FINC 409 - Chapter 8 Practice Problems
Holding demand constant, a decrease in the supply of loanable funds will result in a (n) ___________ in interest rates. a. increase b. decrease c. increase or decrease d. none of the above
A
If interest rates increase because of a previously unanticipated inflation rate risk: a. long-lived debt instruments will decline more than short-lived debt instruments b. long-lived debt instruments will decline less than short-lived debt instruments c. neither set of debt instruments will decline d. all other things being equal, both should decline equally
A
If the nominal rate of interest is 10%, the real rate of interest is 3%, the default premium is 3%, the liquidity premium is 0.5%, and the maturity premium is 1.5%, then the inflation premium must be ______. a. 2.0% b. 2.5% c. 3.0% d. none of the above
A
In an inflationary period, interest rates have a tendency to: a. rise b. fall c. stay the same d. act erratically
A
In response to the financial crisis of 2007-2009, the yield spread between Aaa corporate bonds and treasury bonds: a. widened b. narrowed c. remained the same d. none of the above
A
Inflation caused by an increase in the money supply is called: a. demand-pull inflation b. cost-push inflation c. administrative inflation d. a combination of administrative and speculative inflation
A
Interest on obligations of the federal government: a. is not taxable by state or local government b. is not taxable by the federal government c. is taxable by both the federal and state governments d. except for Treasury notes is taxable by the federal government
A
The basic price that equates the demand for and supply of loanable funds in the financial markets is the __________: a. interest rate b. yield curve c. term structure d. cash price e. none of the above
A
When investors expect __________ inflation rates they will require __________ nominal interest rates so that a real rate of return will remain after the inflation. a. higher, higher b. higher, lower c. lower, higher d. none of the above
A
Which of the following is not true of Treasury bills? a. long-lived b. sold at a discount c. mature at par d. all the above are false
A
Federal obligations usually issued for maturities of one to ten years are called: a. Treasury bonds b. Treasury notes c. Treasury bills d. Agency issues e. none of the above
B
Holding demand constant, an increase in the supply of loanable funds will result in a (n) ___________ in interest rates. a. increase b. decrease c. increase or decrease d. none of the above
B
Holding supply constant, a decrease in the demand of loanable funds will result in a (n) ___________ in interest rates. a. increase b. decrease c. increase or decrease d. none of the above
B
The default risk premiums on _______ corporate bonds are generally better indicators of investor pessimism or optimism about economic expectations than are those on ______ bonds. a. Aaa, Baa b. Baa, Aaa c. Baa, Caa d. Caa, Baa
B
The relationship between interest rates or yields and the time to maturity for debt instruments of comparable quality is called a. the yield to maturity b. the term structure of interest rates c. the maturity risk premium d. the expectations hypothesis
B
Treasury bills are: a. issued on a premium basis and pay a fixed annual interest rate. b. issued on a discount basis and mature at par. c. issued on a premium basis and mature at par. d. issued on a discount basis and pay a fixed annual interest rate. e. none of the above
B
Federal obligations usually issued for maturities up to one year are called: a. Treasury bonds b. Treasury notes c. Treasury bills d. Agency issues e. none of the above
C
If the nominal rate of interest is 11%, the risk-free rate of interest is 2%, the default premium is 4%, the liquidity premium is 0.5%, and the maturity premium is 1.5%, then the inflation premium must be ______. a. 2.0% b. 2.5% c. 3.0% d. none of the above
C
Which of the following statements is most correct? a. Marketable government securities are those securities that cannot be transferred to other persons or institutions and can be redeemed only by being turned in to the U.S. government b. Nonmarketable government securities are those securities that can be transferred to other persons or institutions and can be redeemed only by being turned in to the U.S. government c. Nonmarketable government securities are those securities that cannot be transferred to other persons or institutions and can be redeemed only by being turned in to the U.S. government d. none of the above
C
Securities that may be bought and sold through customary market channels are called: a. Treasury bonds b. Treasury notes c. Treasury bills d. Marketable government securities e. none of the above
D
Which of the following factors is most correct? a. Demand-pull inflation traditionally exists during periods of economic expansion when the demand for goods and services exceeds the available supply of such goods and services. b. Cost-push inflation occurs when prices are raised to cover rising production costs, such as wages c. Speculative inflation is caused by the expectation that prices will continue to rise, resulting in increased buying to avoid even higher future prices d. All of the above are correct e. None of the above are correct
D
______________ occurs during economic expansions when demand for goods and services is greater than supply. a. Administrative inflation b. Speculative inflation c. Cost-push inflation d. Demand-pull inflation
D
___________________ states that interest rates are a function of the supply and demand for loanable funds. a. The expectations theory b. The market segmentation theory c. The liquidity preference theory d. The loanable funds theory
D
3Holding demand constant, an increase in the supply of loanable funds will result in an increase in interest rates.
