Exam 2- Financial Markets & Institutions

A mortgage which requires interest payments for a three- to five-year period, then full payment of principal, is a(n):

balloon payment mortgage.

With a(n) ____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity. Thus, this strategy allocates some funds to achieving a relatively high return and other funds to covering liquidity needs.

barbell

Which of the following is sometimes issued in the primary market by nonfinancial firms to borrow funds?

commercial paper

The actual response of a bond's price to a change in bond yields is:

convex

If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____ pressure on the required rate of return on bonds.

increase; upward; upward

The effective yield of a foreign money market security is ____ when the foreign currency strengthens against the dollar.

increased

The so-called "flight to quality" causes the risk differential between risky and risk-free securities to be:

increased

When a corporation first decides to issue stock to the public, it engages in a(n) ____ offering.

initial public

The first-time issuance of shares by a specific firm to the public is referred to as a(n):

initial public offering (IPO).

Using a(n) ____ strategy, investors allocate funds evenly to bonds in each of several different maturity classes.

laddered

Municipal general obligation bonds are ____. Municipal revenue bonds are ____.

supported by the municipal government's ability to tax; supported by revenue generated from the project

Which of the following is not a guarantor of federally insured mortgages?

the U.S. Treasury

Which of the following is not mentioned in the text as a protective covenant?

the appointment of a trustee in all bond indentures

Some bonds are "stripped," which means that:

they are transferred into principal-only and interest-only securities.

Managers of firms may consider a stock repurchase or even a leveraged buyout when they believe their stock is ____ by the market, or a secondary stock offering when they believe their stock is ____ by the market.

undervalued; overvalued

If a financial institution's bond portfolio contains a relatively large portion of ____, it will be ____.

zero- or low-coupon bonds; more favorably affected by declining interest rates

The prices of bonds with ____ are most sensitive to interest rate movements.

zero-coupon payments

Eurodollar deposits:

are not subject to reserve requirements.

T-bills and commercial paper are sold:

at a discount from par value.

Treasury bills are sold through ____ when initially issued.

auctions

A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 6 percent. What should be the current price?

$1,069.31

The principal-only and the interest-only payments derived from a 20-year, 3.2% coupon bond with a par value of $10,000 and semi-annual interest payments will be, respectively:

$10,000 paid in 20 years; 40 payments of $160

Zero-coupon bonds with a par value of $1,000,000 have a maturity of 10 years, and a required rate of return of 9 percent. What is the current price?

$422,411

An insurance company purchases corporate bonds in the secondary market with six years to maturity. Total par value is $55 million. The coupon rate is 11 percent, with annual interest payments. If the expected required rate of return in 4 years is 9 percent, what will the market value of the bonds be then?

$56,935,022 (2=N; 55 million=FV; 6,050,000=PMT; I/Y=9)

Ackerman Co. has 11 percent coupon bonds on the market with 9 years left to maturity. The bonds make semiannual payments. If the bond currently sells for $1,035.16, what is its YTM? Answer with 4 decimals (e.g. 0.0123)

(55=PMT, 18=N, 1035.16=PV, 1000=FV, multiply by 2)

Assume that the price of a $1,000 zero coupon bond with five years to maturity is $567 when the required rate of return is 12 percent. If the required rate of return suddenly changes to 15 percent, what is the price elasticity of the bond?

-.494

Kiss the Sky Enterprises has bonds on the market making semiannual payments, with 23 years to maturity, and selling for $1,021. At this price, the bonds yield 3.3 percent. What must the coupon rate be on the bonds? Enter the answer with 4 decimals (e.g. 0.0123)

0.0343 (N=46, PV=1,021, I/Y=1.65%, FV=1,000, multiply by 2 and divide by FV to get rate)

Ackerman Co. has 7 percent coupon bonds on the market with 8 years left to maturity. The bonds make annual payments. If the bond currently sells for $1,063.24, what is its YTM? Answer with 4 decimals (e.g. 0.0123)

0.0598 (70=PMT, 8=N, 1063.24=PV, 1000=FV)

Bond Dave has a 4 percent coupon rate, makes semiannual payments, a 7 percent YTM, and 13 years to maturity. If interest rates suddenly rise by 5 percent, what is the percentage change in the price of Bond Dave? Enter the answer with 4 decimals (e.g. 0.0123).

