Fil 241 Exam 2
Which of the following statements is incorrect?
A. According to the market segmentation and preferred-habitat theory, investors want extra compensation for holding securities outside of their preferred maturities. B. According to the market segmentation and preferred-habitat theory, the market is segmented and interest rates for each maturity are determined by supply and demand for that maturity. C. According to the liquidity premium theory, short-term debt is less liquid and thus it pays higher interest rates. D. The term structure of interest rates is the relation between yield and term to maturity on securities that differ only in maturity. E. According to the expectation theory, the total cost paid on a 3-year loan should be the same as the costs of three 1-year loans covering the same 3-year period. C
Which of the following statements is incorrect?
A. Bond rating of BB is better than bond rating of B. B. Lower risk companies find it more expensive to obtain debt financing during periods of extreme economic uncertainty than other firms. Thus, timing their financing is especially important for them. C. Default risk premiums tend to increase during the periods of economic uncertainty. D. Bond rating of AAA means the lowest risk. B
Which of the following statements is incorrect?
A. Bond ratings are likely to understate the probability of default. B. Companies who want to obtain credit ratings for their bonds have to pay for those ratings. C. Bonds with ratings of BB and lower are speculative grade bonds. D. We have a free market bond rating system. D
Which of the following statements is incorrect?
A. Bonds bought in private placements cannot be traded in secondary markets. B. Private placements increase when interest rates are high or market conditions are unstable. C. Junk bonds are less risky (considering default risk) than common stock of the same firm. D. None. A
Which of the following statements are incorrect?
A. Comparing net financial assets and financial liabilities in 2005 and 2010 we can see that the deficit of federal and local governments approximately doubled. B. Notes have maturity of one to ten years. C. Bonds have maturity over ten years. D. None. D
Which of the following is typically not the source of supply of loanable funds in recent years?
A. Consumer savings. B. State, local, and Federal government budget deficit. C. Increase in money supply by the Fed. D. All of the above are typical sources of loanable funds in recent years. B
You have a choice of an AAA-rated corporate bond with a yield of 7% or an AAA-rated municipal bond with a yield of 5.9%. If your marginal tax rate is 20%, which bond should you prefer to buy?
A. Corporate bond. B. Municipal bond. B
Which of the following statements is incorrect?
A. Corporate bonds typically make coupon payments and have a face value of $1,000. B. Bearer bonds are coupon bonds owned by bearer, while owners of registered bonds are only noted by records. C. In the case of term bonds, all bonds in the issue mature on the same date. D. In the case of serial bonds, bonds in the issue mature on different dates. E. Municipal bonds are never serial bonds. E
The Fed can decrease money supply and thus increase interest rates using the following step(s):
A. Decreasing discount rate. B. Selling treasury securities. C. Decrease reserve requirements for banks. D. All of the above. B
Which of the following is not an objective of the Fed's monetary policy?
A. Economic growth. B. Increase in unemployment. C. Price and interest rate stability. D. Stability of foreign exchange markets. B
Which of the following statements is incorrect?
A. Excessive money supply causes inflation. B. Too low money supply causes deflation. C. It is impossible to estimate precisely how much money we need in the economy. D. Since 1970, the Fed did very good job of managing money supply, keeping inflation and unemployment low. D
Which of the following statements is incorrect?
A. Fed funds rate is the interest rate banks use to lend the funds to each other overnight. B. Fed funds rate is the only interest rate that the Fed can control directly by declaration. C. Interest rates are determined by supply and demand for funds. D. When Fed buys T-bonds it increases the price of these bonds and thus reduces the rates of returns on them. B
Which of the following statements is incorrect?
A. Federal agency securities have lower marketability than T-bills, since the market for each agency security is smaller than that for T-bills and some agency securities do not have explicit guarantees of the federal government. B. Federal funds refer to short-term lending and borrowing between banks. C. Federal funds are traded in immediately available funds. D. Federal government is obligated to bail out all government-sponsored agencies. D
Money market mutual funds invest in the following securities:
A. Federal agency securities. B. Commercial paper. C. Banker's acceptances. D. Negotiable certificates of deposit. E. All of the above. E
Which of the following statements is incorrect?