F
A "shock" may be defined as an unanticipated change that will cause the demand for, or supply of loanable funds to change.
T
Administrative inflation is the tendency of prices, aided by union-corporation contracts, to rise during economic expansion and to resist declines during recessions.
T
Cost-push inflation occurs when prices are raised to cover rising production costs, such as wages.
T
Default risk is the risk that a borrower will not pay interest and/or repay the principal on a loan or other debt instrument according to the agreed contractual terms.
T
The market segmentation theory holds that securities of different maturities are not perfect substitutes for each other.
T
The maturity risk premium is the compensation expected by investors due to interest rate risk on debt instruments with longer maturity.
T
Federal obligations usually issued for maturities in excess of ten years are called: a. Treasury bonds b. Treasury notes c. Treasury bills d. Agency issues e. none of the above
A
Which of the following statements is most correct? a. Advance refunding is one of the new debt-management techniques used to extend the average maturity of the marketable debt without disturbing the financial markets and occurs when the Treasury offers the owners of a given issue the opportunity to exchange their holdings well in advance of the holdings' regular maturity for new securities of longer maturity. b. Reverse refunding is one of the new debt-management techniques used to extend the average maturity of the marketable debt without disturbing the financial markets and occurs when the Treasury offers the owners of a given issue the opportunity to exchange their holdings well in advance of the holdings' regular maturity for new securities of longer maturity. c. Extended refunding is one of the new debt-management techniques used to extend the average maturity of the marketable debt without disturbing the financial markets and occurs when the Treasury offers the owners of a given issue the opportunity to exchange their holdings well in advance of the holdings' regular maturity for new securities of longer maturity. d. Laddered refunding is one of the new debt-management techniques used to extend the average maturity of the marketable debt without disturbing the financial markets and occurs when the Treasury offers the owners of a given issue the opportunity to exchange their holdings well in advance of the holdings' regular maturity for new securities of longer maturity. e. none of the above
A
Which of the following statements is most correct? a. Income from the obligations of the federal government is exempt from all state and local taxes but is subject to federal and state inheritance, estate, or gift taxes. b. Income from the obligations of state governments is exempt from all state and local taxes but is subject to federal and state inheritance, estate, or gift taxes. c. Income from the obligations of the federal government is exempt from all federal taxes but is subject to state and local income taxes, state inheritance, estate, or gift taxes. d. Income from the obligations of the federal government is exempt from all federal, state and local taxes but is subject to inheritance, estate, or gift taxes. e. none of the above
A
______________ is the tendency of prices, aided by union-corporation contracts, to rise during economic expansions and resist declines during recessions. a. Administrative inflation b. Speculative inflation c. Cost-push inflation d. Demand-pull inflation
A
The nominal interest rate may include a default risk premium.
T
The maturity risk premium is the compensation that investors demand for holding securities that cannot easily be converted to cash without major price discounts.
F
The most important holders of Treasury bills are corporations and individuals.
F
The risk-free rate of interest is found by combining the real rate of interest and the rate paid on U.S. Treasury debt.
F
The shorter the maturity of a fixed-rate debt instrument, the greater the reduction in its value to a given interest rate increase.
F
Treasury bonds may be issued with any maturity but generally have an original maturity in excess of one year.
F
The expectations theory contends that the shape of the yield curve reflects investor expectations about future GDP growth rates.
F
The interest rate that is observed in the marketplace is called a real interest rate.
