Chapter 8 MC/MA Prac. Prob.

अब Quizwiz के साथ अपने होमवर्क और परीक्षाओं को एस करें!

1. The basic price that equates the demand for and supply of loanable funds in the financial markets is the __________: a. equilibrium interest rate b. yield curve c. term structure d. cash price e. none of the above

Answer: a p 191 (174)

22. 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

Answer: a p 191-192 (174-175) and Fig 8.1

25. 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

Answer: a p 191-192 (174-175) and Fig 8.1

29. 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

Answer: a p 191-192 (174-175) and Fig 8.1

58. 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 depending on the state of the economy d. stay the same

Answer: a p 191-192 (174-175) and Fig 8.1

14. A basic source of loanable funds is: a. current savings that flow through financial institutions expansion of deposits by depository 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

Answer: a p 194 (176-177)

5. In an inflationary period, interest rates have a tendency to: a. rise b. fall c. stay the same d. act erratically

Answer: a p 197 (179) and Eq 8.1

48. When investors expect higher inflation rates they will require __________ nominal interest rates so that a real rate of return will remain after the inflation. a. higher b. lower c. the same d. there is no connection between inflation expectations and nominal interest rates

Answer: a p 197 (179-180) and Eq 8.3 (8.2) r = RR + IP + DRP + MRP + LP

40. If interest rates increase because of a previously unanticipated inflation rate risk, the value of: a. long-lived fixed-rate debt instruments will decline more than short-lived fixed rate debt instruments b. long-lived fixed-rate debt instruments will decline less than short-lived fixed-rate debt instruments c. neither set of debt instruments will decline d. all other things being equal, both should decline equally

Answer: a p 197 (180)

41. 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 risk premium d. default risk premium

Answer: a p 197 (180)

3. As interest rates fall, the prices of existing bonds will: a. rise b. stay the same c. fall d. either rise or fall, depending on the required reserve ratio e. there is no relationship between interest rates and the prices of existing bonds

Answer: a p 197 (180) stated on this page, interest rate risk, the mathematics of this is covered in chapter 10

52. Which one of the following is not a marketable government security? a. Treasury stock b. Treasury bill c. Treasury note d. Treasury bond

Answer: a p 198-200 (181-182)

69. 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

Answer: a p 199 (182)

38. Which of the following statements is correct? a. A downward sloping yield curve implies that Treasury 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. Treasury bills 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.

Answer: a p 199, 203-205, 207-208, 312 (38, 181-182, 186, 188-190), and Fig 8.2

53. 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

Answer: a p 200 (182)

73. Which of the following statements is 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 the federal government is exempt from all federal taxes but is subject to state and local income taxes, state inheritance, estate, or gift taxes. must pay federal income tax on this income c. 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. must pay federal income tax on this income d. none of the above

Answer: a p 200 (182) statement on this page

75. Which of the following statements is 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

Answer: a p 202 (184) statement on this page

36. 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

Answer: a p 203-205 (185-186) and Fig 8.2

9. 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

Answer: a p 205 (186)

4. The liquidity preference theory holds that interest rates are determined by the: a. investor preference for short-term securities b. investor preference for higher-yielding long-term securities. c. "flow" of funds over time d. "flow" of bank credit over time

Answer: a p 206 (187)

56. Inflation caused by an excessive demand for goods and services as a result of large increases in the money supply: a. demand-pull inflation b. cost-push inflation c. administrative inflation d. a combination of administrative and speculative inflation

Answer: a p 210-211 (191) definition/discussion of demand-pull inflation

65. ______________ 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

Answer: a p 211 (192)

46. Multiple Answer Question: Select ALL of the following that are 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 e. the political premium

Answer: a, b, and d p 197-198 (179-180) and Eq 8.3 (8.2)

10. 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 bond and a long-term high quality bond of a large corporation c. a Treasury bond and the commercial paper rate d. a junk bond and a comparable maturity U.S. Treasury security

Answer: b p 107-200 (179, 193)

23. 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

Answer: b p 191-192 (174-175) and Fig 8.1

24. 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

Answer: b p 191-192 (174-175) and Fig 8.1

28. 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

Answer: b p 191-192 (174-175) and Fig 8.1

57. 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 depending on the state of the economy d. stay the same

Answer: b p 191-192 (174-175) and Fig 8.1

59. 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 depending on the state of the economy d. stay the same

Answer: b p 191-192 (174-175) and Fig 8.1

50. 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

Answer: b p 194 (176)

12. 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 deposits 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

Answer: b p 194 (176-177)

6. 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

Answer: b p 194 (186-188)

7. 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.