A. Foreign bonds are issued by foreign companies and denominated in the currency of a country where they are issued. B. Foreign bonds have to comply with the regulations of the country where they are issued. C. Eurobonds are bonds denominated in a currency other than that of the country where they are issued. D. None. D
Which of the following is not a general characteristic of money markets?
A. Good marketability. B. Competitive market with many brokers and dealers. C. Payments in immediately available funds. D. All of the above are general characteristics of money markets. D
Which of the following statements is incorrect?
A. Households are both major issuers and investors in capital market securities. B. Businesses are major issuers of rather than investors in capital market securities. C. Federal and local governments are major investors in rather than major issuers of capital market securities. D. Foreign investors are a major group of investors in the U.S. capital markets. C
Which of the following statements is incorrect?
A. If the Fed wants to increase short-term interest rates, it can sell debt securities with short-term maturities, reducing their prices and thus increasing their rates of return. B. Money market is convenient for investors who temporarily have extra cash but cannot afford forgoing liquidity. C. Money market securities have low default risk. D. Money market securities have low liquidity. D
Which of the following statements is incorrect?
A. In case of bankruptcy, senior debt has priority against subordinated debt. B. Sinking fund in bond indenture refers to a requirement to accumulate funds to retire the firm's debt. C. Call provision allows the borrower to retire bonds before their maturity if the borrower wants to do so. D. None. D
Which of the following statements is incorrect (direct effect considering everything else being equal)?
A. Increase in money supply increases interest rate. B. Increase in government expenditures increases interest rates. C. High growth in GDP increases interest rates. D. Expectation of higher inflation increases nominal interest rates. E. Low economic growth is associated with lower interest rates. A
Which of the following statements is incorrect?
A. Interest rate is a price for borrowing money. B. Interest rates help allocate resources in the market. C. Government can and often does improve resource allocation in the market by manipulating interest rates. D. Incorrect prices lead to inefficient resource allocation. C
Which of the following statements is incorrect?
A. Interest rates are affected by the laws of supply and demand like any other prices. B. Demand for loanable funds comes from consumer credit purchases, business investment, and government deficits. C. Artificially low interest rates discourage people from saving and encourage consuming today. D. None. D
Which of the following statements is incorrect?
A. Investors in corporate bonds typically have long-term horizon and are not concerned with liquidity. B. Public sale of corporate bonds is open to all interested buyers; private placements, while open to all interested buyers, are limited to fewer than 35 investors. C. Most secondary trading of corporate bonds is characterized by low trading volume and wide bid-ask spreads. D. On average, issuers of corporate bonds are riskier than issuers of commercial papers. B
Which of the following statements is incorrect?
A. Keynes made unrealistic assumptions when modeling the impact of government spending on the economy and focused on short term. B. While following Keynes recommendations about government spending, the U.S. was not able to recover from the Great Depression during the 1930s. C. According to Friedman, an increase in money supply creates an illusion of increased demand (prices are going up), that stimulates over-investment in the fields where prices are going up, in a short-run everybody is happy, eventually people realize that there is no real increase in the demand, the new investment is wasted, stock prices in the over-invested area crash, and we have a recession. D. None. D
Which of the following statements is incorrect?
A. Low interest rates discourage saving. B. When Fed buys long-term debt securities, demand for these securities increases, their prices go up, and long-term interest rates go up. C. Long period of low interest rates increases the risk of banks as they accumulate more and more long-term assets paying low interest rates. When interest rates increase again, bank asset value drops significantly. D. Artificially low interest rates can encourage overinvestment and start business cycles. B
Which of the following statements is incorrect?
A. M1 is currency plus checking deposits. B. M2 is M1, savings deposits, money market deposit accounts, overnight repurchase agreements, noninstitutional money market mutual funds, and small time deposits. C. MZM is M2 - small denomination time deposits + institutional money market funds. D. We should use only currency when estimating money supply. D
Which of the following is not an example of bond with collateral?
A. Mortgage bond - land or buildings pledged. B. Equipment trust certificates - specific, titled, or identifiable equipment pledged. C. Collateral bonds - financial assets pledged D. Debentures - company assets pledged. D
If the following securities have the same risk, which one is the best for an investor who has to pay 25% in federal taxes?