F
A basic source of loanable funds is: a. current savings that flow through financial institutions b. future savings and investment by the Federal Reserve c. current and future savings d. investment by the Federal Reserve and expansion of deposits by insurance companies
A
A decrease in the supply for loanable funds accompanied by an increase in demand will cause interest rates to: a. increase b. decrease c. stay the same d. not enough information to tell
A
A decrease in the supply for loanable funds, holding demand constant, will cause interest rates to: a. increase b. decrease c. stay the same d. not enough information to tell
A
A maturity risk premium at a certain point in time may be expressed by comparing the interest rates on: a. a Treasury bill and a Treasury bond b. a Treasury bill and a long-term corporate bond c. a Treasury bill and the commercial paper rate d. a risky security and a comparable maturity U.S. Treasury security e. none of the above
A
An increase in the demand for loanable funds, holding supply constant, will cause interest rates to: a. increase b. decrease c. stay the same d. not enough information to tell
A
As interest rates fall, the prices of existing bonds will: a. rise b. stay the same c. fall d. either a or b, depending on the state of the economy e. none of the above
A
As the economy begins moving out of a recessionary period, the yield curve is generally: a. upward sloping b. flattened out c. downward sloping d. discontinuous
A
Compensation for those financial debt instruments that cannot be easily converted to cash at prices close to estimated fair market values is termed: a. liquidity premium b. market risk premium c. maturity premium d. none of the above
A
The liquidity preference theory holds that interest rates are determined by the: a. investor preference for short-term securties b. investor preference for higher-yielding long-term securities. c. "flow" of funds over time d. "flow" of bank credit over time
A
Three theories commonly used to explain the term structure of interest rates include all of the following EXCEPT a. the default risk theory b. the expectations theory c. the market segmentation theory d. the liquidity preference theory
A
What yield curve shape is depicted if intermediate-term Treasury securities yield 10 percent, short-term Treasuries yield 10.5 percent, and long-term Treasuries yield 9.5 percent? a. downward sloping b. flat or level c. upward sloping d. U shaped
A
Which of the following statements is most correct? a. A downward sloping yield curve implies that government securities with long-term maturities have lower interest rates relative to similar quality securities with short-term maturities. b. Commercial paper is a primary source of short-term borrowing used by the U.S. government. c. A decline in interest rates for long-term Treasury securities indicates an increase in investor long-run inflation expectations. d. The establishment of the Federal Reserve System has caused the yield curve to always be upward sloping.
A
Which one of the following is not a marketable government security? a. Treasury stock b. Treasury bill c. Treasury note d. Treasury bond
A
A decrease in the demand for loanable funds, holding supply constant, will cause interest rates to: a. increase b. decrease c. stay the same d. not enough information to tell
B
An increase in the supply for loanable funds accompanied by a decrease in demand will cause interest rates to: a. increase b. decrease c. stay the same d. not enough information to tell
B
An increase in the supply for loanable funds, holding demand constant, will cause interest rates to: a. increase b. decrease c. stay the same d. not enough information to tell
B
If you expect the inflation premium to be 2%, the default risk premium to be 1% and the real interest rate to be 4%, what interest would you expect to observe in the marketplace under the simplest form of market interest rates? a. 4% b. 7% c. 2% d. 1%
B
The basic sources of loanable funds are: a. short-term funds and currency b. current savings and the creation of new funds through the expansion of credit by depository institutions c. contractual savings and commercial bank credit d. bank loans and the creation of new funds through the contraction of credit by depository institutions
B
The loanable funds theory used to explain the level of interest rates holds that interest rates are a function of the supply of: a. loanable funds and the demand for money b. loanable funds and the demand for loanable funds c. money and the demand for loanable funds d. money and the demand for money
B
The major factor that determines the volume of savings, corporate as well as individual, is the: a. volume of spending b. level of national income c. amount of private pension plans d. amount of life insurance policies
B
What is the real rate of interest if the nominal rate of interest is 15%, the IP is 3%, the DRP is 3%, the MRP is 3%, and the LP is 2%? a. 3% b. 4% c. 5% d. none of the above
B
When referring to a "downward sloping" yield curve: a. as maturities shorten, interest rates decline b. as maturities shorten, interest rates rise c. as maturities lengthen, interest rates remain the same d. as maturities lengthen, interest rates rise
B
Which of the following is not considered to be a basic theory used to explain the term structure of interest rates? a. expectations theory b. loanable funds theory c. liquidity preference theory d. market segmentation theory
B
Which of the following is not considered to be a basic theory used to explain the term structure of interest rates? a. expectations theory b. loanable funds theory c. liquidity preference theory d. market segmentation theory e. all of the above are theories used to explain the term structure of interest rates.
