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(Answers- White version) - part I Answer the following...

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part I: Answer the following Multiple choice questions 1. Which of the following $1,000 face value securities has the highest yield to maturity? (a) A 5 percent coupon bond selling for $1,000 (b) A 10 percent coupon bond selling for $1,000 (c) A 12 percent coupon bond selling for $1,000 (d) A 12 percent coupon bond selling for $1,100 Answer: C 2. The return on a 10 percent coupon bond that initially sells for $1,000 and sells for $900 one year later is (a) –10 percent. (b) –5 percent. (c) 0 percent. (d) 5 percent. Answer: C 3. Which of the following are true concerning the distinction between interest rates and return? (a) The rate of return on a bond will not necessarily equal the interest rate on that bond. (b) The return can be expressed as the sum of the current yield and the rate of capital gains. (c) The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1. (d) All of the above are true. (e) Only (a) and (b) of the above are true.
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Answer: E Answer: C 4. If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding? (a) A bond with one year to maturity (b) A bond with five years to maturity (c) A bond with ten years to maturity (d) A bond with twenty years to maturity Answer: A 5. According to the pure expectations theory of the term structure, (a) when the yield curve is steeply upward-sloping, short-term interest rates are expected to rise in the future. (b) when the yield curve is downward-sloping, short-term interest rates are expected to remain relatively stable in the future. (c) investors have strong preferences for short-term relative to long-term bonds, explaining why yield curves typically slope upward. (d) all of the above. (e) only (a) and (b) of the above. Answer: A 6. When the expected inflation rate increases, the demand for bonds _________, the supply of bonds _________, and the interest rate _________.
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(a) increases; increases; rises (b) decreases; decreases; falls (c) increases; decreases; falls (d) decreases; increases; rises Answer: D 7. Which theory of the term structure proposes that bonds of different maturities are not substitutes for one another? (a) market segmentation theory (b) pure expectations theory (c) liquidity premium theory (d) separable markets theory Answer: A 8. Since yield curves are usually upward sloping, the _________ indicates that, on average, people tend to prefer holding short-term bonds to long-term bonds. (a) market segmentation theory (b) pure expectations theory (c) liquidity premium theory (d) both (a) and (b) of the above (e) both (a) and (c) of the above Answer: E 9. (I) If a corporation suffers big losses, the demand for its bonds will rise because of the higher interest rates the firm must pay. (II) The spread between the interest rates on bonds with default risk and default-free bonds is called the risk premium. (a) (I) is true, (II) false.
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This test prep was uploaded on 04/17/2008 for the course BUS ADM 442 taught by Professor Zeatier during the Spring '07 term at Wisconsin Milwaukee.

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(Answers- White version) - part I Answer the following...

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