FIL 241 Exam #2 (mult. choice practice)

Which of the following money market instruments are time drafts drawn on and accepted by commercial banks? A. Negotiable certificates of deposit B. Commercial paper C. Bankers acceptances D. Repurchase agreements E. Federal agency securities

C. Bankers acceptances

Why do fixed-rate bond prices change with interest rates? A. Because bond coupon rates are equal to the market rates of interest. B. Because bond prices move directly with interest rates. C. Because of the fixed nature of the bonds coupon rate. D. Because coupon payments are made more than once a year. E. Because of foreign exchange risk.

C. Because of the fixed nature of the bonds coupon rate.

Which of the following institutions do not actively participate in the money markets? A. Federal Reserve B. Money market mutual funds C. Life insurance companies D. Commercial banks E. All of the above institutions actively participate in the money markets.

C. Life insurance companies

Characteristics of money market instruments include ______. A. High default risk, high price risk, high marketability, low transaction costs B. High default risk, low price risk, low marketability, high transaction costs C. Low default risk, low price risk, high marketability, low transaction costs D. Low default risk, low price risk, low marketability, high transaction costs

C. Low default risk, low price risk, high marketability, low transaction costs

The first signs of the recent crisis in the money markets were seen in the market for ____. A. federal funds B. non-financial commercial paper C. asset-backed commercial paper (ABCP) D. banker's acceptances E. federal agency securities

C. asset-backed commercial paper (ABCP)

All of the following are discount money market instruments except _______. A. commercial paper B. banker's acceptances C. fed funds D. Treasury bills E. federal agency securities

C. fed funds

Which of the following money market instruments are add-on instruments? A. Treasury bills B. commercial paper C. federal funds D. bankers acceptance E. none of the above

C. federal funds

Bond A has duration of 7 years, bond B has duration of 8 years. Bond B will have ____. A. a shorter maturity than bond A B. a higher coupon rate than bond A C. greater change in price for a given change in interest rates, relative to bond A. D. smaller change in price for a given change in interest rates, relative to bond A.

C. greater change in price for a given change in interest rates, relative to bond A.

As interest rates _______, bond prices _______, and coupons are reinvested at a _______ rate. A. decrease, increase, higher B. increase, increase, lower C. increase, decrease, higher D. decrease, decrease, higher E. decrease, stay the same, lower

C. increase, decrease, higher

If a bond investor receives all the coupon payments on time and the face value on the contract maturity date, investor's return could still vary because of _____ risk. A. price B. liquidity C. reinvestment D. unsystematic E. credit

C. reinvestment

A _______ is a sale of a security with a promise to buy it back later at a predetermined price. A. commercial paper B. Treasury bill C. repurchase agreement D. reverse repurchase agreement E. banker's acceptance

C. repurchase agreement

An investor worried about interest rate risk should ______. A. not purchase coupon bonds B. select bonds whose maturity matches the investor's holding period C. select bonds whose duration matches the investor's holding period D. invest only in U.S. Treasury bonds E. not reinvest bond coupon payments

C. select bonds whose duration matches the investor's holding period

The yield on a five-year Treasury note is 4.5% and the yield on a five-year TIPS is 2.4%. What is the market's estimate of the annual inflation rate over the next five years? A. 1.1% B. 1.6% C. 4.5% D. 2.1% E. 2.4%

D. 2.1%

The U.S. Treasury announces an auction for 5-year T-notes in the amount of $13bln. No non-competitive bids were received. The following are the top competitive bids received: Bidder #1: $3bln. at 3.15% Bidder #2: $2bln. at 3.16% Bidder #3: $4bln. at 3.175% Bidder #4: $2.5bln. at 3.18% Bidder #5: $1.5bln. at 3.205% Bidder #6: $2bln. at 3.205% Bidder #7: $0.8bln at 3.22% What will be the auction's stop-out yield? A. 3.125% B. 3.175% C. 3.18% D. 3.205% E. 3.25%

D. 3.205%

A competitive bid in the Treasury securities auction is characterized by _____. A. the bidder specifying the quantity of securities desired B. the bidder specifying the discount rate he is willing to accept C. all winning bidders accepting the stop-out yield of the auction D. All of the above E. Only (A) and (B)

D. All of the above

Which of the following characterizes negotiable certificates of deposit? A. Tradable before maturity B. Yields depend on the issuing banks creditworthiness C. Yields are higher than on T-bills D. All of the above E. None of the above

D. All of the above

Which of the following money market instruments does not have a secondary market? A. Short-term federal agency debt B. Banker's acceptances C. Negotiable certificates of deposit D. Federal funds E. Commercial paper

D. Federal funds

Which of the following is NOT a characteristic of money markets or money market instruments? A. Short-term debt B. High credit quality C. Large transactions D. Low marketability E. All of the above are characteristics of money markets or money market instruments.

