Finance CH. 6 Questions

What is a forward rate? A. A forward rate is a real rate of interest that has been adjusted for inflation. B. A forward rate is a real rate that has been adjusted for all the risks associated with an individual security j. C. A forward rate is a rate on a security that will mature sometime in the future. D. A forward rate is an implied rate on a short-term security that will originate sometime in the future.

D. A forward rate is an implied rate on a short-term security that will originate sometime in the future.

What is the definition of a money market? A. A money market is a security where the funds are invested solely in cash. B. A money market is a market that trades newly issued securities where the issuer is also the seller. C. A money market is a market where securities are traded for cash. D. A money market is a market that trades securities that mature in one year or less.

D. A money market is a market that trades securities that mature in one year or less.

How is a primary market defined? A. A primary market is the market in which a handful of institutions purchase an entire issue of securities. B. A primary market is the sale of any security that has been registered with the SEC. C. The primary market is defined as the market where only IPOs can occur. D. A primary market is a market in which corporations and other fund demanders obtain funds by issuing new securities.

D. A primary market is a market in which corporations and other fund demanders obtain funds by issuing new securities.

Anna withdrew funds from her bank and purchased 500 shares of ABC stock at the recommendation of her broker. Which one of these parties meets the definition of a delegated monitor? A. ABC Company B. Anna C. Anna's bank D. Anna's broker

D. Anna's broker

Which of these is the special provision that grants an issuer the right to retire a security prior to maturity? A. Term structure B. Exchange provision C. Convertibility D. Call option

D. Call option

A firm produces goods in the U. S. and receives euros in Germany when the goods are sold. Which particular aspect of this firm's operations exposes the firm to foreign exchange risk? A. Paying German salesmen in euros B. Paying American suppliers in dollars C. Paying American workers in dollars D. Converting the euros into dollars

D. Converting the euros into dollars

Which term is used to designate an economic agent appointed to act on behalf of smaller investors in collecting information? A. Free agent B. Asset transformer C. Security issuer D. Delegated monitor

D. Delegated monitor

How will an expected increase in the rate of inflation affect interest rates? A. Interest rates will remain unchanged. B. Interest rates will decrease. C. Interest rates will change but the direction of the change is unpredictable. D. Interest rates will increase.

D. Interest rates will increase.

What can you determine with certainty about an upward-sloping yield curve according to the liquidity premium theory? A. Future 1-year rates will be higher than today's 1-year rate B. Future 1-year rates will be lower than today's 1-year rate C. Future 1-year rates will be the same as today's 1-year rate D. Longer-term rates are higher than shorter-term rates today

D. Longer-term rates are higher than shorter-term rates today

Which money market security involves a sale, generally at a discounted price, that includes a promise to reverse the sale at a specified price on a specified date? A. Treasury bill B. Banker's acceptance (BA) C. Negotiable certificate of deposit D. Repurchase agreement (repo)

D. Repurchase agreement (repo)

The term structure of interest rates compares similar bonds based on which variable? A. Taxability provision B. Degree of liquidity C. Level of default risk D. Time to maturity

D. Time to maturity

The sale of which of these securities matches the definition of a money market transaction? Select all that apply. A. 5-year corporate bond B. 90-day U. S. Treasury bill C. 6-month U. S. Treasury security D. 2-year U. S. Treasury note

B. 90-day U. S. Treasury bill C. 6-month U. S. Treasury security

What is a nominal interest rate? A. A nominal interest rate is the rate on a default-free loan minus the inflation premium. B. A nominal interest rate is the rate observed in the financial markets. C. A nominal interest rate is the base rate excluding inflation, default risk, and liquidity risk. D. A nominal interest rate is the market rate of interest minus the inflation premium.

B. A nominal interest rate is the rate observed in the financial markets.

Default risk is the risk associated with either late or missed payments on which of these securities? A. Bonds only B. Bonds and preferred stock C. Preferred stock only D. Treasury bonds only

B. Bonds and preferred stock

Which of these is the special provision that grants an issuer the right to retire a security prior to maturity? A. Exchange provision B. Call option C. Convertibility D. Term structure

B. Call option

A firm produces goods in the U. S. and receives euros in Germany when the goods are sold. Which particular aspect of this firm's operations exposes the firm to foreign exchange risk? A. Paying American suppliers in dollars B. Converting the euros into dollars C. Paying German salesmen in euros D. Paying American workers in dollars

B. Converting the euros into dollars

The Corner Bank packaged a pool of home mortgages and sold mortgage-backed securities to the Uptown Insurance Co. to fund the monies loaned to the home owners. Which party(ies) meet the definition of asset transformer? A. Homeowners with Corner Bank mortgages B. Corner Bank only C. Corner Bank and Uptown Insurance Co. D. Uptown Insurance Co.