0.36 (20=PMT, 3.5=I/Y, 26=N, FV=1000, PV1=746.64, I/Y2= 6, PV2= 479.87)

(Financial calculator required.) Ed Wood, a private investor, can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Mr. Wood's yield to maturity is ____ percent.

10.24

Staind, Inc., has 10 percent coupon bonds on the market that have 29 years left to maturity. The bonds make semiannual payments. If the YTM on these bonds is 8 percent, what is the current bond price? Answer the question with 2 decimals (e.g. 1030.12)

1224.30 (50=PMT, 58=N, 4=I/Y, 1000=FV)

A bond has three years remaining to maturity, a $1,000 par value, an 8 percent coupon rate, and a 6 percent yield to maturity. What is the duration and modified duration of this bond?

2.79 years and 2.63 years, respectively (6=I/Y, 80=PMT, 1000=FV, 3=N, PV=1053.46; Go through CF button, CF1: 80, CF2: 160, CF3: 1080*3=3240; take NPV of FCF divided by PV of bond)

Commercial paper with a maturity exceeding ____ must be registered with the SEC.

270 days

An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of $10,000,000 at the end of a 90-day period. The repo rate is ____ percent.

3.10

A financial institution has a higher degree of interest rate risk on a ____ than a ____.

30-year fixed-rate mortgage; 15-year fixed-rate mortgage

A ten-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5 percent. During the first six months since the bond was issued, the inflation rate was 2 percent. Based on this information, the annual coupon payment after six months will be $____.

510

Predicting Bond Values. Bulldog Bank has just purchased a bond with 19 years remaining to maturity, and a coupon rate of 4 percent. It expects the YTM on these bonds to be 9 percent one year from now. The bond makes semi-annual payments.a. At what price could Bulldog Bank sell these bonds for one year from now?

558.35 (18 years remaining= 36 periods=N, 20=PMT, 1000=FV, 4.5%=I/Y)

Grohl Co. issued 19 year bonds 6 years ago at a coupon rate of 4 percent. The bonds make semiannual payments. If the YTM on these bonds is 8 percent, what is the current bond price? Enter the answer with 2 decimals (e.g. 950.45)

680.34 (26=N, 20=PMT, 4=I/Y, 1000=FV)

A firm has a current stock price of $15.32. The firm's annual dividend is $1.14 per share. The firm's dividend yield is ____ percent.

7.44

(Financial calculator required.) Harry Potter can purchase bonds with 15 years until maturity, a par value of $1,000, and a 9 percent annualized coupon rate for $1,100. Mr. Potter's yield to maturity is ____ percent.

7.84

An investor buys commercial paper with a 60-day maturity for $985,000. Par value is $1,000,000, and the investor holds it to maturity. What is the annualized yield?

9.14 percent

____ bonds require the owner to clip coupons attached to the bonds and send them to the issuer to receive coupon payments.

Bearer

____ are the most active participants in the federal funds market.

Commercial banks

"Securitization" refers to the private insurance of conventional mortgages.

False

Which of the following statements is incorrect with respect to the federal funds rate?

It is not influenced by the supply and demand for funds in the federal funds market.

___ are acquisitions that require substantial amounts of borrowed funds.

Leveraged buyouts

At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically ____ the initial interest rate offered on a new adjustable-rate mortgage.

above

____ risk is the risk that a borrower may prepay the mortgage in response to a decline in interest rates.

Prepayment

When would a firm most likely call bonds?

after interest rates have declined

Which of the following statements is incorrect?

Stocks are issued by corporations to raise short-term funds.

Which of the following is not true regarding the call provision?

The difference between the market value of the bond and the par value is called the call premium.

