Chapter 2 Ayres

True or false: The unbiased expectation theory acknowledges that an investor with an "n" year investment horizon has a choice between purchasing one "n" year maturity security, or a series of "n" one-year securities

True

The difference between the nominal rate quoted on a security and the rate quoted on a Treasury security with similar characteristics is called the: a. credit risk premium b. maturity risk premium c. default risk premium d. inflation risk premium

a. credit risk premium c. default risk premium

Investors in callable securities generally require ______ interest compared to non-callable securities a. higher b. the same c. lower d. variable

a. higher

The ______ the annuity payment "PMT", the ______ the future value of the annuity. a. higher; higher b. higher; lower c. lower; higher d. lower; lower

a. higher; higher d. lower; lower

When financial market participants have ______ near-term spending needs, the supply of loanable funds at every interest rate is ______ a. higher; lower b. lower; higher c. higher; higher d. lower; lower

a. higher; lower b. lower; higher

As an investor's utility (enjoyment) of assets obtained with borrowed funds increases, the demand for borrowed funds will _____ and interest rates will_______. a. increase; increase b. decrease; decrease c. decrease; increase d. increase; decrease

a. increase; increase

An increase in which of the following factors will cause household to increase their supply of loanable funds provided? a. interest rates b. immediate consumption needs c. riskiness of investments d. household wealth

a. interest rates d. household wealth

Both the unbiased expectations theory and the liquidity premium theory ignore investor preferences regarding the _______ of the securities they hold. a. maturity b. return c. number d. price

a. maturity

Investors are willing to supply more funds at higher interest rates because: a. their reward is higher b. the demand is higher c. their reward is lower d. demand is lower

a. their reward is higher

Business demand funds for which of the following reasons? a. to invest in long-term (fixed) assets like plant and equipment b. to satisfy short-term working capital needs for inventory and receivables c. to make speculative investments in currency markets d. to pay cumulative dividends to preferred shareholders

a. to invest in long-term (fixed) assets like plant and equipment b. to satisfy short-term working capital needs for inventory and receivables

Due to the value of the conversion option, convertible securities generally pay ______ rate of interest than similar non-convertible securities. a. the same b. a lower c. a variable d. a higher

b. a lower

A consequence of the unbiased expectation theory is that if investors believe that short-term interest rates will _______ in future periods, the yield curve will be ______ sloped. a. increase; negatively b. decrease; negatively c. decrease; positively d. increase; positively

b. decrease; negatively d. increase; positively

the default risk premium tends to _______ when the economy is _______. a. decrease; contracting b. increasing; contracting c. decrease; expanding d. increase; expanding

b. increasing; contracting c. decrease; expanding

Short-term securities have a more active secondary market and hence are more _____ than long-term securities: a. risky b. liquid c. desirable d. profitable

b. liquid

The theory that investors must be compensated for the higher price risk and lower liquidity inherent in longer-term securities is called the a. theory of market impostors b. liquidity premium theory c. market segmentation theory d. unbiased expectations theory

b. liquidity premium theory

For securities that are not highly liquid, investors demand a _______ to the interest rate as compensation. a. default risk premium b. liquidity risk premium c. rate risk premium d. inflation risk premium

b. liquidity risk premium

A highly liquid asset has which of the following characteristics? a. low sale price b. low transaction cost c. predictable price d. can be sold quickly

b. low transaction cost c. predictable price d. can be sold quickly

The _____ the default risk of a security, the ______ the interest rate demanded by the buyer. a. higher; lower b. lower; lower c. lower; higher d. higher; higher

b. lower; lower d. higher; higher

The loanable funds theory views the level of interest rates as being determined by: a. consumer confidence b. supply and demand for funds c. the Federal Reserve Bank d. the U.S. Treasury

b. supply and demand for funds

Market segmentation theory posits that the ______ and _____ of securities of differing maturities determines the interest rate at each maturity and hence the shape of the yield curve. a. volume; cost b. supply; demand c. supply; risk d. risk; return

b. supply; demand

Investors are willing to supply more funds at higher interest rates because: a. demand is lower b. their reward is higher c. the demand is higher d. their reward is lower

b. their reward is higher

A real risk-free interest rate is what an investor could earn in a world without a. opportunity b. cost c. inflation d. risk

c. inflation

As the ______ of a financial security decreases, it become more attractive to investors and investors are willing to supply more funds to invest in it. The supply curve shifts right and the interest rate _____. a. rating; increases b. return; increases c. risk; decreases d. reputation; decreases

c. risk; decreases

The prices of securities with longer maturities are ______ sensitive to changes in interest rates when compared to shorter maturity securities. a. less b. not c. partially d. more

d. more

Over time, the most common shape of the yield curve is ______ indicating that on average, the maturity premium is ________. a. flat; zero b. unevenly sloped; uncertain c. negatively sloped; negative d. positively sloped; positive

d. positively sloped; positive

A consequence of the unbiased expectation theory is that if investors believe that short-term interest will _____ in future periods, the yield curve will be ________ sloped. a. decrease; negatively b. decrease; positively c. increase; negatively d. increase; positively

a. decrease; negatively d. increase; positively

Investors demand more funds at lower interest rates because: a. the cost of borrowing funds is lower b. the cost of borrowing funds is uncertain c. the cost of borrowing funds is higher d. the cost of borrowing funds may be less volatile

a. the cost of borrowing funds is lower

The relationship among the real risk-free rate, the expected inflation, andthe nominal intereset rate is a called: a. the nominal effect b. the Fisher effect c. the inflation effect d. the fisher gambit

b. the Fisher effect

_________ are regarded as having no default risk. a. bankers' acceptances b. interbank loans c. U.S. government securities d. mortgage-backed securities

c. U.S. government securities

If the rate of interest is set above the equilibrium rate, there will be _____ loanable funds. a. just enough b. a deficit of c. a surplus of

c. a surplus of

The Fisher effect predicts that the _______ expected inflation is, the _____ will be nominal interest rates. a. higher; lower b. lower; higher c. higher; higher d. lower; lower

c. higher; higher d. lower; lower

For securities that are not highly liquid, investors demand a ______ to the interest rate as compensation. a. inflation risk premium b. rate risk premium c. liquidity risk premium d. default

c. liquidity risk premium

One model that is commonly used to explain interest rates and interest rate movements is called the: a. borrowed funds hypothesis b. interest rate parity theory c. loanable funds theory d. theory of financial relativity

c. loanable funds theory

The loanable funds theory categorizes all market participants (consumers, businesses, governments, and foreign participants) as net ________ or ________ of funds. a. users; consumers b. generators; printers c. providers; creators d. suppliers; demanders

d. suppliers; demanders

The demand for loanable funds _______ as interest rates increase. a. becomes more volatile b. does not change c. increase d. decreases

d. decreases

The financial sector of U.S. business is the ______ provider of loanable funds and the _____ user of loanable funds a. largest; smallest b. smallest; largest c. smallest; smallest d. largest; largest

d. largest; largest

the difference between the required yield on long and short-term securities of the same characteristics except maturity is called the: a. default risk premium b. inflation premium c. credit risk premium d. maturity premium

d. maturity premium