FIn 3323 review Test 1.docx

FIn 3323 review Test 1.docx - FIN 3323-002 Quiz#1 Name and...

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FIN 3323-002 Quiz #1 09/05/2017 Name and R# : True / False Questions 1. An investor earned a 5 percent nominal risk-free rate over the year. However, over the year, inflation increased by 2 percent. The investor’s real risk-free rate was less than his nominal rate of return. True False reference : Chapter Slide 02 page 2-2 and 2-3 2. Households generally supply more funds to the markets as their income and wealth increase, resulting in lower interest rates given the unchanged demand for funds. True False reference : Chapter Slide 02 page 2-8 and 2-15 Multiple Choices 3. According to the liquidity premium theory of interest rates, A. long-term spot rates are totally unrelated to expectations of future short-term rates. B. the term structure must always be upward sloping. C. investors prefer certain maturities and won’t normally switch out of those maturities. D. long-term interest rates are geometric averages of current and expected future short-term interest rates plus liquidity risk premiums that increase with maturity. E. investors are indifferent between different maturities if the long-term spot rates are equal to the average of current and expected future short-term rates. reference : Chapter Slide 02 page 2-24 4. According to the WSJ article for week 2 (posted on the class Blackboard), “a is a threat to Treasurys because it chips away at the b that their fixed payments offer.” What are a and b, respectively? A. nominal interest rate and real interest rate B. Fisher effect and default risk premium C. inflation and purchasing power D. liquidity risk and term to maturity E. none of the options reference : The WSJ Week 2 article 1
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Fill in the Blanks 5. The relationship between maturity and yield to maturity is called the (term struc- ture or Yield Curve). (Hint: This is the relationship between interest rates on bonds similar in terms except for maturity.) reference : Chapter Slide 02 page 2-22 FIN 3323-002 Quiz #2 09/14/2017 Name and R# : True / False Questions 1. Required rate of return are rates actually earned on investments. True False 2. Expected rate of return are rates participants would earn by buying securities at current market prices. True False 3. Realized rate of return are rates used by individual market participants to calculate fair present values. True False reference : Chapter Slide 03 page 3-2 Multiple Choices 4. Regarding duration of bonds, which is NOT true? A. Duration is the weighted-average time to maturity (measured in years) on a financial security. B. Duration measures the sensitivity (or elasticity) of a fixed-income securitys price to small interest rate changes. C. Duration captures the coupon and maturity effects on volatility. D. Duration incorporates the curvature of the price-yield curve into the es- timated percentage price change of a bond given an interest rate change.
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