B. Corner Bank only

The United States government is a large borrower - partly to finance past deficits. The national debt, as of 2018, is A. $21.05 trillion B. $32.05 trillion C. $5.02 trillion D. $2.05 trillion

A. $21.05 trillion

What is the definition of a capital market? A. A capital market is a market that trades securities with maturities in excess of one year. B. A capital market is a market that trades only securities issued by governmental entities. C. A capital market is a market that deals only with primary issues. D. A capital market is a market that trades securities amongst financial institutions.

A. A capital market is a market that trades securities with maturities in excess of one year.

Which one of these defines an asset transformer? A. A financial institution which issues secondary securities to investors B. A financial institution that issues primary equity securities C. An economic agent appointed to act on behalf of investors D. A corporation that repurchases outstanding shares of stock

A. A financial institution which issues secondary securities to investors

The Corner Bank packaged a pool of home mortgages and sold mortgage-backed securities to the Uptown Insurance Co. to fund the monies loaned to the home owners. Which party(ies) meet the definition of asset transformer? A. Corner Bank only B. Uptown Insurance Co. C. Homeowners with Corner Bank mortgages D. Corner Bank and Uptown Insurance Co.

A. Corner Bank only

Which of the following affect the dollar-yuan exchange rate? Select all that apply. A. Demand for and supply of U. S. dollars B. Chinese government intervention C. Demand for and supply of Mexican pesos D. Demand for and supply of Chinese yuan

A. Demand for and supply of U. S. dollars B. Chinese government intervention D. Demand for and supply of Chinese yuan

You are a U. S. cereal maker who buys corn in the U. S. and sells cereal in Mexico. Which of these options would be of interest to you? Select all that apply. A. Hedging a position to lock in a dollar/peso exchange rate B. Hedging a position to lock in the price of corn C. Hedging a position to lock in an interest rate D. Hedging a position to lock in the price of cotton

A. Hedging a position to lock in a dollar/peso exchange rate B. Hedging a position to lock in the price of corn

Which one of these is a common feature of a secondary security as compared to the primary claim? A. Increased liquidity B. Less attractive to investors C. Less accessibility to funds D. Decreased marketability

A. Increased liquidity

Which one of these best defines the role of investment banks? A. Investment banks are financial intermediaries between demanders and suppliers of funds. B. Investment banks are the primary suppliers of funds. C. Investment banks are the primary suppliers of mortgage funds. D. Investment banks are the primary demanders of funds.

A. Investment banks are financial intermediaries between demanders and suppliers of funds.

What key role does an investment bank play? A. Investment banks arrange primary market transactions for business entities. B. Investment banks serve as an intermediary between the issuer of a security and the underwriter of that security. C. Investment banks purchase all private placements. D. Investment banks maintain a liquid secondary securities market.

A. Investment banks arrange primary market transactions for business entities.

What is the key premise of the market segmentation theory? A. Investors do not consider securities with different maturities as perfect substitutes. B. The key premise is that a segmented market will yield a flat yield curve. C. The key premise is that the yield curve must be upward-sloping in order for demand to equal supply in each segment. D. Investors require a premium in direct relation to the term of a security.

A. Investors do not consider securities with different maturities as perfect substitutes.

Which three of the following are key factors that limit direct investment in financial claims? Select three. A. Liquidity costs B. Monitoring costs C. Price risk D. Inflation risk

A. Liquidity costs B. Monitoring costs C. Price risk

Which of these factors affecting nominal rates is the risk that a security cannot be sold quickly at full value? A. Liquidity rate B. Special provision C. Default risk D. Inflation risk

A. Liquidity rate

Which of the following are specific factors that affect nominal interest rates? Select all that apply A. Liquidity risk B. exchange rate risk C. Term to maturity D. Default risk

A. Liquidity risk C. Term to maturity D. Default risk

True or false: The issuer of the new securities will receive the proceeds of a security's sale if that sale occurs in the primary market.

True

Which of these fits the definition of a secondary market transaction? Select all that apply. A. Martha sold 100 shares of stock to her son. B. The Bolt Co. purchased 300 shares of Metals, Inc. stock in an IPO. C. The Feel Good Co. sold 500 shares of ABC, Inc. to The Better Health Co. D. The Excel Co. sold 1,000 shares of its stock to Fred Stone.

A. Martha sold 100 shares of stock to her son. C. The Feel Good Co. sold 500 shares of ABC, Inc. to The Better Health Co.

