Series 65 - Unit 6 Quiz #1

Under the concept of inertial inflation, A) prices tend to increase at a steady rate until the system receives an economic shock. B) prices tend to remain the same until the system receives an economic shock. C) inflation and deflation alternate at regular intervals. D) core inflation is a better measure of the actual inflation rate than the CPI.

A. Explanation Inertial inflation is an economic condition where the rate of price increases reaches a stable equilibrium and stays there until a shock to the system occurs, at which time, the rate of inflation changes. It is true that most economists view the core inflation rate as a more accurate measure of true inflation than the CPI, but that has nothing to do with inertial inflation. LO 6.d

Which of the following would not be considered a defensive security? A) Steel company stock B) Food chain stock C) Utility company stock D) Tobacco stock

A. Steel company stock Steel is cyclical and is not considered defensive; defensive stocks are generally less affected by the business cycle.

An investor purchasing gold bullion is most likely looking for an investment that is A) countercyclical. B) cyclical. C) exchange traded. D) income producing.

A. countercyclical Explanation Countercyclical assets are those whose prices tend to move in the opposite direction of the overall economy. Historically, the price of precious metals, especially gold (and stock in gold-mining companies), moves up when the economy enters the contraction phase and moves in the reverse direction during expansion. Cyclical stocks follow the cycle. There is no "gold bullion exchange." It is a dealer market with bullion dealers all over the world setting their own spreads. A bar of gold does not provide income. LO 6.a

Which of the following statements describes the federal funds rate? A) Charge on loans to brokers on stock exchange collateral B) Rate charged on reserves traded among commercial banks for overnight use in amounts of $1 million or more C) Charge on loans to depositary institutions by the New York FRB D) Base rate on corporate loans at large U.S. money center commercial banks

B.

When a bank that is a member of the Federal Reserve System borrows from another member bank, the rate that is charged is known as A) the call loan rate. B) the federal funds rate. C) the prime rate. D) the discount rate.

B. Federal Funds Rate Explanation Loans between banks, usually on an overnight basis, are made at the federal funds rate. It is the most volatile of the money market rates. The discount rate is the rate charged when banks borrow directly from the Federal Reserve.

While listening to a commentator on cable TV, you hear the statement, "The flight to quality has ended." What would you expect the effect of this to be? A) Yield spreads are widening. B) Yield spreads are narrowing. C) Airline stocks are in for a beating. D) Pessimism is spreading.

B. Yield spreads are narrowing. Explanation The term yield spread refers to the difference in yield between very-high-quality debt instruments, such as U.S. government bonds, and those with lower ratings. The spread compensates for the additional risk. When investors perceive that the risk has lessened, they won't demand as much in return from the lower-rated instruments.

If the U.S. dollar has been appreciating against foreign currencies, all of the following statements are true except A) foreign goods become cheaper in the United States. B) the U.S. dollar buys more of foreign currencies. C) U.S. exports become more competitive. D) U.S. goods become more expensive in foreign countries. PREV

C. U.S. exports become more competitive. The U.S. exports will cost more to foreigners and become less competitive. The dollar is worth more in terms of foreign currencies and will purchase more foreign goods per dollar.

A bond analyst is plotting a yield curve and notices that short-term maturities have higher yields than intermediate and long-term maturities. This is an example of A) an algorithmic yield curve. B) a positive yield curve. C) an inverted yield curve. D) a normal yield curve.

C. an inverted yield curve. Explanation An inverted, or negative, yield curve is one that results when debt with short-term maturities has higher yields than those with maturities that are longer. A positive, or normal, yield curve results when the yields increase as maturities do.

An upward-sloping yield curve represents all of the following except A) inflation expectations. B) increased risk of default over time. C) foreign interest rate differentials. D) time value of money.

C. foreign interest rate differentials. Explanation Foreign interest rate differentials are not reflected in an upward-sloping yield curve. Interest rate differentials between countries reflect differences in domestic monetary and fiscal conditions. The time value of money is reflected in the upward-sloping yield curve. Longer-term rates require higher rates to compensate for loss of current buying power and liquidity. Longer-term funds bear a higher risk of default than do shorter-term funds and, as a result, command higher rates. Increasing inflation expectations cause the yield curve to slope upward to compensate lenders for the loss of future buying power. This is an example of how you get a question correct by process of elimination.

Core inflation is best described as an inflation rate A) the central bank views as acceptable. B) for producers' raw materials. C) that excludes certain volatile goods prices. D) that includes food and energy prices.

C. that excludes certain volatile goods prices. Explanation Core inflation is measured using a price index that excludes food and energy prices. The primary reason for that is the volatility of those two.

The Conference Board, a nongovernmental nonprofit organization, regularly publishes a list of economic indicators. Which of the following would be included in their list of leading indicators? A) Manufacturing and trade sales (in constant dollars) B) Average duration of unemployment C) Average prime rate D) Average weekly initial claims for unemployment insurance

D. Explanation Of these, the only one that is included in the list of leading indicators is the average weekly initial claims for unemployment insurance. Manufacturing and trade sales is a coincident indicator, and average duration of unemployment and average prime rate are lagging indicators. LO 6.d

A securities analyst's stock selection method is to begin by looking for superior companies, regardless of their industry sector or the condition of the overall economy. In so doing, this analyst is using A) the top-down approach. B) the business cycle approach. C) the optimal portfolio approach. D) the bottom-up approach.

D. Explanation This is the basic approach of bottom-up analysis. Rather than focusing the attention on the overall market (the macro view of the economy) or the sectors that are likely to outperform, this approach seeks to identify—usually based on the company's fundamentals—the most attractive individual stocks. LO 6.c