Which of the following is true of money market instruments?

Their yields are highly correlated over time.

Which of the following statements is true regarding STRIPS?

They are created and sold by various financial institutions.

____ bonds have the most active secondary market.

Treasury

An international interbank market facilitates the transfer of funds from banks with excess funds to those with deficient funds.

True

Corporate bonds can be placed with investors through a public offering or a private placement.

True

The yield to maturity is the annualized discount rate that equates the future coupon and principal payments to the initial proceeds received from the bond offering.

True

Buy and sell orders on the OTC market are completed by:

a telecommunications network.

The difference between the 30-year mortgage rate and the 30-year Treasury bond rate is primarily attributable to ____ risk.

credit

Bonds that are not secured by specific property are called:

debentures.

If interest rates suddenly ____, those existing bonds that have a call feature are ____ likely to be called.

decline; more

As interest rates increase, long-term bond prices:

decrease by a greater degree than short-term bond prices.

If bond portfolio managers expect interest rates to increase in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions.

decrease; decrease

When the lockup period expires, the share price commonly:

decreases significantly.

At a given point in time, the yield on a T-bill is slightly higher than the yield on commercial paper with the same maturity, because commercial paper has higher:

default risk

If investors quickly sell an IPO stock in the secondary market, there will be ____ pressure on the stock's price.

downward

If the coupon rate ____ the required rate of return, the price of a bond ____ par value.

equals; equals

Interest earned from Treasury bonds is:

exempt from state and local taxes.

The rate at which depository institutions effectively lend or borrow funds from each other is the ____ rate.

federal funds

The practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called:

flipping

For a given par value of a bond, the higher the investor's required rate of return is above the coupon rate, the:

greater is the discount on the price.

The yield on commercial paper is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period.

greater than; recessionary

For any given interest rate, the shorter the life of the mortgage, the ____ the monthly payment and the ____ the total payments over the life of the mortgage.

greater; less

When two securities have the same expected cash flows, the value of the low-risk security will be ____ than the value of the high-risk security.

higher

Corporate bonds that receive a ____ rating from credit rating agencies are normally placed at ____ yields.

higher; lower

If analysts expect that the demand for loanable funds will increase, and the supply of loanable funds will decrease, they would most likely expect interest rates to ____ and prices of existing bonds to ____.

increase; decrease

A(n) ____ in the expected level of inflation results in ____ pressure on bond prices.

increase; downward

An expected ____ in economic growth places ____ pressure on bond prices.

increase; downward

Firms assume ____ risk when they issue preferred stock than when they issue bonds. The payment of dividends on preferred stock ____ be omitted without the firm being forced into bankruptcy.

less; can

From the perspective of the lending financial institution, interest rate risk is:

lower on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.

The municipal yield curve is typically ____ than the Treasury yield curve, and the shape of the municipal yield curve is ____ the shape of the Treasury yield curve.

lower; similar to

Securities with maturities of one year or less are classified as:

money market instruments

Commercial paper is:

placed either directly or with the help of commercial paper dealers.

The purpose of a lockup provision is to:

prevent downward pressure on the stock's price.

The prevailing price per share divided by the firm's earnings per share is known as the:

price-earnings ratio.

Which pass-through security is backed by mortgages that are insured through private insurance companies?

publicly issued pass-through securities (PIPs)

The effective yield of a foreign money market security is ____ when the foreign currency weakens against the dollar.

reduced

A protective covenant may:

restrict the amount of additional debt the firm can issue.

In general, variable-rate municipal bonds are desirable to investors who expect that interest rates will ____.

rise

A new stock issuance by a specific firm that already has stock outstanding is referred to as a(n):

secondary stock offering.

A firm can best avoid the time lag between registering new securities with the SEC and actually selling them by:

shelf-registration

If the coupon rate equals the required rate of return, the price of the bond:

should be equal to its par value.

At any given time, the yield on commercial paper is ____ the yield on a T-bill with the same maturity.

slightly higher than