FINANCE

72. One-year Treasury bill rates in 20XX averaged 5.15% and inflation for the year was 7.3%. If investors had expected the same inflation rate as that realized, calculate the real interest rate for 20XX according to the Fisher effect.
A. 0.00%
B. -2.15%
C. 2.15%
D. 3.95%

 

73. Assume that you observe the following rates on long-term bonds:

U.S. Treasury bonds = 4.15%
AAA Corporate bonds = 6.2%
BBB Corporate bonds = 7.15%

The main reason for the differences in the interest rates is:
A. Maturity risk premium
B. Inflation premium
C. Default risk premium
D. Convertibility premium

 

74. Which of the following statements is correct?
A. According to the unbiased expectations theory, the return for holding a 2-year bond to maturity is equal to the nominal rate divided by the real interest rate.
B. The rate on a 10-year Corporate can never be less than the rate on a 10-year Treasury.
C. We usually observe the inverted yield curve.
D. The rate on a 3-year Treasury can never be less than the rate on a 15-year Treasury.

 

75. One-year interest rates are 3%. The market expects one-year rates to be 5% one year from now. The market also expects one-year rates to be 7% two years from now. Assume that the unbiased expectations theory holds. Which of the following is correct?
A. The yield curve is downward sloping.
B. The yield curve is flat.
C. The yield curve is upward sloping.
D. We need the maturity risk premiums to be able to answer this question.

 

76. Which of the following statements is correct?
A. If the unbiased expectations theory is correct, we could see an inverted yield curve.
B. If a yield curve is inverted, long-term bonds have higher yields than short-term bonds.
C. If the maturity risk premium is zero, the yield curve would be flat.
D. If the unbiased expectations theory is correct, the maturity risk premium is zero.

 

77. The Wall Street Journal states that the yield curve for Treasuries is downward sloping and there is no liquidity premium or maturity risk premium. Given this information, which of the following statements is correct?
A. A 30-year corporate bond must have a higher yield than a 5-year corporate bond.
B. A 5-year corporate bond must have a higher yield than a 30-year Treasury bond.
C. A 5-year Treasury bond must have a higher yield than a 5-year corporate bond.
D. All of these statements are correct.

 

78. Which of the following statements is correct?
A. An IPO is an example of a primary market transaction.
B. Money markets are subject to wider price fluctuations and are therefore more risky than capital market instruments.
C. A direct transfer of funds is more efficient than utilizing financial institutions.
D. The market segmentation theory argues that the different investors have different risk preferences which determine the shape of the yield curve.

 

79. In 20XX, the 10-year Treasury rate was 4.5% while the average 10-year Aaa corporate bond debt carried an interest rate of 6.0%. What is the average default risk premium on Aaa corporate bonds?
A. 0.75%
B. 1.5%
C. 1.95%
D. 2.25%

 

80. Which of the following statements is correct?
A. The default risk premium of Baa 20-year corporate bonds over Aaa 20-year corporate bonds does not vary.
B. The market segmentation theory assumes that borrowers and investors do not want to shift from one maturity sector to another without an interest rate premium.
C. Real interest rates are the rates that are quoted in the news.
D. All of these statements are correct.

 

81. All of the following are types of financial institutions except _______.
A. Insurance companies
B. Pension funds
C. Thrifts
D. Federal Reserve Bank

 

82. All of the following are benefits that financial institutions provide to our economy except _________.
A. Increased liquidity
B. Increased monitoring
C. Increased dollar amount of funds flowing from suppliers to fund users
D. Increased price risk

 

83. All of the following are factors that affect nominal interest rates except ___________.
A. Time to maturity
B. Real interest rate
C. Convertibility features
D. Foreign exchange

 

84. Which of the following statements is correct?
A. A flat yield curve occurs when the yield-to-maturity is virtually unaffected by the term-to-maturity.
B. Real interest rates are generally lower than nominal interest rates.
C. Liquidity risk is the risk that a security may be difficult to sell on short notice for its true value.
D. All of these statements are correct.

 

85. Which of the following statements is incorrect?
A. Governments affect foreign exchange rates indirectly by altering prevailing interest rates within their own countries.
B. Foreign currency exchange rates vary with the day-to-day demand and supply of the two foreign currencies.
C. Central governments can intervene in foreign exchange markets directly and value their currency at high rates relative to another currency.
D. All of these statements are correct.

 

86. The theory that argues that individual investors and financial institutions have specific maturity preferences is called the ______________.
A. Market segmentation theory
B. Unbiased expectations theory
C. Liquidity preference theory
D. Inverted forward theory

 

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