D. Low marketability

Of the bonds with the characteristics below, which one would have the shortest duration? A. Maturity 12 years, Coupon rate 3%, Yield to maturity 8% B. Maturity 10 years, Coupon rate 5%, Yield to maturity 8% C. Maturity 12 years, Coupon rate 5%, Yield to maturity 8% D. Maturity 10 years, Coupon rate 6%, Yield to maturity 10% E. Maturity 10 years, Coupon rate 6%, Yield to maturity 8%

D. Maturity 10 years, Coupon rate 6%, Yield to maturity 10%

Which of the following statements is not true? A. Low-coupon bonds are more sensitive to interest rate changes compared to high-coupon bonds, holding everything else constant. B. Bond prices are inversely related to bond yields. C. Long-term bonds are more sensitive to interest rate changes than short-term bonds, all else equal. D. The higher a bond's duraton, the lower its price sensitivity to yield changes. E. All of the above statements are true.

D. The higher a bond's duraton, the lower its price sensitivity to yield changes.

Which bond yield measure allows for a coupon reinvestment rate to be different from the yield itself? A. Yield to maturity B. Expected yield C. Realized yield D. Total return E. both (A) and (B)

D. Total return

Which of the following statements about STRIPS is true? A. STRIPS are sold directly by the Treasury Department B. When a STRIPS is created, all interest payments become one security and the principal payment becomes the other. C. Many small investors prefer STRIPS because they require a lower minimum investment than original Treasury notes and bonds. D. Treasury securities dealers create STRIPS because they expect to sell the created zero-coupon securities for more than what they paid for the original Treasury security. E. None of the above statements is true.

D. Treasury securities dealers create STRIPS because they expect to sell the created zero-coupon securities for more than what they paid for the original Treasury security.

Which of the following statements about STRIPS is true? A. STRIPS are sold directly by the Treasury Department B. When a STRIPS is created, all interest payments become one security and the principal payment becomes the other. C. Many small investors prefer STRIPS because they require a lower minimum investment than original Treasury notes and bonds. D. Treasury securities dealers create STRIPS because they expect to sell the created zero-coupon securities for more than what they paid for the original Treasury security. E. None of the above statements is true.

D. Treasury securities dealers create STRIPS because they expect to sell the created zero-coupon securities for more than what they paid for the original Treasury security.

Which of the following statements about STRIPS is true? A. STRIPS are sold directly by the Treasury Department B. When a STRIPS is created, all interest payments become one security and the principal payment becomes the other. C. Many small investors prefer STRIPS because they require a lower minimum investment than original Treasury notes and bonds. D. Treasury securities dealers create STRIPS because they expect to sell the created zero-coupon securities for more than what they paid for the original Treasury security. E. None of the above statements is true.

D. Treasury securities dealers create STRIPS because they expect to sell the created zero-coupon securities for more than what they paid for the original Treasury security.

A mechanism of over-collateralization of a repo is known as a ____. A. flight to quality B. shave C. harakiri D. haircut E. banker's acceptance

D. haircut

You bought a 7-year, $1,000 par, 8% annual coupon rate bond with semiannual coupon payments for $1,070. You sold it after 3 years (6 interest payments) for $1,020. What is your realized yield? A. 7.51% B. 3.02% C. 6.34% D. 5.44% E. 6.03%

E. 6.03%

Which of the following statements is NOT true? A. Bond prices are inversely related to bond yields. B. Price volatility of a long-term bond is greater than that of a short-term bond, all else equal. C. Price volatility of a low-coupon bond is greater than that of a high-coupon bond, all else equal. D. Duration of a bond portfolio is a weighted average of individual bond durations. E. All of the above statements are true.