B
Which of the following is not true of Treasury bonds? a. long-lived b. noncallable c. stated interest rate d. all the above are false
B
An increase in inflation should: a. increase the demand for loanable funds b. decrease the interest rate on loans c. increase the interest rate on loans d. none of the above
C
As interest rates rise, the prices of existing bonds will: a. rise b. stay the same c. fall d. either a or b, depending on the state of the economy
C
Assume that these current yields exist: long-term government securities yield 9 percent, five-year Treasury securities yield 8.5 percent, and one-year Treasury bills yield 8 percent. What type of yield curve is depicted? a. downward sloping b. flat or level c. upward sloping d. U shaped
C
If the money supply and total demand increase faster than output, prices will: a. fall b. stay the same c. rise d. reflect lower inflation
C
If you expect the inflation premium to be 2%, the default risk premium to be 1% and the real interest rate to be 4%, what interest would you expect to observe in the marketplace on short term treasury securities? a. 8% b. 7% c. 6% d. 5%
C
Long-run inflation expectations in the capital markets can be estimated by: a. subtracting a real return component from the rate on short-term Treasury bills b. adding a real return component to interest rates on long-term corporate bonds c. subtracting a real return component from the rate on long-term Treasury securities d. adding a real return component to interest rates on short-term corporate securities
C
Price inflation has been characteristic of: a. modern industrial society b. our post gold-standard period c. the history of prices since earliest recorded history d. only modern industrialized societies
C
Sources of loanable funds do not include: a. current savings b. the expansion of deposits by depository institutions c. federal deficits d. all the above are sources of loanable funds
C
If the nominal interest rate for Treasury bills is 8% and the risk-free rate is 3%, the expected inflation rate must be: a. 3% b. 5% c. 11% d. cannot be determined without additional information
D
The maturity risk premium is the added return expected by lenders because of the expectation of inflation.
F
The yield curve or the term structure of interest rates is typically downward sloping when: a. short-term Treasury interest rates are lower than long-term Treasury interest rates b. short-term and long-term Treasury interest rates are the same c. long-term Treasury interest rates are lower than short-term Treasury interest rates d. long-term Treasure interest rates are higher than short-term Treasury interest rates
C
Which of the following is NOT a determinant of market interest rates? a. the inflation premium b. the maturity risk premium c. the volatility risk premium d. the real rate of interest
C
Which of the following statements is most correct? a. The liquidity preference theory holds that interest rates are determined by the supply of and demand for loanable funds. b. The loanable funds theory and the liquidity preference theory are incompatible with each other because one is right and the other is wrong. c. . Marketable U.S. securities are mainly sold through dealers and have interest payments that are federally taxable. d. The market segmentation theory holds that securities of different maturities are perfect substitutes for each other.
