FIN 3080 Chapter 2

Suppose that the current one-year Treasury bill rate is 3.15 percent and the expected one-year rate 12 months from now is 4.25 percent. According to the unbiased expectations theory, what should be the current rate for a two-year Treasury security? A) 3.70% B) 4.15% C) 2.36% D) 4.74% E) 5.50%

A) 3.7%

According to the liquidity premium theory of interest rates: A) Long-term spot rates are higher than the average of current and expected future short-term rates. B) Investors prefer certain maturities and will not normally switch out those maturities. C) Investors are indifferent between different maturities if the long-term spot rates are equal to the average of current and expected future short-term rates. D) The term structure must always be upward sloping. E) Long-term spot rates are totally unrelated to expectations of future short-term rates.

A) Long-term spot rates are higher than the average of current and expected future short-term rates.

Which of the following bond types pays interest that is exempt from federal taxation? A) Municipal bonds B) Corporate bonds C) Treasury bonds D) Convertible bonds E) Municipal bonds and Treasury bonds

A) Municipal bonds

You buy a car for $38,000. You agree to a 60-month loan with a monthly interest rate of 0.55 percent. What is your required monthly payment? A) $634.24 B) $745.29 C) $605.54 D) $764.07 E) None of these choices are correct

B) $745.29

Upon graduating from college this year, you expect to earn $25,000 per year. If you get your MBA, in one year you can expect to earn $35,000 per year. Over the year, inflation is expected to be 5%. In today's dollars, how much additional (less) money will you make from getting your MBA (to the nearest dollar) in your first year? A) -$2,462 B) $8,333 C) $8,750 D) $9,524 E) $10,000

B) $8,333

The relationship between maturity and yield to maturity is called the: A) Loan covenant B) Term structure C) Bond indenture D) Fisher effect E) DPR structure

B) Term structure

You want to have $5 million when you retire in 40 years. You believe you can earn 9 percent per year on your investment. How much must you invest each year to achieve your goal when you retire? (Ignore all taxes.) A) $10,412 B) $11,619 C) $14,798 D) $15,295 E) None of these choices are correct

C) $14,798

An investment pays $400 in one year, X amount of dollars in two years, and $500 in three years. The total present value of all the cash flows (including X) is equal to $1,500. If the nominal interest rate is 6 percent, what is X? A) $702.83 B) $822.41 C) $789.70 D) $749.67 E) $600.00

C) $789.70

An investor requires a 3 percent increase in purchasing power in order to induce her to lend. She expects inflation to be 2 percent next year. The nominal rate she must charge is about: A) 3 percent B) 2 percent C) 1 percent D) 5 percent E) 7 percent

D) 5 percent

According to the unbiased expectations theory: A) Markets are segmented and buyers stay in their own segment. B) Liquidity premiums are negative and time varying. C) The term structure will most often be upward sloping. D) The long-term spot rate is an average of the current and expected short-term interest rates. E) Forward rates are less than the expected future spot rates.

D) The long-term spot rate is an average of the current and expected future short-term interest rates.

Investment A pays 8% simple interest for 10 years. Investment B pays 7.75% compound interest for 10 years. Both require an initial $10,000 investment. The future value of A minus the future value of B equals _______ (to the nearest penny). A) $2,500.00 B) -$2,500.00 C) $1,643.32 D) $3,094.67 E) -$3,094.67

E) -$3,094.67

An investor wants to be able to buy 4 percent more goods and services in the future in order to induce her to invest today. During the investment period, prices are expected to rise by 2 percent. Which statement(s) below is/are true? I. 4 percent is the desired real risk-free interest rate. II. 6 percent is the approximate nominal rate of interest required. III. 2 percent is the expected inflation rate over the period. A) I only B) II only C) III only D) I and II only E) I, II, and III

E) I, II, and III