Finance Final
The greater the number of compounding periods within a year, then the greater the future value of a lump sum investment at Time 0 and the greater the present value of a given lump sum to be received at some future date. T or F?
False
Because the maturity risk premium is normally positive, the yield curve is normally upward sloping. T or F?
True
If the pure expectations theory is correct, a downward-sloping yield curve indicates that interest rates are expected to decline in the future. T or F?
True
The "yield curve" shows the relationship between bonds' maturities and their yields. T or F?
True
If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill? a. The yield on a 10-year bond would be less than that on a 1-year bill. b. The yield on a 10-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium. c. It is impossible to tell without knowing the coupon rates of the bonds. d. The yields on the two securities would be equal. e. It is impossible to tell without knowing the relative risks of the two securities.
a. The yield on a 10-year bond would be less than that on a 1-year bill.
Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is CORRECT, other things held constant? a. if the pure expectations theory holds, the Treasury yield curve must be downward sloping. b. If the pure expectations theory holds, the corporate yield curve must be downward sloping. c. if there is a positive maturity risk premium, the Treasury yield curve must be upward sloping. d. If inflation is expected to decline, there can be no maturity risk premium. e. The expectations theory cannot hold if inflation is decreasing.
a. if the pure expectations theory holds, the Treasury yield curve must be downward sloping.
Assume the interest rates on 20-year Treasury and corporate bonds are as follows: T-bond= 7.72% AAA= 8.72% A= 9.64% BBB= 10.18% The difference in these rates were probably caused primarily by: a. Tax effects b. Default risk differences. c. Maturity risk differences. d. Inflation differences. e. Real risk-free rate differences.
b. Default risk differences
Which of the following factors would be most likely to lead to an increase in nominal interest rates? a. Households reduce their consumption and increase their savings. b. a new technology like the Internet has just been introduced, and it increases investment opportunities. c. there is a decrease in expected inflation. d the economy falls into a recession. e. The Federal Reserve decides to try to stimulate the economy.
b. a new technology like the Internet has just been introduced, and it increases investment opportunities.
In the foreseeable future, the real risk-free rate of interest, r*, is expected to remain at 3%, inflation is expected to steadily increase, and the maturity risk premium is expected to be 0.1 (t-1)%, where t is the number of years until the bond matures. Given this information, which of the following statements is correct? a. The yield on a 2-year Treasury securities must exceed the yield 5-year Treasury securities. b. The yield on 5-year Treasury securities must exceed the yield on 10-year corporate bonds. c. The yield on 5-year corporate bonds must exceed the yield on 8-year Treasury bonds. d. The yield curve must be "humped" e. The yield curve must be upward-sloping.
e. The yield curve must be upward-sloping.
Because the maturity risk premium is normally positive, the yield curve must have an upward slope. If you measure the yield curve and find a downward slope, you must have done something. T or F?
False
Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value. T or F?
False
If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate. T or F?
False
If the Treasury yield curve were downward sloping, the yield to maturity on a 10-year Treasury coupon bond would be higher than that on a 1-year T-bill. T or F?
False
If the discount (or interest rate) is positive, the present value of an expected series of payments will always exceed the future value of the same series. T or F?
False
One of the four most fundamental factors that affect the cost of money as discussed in the text is the current state of weather. If the weather is dark and stormy, the cost of money will be higher than if it is bright and sunny, other things held constant. True or False?
False
Since yield curves are based on a real risk-free rate plus the expected rate of inflation, at any given time there can be only one yield curve, and it applies to both corporate and Treasury securities. True or False?
False
Suppose the federal deficit increased sharply from one year to the next, and the Federal Reserve kept the money supply constant. Other things held constant, we would expect to see the interest rates decline. T or F?
False
The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) the skill level of the economy's labor force. T or F?
False
The four most fundamental factors that affect the cost of money are (1) production oppurtunities, time preference for consumption, (3) risk, and (4) weather conditions. T or F?
False
An upward-sloping yield curve is often called a "normal" yield curve, while a downward-sloping yield curve is often called "abnormal". T or F?
True
Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future value. T or F?
True
During periods when inflation is increasing, interest rates tend to increase, while interest rates tend to fall when inflation is declining. T or F?
True
If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate. T or F?
True
If investors expect a zero rate of inflation, then the nominal rate of return on a very short-term U.S treasury bond should be equal to the real risk-free rate, *r. T or F?
True
If investors expect the rate of inflation to increase sharply in the future, then we should not be surprised to see an upward-sloping yield curve. T or F?
True
If the demand curve for funds increased but the supply curve remained constant, we would expect to see the total amount of funds supplied and demanded increase and interest rates in general also increase. T or F?
True
If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series. T or F?
True
One of the four most fundamental factors that affect the cost of money as discussed in the text is the availability of production opportunities and their expected rates of return. If production opportunities are relatively good, then interest rates will tend to be relatively high, other things held constant. True or False?
True
One of the four most fundamental factors that affect the cost of money as discussed in the text is the availability of production. T or F?
True
One of the four most fundamental factors that affect the cost of money as discussed in the text is the risk inherent in a given security. The higher the risk, the higher the security's required return, other things held constant. True or False?
True
Suppose Sally Smith plans to invest $1,000. She can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be more than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.) T or F?
True
The Federal Reserve tends to take actions to increase interest rates when the economy is very strong and to decrease rates when the economy is weak. T or F?
True
The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) inflation. T or F?
True
The greater the number of compounding periods within a year, then the greater the future value of a lump sum investment at Time 0 and the smaller the present value of a given sum to be received at some future date. T or F?
True
The risk that interest rates will decline, and that decline will lead to a decline in the income provided by a bond portfolio as interest and maturity payments are reinvested, is called "reinvestment rate risk". T or F?
True
The risk that interest rates will increase, and that increase will lead to a decline in the prices of outstanding bonds, is called "interest rate risk", or "interest rate price risk". T. or F?
True
The risk that interest rates will increase, and that increase will lead to a decline in the prices of outstanding bonds, is called "interest rate risk", or "interest rate price risk". True or False?
True
Which of the following would be most likely to lead to a higher level of interest rates in the economy? a. Households start saving a larger percentage of their income. b. Corporations step up their expansion plans and thus increase their demand for capital. c. the level of inflation begins to decline. d. the economy moves from a boom to a recession. e. The Federal Reserve decides to try to stimulate the economy.
b. Corporations step up their expansion plans and thus increase their demand for capital.
Which of the following statements is CORRECT, other things held constant? a. if companies have fewer good investment opportunities, interest rates are likely to increase. b. if individuals increase their savings rate, interest rates are likely to increase. c. If expected inflation increases, interest rates are likely to increase. d. Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities. e. Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.
c. If expected inflation increases, interest rates are likely to increase.
