forward rate is a real rate of interest that has been adjusted for inflation. A forward rate is a rate on a security that will mature sometime in the future.

A forward rate is an implied rate on a short-term security that will originate sometime in the future.

How is a primary market defined? A) A primary market is the market in which a handful of institutions purchase an entire issue of securities. B) A primary market is the sale of any security that has been registered with the SEC. C) A primary market is a market in which corporations and other fund demanders obtain funds by issuing new securities. D) The primary market is defined as the market where only IPOs can occur.

A primary market is a market in which corporations and other fund demanders obtain funds by issuing new securities.

Which of the following will increase the nominal rate of interest on a security? Addition of a call provision Decrease in default risk Increase in the real rate of interest Decrease in liquidity

Addition of a call provision, Increase in the real rate of interest, Decrease in liquidity

What is the definition of an initial public offering (IPO)? A) An IPO is any sale of securities by a firm in the primary market. B) An IPO is any sale of newly issued securities by a firm to the general public. C) An IPO is the first offering of financial securities by a firm to the general public. D) An IPO is any sale of newly issued securities by a corporation.

An IPO is the first offering of financial securities by a firm to the general public.

Default risk is the risk associated with either late or missed payments on which of these securities? Preferred stock only Bonds and preferred stock Bonds only Treasury bonds only

Bonds and preferred stock

True or false: U. S. interest rates can affect all exchange rates involving U. S. dollars.

True

What does the symbol E(Nr1) mean as it is used in the unbiased expectations theory formula? A) Actual 1-year rate for year N B) Expected N-year rate for year 1 C) Expected 1-year rate for year N D) Actual N-year rate for year 1

Expected 1-year rate for year N

True or false: Capital markets are defined by the type of securities traded rather than the maturity of those securities.

False

Which money market security is defined as short-term funds transferred between financial institutions, often for no more than one day? Commercial Paper Negotiable certificates of deposit federal funds banker's acceptances

Federal funds

Which one of these is the best definition of foreign exchange markets? A) Foreign exchange markets are markets outside of the U. S. in which financial transactions occur. B) Foreign exchange markets are markets in which agreements are made for goods to be imported from or exported to non-U. S. firms. C) Foreign exchange markets are markets in which foreign currency is traded for immediate delivery. D) Foreign exchange markets are markets in which foreign currency is traded for immediate or future delivery.

Foreign exchange markets are markets in which foreign currency is traded for immediate or future delivery.

What is the interest rate called that is derived from existing spot rates on similar securities with varying terms? Effective annual rate Real rate Forward rate Compounded rate

Forward rate

A U. S. manufacturer that will be selling a large quantity of goods in Brazil in 6 months. It is concerned about foreign exchange risk so it may enter in a

Futures contract

Which set of characteristics best applies to a derivative security agreement? A) Standardized quantity, unspecified price of exchanged asset, and unspecified exchange date, low degree of leverage. B) Variable quantity, predetermined price of exchanged asset, variable exchange date, low degree of leverage C) Standardized quantity, predetermined price of exchanged asset, specified exchange date, high degree of leverage D) Variable quantity, specified price of exchanged asset, and specified exchange date, high degree of leverage

Standardized quantity, predetermined price of exchanged asset, specified exchange date, high degree of leverage

Which of the following influence all financial securities? Inflation Premium Special Covenant Premium Liquidity Risk Premium Maturity Premium Real Risk-free rate Default Risk Premium

Inflation Premium Real Risk-free rate

Which one of these best defines the role of investment banks? A) Investment banks are the primary demanders of funds. B) Investment banks are the primary suppliers of funds. C) Investment banks are the primary suppliers of mortgage funds. D) Investment banks are financial intermediaries between demanders and suppliers of funds.

Investment banks are financial intermediaries between demanders and suppliers of funds.

What key role does an investment bank play? A) Investment banks serve as an intermediary between the issuer of a security and the underwriter of that security. B) Investment banks purchase all private placements. C) Investment banks arrange primary market transactions for business entities. D) Investment banks maintain a liquid secondary securities market.

Investment banks arrange primary market transactions for business entities.

