Fin 308 test 1 answer key

A six year maturity bond has a five year duration

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Unformatted text preview: s E) N/(N-1) years Answer: A Page: 78-80 Level: Medium 34. A bond has a 6% required return. Interest rates are projected to rise 25 basis points. The bond's duration is 5 years. What is the predicted price change? A) ±1.18% B) 4.71% C) 1.25% D) ±1.25% E) 1.18% Answer: A Page: 82-83 Level: Medium Response: -5 v (+0.0025/1.06) 24 Saunders, Financial Markets and Institutions, 2/e Chapter 1 Introduction 35. Convexity arises because A) Bond's pay interest semiannually B) Coupon changes are the opposite sign of interest rate changes C) Of Federal Reserve policy D) Present values are a nonlinear function of interest rates E) The professor said so Answer: D Page: 84 Level: Medium 36. The duration of a 180 day T-Bill is (in years) A) 0.493 B) 0.246 C) 1 D) 0 E) Indeterminate Answer: A Page: 80 Level: Easy Response: 180/365 37. For large interest rate increases, duration _____ the fall in security prices and for large interest rate decreases, duration _____ the rise in security prices. A) Overpredicts, overpredicts B) Overpredicts, underpredicts C) Underpredicts, overpredicts D) Underpredicts, underpredicts E) None of the above Answer: B Page: 82 Level: Medium Chapter 4 True/False Questions 1. Federal Reserve interest rate decisions can be vetoed by the U.S. President or the Congress. Answer: False Page: 88 Level: Easy 2. The FOMC is responsible for supervising and regulating depository institutions and foreign exchange traders. Answer: False Page: 91 Level: Easy Saunders, Financial Markets and Institutions, 2/e 25 3. Four seats on the FOMC are allocated to Federal Reserve Bank presidents on an annual rotating basis. Answer: True Page: 91 Level: Easy 4. The discount rate is usually set about 50 basis points above the target Fed Funds rate. Answer: False Page: 91 Level: Easy 5. There are 10 Federal Reserve Districts throughout the U.S., each one headed by a Federal Reserve Bank. Answer: False Page: 93 Level: Easy 6. The major asset of the Federal Reserve is currency outside banks, and the major liability is U.S. Treasury securities. Answer: False Page: 94 Level: Medium 7. All nationally charted banks are required to join the Federal Reserve System, state chartered banks may choose to join the Federal Reserve or not. Answer: True Page: 93-94 Level: Easy 8. Federal Reserve Board members are appointed by the U.S. President and confirmed by the Senate for a non-renewable 14 year term. Answer: True Page: 95 Level: Easy 9. If the FOMC wished to generate faster economic growth, they could issue a policy directive to the Federal Reserve Board Trading desk to purchase U.S. government securities. Answer: True Page: 99-101 Level: Medium 10. Open market operations are the purchase and sale of U.S. government and federal agency securities. Answer: True Page: 96 Level: Easy Multiple Choice Questions 11. The primary policy tool used by the Fed to meet its monetary policy goals is: A) Changing the discount rate 26 Saunders, Financial Markets and Institutions, 2/e Chapter 1...
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This note was uploaded on 09/23/2013 for the course FIN 308 taught by Professor Spivey during the Fall '08 term at Clemson.

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