C
A decrease in the supply for loanable funds accompanied by a decrease in demand will cause interest rates to: a. increase b. decrease c. stay the same d. not enough information to tell
D
An increase in the supply for loanable funds accompanied by an increase in demand will cause interest rates to: a. increase b. decrease c. stay the same d. not enough information to tell
D
By September of 2011 the federal debt was owned primarily by: a. foreign and international investors b. commercial banks c. insurance companies d. the sum of all private investors
D
The average maturity of the marketable debt in the United States: a. is of little importance, unlike that of private corporations b. has been constant for the last two decades c. remains unchanged unless new obligations are issued d. decreases day by day unless new obligations are issued to offset such decreases
D
The default risk premium at a certain point in time may be expressed by comparing the interest rates on: a. a Treasury bill and a Treasury bond b. a Treasury bill and a long-term corporate bond c. a Treasury bill and the commercial paper rate d. a risky security and a comparable maturity U.S. Treasury security
D
The risk-free interest rate is composed of: a. an inflation premium and a default risk premium b. a default risk premium and a maturity risk premium c. a real rate of interest and a liquidity premium d. a real rate of interest and an inflation premium
D
When referring to an "upward sloping" yield curve, interest rates: a. are flat across all maturities b. decrease as maturity increases c. increase as maturity decreases d. increase as maturity increases
D
Which of the following costs serves to compensate the lender for loss of liquidity? a. administrative costs of making the loan b. cost of paying for the risk involved c. cost to offset the likelihood of inflation d. cost for use of money during the period of the loan
D
Which of the following factors affects the supply of loanable funds? a. the volume of savings b. expansion of deposits by banks c. attitudes about liquidity d. all the above
D
Which of the following factors directly impact the level of interest rates? a. risk b. marketability c. maturity d. all of the above
D
Which of the following may accumulate savings? a. individuals b. corporations c. sometimes governmental units d. all the above may have savings
D
Which of the following statements is false? a. A major determinant in the long run of the volume of savings is the level of taxes. b. The money market involves obtaining and trading of credit and debt instruments with maturity of one year or less. c. Bond risk premiums follow changes in investor optimism/pessimism about expected economic activity. d. A high interest rate level but downward sloping yield curve is generally perceived as being conductive to future economic expansion.
D
An economy with a large share of young people will have more total savings than one with more late middle-aged people.
F
Business will increase current long-term borrowing if they forecast a decrease in interest rates in the near future.
F
Cost-push inflation during economic expansions when demand for goods and services is greater than supply.
F
Holding supply constant, an increase in the demand for loanable funds will result in a decrease in interest rates.
F
Interest rates generally fall during periods of economic expansion and rise during economic contraction.
F
Interest rates in the United States are only influenced by domestic factors.
F
The Treasury's major influence through its borrowing to finance federal deficits is on the supply rather than demand for loanable funds.
F
The default risk premium is the compensation that investors demand for holding securities that cannot easily be converted to cash without major price discounts.
F
Demand-pull inflation may be defined as an excessive demand for goods and services during periods of economic expansion as a result of large increases in the money supply.
T
Holding demand constant, a decrease in the supply of loanable funds will result in an increase in interest rates.
T
Holding supply constant, a decrease in the demand for loanable funds will result in a decrease in interest rates.
T
If the Fed changes discount policies it may affect the supply of loanable funds.
T
Inflation is an increase in the price of goods or services that is not offset by an increase in quality.
T
Interest rates will move from one equilibrium level to another if an anticipated change occurs that causes the demand for loanable funds to change.
T
Speculative inflation is caused by the expectation that prices will continue to rise, resulting in increased buying to avoid even higher future prices.
T
Tax deferral on investments may increase the volume of savings.
T
The demand for loanable funds comes from all sectors of the economy.
T
The interest rate is the basic price that equates the demand for supply of loanable funds in the financial markets.
T
The liquidity premium is compensation for those financial debt instruments that cannot be easily converted to cash at prices close to their estimated fair market values.
T
The liquidity premium is the compensation that investors demand for holding securities that cannot easily be converted to cash without major price discounts.
T
The loanable funds theory states that interest rates are a function of the supply of and demand for loanable funds.
T
The risk free rate of interest is the interest rate on a debt instrument with no default, maturity, or liquidity risks.
T
The risk-free rate of interest is equal to the real rate of interest plus a premium for inflation.
T
The term structure of interest rates indicates the relation between interest rates and the maturity of comparable quality debt instruments.
T
There are two basic sources of loanable funds: current savings and the expansion of deposits of depository institutions.
T
There is an inverse relation between debt instrument prices and nominal interest rates in the marketplace.
T
Three theories commonly used to explain the term structure of interest rates are the expectations theory, the liquidity preference theory, and the market segmentation theory.
T
Treasury notes are intermediate-term Federal debt obligations.
T
While the Federal Reserve strongly influences the supply of funds, the Treasury's major influence is on the demand for funds, as it borrows heavily to finance federal deficits.
T