Financial Markets Exam 1
A two-year corporate bond returns 25% of its fair present value (PV) in the first year and 75% of its value in the second year. What is the bond's duration?
1.75 years Duration= .25 X 1 + .75 X 2= 1.75
A one-year, $1000 par value corporate bond has a coupon rate of 8% (paid semiannually). The real rate of interest is 2%. This year's inflation rate was 2% and it is expected to increase to 3% over the coming year. The default risk premium on similar corporate bonds is 2%. This bond's price (fair value) is
1009.50
Through open market operations, the Fed purchases Treasury securities totaling $200 million. If the reserve requirement is 10%, what is the total change in the money supply associated with these Treasury purchases?
2 billion (1/.10)X200mil=2 bllion
Investment XYZ pays 5 percent simple interest for 10 years. Investment ABC pays 4.50 percent compound interest for 10 years. As an investor with $10,000, you would choose investment ______ and earn an additional _____ in interest.
ABC; $529.69
long-term spot rates are higher than the average of current and expected future short-term rates.
According to the LIQUIDITY PREMIUM theory of interest rates
Which of the following is not a likely impact of expansionary policies implemented by the Fed? A. An increase in reserves B. An increase in interest rates C. An increase in credit availability D. None of the above
An increase in interest rates
All else equal, as the coupon rate on a bond INCREASES, the bond's sensitivity to changes in interest rates
DECREASES
Which of the following statements about a bond's duration is not correct? A. The higher the yield to maturity, the shorter the bond's duration B. Duration overestimates price declines associated with large increases in interest rates C. Duration underestimates price declines associated with large increases in interest rates D. Duration increases with maturity, but at a decreasing rate.
Duration UNDERESTIMATES price declines associated with large increases in interest rates.
Typically, during periods of uncertainty in financial markets (e.g. high unemployment, recessions), the price of Treasury securities will _______ while the default risk premium (DRP) will _____.
Increase; widen
Which of the following is NOT a function of the Federal Reserve System A. Conduct monetary policy B. Supervise and regulate depository financial institutions C. Supervise and regulate transactions in the stock market D. Maintain financial system stability
Supervise and regulate transactions in the stock market
Which of the following statements about the Federal Reserve System (FRS) is INCORRECT? A. There are 12 Federal Reserve Banks. B. The Board of Governors has 12 members. C. The Federal Open Market Committee is the major policy making body of the FRS. D. The Federal Open Market Committee has 12 members.
The Board of Governors has 12 members
The discount rate is the rate that
The Federal Reserve charges on loans to depository institutions
Shorter; decreases
The duration of a bond with a 15% coupon rate is ______ than the duration of a similar bond with a 10% coupon rate. If the yield to maturity increases the bond's duration ________.
Which of the following is not an accurate statement about the Board of Governors of the Federal Reserve System: A. It has seven members B. The president of the New York Fed is a member C. Board members serve nonrenewable fourteen-year terms D. Board members are appointed by the president and ratified by Congress
The president of the NY Fed is a member
A security that has an unexpected return that is HIGHER than its required rate of return is:
UNDERPRICED (selling for less than its fair present value)
The original issuer of the securities raises funds from securities traded in secondary markets
Which of the following is not a characteristic of secondary markets
If interest rates are expected to drop, which of the following bonds would you rather hold if you base your decision solely on the price impact of such a change in interest rates?
a 10-year, AAA rated zero- coupon bond