A. Municipal bond with 7% yield to maturity. B. Corporate bond with 8% yield to maturity. C. Corporate bond with 9% yield to maturity. D. Mortgage backed security with 10% yield to maturity. D
Which of the following statements is incorrect?
A. Nominal interest consists of real interest rate and inflation. B. Real interest rate provides compensation for delayed consumption and risk. C. Interest rates are hard to predict. You can make a lot of money if you can do this better than others. D. If you can correctly predict an increase in interest rates in the future, you can make money by buying bonds before the increase. D
Which of the following statements about federal funds is incorrect?
A. Originally, the market for excess reserves held at the Fed. B. Interest rates on federal funds are fully controlled by the Fed. C. Bookkeeping entry. D. Short-term lending and borrowing between banks. B
Which of the following statements is incorrect?
A. Outstanding U.S. Treasury bills increased significantly from 2005 to 2010. B. Outstanding money markets securities issued by corporations decreased from 2005 to 2010. C. When a firm needs money for a long-term, short-term borrowing is less risky than long-term borrowing. Thus, it makes sense to increase short-term borrowing when economic situation is very uncertain. D. When economic situation is very uncertain, many companies find that it is hard or impossible to issue commercial paper. C
Which of the following statements does describe financial guarantees?
A. Provided for a fee by commercial banks and insurance companies. B. Cover the payment of principal and interest in the event of default. C. Substitutes the credit standing of the guarantor for that of the issuer. D. All of the above. D
Which of the following statements about repurchase agreements is incorrect?
A. Sale of securities with an agreement to buy them back later at a higher price. B. Essentially it is borrowing with collateral. C. Value of securities used as collateral usually exceeds the sale and the repurchase prices. D. None of the above. D
Which of the following is not a general characteristic of money markets?
A. Securities with up to one-year maturities. B. Risky borrowers. C. Low transaction costs. D. Standardized securities. B
Which of the following statements about securitized credit instruments are correct?
A. Securitization is packaging loans and selling claims to future cash flows of the loans. B. Value of new securities is expected to exceed the value of loan cash flows, providing incentives to securitize. C. A variety of asset backed securities have been created, beginning in the mortgage market and now extending to other types of loans. D. All of the above. D
Which of the following statements is incorrect?
A. Separate trading of registered interest and principal refers to making each interest payment and principal payment into separate securities that are zero-coupon bonds. B. STRIPs are created by financial institution when investors value these securities more highly than the original securities. C. Zero coupon bonds are much easier to use when managing interest rate risk than coupon paying bonds. D. Zero coupon bonds usually pay higher coupon rate than other bonds. D
Which of the following statements is incorrect?
A. Since the creation of the Fed the U.S. economy became less volatile. B. Since the creation of the Fed recovering from crisis became easier. C. During recent years the Fed is very conservative in its monetary policy. D. All of the above are incorrect. D
Which of the following statements about commercial paper is incorrect?
A. Sold at a discount from par value. B. Major investors include commercial banks, insurance companies, and state and local pension funds. C. Banks can provide backup lines of credit, reducing the risk of commercial papers. D. Corporations always sell commercial paper through their own sales force. D
Which of the following statements is incorrect?
A. State and local government bonds (munis) are backed by the federal government. B. Some municipal bonds are backed by the taxing power of a political entity that issued them. C. Some municipal bonds are paid back with cash from a specific project. D. State and local governments sometimes use public financing to finance private business. A
Which of the following statements is incorrect?
A. State and local government debt pays higher interest rates than the same risk corporate debt because of the higher taxes one has to pay on government debt. B. A coupon incomes on state and local government debt are exempt from federal taxes. C. A call provision in a bond contract allows the issuer to retire debt before its maturity. D. Bond contracts sometimes give additional rights to buyers or sellers. A
Which of the following statements is incorrect?
A. T-bills are sold through auctions using competitive and noncompetitive bids. B. Noncompetitive bids do not require specifying the price at which one wants to buy securities. C. Competitive bids do not require specifying the quantity one wants to acquire. D. The maximum quantity that can be specified in noncompetitive bids is $5,000,000. C
Which money market instruments are issued by nonfinancial corporations?
A. T-bills. B. Commercial paper. C. Negotiable CDs. D. Repurchase agreements. B
Which securities commercial banks do not use to obtain financing?
