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Unformatted text preview: Please choose the best answer of the choices presented in the multiple choice questions. 1. If the interest rate is zero, a promise to receive a $100 payment one year from now is: A. More valuable than receiving $100 today B. Less valuable than receiving $100 today C. Equal in value to receiving $100 today D. Equal in value to receiving $101 today 2. Which of the following best expresses the proceeds a lender receives from a oneyear simple loan when the annual interest rate equals i? A. PV + i B. FV/i C. PV(1 + i) D. PV/i 3. Compound interest means that: A. You get an interest deduction for paying your loan off early B. You get interest on interest C. You get an interest deduction if you take out a loan for longer than one year D. Interest rates will rise on larger loans 4. Which of the following best expresses the payment a saver receives for investing their money for two years? A. PV + PV B. PV + PV (1 + i) C. PV( 1 + i)2 D. 2PV( 1 +i) 5. The future value of $100 that earns 10% annually for n years is best expressed by which of the following? A. $100(0.1)n B. $100 x n x (1.1) C. $100(1.1)n D. $100/(1.1)n 6. Which of the following best expresses the future value of $100 left in a savings account earning 3.5% for three and a half years? A. $100(1.035)3.5 B. $100(0.35)3.5 C. $100 x 3.5 x (1.035) D. $100(1.035)3/2 7. Farou invests $2,000 at 8% interest. About how long will it take for Farou to double his investment (e.g., to have $4,000)? A. 4 years B. 5 years C. 8 years D. 9 years 8. The decimal equivalent of a basis point is: A. 0.0001 B. 1.00 C. 0.001 D. 0.01 9. The higher the future value of the payment: A. The lower the present value B. The higher the present value C. The future value doesn't impact the present value, only the interest rate really matters D. The lower the present value because the interest rate must fall 10. The shorter the time until a payment: A. The higher the present value B. The lower the present value because time is valuable C. The lower must be the interest rate D. The higher must be the interest rate 11. The lower the interest rate, i: A. The lower is the present value B. The greater must be n C. The higher is the present value D. The higher is the future value 12. Higher savings usually requires higher interest rates because: A. Everyone prefers to save more instead of consuming B. Saving requires sacrifice and people must be compensated for this sacrifice C. Higher savings means we expect interest rates to decrease D. Of the rule of 72 13. The internal rate of return of an investment is: A. The same as return on investment B. Zero when the present value of an investment equals its cost C. The interest rate that equates the present value of an investment with its cost D. Equal to the market rate of interest when an investment is made 14. If the internal rate of return from an investment is more than the opportunity cost of funds: A. The firm should make the investment B. The firm should not make the investment C. The firm should only make the investment using retained earnings D. The firm should only make part of the investment and wait to see if interest rates decrease 15. If a lender wants to earn a real interest rate of 3% and expects inflation to be 3%, he/she should charge a nominal interest rate that: A. Is at least 7% B. Is anything above 0% C. Equals the real rate desired plus expected inflation D. Equals the real rate desired less expected inflation 16. Investors usually obtain bond ratings from: A. Private bondrating agencies B. The annual tax returns of the issuer C. The U.S. government from publicly available information D. Public Information made available by the bond issuers 17. What is the highest bond rating assigned by Standard and Poor's? A. AA B. EEE C. AAA D. A 18. The lowest rating for an investment grade bond assigned by Moody's is: A. Baa B. A C. BBB D. Aa 19. Bonds rated as "highly speculative": A. Are rated so because they guarantee high returns for the buyer B. Are commonly referred to as junk bonds C. Are ranked just below investment grade by Standard & Poor's D. Are rated so because they do not have any default risk 20. Once a bond rating is assigned, it: A. Never changes over the life of the bond B. Can change as the financial position of the issuer changes C. Can only change if the rating change is approved by the Securities and Exchange Commission D. Can change on the next bond from the issuer but is fixed for the current bond 21. Bonds issued by the U.S. Treasury are referred to as benchmark bonds because: A. They are always purchased for a premium B. They are the closest thing to a riskfree bond C. All bonds from national governments are labeled as benchmark bonds D. All bonds from the U.S. government have the same rate of interest 22. The risk spread is: A. The difference between a bond's purchase price and selling price B. The difference between the bond's yield and the yield on a U.S. Treasury bond of the same maturity C. Less than 0 (zero) for a U.S. Treasury bond D. Assigned by a bondrating agency 23. The risk structure of interest rates says: A. The interest rates on a variety of bonds will move independently of each other B. Lower rated bonds will have higher yields C. U.S. Treasury bond yields always change by more than other bonds D. Interest rates only compensate for risk in structured amounts 24. The yield on a taxexempt bond: A. Equals the taxable bond yield times one minus the tax rate B. Is equal to the yield on a U.S. 30year bond C. Is called the riskfree yield D. Only applies to foreign bonds because they are exempt from U.S. income taxes 25. Suppose the economy has an inverted yield curve. According to the Expectations Hypothesis, which of the following interpretations could be used to explain this? A. Interest rates are expected to fall in the future B. Investors prefer bonds with more interestrate risk C. Investors prefer bonds with less interestrate risk D. The term spread is positive 26. The risk spread on bonds fluctuates mainly because: A. Taxes tend to increase over time B. Bond rating agencies are often inconsistent C. New information about a borrower's financial condition becomes available D. People change their attitudes towards risk quickly 27. During a recession you would expect the difference between the commercial paper rate