Which one of these relationships related to the liquidity premium formula is correct? 1R1 > E(2r1) 1R1 < E(2r1) L3 = L4 = L5 L3 < L4 < L5

L3 < L4 < L5

Which one of these is a basic premise of the unbiased expectations theory? A) Long-term rates must exceed short-term rates to compensate for greater market risk. B) The current yield curve must be flat for the market to be in equilibrium. C) Long-term rates consist of a series of successive short-term rates. D) Interest rates balance the expected demand and supply for securities of varying maturities.

Long-term rates consist of a series of successive short-term rates.

The Fisher effect is based on the theory that investors must be compensated for which two of the following factors? A) Premium for possibility of default B) Lost purchasing power on loaned funds C) Premium for forgoing present consumption D) Lack of liquidity

Lost purchasing power on loaned funds, Premium for forgoing present consumption

In the default risk premium formula, the symbol ijt represents which interest rate? A) Real rate on a Treasury security B) Nominal rate on a non-Treasury security C) Real rate on a non-Treasury security D) Nominal rate on a Treasury security

Nominal rate on a non-Treasury security

To minimize liquidity risk which three factors must exist? Predictable sale price Low transaction costs Sale on short notice Sale at a reasonable profit

Predictable sale price, Low transaction costs, Sale on short notice

The risk that an asset's value may be less than its purchase price is referred to as which type of risk? Default risk Inflation risk Liquidity risk Price risk

Price risk

Which money market security involves a sale, generally at a discounted price, that includes a promise to reverse the sale at a specified price on a specified date? Treasury bill Repurchase agreement (repo) Banker's acceptance (BA) Negotiable certificate of deposit

Repurchase agreement

Which one of these is a public offering? A) Sale of an entire stock issue directly to a financial institution B) Sale of newly-issued securities to investors with the assistance of an investment bank C) Sale of stock by a current individual stockholder directly to another individual D) Sales transaction directly between the issuer and a small group of investors

Sale of newly-issued securities to investors with the assistance of an investment bank

Which one of these is a public offering? A) Sales transaction directly between the issuer and a small group of investors B) Sale of an entire stock issue directly to a financial institution C) Sale of newly-issued securities to investors with the assistance of an investment bank D) Sale of stock by a current individual stockholder directly to another individual

Sale of newly-issued securities to investors with the assistance of an investment bank

Which one of these is a private placement? A) Sale of securities to a large number of small individual investors B) Sale of securities that were required to be registered with the Securities and Exchange Commission (SEC) C) Sale of newly-issued, unregistered securities to a group of five financial institutions D) Sale of securities handled by an investment bank which acted as the security underwriter

Sale of newly-issued, unregistered securities to a group of five financial institutions

The largest supplier of loanable funds in the United States is Corporate investments The household sector U.S. banks

The household sector

If both the real rate of interest and the expected rate of inflation are positive, then which of these is correct? A) The nominal rate will be less than the real rate. B) The nominal rate will exceed both the real rate and the inflation rate. C) The nominal rate will be greater than the real rate but less than the inflation rate. D) The nominal rate will be the average of the real rate and the inflation rate.

The nominal rate will exceed both the real rate and the inflation rate.

Assume you computed an inflation premium, IP, of 2.3 percent based on the PPI. How do you interpret this value? A) The consumer price index increased by 2.3 percent for the period. B) The producer price index increased by 2.3 percent for the period. C) Nominal interest rates increased by 2.3 percent for the period. D) Real interest rates decreased by 2.3 percent for the period.

The producer price index increased by 2.3 percent for the period.

The term structure of interest rates is derived from which one of these? Time value of money Consumer price index Fisher effect Default risk concept

Time value of money

Which one of the following is a capital market security? Banker's acceptances US Treasury bond Commercial Paper Federal funds

US treasury bond

Which one of these is a characteristic of a derivative security? A) Value dependent on underlying security B) Informal agreement C) Price of asset exchanged determined when exchange occurs D) Risk-free security

Value dependent on underlying security

The traditional banking model exposes the institution to potential

liquidity, interest rate, and credit risk

There was an increase in systemic risk when the banking model shifted from originate and hold to originate to

sell

The characteristic that distinguishes money market from capital market security is dividend payment. tax liability. government backing. time to maturity.

time to maturity

As compared to money market securities, capital market securities have which one of the following characteristics? Less risky shorter maturities wider price fluctuations only corporate, not government issuers

wider price fluctuations