a. If companies have fewer good investment opportunities, interest rates are likely to increase.
b. If individuals increase their savings rate, interest rates are likely to increase.
c. If expected inflation increases, interest rates are likely to increase.
d. Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.
e. Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.
Answer Options:
Answer: c. If expected inflation increases, interest rates are likely to increase.
Question: Which of the following statements is CORRECT?
Answer Options:
a. The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due.
b. If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%.
c. If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
d. The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
e. An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.
Answer: b. If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%.
Question: A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT?
a. The bond’s coupon rate exceeds its current yield.
b. The bond’s current yield exceeds its yield to maturity.
c. The bond’s yield to maturity is greater than its coupon rate.
d. The bond’s current yield is equal to its coupon rate.
e. If the yield to maturity stays constant until the bond matures, the bond’s price will remain at $850.
Answer Options:
a. False
b. False
c. True
d. False
e. False
Answer: c. True
Question: Assuming that the term structure of interest rates is determined as posited by the pure expectations theory, which of the following statements is CORRECT?
a. In equilibrium, long-term rates must be equal to short-term rates.
b. An upward-sloping yield curve implies that future short-term rates are expected to decline.
c. The maturity risk premium is assumed to be zero.
Answer Options:
Answer: b. An upward-sloping yield curve implies that future short-term rates are expected to decline.
Question: Which of the following events would make it more likely that a company would call its outstanding callable bonds?
a. The company’s bonds are downgraded.
b. Market interest rates rise sharply.
Answer Options:
a. True
b. False
Answer: b. False
Question: The “yield curve” shows the relationship between bonds’ maturities and their yields.
Answer Options:
a. True
b. False
Answer: a. True
Question: Short Corp just issued bonds that will mature in 10 years, and Long Corp issued bonds that will mature in 20 years. Both bonds promise to pay a semiannual coupon, they are not callable or convertible, and they are equally liquid. Further assume that the Treasury yield curve is based only on the pure expectations theory. Under these conditions, which of the following statements is CORRECT?
a. If the yield curve for Treasury securities is flat, Short’s bond must under all conditions have the same yield as Long’s bonds.
b. If the yield curve for Treasury securities is upward sloping, Long’s bonds must under all conditions have a higher yield than Short’s bonds.
c. If Long’s and Short’s bonds have the same default risk, their yields must under all conditions be equal.
d. If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short’s bonds must under all conditions have a lower yield than Long’s bonds.
e. If the Treasury yield curve is downward sloping, Long’s bonds must under all conditions have the lower yield.
Answer Options:
Answer: d. If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short’s bonds must under all conditions have a lower yield than Long’s bonds.
Question: Which of the following statements is CORRECT?
a. If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of their coupon rates.
b. All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.
c. All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.
d. If a bond’s yield to maturity exceeds its coupon rate, the bond’s price must be less than its maturity value.
e. If a bond’s yield to maturity exceeds its coupon rate, the bond’s current yield must be less than its coupon rate.
Answer Options:
a. True
b. False
c. False
d. True
e. False
Answer: d. True
Question: If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.
Answer Options:
a. True
b. False
Answer: a. True
Question: If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.
Answer Options:
a. True
b. False
Answer: b. False
Question: Inflation is expected to increase steadily over the next 10 years, there is a positive maturity risk premium on both Treasury and corporate bonds, and the real risk-free rate of interest is expected to remain constant. Which of the following statements is CORRECT?
a. The yield on 10-year Treasury securities must exceed the yield on 7-year Treasury securities.
b. The yield on any corporate bond must exceed the yields on all Treasury bonds.
c. The yield on 7-year corporate bonds must exceed the yield on 10-year Treasury bonds.
d. The stated conditions cannot all be true—they are internally inconsistent.
e. The Treasury yield curve under the stated conditions would be humped rather than have a consistent positive or negative slope.
Answer Options:
Answer: e. The Treasury yield curve under the stated conditions would be humped rather than have a consistent positive or negative slope.
Question: If an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable risk.
Answer Options:
a. True
b. False
Answer: b. False
Question: Which of the following is the SMALLEST?
a) Tissue
b) Organ
c) Molecule
d) Cell
Answer Options:
Answer: c) Molecule