Financial Markets and Institutions Exam 2

Tom deposits $10,000 in a savings deposit paying 4% compounded monthly. What amount would he have at the end of seven years? A. $13,225 B. $13,159 C. $13,179 D. $13,325

A. $13,225

A 3-year zero coupon bond selling at $900 and yielding 12.18 percent has a duration of A. 3 years B. 2.78 years C. 2.50 years D. 2 years

A. 3 years

A bond's price would likely fall as a result of any of the following except A. heavy Federal Reserve buying on the open market B. the Fed Funds rate going up C. contraction of the supply of loanable funds D. strengthening of the demand for loanable funds

A. heavy Federal Reserve buying on the open market

The value of a conversion option from a variable-coupon bond to a fixed-coupon bond should rise when A. interest rates fall B. price of the bond rises C. the bond's credit rating is upgraded D. interest rates rise

A. interest rates fall

Suppose the 1-year spot rate is 1% and the 4-year spot rate is 3%. The implied forward rate on a 3-year security of the same risk class originating 1 year from now is A. 2.313% B. 3.676% C. 4.166% D. 3.767%

B. 3.676%

Which of the following statements about bonds is NOT true? A. The greater the default risk, the greater the yield B. Bonds selling at premium are especially high quality C. The less marketable a bond, the higher the yield D. Municipal bonds have lower yields than similar corporate bonds

B. Bonds selling at premium are especially high quality

Which bond characteristic is not fixed by contract? A. par value B. yield C. coupon D. maturity

B. yield

With reference to the data above, what is the default risk premium on commercial paper? A. 5.65% B. 0.95% C. 0.79% D. 0.55%

C. 0.79%

Applying the expectations theory, a bank depositor chooses between purchasing a one-year CD paying 5% and a two-year CD paying 5.5%. If indifferent between the two, the depositor must expect one-year CDs one year from now to have a rate of A. 6.5% B. 4.5% C. 6.0% D. 5.0%

C. 6.0%

Which of the following statements about callable bonds is not true? A. Callable bonds have higher yields than comparable noncallable bonds B. The call price is usually above the bond's par value C. Calls usually benefit the bondholder D. Investors are notified when bonds are called

C. Calls usually benefit the bondholder

Suppose a U.S Treasury note with 10 years to maturity yields 2 percent. An XYZ Corporation Bond with the same term to maturity yields 3 percent. Most of the difference is probably because of A. liquidity premium B. interest rate risk C. default risk D. purchasing power risk

C. default risk

An important difference between "yield to maturity" and "expected yield" is that A. yield to maturity assumes reinvestment of interest coupons at varying rates B. yield to maturity requires an interest rate forecast C. expected yield requires an interest rate forecast D. yield to maturity ignores par value

C. expected yield requires an interest rate forecast

As bond maturity _________, so does the _________ and ________ A. decreases; coupon rate; price volatility B. decreases; duration; face value C. increases; duration; price volatility D. increases; risk; coupon rate

C. increases; duration; price volatility

If market interest rates fall after a bond is issued, the A. face value of the bond increases B. investor will sell the bond C. market value of the bond is increasing D. market value of the bond is decreasing

C. market value of the bond is increasing

Each of the following bonds was issued at the same time by the same issuer with the same maturity. Which has the shortest duration? A. annual coupon bond B. semiannual coupon bond C. quarterly coupon bond D. zero coupon bond

C. quarterly coupon bond

Interest rate risk is: A. measured by duration B. the extent that coupon rates vary with time C. the potential variability in the realized rate of return caused by changes in market interest rates D. the potential variability in the bond maturity caused by changing discount rates

C. the potential variability in the realized rate of return caused by changes in market interest rates

Use the below interest rate data to answer following questions 90-day Treasury bills 8.36 percent 180-day Treasury bills 8.48 percent 2-year Treasury notes 9.10 percent 3-year Treasury notes 9.25 percent 90-day Commercial paper 9.15 percent 3-year Corporate bonds (AA) 10.10 percent 3-year Municipal (AA) 7.07 percent Which one of the above bonds does the market view as having the greatest default risk? A. 90-day Treasury securities B. 180-day Treasury securities C. 2-year Treasury securities D. 90-day Commercial paper

D. 90-day Commercial paper

The major determinant of the bond ratings assigned by Moody's, Standard and Poors, or Fitchs is A. marketability B. tax treatment C. term to maturity D. default risk

D. default risk

The actual yield curve is usually more upward sloping than the one predicted by expectation theory because A. interest rate forecasts are usually wrong B. investors are indifferent between short maturities and long maturities C. shorter-term securities are more volatile D. investors usually demand a liquidity premium on longer-term securities

D. investors usually demand a liquidity premium on longer-term securities

All else equal, callable bonds pay a higher yield because A. they usually carry higher default risk B. the call option implies an expectation that interest rates will rise C. the call option implies an expectation that bond prices will fall D. the call option increases the bondholder's reinvestment risk

D. the call option increases the bondholder's reinvestment risk

Assume all the following bonds were issued at the same time with the same maturity by the same issuer and that market yield is now higher than coupon rates of all bonds. Which should trade at the deepest discount from par? A. annual coupon bond B. semiannual coupon bond C. quarterly coupon bond D. zero coupon bond

D. zero coupon bond

A downward sloping yield curve forecasts higher future interest rates.

False

If the coupon rate equals the market rate, a bond is likely to be selling at a discount

False

Short-term bonds have greater price risk compared to long-term bonds

False

An investor in the 33 percent tax bracket should buy a 6 percent municipal bond rather than a similarly rated 8.5 percent corporate bond.

True

Default risk premiums are usually smaller during periods of high economic growth

True

The higher the coupon rate, the lower the bond price volatility

True

The less marketable a security, the higher its yield.

True

The price of a bond and the market rate of interest are inversely related.

True

The realized yield may be influenced by coupon reinvestment rates

True

The shape of the yield curve is at least partly determined by expectations of change in future interest rates.

True