E. All of the above statements are true.

Which of the following is consistent with a flight to quality in the money markets? A. An increase in the outstanding amount of money market instruments whose perceived credit risk has increased. B. The repo market moving toward requiring securities with the highest perceived credit risk as collateral. C. The repo market decreasing haircuts on collateral whose perceived credit risk has increased. D. Narrowing spread between the yields of risky and riskless money market instruments E. None of the above

E. None of the above

U.S. Treasury bills are _____ Federal government debt. They are sold through an auction where all winners receive the _____ accepted interest rate. A. short-term; lowest B. long-term; lowest C. short-term; average D. long-term; highest E. short-term; highest

E. short-term; highest

The minimum denomination of T-bills is ____. A. $100 B. $1,000 C. $10,000 D. $100,000 E. $5,000,000

A. $100

The U.S. Treasury announces an auction for 2-year T-notes in the amount of $25bln. Non-competitive bids received total $3bln. The following are the top competitive bids received: Bidder #1: $7bln. at 1.25% Bidder #2: $5bln. at 1.32% Bidder #3: $6 bln. at 1.33% Bidder #4: $4bln. at 1.35% Bidder #5: $3bln. at 1.40% Bidder #6: $3bln. at 1.50% What will be the coupon rate on the note? A. 1.25% B. 1.35% C. 1.375% D. 1.40% E. 1.50%

A. 1.25%

The U.S. Treasury announces an auction for 2-year T-notes in the amount of $25bln. Non-competitive bids received total $3bln. The following are the top competitive bids received: Bidder #1: $7bln. at 1.25% Bidder #2: $5bln. at 1.32% Bidder #3: $6 bln. at 1.33% Bidder #4: $4bln. at 1.35% Bidder #5: $3bln. at 1.40% Bidder #6: $3bln. at 1.50% What will be the coupon rate on the note? A. 1.25% B. 1.35% C. 1.375% D. 1.40% E. 1.50%

A. 1.25%

The United States Treasury announces an auction for 5-year T-notes in the amount of $12bln. No non-competitive bids were received. The following are the top competitive bids received: Bidder #1: $3bln. at 1.25% Bidder #2: $2bln. at 1.26% Bidder #3: $4bln. at 1.275% Bidder #4: $2.5bln. at 1.275% Bidder #5: $1.5bln. at 1.28% Bidder #6: $2bln. at 1.28% Bidder #7: $0.8bln at 1.285% What will be the coupon rate on the note? A. 1.25% B. 1.275% C. 1.28% D. 1.285% E. 1.375%

A. 1.25%

What is the yield to maturity (YTM) of a 4 percent annual coupon rate bond with 8 years to maturity, par value of $1,000, and semiannual payments if it sells for $982? A. 4.27% B. 2.13% C. 4.50% D. 2.25% E. 4%

A. 4.27%

A $1,000 par bond with a coupon rate of 7% and coupons paid annually matures in eight years. If the bond is now selling for $950, what is its yield to maturity? A. 7.9% B. 6.5% C. 9.0% D. 8.3% E. 7.0%

A. 7.9%

Which of the following may be a liability of a non-financial corporation? A. Commercial paper B. Federal funds C. Treasury securities D. Negotiable certificates of deposit E. None of the above

A. Commercial paper

Which of the following statements about STRIPS is NOT true? A. STRIPS provide investors with protection against inflation. B. STRIPS are good for immunizing portfolios from interest rate risk. C. STRIPS help avoid rebalancing the portfolio because duration is the same as maturity. D. STRIPS accrued interest is taxed every year at the federal level.

A. STRIPS provide investors with protection against inflation.

What aspect of TIPS makes them an attractive investment? A. They make higher coupon payments when the level of prices goes up. B. Their interest is tax exempt at the federal level. C. Each interest payment is a separate zero-coupon security. D. You will always receive the same coupon payment regardless of inflation/deflation. E. The increase in principal is taxed annually.

A. They make higher coupon payments when the level of prices goes up.

When T-bill yields fell and yields of other money market instruments rose during the recent financial crisis, it was a manifestation of a(n) _____. A. flight to quality B. flight to risk C. increase in perceived default risk of T-bills D. increase in future expected interest rates E. Both (C) and (D)

A. flight to quality

If a bond's yield to maturity is greater than the coupon rate, the bond must be ________. A. selling at a discount B. selling at a premium C. selling at par D. a zero-coupon bond

A. selling at a discount

In TIPS, _____ adjusts with inflation. A. the principal B. the coupon rate C. the maturity D. all of the above E. only (A) and (B)

A. the principal

The yield to maturity measure assumes that a bonds coupons are reinvested at ______. A. the yield to maturity B. the changing market rates C. the bond's coupon rate D. the 5-year Treasury note rate E. It assumes coupons are not reinvested.

