Answer Options:
a. True
b. False
Answer: a. True
Question: During periods when inflation is increasing, interest rates tend to increase, while interest rates tend to fall when inflation is declining.
Answer Options:
a. True
b. False
Answer: a. True
Question: Which of the following bank accounts has the lowest effective annual return?
Answer Options:
a. An account that pays 8% nominal interest with monthly compounding.
b. An account that pays 8% nominal interest with annual compounding.
c. An account that pays 7% nominal interest with daily (365-day) compounding.
d. An account that pays 7% nominal interest with monthly compounding.
e. An account that pays 8% nominal interest with daily (365-day) compounding.
Answer: d. An account that pays 7% nominal interest with monthly compounding.
Question: The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan’s life, the greater the percentage of the payment that will be a repayment of principal.
Answer Options:
a. True
b. False
Answer: a. True
Question: A $150,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?
Answer Options:
a. The annual payments would be larger if the interest rate were lower.
b. If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan.
c. The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were higher.
d. The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.
e. The proportion of interest versus principal repayment would be the same for each of the 7 payments.
Answer: d. The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.
Question: The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) inflation.
Answer Options:
a. True
b. False
Answer: a. True
Question: Starting to invest early for retirement reduces the benefits of compound interest.
Answer Options:
a. True
b. False
Answer: b. False
Question: Bad managerial judgments or unforeseen negative events that happen to a firm are defined as “company-specific,” or “unsystematic,” events, and their effects on investment risk can in theory be diversified away.
Answer Options:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
a. You hold two bonds, a 10-year, zero coupon, and a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline.
b. The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
c. You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.
d. The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates.
e. The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.
Answer Options:
a. True
b. False
c. False
d. False
e. False
Answer: a. True
Question: The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.
Answer Options:
a. True
b. False
Answer: b. False
Question: A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.
Answer Options:
a. True
b. False
Answer: b. False
Question: Which of the following bank accounts has the highest effective annual return?
Answer Options:
a. An account that pays 8% nominal interest with monthly compounding.
b. An account that pays 8% nominal interest with annual compounding.
c. An account that pays 7% nominal interest with daily (365-day) compounding.
d. An account that pays 7% nominal interest with monthly compounding.
e. An account that pays 8% nominal interest with daily (365-day) compounding.
Answer: e. An account that pays 8% nominal interest with daily (365-day) compounding.
Question: If the pure expectations theory is correct, a downward-sloping yield curve indicates that interest rates are expected to decline in the future.
Answer Options:
a. True
b. False
Answer: a. True
Question: Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?
a. An 8-year bond with a 9% coupon.
b. A 1-year bond with a 15% coupon.
c. A 3-year bond with a 10% coupon.
d. A 10-year zero coupon bond.
e. A 10-year bond with a 10% coupon.
Answer Options:
a. False
b. False
c. False
d. True
e. False
Answer: d. True
Question: When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment’s percentage declines in the loan’s later years.
Answer Options:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
a. 10-year, zero coupon bonds have more reinvestment risk than 10-year, 10% coupon bonds.
b. A 10-year, 10% coupon bond has less reinvestment risk than a 10-year, 5% coupon bond (assuming all else equal).
c. The total (rate of) return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year, divided by the bond’s price at the beginning of the year.
d. The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond.
e. A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%.
Answer Options:
a. False
b. False
c. True
d. False
e. False
Answer: c. True
Question: Which of the following statements is CORRECT?
Answer Options:
A. A bond is likely to be called if its coupon rate is below its YTM.
B. A bond is likely to be called if its market price is below its par value.
C. Even if a bond’s YTC exceeds its YTM, an investor with an investment horizon longer than the bond’s maturity would be worse off if the bond were called.
D. A bond is likely to be called if its market price is equal to its par value.
E. A bond is likely to be called if it sells at a discount below par.
Answer: C. Even if a bond’s YTC exceeds its YTM, an investor with an investment horizon longer than the bond’s maturity would be worse off if the bond were called.
Question: Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.
Answer Options:
a. True
b. False
Answer: a. True
Question: If the pure expectations theory is correct (that is, the maturity risk premium is zero), which of the following is CORRECT?
a. An upward-sloping Treasury yield curve means that the market expects interest rates to decline in the future.
b. A 5-year T-bond would always yield less than a 10-year T-bond.
c. The yield curve for corporate bonds may be upward sloping even if the Treasury yield curve is flat.
d. The yield curve for stocks must be above that for bonds, but both yield curves must have the same slope.
e. If the maturity risk premium is zero for Treasury bonds, then it must be negative for corporate bonds.
Answer Options:
Answer: c. The yield curve for corporate bonds may be upward sloping even if the Treasury yield curve is flat.
Question: Three $1,000 face value, 10-year, noncallable, bonds have the same amount of risk, hence their YTMs are equal. Bond 8 has an 8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual coupon. Bond 10 sells at par. Assuming that interest rates remain constant for the next 10 years, which of the following statements is CORRECT?
a. Bond 8’s current yield will increase each year.
b. Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity.
c. Bond 12 sells at a premium (its price is greater than par), and its price is expected to increase over the next year.
d. Bond 8 sells at a discount (its price is less than par), and its price is expected to increase over the next year.
e. Over the next year, Bond 8’s price is expected to decrease, Bond 10’s price is expected to stay the same, and Bond 12’s price is expected to increase.
Answer Options:
a. False
b. False
c. False
d. True
e. False
Answer: d. True
Question: A time line is meaningful even if all cash flows do not occur annually.
Answer Options:
a. True
b. False
Answer: a. True
Question: If you plotted the returns of a company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future.
a. True
b. False
Answer Options:
Answer: False