This preview shows page 1. Sign up to view the full content.
Unformatted text preview: e right.
Answer: True Page: 45 Level: Medium 18. The risk that a security cannot be sold at a predictable price with low transaction costs at short notice is
called default risk.
Answer: False Page: 47 Level: Easy 19. The nominal rate less the DRP is the real rate.
Answer: False Page: 48 Level: Medium 20. Default risk premiums on investment grade debt typically increase during economic slowdowns.
Answer: True Page: 48-49 Level: Easy 21. Everything else equal, the interest rate on a callable bond will be less than the interest rate on a
Answer: False Page: 51-52 Level: Easy 10 Saunders, Financial Markets and Institutions, 2/e Chapter 1 Introduction 22. The term structure of interest rates is the relationship between interest rates on bonds similar in terms
except for maturity.
Answer: True Page: 52-53 Level: Easy 23. The unbiased expectations hypothesis of the term structure posits that long term interest rates are
unrelated to expected future short term rates.
Answer: False Page: 54-55 Level: Medium 24. The traditional liquidity premium theory states that long term interest rates are greater than the average
of expected future interest rates.
Answer: True Page: 56 Level: Medium 25. According to the market segmentation theory short term investors will not normally switch to
intermediate or long term investments.
Answer: True Page: 57 Level: Easy Multiple Choice Questions 26. An investment pays, $950 in one year, X amount of dollars in two years and $450 in 3 years. The total
present value of all the cash flows (including X) is equal to $2000. If it is 9%, what is X?
Answer: D Page: 34 Level: Difficult
Response: X = [2000 ± (950/1.09) ± (450/1.093)]*1.092 Saunders, Financial Markets and Institutions, 2/e 11 27. An annuity and an annuity due that have the same number of payments also have the same present value
if r = 10%. Which one has the higher payment?
A) The annuity has the higher payment
B) The annuity due has the higher payment
C) They both must have the same payment since the present values are the same
D) There is no way to tell which has the higher payment
E) An annuity and an annuity due cannot have the same present value
Answer: A Page: 34 Level: Medium 28. A 10 payment annual annuity has its first payment in 6 years. The investment has a current value today
of $50,000. What is the payment amount (to the penny) if the interest rate is 12%?
Answer: E Page: 32 Level: Difficult
Response: 50,000* 1.125 = Pmt v PVIFA(12%,10 yrs) 29. You borrow $95 today for six and a half weeks. You must repay $100 at loan maturity. What is the
effective annual rate on this loan?
Answer: A Page: 34 Level: Difficult
Response: (100 / 95)(52 / 6.5) 30. If M > 1 and you solve the following equation to find i: PV * (1 + (i/M))M*N = FV, the i you get will be
A) The bond eq...
View Full Document
This note was uploaded on 09/23/2013 for the course FIN 308 taught by Professor Spivey during the Fall '08 term at Clemson.
- Fall '08
- Financial Markets