FI 301: Chapter 2 and 3 Mindtap

Which of the following is consistent with the pure expectations theory of the yield curve? Check all that apply. - A flat yield curve suggests that the market thinks interest rates in the future will be the same as they are today. - A downward-sloping yield curve suggests that the market thinks interest rates in the future will be higher than they are today. - A flat yield curve suggests that the market thinks interest rates in the future will be higher than they are today. - A downward-sloping yield curve suggests that the market thinks interest rates in the future will be lower than they are today.

- A flat yield curve suggests that the market thinks interest rates in the future will be the same as they are today. - A downward-sloping yield curve suggests that the market thinks interest rates in the future will be lower than they are today.

Which of the following is one of the reasons that the demand curve for loanable funds is downward sloping? - A lower real interest rate discourages people from saving. - A lower real interest rate makes borrowing less expensive. - A higher real interest rate encourages domestic investors to purchase foreign securities and discourages foreign investors from purchasing their own securities. - A higher real interest rate encourages people to save.

A lower real interest rate makes borrowing less expensive.

Which of the following is one of the reasons that the supply curve for loanable funds is upward sloping? - A lower real interest rate encourages domestic consumers to purchase foreign securities and discourages foreigners from purchasing domestic securities. - A higher real interest rate makes borrowing less expensive. - A lower real interest rate makes saving less appealing. - A lower interest rate makes borrowing less expensive.

A lower real interest rate makes saving less appealing.

Debt securities offer varying yields due to characteristics such as credit risk, liquidity, tax status, and term to maturity. For each of the following scenarios, determine which security will have a higher yield and will be more popular to investors seeking a high return on their investment. Assume that other than the differences in characteristics mentioned, the securities are identical. Security 1: A 10-year Treasury bond. Security 2: A 30-year Treasury bond.

Security 2

Debt securities offer varying yields due to characteristics such as credit risk, liquidity, tax status, and term to maturity. For each of the following scenarios, determine which security will have a higher yield and will be more popular to investors seeking a high return on their investment. Assume that other than the differences in characteristics mentioned, the securities are identical. Security 1: A Treasury bond that has a very active secondary market. Security 2: A debt security that has a long-term maturity and that does not have a very active secondary market.

Security 2

Debt securities offer varying yields due to characteristics such as credit risk, liquidity, tax status, and term to maturity. For each of the following scenarios, determine which security will have a higher yield and will be more popular to investors seeking a high return on their investment. Assume that other than the differences in characteristics mentioned, the securities are identical. Security 1: A Treasury bond with a 5-year maturity that offers an annualized yield of 6 percent to maturity. Security 2: A corporate bond with a 5-year maturity that offers an annualized yield of 11 percent to maturity.

Security 2

Debt securities offer varying yields due to characteristics such as credit risk, liquidity, tax status, and term to maturity. For each of the following scenarios, determine which security will have a higher yield and will be more popular to investors seeking a high return on their investment. Assume that other than the differences in characteristics mentioned, the securities are identical. Security 1: A taxable security that offers a before-tax yield of 6.5 percent, sold to an investor with a marginal tax rate of 20 percent. Security 2: A tax-exempt security with a yield of 6 percent.

Security 2

Yakov would like to invest a certain amount of money for two years and considers investing in a one-year bond that pays 6 percent and a two-year bond that pays 9 percent. Yakov is considering the following investment strategies: Strategy A: In the first year, buy a one-year bond that pays 6 percent. Once that bond matures, buy another one-year bond that pays the forward rate. Strategy B: In the first year, buy a two-year bond that pays 9 percent annually. If the one-year bond purchased in year two pays 5 percent, Yakov will choose _____________.

Strategy B

Which of the following are characteristics of the segmented markets theory? Check all that apply. The choice of long-term versus short-term maturities is determined by an investors' needs, rather than by their expectation of future interest rates. Investors and borrowers make decisions about which securities best fit their financial needs based on their expectations of future interest rates. The segmented markets theory explains the yield curve's shape but is not the sole explanation for the yield curve. The choice of long-term versus short-term maturities is determined by a borrower's expectation of future interest rates, rather than by their financial needs.

The choice of long-term versus short-term maturities is determined by an investors' needs, rather than by their expectation of future interest rates. The segmented markets theory explains the yield curve's shape but is not the sole explanation for the yield curve Characteristics: Investors and borrowers participate only in the maturity market that satisfies their forecasted cash flow needs, which is what causes the market segmentation. In other words, investors and borrowers will switch between short-term and long-term markets only if their financial needs change. Investors and borrowers typically stay within a particular maturity market; however, certain circumstances may cause them to deviate from their original strategies. In other words, although investors and borrowers have strategies that may require them to invest mainly in short-term or long-term markets, it's possible that a firm investing in short-term securities chooses to shift that strategy toward long-term securities if it's in the best interest of the company. Even though there is not complete market segmentation, investor and borrower preferences for securities with particular maturities can affect the prices and yields of those securities. These preferences affect the supply and demand for loanable funds, which results in a change in interest rates, which then determines the yield curve for securities with different maturities. Therefore, the segmented markets theory explains the yield curve's shape but is not the sole explanation for the yield curve. Limitation: Some investors and borrowers have the flexibility to choose among short-term and long-term securities markets. If interest rates are expected to increase in the future, companies that typically invest in long-term securities may invest in short-term securities now in order to free up funds once the interest rates increase. Additionally, if interest rates are expected to decrease in the future, companies that typically invest in short-term securities may invest in long-term securities now in order to lock in the higher interest rates.

Which of the following describes conditions under which Yakov would be indifferent between Strategy A and Strategy B? The rate on the one-year bond purchased in year two pays 10.272 percent. The rate on the one-year bond purchased in year two pays 11.360 percent. The rate on the one-year bond purchased in year two pays 12.085 percent. The rate on the one-year bond purchased in year two pays 12.568 percent.

The rate on the one-year bond purchased in year two pays 12.085 percent. (1+.06) * (1 +r) = (1+.09)^2

Injection Molding Inc. borrows $130,000 to finance the purchase of injection molds for its next production cycle.

demand, business

A federal government runs a budget deficit and needs to issue bonds in order to compensate for the difference between tax revenue and government expenditures.

demand, federal gov

Argentina's government wants to obtain financing by issuing Argentina Treasury bills to U.S. investors.

demand, foreign

Nick borrows $27,500 to finance the purchase of a 2019 Toyota Camry.

demand, household

North Texas Municipal Water District issues millions of dollars in bonds to help finance the upgrade of its water treatment plants.

demand, municipal gov

Suppose you learn that in 2021 there are plans for the federal government to institute a $20 per hour minimum wage across the country, and as a result, the average household income in the country will rise. Assuming there are no other changes to SA or DA, the projected net demand for loanable funds (ND) will be ______________, placing _____________ pressure on interest rates.

negative, downward

The U.S. government runs a budget surplus and purchases $1 billion worth of bonds from banks with the excess funds.

supply, federal gov

Canada's government imposes a tax law that makes any savings during the year exempt from personal income taxes.

supply, household

Sam deposits a $1,500 paycheck into a savings account at the local credit union.

supply, household