Answer: b p 194, 205-206 (186-188)

30. 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

Answer: b p 195 (177) statement on this page, there are other factors

47. What is the real rate of interest if the nominal rate of interest is 15%, the IP is 5%, the DRP is 3%, the MRP is 4%, and the LP is 1%? a. 4% b. 2% r = RR + IP + DRP + MRP + LP → c. 5% 15% = RR + 5% + 3% + 4% + 1% → d. 13% RR = 15% - 13% = 2%

Answer: b p 197 (179-180) and Eq 8.3 (8.2)

20. 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%

Answer: b p 197-198 (179) and eq 8.2 (8.1) r = RR + IP + DRP = 4% + 2% + 1% = 7%

68. Federal obligations usually issued for maturities of two to ten years are called: a. Treasury bonds b. Treasury notes c. Treasury bills d. Agency issues e. none of the above

Answer: b p 199 (181)

71. 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

Answer: b p 199 (181)

44. 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

Answer: b p 199-200 (182)

63. 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

Answer: b p 201 (185)

33. 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

Answer: b p 203-205 (185-186) and Fig 8.2

77. ______________ is caused by the expectation that prices will continue to rise, resulting in increased buying to avoid even higher future prices. a. Administrative inflation b. Speculative inflation c. Cost-push inflation d. Demand-pull inflation

Answer: b p 211 (191-192)

8. Multiple Answer Question: Select ALL of the following theories that are commonly used to explain the term structure of interest rates: a. the default risk theory b. the expectations theory c. the market segmentation theory d. the liquidity preference theory e. the demand-pull theory f. the cost-push theory

Answer: b, c, d p 205-206 (186-188)

43. Multiple Answer Question: Select ALL of the following that are true of Treasury bills: a. are issued usually for maturities ranging from one to ten years b. are issued with maturities of up to one year c. typically have original maturities in excess of ten years d. are issued on a discount basis e. are callable f. mature at par g. issued at specified interest rates

Answer: b, d, f p 199 (181-182)

15. Long-run inflation expectations in the capital markets can be estimated by: a. subtracting the real return and maturity risk premium components from the rate on short-term Treasury bills b. adding the real return and maturity risk premium components to interest rates on long-term corporate bonds c. subtracting the real return and maturity risk premium components from the rate on long-term Treasury securities d. adding the real return and maturity risk premium components to interest rates on short-term corporate securities

Answer: c 197-198 (179) and Eq 8.3 (8.2) r = RR + IP + DRP + MRP + LP, for Treasury securities DRP & LP are 0

13. 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

Answer: c p 194 (176-177)

2. As interest rates rise, the prices of existing bonds will: a. rise b. stay the same c. fall d. either rise or fall, depending on the state of the economy e. there is no relationship between interest rates and the prices of existing bonds

Answer: c p 197 (180) stated on this page, interest rate risk, the mathematics of this is covered in chapter 10

21. 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% DRP and LP on Treasury securities are 0%, and short term securities MRP are 0% → c. 6% r = RR + IP + DRP + MRP + LP = 4% + 2% + 0% + 0% + 0% = 6% d. 5%

Answer: c p 197-198 (179-180) and Eq 8.3 (8.2)

61. If the nominal rate of interest is 10%, the real rate of interest is 3%, the default premium is 2%, 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% r = RR + IP + DRP + MRP + LP → c. 3.0% 10% = 3% + IP + 2% + 1.5% + 0.5% → d. 4.5% IP = 10% - 7% = 3%

Answer: c p 197-198 (179-180) and Eq 8.3 (8.2)

37. Multiple Answer Question: Select ALL of the following statements that are correct. a. The liquidity preference theory holds that interest rates are determined by the supply of and demand for loanable funds. loanable funds theory b. The mutual funds theory and the liquidity preference theory are compatible with each other. c. Marketable U.S. government 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.

Answer: c p 198, 200, 206 (176, 182, 188)

74. Which of the following statements is 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

Answer: c p 198, 200-201 (181, 1830 definitions of marketable and nonmarketable government securities

70. 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

Answer: c p 199 (181)

34. 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

Answer: c p 203-205 (185-186) and Fig 8.2

35. Assume that these current yields exist: long-term Treasury bonds yield 9 percent, five-year Treasury notes 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

Answer: c p 203-205 (185-186) and Fig 8.2

55. Changes in the money supply or in the amount of metal in the money unit have influenced prices: a. only during wars b. only during our gold-standard period c. since the earliest records of civilization d. only in modern industrialized societies

Answer: c p 207 (188-190)

31. If the money supply increases faster than output, prices will: a. fall b. stay the same c. rise d. reflect lower inflation

Answer: c p 210 (191)

78. ______________ occurs when prices are raised to cover rising production costs, such as wages. a. Administrative inflation b. Speculative inflation c. Cost-push inflation d. Demand-pull inflation

Answer: c p 210 (191-192)

79. Junk bonds a. are high grade corporate bonds. b. are high grade government bonds. c. have a substantial probability of default. d. are investment grade bonds

Answer: c p 213 (194

67. Investment grade bonds have ratings of or higher. a. AAA b. Aba c. Baa d. BBa

Answer: c p 213 (194) definition

60. ___________________ 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

Answer: d 194 (176)