A. T-bills. B. Federal funds. C. Commercial paper. D. Repurchase agreements. A
Which securities does the U.S. Treasury use to obtain financing?
A. T-bills. B. Federal funds. C. Commercial paper. D. Repurchase agreements. A
Which of the following statements is incorrect?
A. TIPS provide protection from inflation. B. The face value on inflation-indexed notes and bonds pay changes with inflation. C. Inflation-indexed notes and bonds pay variable coupon rates which change with inflation. D. The principal of inflation-indexed notes and bonds adjusts for inflation while coupon rate remains fixed. C
Which of the following statements is incorrect?
A. The Fed can estimate and predict money velocity accurately. B. Money velocity = National income / Money supply. C. Money velocity depends on how quickly money change hands. D. Optimal money supply depends on money velocity. A
Which of the following statements is incorrect?
A. The Fed is more active in recent years. B. The Fed is achieving its main goals in recent years. C. Unemployment cannot be solved by increasing inflation. D. Attempting to reduce unemployment by creating public works and paying for these works with newly printed money increases inflation. B
Which of the following statements is incorrect?
A. The Securities and Exchange Commission is the principal regulator of financial markets. B. The SEC has a strong motivation to have good regulations as otherwise the SEC will not survive competition. C. Private exchanges have motivation to use good regulations as otherwise these exchanges will not survive competition. D. States also have regulations about security issues and trading. B
Which of the following statements is incorrect?
A. The U.S. Treasury bills are sold on discount basis. B. Individual investors can invest smaller amounts in T-bills through the Treasury Direct Program. C. All federal debt is completely risk free. D. T-bill yields estimated as bank discount rates are lower than the actual yields received on these investments. C
Which of the following statements is incorrect?
A. The vast majority of commercial paper issues are in the top two credit rating categories. B. Negotiable certificates of deposit make time deposits in the bank more liquid by allowing the depositor to sell the right to the deposit in the bank to somebody else at any time. C. The interest rate on negotiable certificates of deposit depends on the credit risk of the depositor rather than on the credit risk of the issuing bank. D. Bankers' acceptances facilitate the trade between sellers and buyers who do not know each other well. C
Which of the following is not a characteristic of bankers' acceptances?
A. Time draft - order to pay in future. B. Mostly related to international trade. C. The interest they pay depend on the credit worthiness of the bank that accepted them. D. The interest they pay depend on the credit worthiness of the buyer in the business transaction. D
Which of the following statements about securitized credit instruments are correct?
A. Tranches from one pool of loans can vary from very high to very low risk. B. Financial guarantees can reduce the risk of the tranches. C. The residual or non-guaranteed tranches have a higher risk/return profile. D. All of the above. D
A money market mutual fund takes money from many investors and forms one investment portfolio, investing in securities with less than one-year maturity.
A. True. B. False. A
It is easier for individuals to invest in money market mutual funds than to buy money market securities like commercial paper or certificates of deposit.
A. True. B. False. A
Which of the following statements about commercial paper is not correct?
A. Unsecured corporate debt. B. Large denominations of $100,000 and up. C. Small investors can buy much smaller denominations through the Direct Purchase Program offered by the Fed. D. Issued by high-quality borrowers. C
Which of the following statements is incorrect?
A. When the Fed manipulates short-term and long-term interest rates differently, the yield curve may not reflect the market expectations about future economic performance. B. Downward sloping yield curve suggests that investors expect an increase in future interest rates. C. Significantly higher long-term than short-term interest rates suggest an expectation of expansion in business in the future and thus an increase in the demand for loanable funds in the future. D. Significantly upward sloping yield curve suggests an increase in future interest rates and an expected business expansion. B
Which of the following statements is incorrect?
A. With book entry securities, investors do not receive the physical security they buy, instead the physical security is held at some financial institution. B. Most of marketable Treasury debt is in book-entry form. C. The largest federal agencies can issue their own debt securities, while smaller federal agencies are more likely to obtain financing through Federal Financing Bank. D. Government-sponsored agencies, differently from government-owned agencies, do not have an explicit guarantee of the government. A
The Fed kept low interest rates before (not necessarily right before) the following event(s):
A. the Great Depression. B. the stock market crash of 1999. C. the last real estate market crash. D. all of the above. D
