Chapter 2 SSQ - Name: _ Class: _ Date: _ ID: A Chapter 2...

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Name: ________________________ Class: ___________________ Date: __________ ID: A 7 Chapter 2 Self Study Questions True/False Indicate whether the sentence or statement is true or false. ____ 1. If an individual investor buys and sells existing stocks through a broker, these are primary market transactions. ____ 2. If the Federal Reserve tightens the money supply, other things held constant, short-term interest rates will be pushed upward, and this increase probably will be greater than the increase in rates in the long-term market. ____ 3. The fact that a percentage of the interest income received by one corporation is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing. ____ 4. If the tax laws stated that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, it would probably encourage companies to use more debt financing than they presently do, other things held constant. ____ 5. Financial asset markets deal with stocks, bonds, mortgages, and other claims on real assets with respect to the distribution of future cash flows. ____ 6. The yield curve is downward sloping, or inverted, if the long-term rates are higher than the short-term rates. ____ 7. American depository receipts are foreign stocks that sell in American stock exchanges and are denominated in dollar prices. ____ 8. If you have information that a recession is ending, and the economy is about to enter a boom, and your firm needs to borrow money, it should probably issue long-term rather than short-term debt. ____ 9. The two reasons most experts give for the existence of a positive maturity risk premium are (1) because investors are assumed to be risk averse, and (2) because investors prefer to lend long while firms prefer to borrow short. ____ 10. An investor with a six-year investment horizon believes that interest rates are determined only by expectations about future interest rates, (i.e., this investor believes in the expectations theory). This investor should expect to earn the same rate of return over the 6-year time horizon if he or she buys a 6-year bond or a 3-year bond now and another 3-year bond three years from now (ignore transaction costs). ____ 11. The existence of an upward sloping yield curve proves that the liquidity preference theory is correct, because an upward sloping curve necessarily implies that firms must offer a maturity risk premium in order to induce investors to lend for longer periods. ____ 12. Suppose financial institutions, such as savings and loans, were required by law to make long-term, fixed interest rate mortgages, but, at the same time, were largely restricted, in terms of their capital sources, to deposits that could be withdrawn on demand. Under these conditions, these financial institutions should prefer a "normal" yield curve to an inverted curve. ____ 13.
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This note was uploaded on 06/19/2009 for the course FIN 5FMA taught by Professor Dusa during the Three '09 term at La Trobe University.

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Chapter 2 SSQ - Name: _ Class: _ Date: _ ID: A Chapter 2...

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