27. 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

Answer: d p 191-192 (174-175) and Fig 8.1 end result depends on the magnitude of the shifts

26. 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

Answer: d p 191-192 (174-175) and Fig 8.1 end result depends on the magnitudes of the shifts

19. Which of the following may accumulate savings? a. individuals b. sometimes corporations c. sometimes governmental units d. all the above may have savings

Answer: d p 194 (176)

45 . 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

Answer: d p 195-196 (177-178)

39. 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. affects disposable income b. The money market involves obtaining and trading of credit and debt instruments with maturity of one year or less. definition of money market c. Bond risk premiums follow changes in investor optimism/pessimism about expected economic activity. d. High short-term Treasury interest rates and a downward sloping yield curve is generally perceived as being conductive to future economic expansion. this usually occurs when economic activity peaks

Answer: d p 195-198, 203-204 (164, 177-180, 181, 186) and Fig 8.2

42. If the nominal interest rate for Treasury bonds is 8% and the risk-free rate is 3%, the expected inflation rate must be: a. 3% nominal interest r = RR + IP + DRP + MRP + LP and risk-free rate = RR + IP = 3% b. 5% for Treasury bonds DRP and LP are 0, MRP > 0 → 8% = RR + IP + MRP = 3% + MRP → c. 11% MRP = 5% but you need to know RR to be able to calculate IP d. cannot be determined without additional information

Answer: d p 197 (179-180) and Eq 8.3 (8.2)

17. Which of the following costs serves to compensate the lender for not being able to quickly convert the loan to cash at a price close to the estimated market value of the loan? a. administrative costs of making the loan b. cost of paying for the risk involved similar to default risk for bonds c. cost to offset the likelihood of inflation similar to inflation risk for bonds d. liquidity premium similar to liquidity premium for bonds

Answer: d p 197 (180

51. 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

Answer: d p 197 (180) and Eq 8.1

18. Which of the following factors directly impact the level of interest rates? a. risk b. marketability c. maturity d. all of the above

Answer: d p 197-198 (179-180) and Eq 8.3 (8.2)

62. If the nominal rate of interest is 8%, the real rate of interest is 0.75%, 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% Risk-Free Rate = RR + IP c. 3.0% 2% = 0.75% + IP d. 1.25% IP = 1.25%

Answer: d p 197-198 (179-180) and Eq 8.3 (8.2)

72. Securities that may be bought and sold through customary market channels are called: a. Federal Reserve bonds b. Federal Reserve notes c. Federal Reserve bills d. Marketable government securities definition e. none of the above

Answer: d p 198-199 (181)

54. Since 2008 more than half of the federal debt has been owned by: a. foreign and international investors b. depository institutions c. mutual funds d. total for private investors

Answer: d p 201 (183) and Tab 8.1

49. The average maturity of the marketable debt in the United States: a. increases day by day unless new obligations are issued to offset such increases 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 if no new obligations are issued, as time passes →

Answer: d p 202 (184) closer to maturity date of each security → ↓ average time to maturity

32. 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

Answer: d p 203-205 (185-186) and Fig 8.

64. ______________ occurs when there is an excessive demand for goods and services as a result of large increases in the money supply: a. Administrative inflation b. Speculative inflation c. Cost-push inflation d. Demand-pull inflation

Answer: d p 210-211 (191)

76. Which statement about inflation is incorrect? a. Demand-pull inflation traditionally exists during periods of economic expansion when an increase in the money supply causes the demand for goods and services to exceed 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. Administrative inflation occurs when the Fed lowers the prime rate. e. None of the four (a, b, c, and d) are correct f. All four (a, b, c, and d) are correct

Answer: d p 210-211 (191-192)

66. 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 is a. liquidity risk b. interest rate risk c. maturity risk d. default risk

Answer: d p 212 (194)

16. Assuming no adjustment on the part of borrowers, an unanticipated 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. have no effect on the interest rate on loans

Eq 8.3 (8.2) r = RR + IP + DRP + MRP + LP, ↑ inflation ↑ → ↑IP → ↑ r Answer: c p 191-192 and Fig 8.1 graph C

11. 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 corporate bond also includes default risk premium c. a Treasury bill and a Federal Reserve note Federal Reserve note is fiat money d. a risky stock and a comparable maturity U.S. Treasury security stocks have no maturity date e. none of the above

r = RR + IP + DRP + MRP + LP, for Treasury securities 0 = DRP = LP Answer: a p 197-200 (180) estimate IP for bond and subtract it from the nominal interest rate on the bond


संबंधित स्टडी सेट्स

Junior English 2nd Semester : 1. NONFICTION

View Set

Acc 312 Exam 3 - Stockholders Equity

View Set

Series 7: Retirement Plans (Variable Annuities)

View Set

Safety and Inf control (remediation goal > 65%)

View Set