Which one of the following is a key factor that makes direct investments unpopular with investors? A. Monitoring costs B. Financial intermediary costs C. Costs of holding cash D. Banker's fees

A. Monitoring costs

The risk that an asset's value may be less than its purchase price is referred to as which type of risk? A. Price risk B. Inflation risk B. Default risk C. Liquidity risk

A. Price risk

Which one of these is the definition of a real risk-free rate? A. Rate that would exist on a default-free security if no inflation were expected B. Interest rate actually observed in financial markets C. Interest rate that reflects annualizing with compounding figured in D. Continual increase in the price level of a basket of goods

A. Rate that would exist on a default-free security if no inflation were expected

Which one of these statements is correct? A. Secondary securities tend to be more liquid than primary securities. B. Secondary securities represent direct transfers of funds. C. Secondary securities are primarily owned by financial institutions. D. Secondary securities are additional offerings of stock issued by corporations.

A. Secondary securities tend to be more liquid than primary securities.

Which set of characteristics best applies to a derivative security agreement? A. Standardized quantity, predetermined price of exchanged asset, specified exchange date, high degree of leverage B. Standardized quantity, unspecified price of exchanged asset, and unspecified exchange date, low degree of leverage. C. Variable quantity, predetermined price of exchanged asset, variable exchange date, low degree of leverage D. Variable quantity, specified price of exchanged asset,and specified exchange date, high degree of leverage

A. Standardized quantity, predetermined price of exchanged asset, specified exchange date, high degree of leverage

The largest supplier of loanable funds in the United States is A. The household sector B. Corporate investments C. U.S. Banks

A. The household sector

Which of these defines a secondary market? Select all that apply. A. The secondary market involves the resale of a stock by a shareholder. B. A secondary market is a market where previously issued securities are traded. C. A secondary market is a market in which the seller is also the issuer. D. The secondary market refers to all security transactions that involve individual investors.

A. The secondary market involves the resale of a stock by a shareholder. B. A secondary market is a market where previously issued securities are traded.

Which one of the following best explains the concept of the unbiased expectations theory? A. The current yield curve is the market's expectations of current and future long-term rates. B. Current long-term interest rates are geometric averages of current and future expected short-term rates. C. Current long-term interest rates are arithmetic averages of current and future expected short-term rates. D. The long term N-year rate is simply the current 1-year rate raised to the Nth power.

B. Current long-term interest rates are geometric averages of current and future expected short-term rates.

Which one of the following parties is most apt to hedge a position to lock in the price at which they can sell milk in the future? A. Ice cream maker B. Dairy farmer C. Cheese producer D. Retail grocer

B. Dairy farmer

What is the best definition of default risk? A. Default risk is defined as paying off a loan prior to maturity to avoid incurring future interest. B. Default risk is the possibility that an issuer may pay late or miss an interest or principal payment. C. Default risk is the potential for an issuer to never pay the interest or principal payments on a debt security. D. Default risk is defined as non-repayment of the principal value of a loan.

B. Default risk is the possibility that an issuer may pay late or miss an interest or principal payment.

Which one of these is the best definition of foreign exchange markets? A. Foreign exchange markets are markets outside of the U. S. in which financial transactions occur. B. Foreign exchange markets are markets in which foreign currency is traded for immediate or future delivery. C. Foreign exchange markets are markets in which agreements are made for goods to be imported from or exported to non-U. S. firms. D. Foreign exchange markets are markets in which foreign currency is traded for immediate delivery.

B. Foreign exchange markets are markets in which foreign currency is traded for immediate or future delivery.

What is the interest rate called that is derived from existing spot rates on similar securities with varying terms? A. Effective annual rate B. Forward rate C. Compound rate D. Real rate

B. Forward rate

Which one of these best defines the role of investment banks? A. Investment banks are the primary demanders of funds. B. Investment banks are financial intermediaries between demanders and suppliers of funds. C. Investment banks are the primary suppliers of mortgage funds. D. Investment banks are the primary suppliers of funds.

B. Investment banks are financial intermediaries between demanders and suppliers of funds.

What is the basic premise of the liquidity theory? A. Investors demand a premium that is inversely related to the term to maturity. B. Investors must be paid a premium to offset increased future uncertainty. C. Investors are indifferent to liquidity. D. Investors must be paid a premium to hold more liquid securities.

B. Investors must be paid a premium to offset increased future uncertainty

Which one of these best defines liquidity risk? A. Liquidity risk is the risk that an issuer will repay a security prior to the original maturity date. B. Liquidity risk is the possibility that an asset's price must be lowered below fair market value in order to sell the asset on short notice. C. Liquidity risk is the possibility that an asset will sell immediately at fair market value. D. Liquidity risk is the risk that a security issuer will have insufficient funds to make timely payments.

B. Liquidity risk is the possibility that an asset's price must be lowered below fair market value in order to sell the asset on short notice.

Which one of these is a basic premise of the unbiased expectations theory? A. The current yield curve must be flat for the market to be in equilibrium. B. Long-term rates consist of a series of successive short-term rates. C. Long-term rates must exceed short-term rates to compensate for greater market risk. D. Interest rates balance the expected demand and supply for securities of varying maturities.