A. the yield to maturity

You just bought a 5-year, $1,000 par, 8% semiannual coupon bond for $1,070. You expect to sell it after 3 years (6 interest payments) for $975. What is your expected yield? A. 2.34% B. 4.69% C. 5.44% D. 6.34% E. 8.97%

B. 4.69%

If an investor wanted to purchase bonds with no or extremely low credit risk and to eliminate reinvestment risk, s/he should purchase _____. A. TIPS B. Treasury STRIPS C. Municipal bonds D. Revenue bonds E. Speculative-grade bonds

B. Treasury STRIPS

Which of the following money market instruments has the lowest perceived default risk? A. Commercial paper B. U.S. Treasury bills C. Bankers acceptances D. Repurchase agreements E. Negotiable certificates of deposit

B. U.S. Treasury bills

The actual relationship between bond prices and yields is _____; if the yield rises by 1%, the bond price will fall by _____ it will rise if the yield falls by 1%. A. convex; more than B. convex; less than C. linear; by the same amount D. concave; less than E. concave; more than

B. convex; less than

The actual bond price change for a 1% yield increase is a decrease of 5%. If you use duration to estimate the bond's price change for the same yield change, it would predict a(n) ______ of ______. A. decrease; 5% B. decrease; more than 5% C. increase; more than 5% D. decrease; less than 5% E. increase; less than 5%

B. decrease; more than 5%

Commercial paper is _____. A. always a secured (collateralized) promissory note B. issued by high credit standing firms C. an instrument with maturities greater than 270 days D. Both (B) and (C) E. All of the above

B. issued by high credit standing firms

All else equal, the _____ the maturity of a bond, the greater the bond's price volatility; all else equal, the _____ the coupon rate, the greater the bond's price volatility. A. shorter; higher B. longer; lower C. longer; higher D. shorter; lower

B. longer; lower

The U.S. Treasury announces an auction for 2-year T-notes in the amount of $25bln. No non-competitive bids were received. The following are the top competitive bids received: Bidder #1: $7bln. at 1.25% Bidder #2: $5bln. at 1.32% Bidder #3: $6 bln. at 1.33% Bidder #4: $4bln. at 1.35% Bidder #5: $3bln. at 1.40% Bidder #6: $3bln. at 1.50% What will be the coupon rate on the note? A. 1.325% B. 1.35% C. 1.375% D. 1.40% E. 1.50%

C. 1.375%

The U.S. Treasury announces an auction for 5-year T-notes in the amount of $15bln. Non-competitive bids received total $2bln. The following are the top competitive bids received: Bidder #1: $3bln. at 3.15% Bidder #2: $2bln. at 3.16% Bidder #3: $4bln. at 3.175% Bidder #4: $2.5bln. at 3.18% Bidder #5: $1.5bln. at 3.195% Bidder #6: $1.9bln. at 3.20% Bidder #7: $0.8bln at 3.205% What is the auction's stop-out yield? A. 3.125% B. 3.175% C. 3.195% D. 3.20% E. 3.25%

C. 3.195%

The U.S. Treasury announces an auction for 5-year T-notes in the amount of $15bln. No non-competitive bids were received. The following are the top competitive bids received: Bidder #1: $3bln. at 3.15% Bidder #2: $2bln. at 3.16% Bidder #3: $4bln. at 3.175% Bidder #4: $2.5bln. at 3.18% Bidder #5: $1.5bln. at 3.205% Bidder #6: $1.9bln. at 3.205% Bidder #7: $0.8bln at 3.22% What will be the auction's stop-out yield? A. 3.125% B. 3.175% C. 3.22% D. 3.205% E. 3.25%

C. 3.22%

If a bond with a face value of $1,000, 8 years to maturity, semiannual coupons, and the yield to maturity of 4% sells for $1,067.89, what is its annual coupon rate? A. 3% B. 2% C. 5% D. 4% E. 2.5%

C. 5%

Which of the following is NOT true about duration? A. Duration can be used to measure a bond's interest rate risk. B. All else equal, higher coupon rates mean lower duration. C. All else equal, higher yields mean higher duration. D. Duration is equal to maturity for zero-coupon bonds. E. All else equal, longer maturities mean higher duration.

C. All else equal, higher yields mean higher duration.