Fin 308 test 1 answer key

Decreases c i decreases ii increases iii increases d

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Unformatted text preview: r: E Page: 38-39 Level: Difficult 16 Saunders, Financial Markets and Institutions, 2/e Chapter 1 Introduction 45. Classify each of the following in terms of their effect on interest rates (increase or decrease): I. Covenants on borrowing become more restrictive II. The Federal Reserve increases the money supply III. Total household wealth increases A) I increases, II increases, III increases B) I increases, II decreases, III decreases C) I decreases, II increases, III increases D) I decreases, II decreases, III decreases E) None of the above Answer: D Page: 38-39 Level: Difficult 46. Inflation causes the demand curve for loanable funds to shift to the _____ and causes the supply curve to shift to the _____. A) Right; right B) Right; left C) Left; left D) Left; right Answer: B Page: 45 Level: Medium 47. An individual desires to earn a real return of 3%. Prices are expected to rise over the investment period by 4%. The investor has a federal tax rate of 28% and state and local tax rate of 6%, what is the investor's expected after tax rate of return? A) 7.006% B) 10.61% C) 5.04% D) 4.62% E) 6.58% Answer: D Page: 47,48,51 Level: Medium Response: (0.04 + 0.03) v [1 ± (0.28 + 0.06)] Chapter 3 True/False Questions 1. If interest rates increase, the value of a fixed income contract decreases and vice versa. Answer: True Page: 63 Level: Easy 2. At equilibrium a security's required rate of return will be less than its expected rate of return. Saunders, Financial Markets and Institutions, 2/e 17 Answer: False Page: 63-64 Level: Easy 3. If a security's realized return is negative it must have been true that the expected return was greater than the required return. Answer: False Page: 63-64 Level: Medium 4. If the present value of a security's cash flows is below its current market price the security is undervalued. Answer: False Page: 63-64 Level: Easy 5. The required rate of return is the interest rate that equates the current market price of the bond with the present value of all future cash flows received. Answer: False Page: 64 Level: Medium 6. A bond with an 8% coupon and a 10% required return will sell at a premium to par. Answer: False Page: 68 Level: Easy 7. A bond with a 10% coupon and an 8% required return will sell at a discount from par. Answer: False Page: 66-67 Level: Easy 18 Saunders, Financial Markets and Institutions, 2/e Chapter 1 Introduction 8. Discount bonds are poorer buys than premium bonds. Answer: False Page: 68 Level: Easy 9. The duration of a four year maturity 10% coupon bond is less than four years. Answer: True Page: 69-71 Level: Easy 10. The longer the time to maturity the lower the security's price sensitivity to an interest rate change, ceteris paribus. Answer: False Page: 70-71 Level: Easy 11. The greater a security's coupon the lower the securit y's price sensitivity to an interest rate change. Answer: True Page: 70-71 Level: Easy 12. For a given interest rate change, a 20 year bond's price change will be twice that of a 1...
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