B. Long-term rates consist of a series of successive short-term rates.

Which one of these sets of characteristics applies to money market securities? A. Short-term, low risk, high price volatility B. Low risk, low price volatility, short-term C. Short-term, low price volatility, high risk D. High risk, high price volatility, long-term

B. Low risk, low price volatility, short-term

To minimize liquidity risk which three factors must exist? Select three A. Sale at a reasonable profit B. Predictable sale price C. Low transaction costs D. Sale on short notice

B. Predictable sale price C. Low transaction costs D. Sale on short notice

Which of these parties are affected by foreign exchange risk? Select all that apply. A. New Englander exporter of fish to Iowa B. U. S. exporter of goods to Canada C. Individual who invests in overseas markets D. U. S. importer of clothing from Asia

B. U. S. exporter of goods to Canada C. Individual who invests in overseas markets D. U. S. importer of clothing from Asia

Which one of these price changes meets the definition of price risk? A. Theo purchased land for $539,000 and later sold it for $541,000. B. Willis purchased a lot for $120,000. That lot is now worth $89,000. C. Audry purchased a building for $267,000. That building is still worth $267,000. D. Jamie purchased a store for $389,000. That store is now worth $415,000.

B. Willis purchased a lot for $120,000. That lot is now worth $89,000.

Which one of these is the definition of a nominal interest rate? A. A nominal interest rate is the rate of interest which excludes any special provisions. B. A nominal interest rate is the rate of interest that excludes the inflation premium. C. A nominal interest rate is the rate of interest that includes all risk premiums. D. A nominal interest rate is the rate of interest that excludes all risk premiums.

C. A nominal interest rate is the rate of interest that includes all risk premiums.

What is the definition of a real interest rate? A. A real interest rate is the guaranteed rate that a bank pays on a certificate of deposit B. A real interest rate is the rate designated as (i) in the Fisher effect formula. C. A real interest rate is the rate that would exist on a default-free security if no inflation were expected. D. A real interest rate is the rate an investor actually earns on an investment.

C. A real interest rate is the rate that would exist on a default-free security if no inflation were expected.

What is the definition of an initial public offering (IPO)? A. An IPO is any sale of newly issued securities by a firm to the general public. B. An IPO is any sale of securities by a firm in the primary market. C. An IPO is the first offering of financial securities by a firm to the general public. D. An IPO is any sale of newly issued securities by a corporation.

C. An IPO is the first offering of financial securities by a firm to the general public.

Which one of these terms best describes the relationship between the rate of inflation and the rate of interest? A. No relationship B. Exponential relationship C. Direct relationship D. Indirect relationship

C. Direct relationship

True or false: U. S. interest rates can affect all exchange rates involving U. S. dollars.

True

Which one of these statements correctly applies to the market segmentation theory? A. Individual investors prefer longer-term securities and must be compensated to switch to shorter-term securities. B. The maturity preferences of individual investors are directly offset by the maturity preferences of financial intermediaries (FIs). C. Each individual investor has a preferred maturity based on his or her own financial situation. D. Financial intermediaries (FIs) are neutral in respect to security maturities.

C. Each individual investor has a preferred maturity based on his or her own financial situation.

Which money market security is defined as short-term funds transferred between financial institutions, often for no more than one day? A. Negotiable certificates of deposit B. Banker's acceptances C. Federal funds D. Commercial paper

C. Federal funds

According to the definition of a foreign exchange market, what good or commodity is exchanged in these markets? A. Foreign services B. Foreign-produced goods C. Foreign currency only D. Domestic-produced

C. Foreign currency only

Which type of bond will generally pay the lowest rate of interest based on its taxability provision? A. U.S. Treasury bond B. Corporate bond C. Municipal bond D. U.S. Treasury note

C. Municipal bond

How many initial public offerings can a corporation issue? A. Maximum of ten B. Two; one for bonds and one for stocks C. One D. Unlimited

C. One

Which one of these characteristics applies to money market securities? A. Issued solely by the U. S. Treasury B. High level of risk C. Short maturities D. Potentially large fluctuations in value

C. Short maturities

The term structure of interest rates is derived from which one of these? A. Consumer price index B. Fisher effect C. Time value of money D. Default risk concept

C. Time value of money

Which one of these is a characteristic of a derivative security? A. Price of asset exchanged determined when exchange occurs B. Risk-free security C. Value dependent on underlying security D. Informal agreement

C. Value dependent on underlying security

True or false: Capital markets are defined by the type of securities traded rather than the maturity of those securities.

False

True or false: In general, the quantity of loanable funds demanded drops as interest rates fall.

False

The traditional banking model exposes the institution to potential __________, ___________ rate, and __________ risk.

liquidity, interest, credit

Generally, the quantity of loanable funds supplied increases as interest rates ______________. (rise or fall)

rise or increase