and the yield on U.S. Tbills of the same maturity to: A. Be the same since their maturities are the same B. Increase reflecting the possibility of higher default risk for commercial paper C. Decrease D. Fluctuate on a daily basis 28. If the federal government replaced the current income tax with a national sales tax, the price of: A. Corporate bonds would rise B. Municipal bonds would rise C. Corporate bonds would fall while the price of municipal bonds would rise D. Municipal bonds would fall while the price of corporate bonds would rise 29. The term structure of interest rates: A. Always results in an upward sloping yield curve B. Represents the variation in yields for securities differing in maturities C. Usually results in a flat yield curve D. Usually results in a downward sloping yield curve 30. When the yield curve is upward sloping, people are expecting: A. An economic slowdown B. The U.S. Treasury may default on its obligations C. The Federal Reserve is going to ease monetary policy D. Longterm yields to be higher than shortterm yields 31. The Expectations Hypothesis assumes: A. A high level of uncertainty regarding the future of longterm yields B. Investors know the yields on bonds today and form expectations of the yields on shortterm bonds in future time periods C. Securities of different maturities are not perfect substitutes for each other D. The risk premium increases with longer maturities 32. Suppose that interest rates are expected to remain unchanged over the next few years. However, there is a risk premium for longerterm bonds. According to the liquidity premium theory, the yield curve should be: A. Upward sloping and very steep B. Upward sloping and relatively flat C. Inverted D. Vertical 33. A flight to quality refers to a move by investors: A. Away from bonds towards stocks B. Towards securities of other countries and away from U.S. Treasuries C. Towards precious metals and away from U.S. Treasury bonds D. Away from lowquality bonds towards highquality bonds 34. How would you expect the mayors of most U.S. cities to respond to a proposed significant reduction in U.S. income taxes? A. Favorably, since this will significantly increase the demand for municipal bonds B. Unfavorably, the demand for municipal bonds will fall and their yields will increase C. Favorably, the price of municipal bonds should increase and their yields fall D. No reaction, this should have no impact on municipal bonds at all 35. A zerocoupon bond refers to a bond which: A. Does not pay any coupon payments because the issuer is in default B. Promises a single future payment C. Pays coupons only once a year D. Pays coupons only if the bond price is above face value 36. A consol is: A. Another name for a zerocoupon bond B. A bond with a maturity date exceeding 10 years C. A bond that makes periodic interest payments forever but never matures D. A form of a bond that is issued quite often by the U.S. Treasury 37. A pure discount bond is also known as: A. A consol B. A fixed payment loan C. A coupon bond D. A zerocoupon bond 38. Which of the following best expresses the formula for determining the price of a U.S. Treasury bill that matures n periods from now per $100 of face value when the interest rate is i? A. $100/(1 + i)n B. $100(1 + i) C. $100/(1 + i) D. 1 + $100/(1 + i)n 39. The relationship between the price and the interest rate for a zero coupon bond is best described as: A. Volatile: B. Fluctuating C. Inverse D. Nonexistent 40. The price of a coupon bond can best be described as: A. The present value of the face value B. The future value of the coupon payments C. The future value of the coupon payments and the face value D. The present value of the face value plus the present value of the coupon payments 41. The price (P) of a consol offering an annual coupon payment (C) is best expressed by: A. F/C B. C(1 + i) C. C/(1+ i) D. C/i 42. When the price of a bond equals the face value: A. The yield to maturity will be above the coupon rate B. The yield to maturity will be below the coupon rate C. The current yield is equal to the coupon rate D. The yield to maturity is greater than the current yield 43. The bid price for a bond quote is: A. The price at which the bond dealer is willing to sell the bond B. The price at which the bond dealer is willing to purchase the bond C. Fixed over the life of a bond D. Determined solely by the time left to maturity 44. In reading bond quotes: A. The bid price is usually above the asked price B. The asked price is fixed over the life of the bond C. The asked price is usually above the bid price D. Bid and asked prices must be equal as set forth by SEC regulations 45. The bond dealer's spread is: A. The asking price less the bid price B. The difference between the current yield and the yield to maturity C. The bid price less the asking price D. Usually negative; the dealer makes a profit holding the bonds 46. The larger the bond dealer's spread: A. The less liquid is the market for that bond B. The greater is the coupon rate for that bond C. The more liquid is the market for that bond D. The less risk there is for the dealer to hold that bond 47. If the U.S. government's borrowing needs increase, all other factors constant: A. The demand for bonds will decrease B. The price of bonds will increase C. The supply of bonds will increase D. The yields on bonds will decrease 48. As general business conditions improve, we would witness the following in the bond market: A. The bond demand curve shifting left B. The bond supply curve shifting left C. Bond prices decreasing D. Bond prices increasing 49. When expected inflation increases, for any given nominal interest rate: A. The cost of borrowing increases and the desire to borrow decreases B. The real interest rate increases C. The bond supply curve shifts to the left D. The cost of borrowing decreases and the desire to borrow increases 50. When expected inflation increases, for any given nominal interest rate: A. The bond demand curve shifts right B. The bond supply curve shifts right C. The price of bonds increases D. The yield on bonds will increase Please turn in to me the exam and scantron when you are done. ...
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This note was uploaded on 02/12/2012 for the course ECON 101 taught by Professor Abrams during the Spring '11 term at Adams State University.
- Spring '11