Chap018 - Chapter 18 - Financial Markets and Asset Prices...

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Chapter 18 - Financial Markets and Asset Prices Chapter 18 Financial Markets and Asset Prices Multiple Choice Questions 1. If we plot the interest rates on government securities with different terms to maturity over the last three decades, we can see that a. There is no clear pattern B . They are all volatile but follow a similar pattern c. 10-year bonds have always had a lower yield than three-month Treasury bills d. Interest rates on average were lower in the 1980s than in the 1990s e. Interest rates were at their highest around 1991 Difficulty: Easy 2. If your bank pays you a nominal interest rate of 2.5% on funds in your savings account and the rate of inflation is 4%, what is the real rate of return on your savings? a. +6.5% b. +2.5% c. +1.5% D . -1.5% e. -4.0% Difficulty: Easy 3. The concept of arbitrage is very important to the understanding of financial markets since a. It can explain why U.S. government securities are much more desirable than securities from some foreign governments b. It explains why we are unable to predict future stock market swings c. It explains why the stock market reacts slowly to new information D . It says that, in equilibrium, asset prices will make financial investors equally willing to buy or sell an asset e. It says that future behavior of stock prices can be extrapolated from past behavior Difficulty: Easy 18-1
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Chapter 18 - Financial Markets and Asset Prices 4. The concept of arbitrage A . Applies to the stock, bond, and foreign currency markets b. Only applies to the stock market c. Only applies to the stock and bond markets d. Only applies to the foreign currency market e. Doesn't apply to any of these markets Difficulty: Easy 5. The concept of arbitrage implies that a. Stock market prices cannot be accurately predicted b. Financial markets are inefficient c. International interest rate differentials persist over the long run d. Long-term bonds and short-term bonds have the same yield E . None of the above Difficulty: Easy 6. Generally one can expect the yield of a corporate bond to be higher a. If the maturity of a bond is shorter b. If the bond is more liquid C . If the bond is less liquid d. If the corporation has a better rating e. If the earnings of the corporation are higher Difficulty: Easy 7. Payments made on government bonds in periodic instances (once a year, for example) are called a. Face values b. Par values c. Dividends D . Coupon payments e. None of the above Difficulty: Easy 18-2
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Chapter 18 - Financial Markets and Asset Prices 8. If the current market interest rate rises from 4% to 5%, the price of a ten-year maturity bond will A . Fall more than the price of a two-year maturity bond b. Fall less than the price of a two-year maturity bond c. Rise more than the price of a two-year maturity bond d. Rise less than the price of a two-year maturity bond e. Not be affected, and neither will the price of a two-year maturity bond Difficulty: Easy 9. The relationship between the yields of government securities with different terms to
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This note was uploaded on 12/05/2011 for the course ECON 201 taught by Professor Dr.matin during the Spring '09 term at Charleston.

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Chap018 - Chapter 18 - Financial Markets and Asset Prices...

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