chapter 3 | mcq Flashcards
In general, securities with ____ characteristics will offer ____ yields.
a. favorable; higher
b. favorable; lower
c. unfavorable; lower
d. None of these are correct.
b. favorable; lower
Credit (default) risk is likely to be highest for: a. short-term Treasury securities
b. AAA corporate securities
c. long-term Treasury securities
d. BBB corporate securities
d. BBB corporate securities
Some financial institutions such as commercial banks typically invest only in:
a. junk bonds
b. corporate bonds rated B or higher
c. Treasury securities
d. investment-grade bonds
d. investment-grade bonds
Credit ratings are most commonly used to indicate which financial institutions have available funds that they can lend to borrowers.
a. True
b. False
b. False
If a security can easily be converted to cash without a loss in value, it
a. is liquid.
b. has a high after-tax yield.
c. has high credit risk.
d. is illiquid.
a. is liquid.
Interest rate movements across countries tend to be _________ correlated as a result of ____________ financial markets.
a. positively; internationally integrated
b. positively; fully segmented
c. negatively; partially segmented
d. negatively; internationally integrated
a. positively; internationally integrated
If all other characteristics are similar, ____ would have to offer ____.
a. taxable securities; a higher after-tax yield than tax-exempt securities
b. taxable securities; a higher before-tax yield than tax-exempt securities
c. tax-exempt securities; a higher after-tax yield than taxable securities
d. tax-exempt securities; a higher before-tax yield than taxable securities
b. taxable securities; a higher before-tax yield than tax-exempt securities
Assume an investor’s tax rate is 25 percent. The before-tax yield on a security is 12 percent. What is the after-tax yield?
a. 16.00 percent
b. 9.25 percent
c. 9.00 percent
d. 3.00 percent
e. None of these are correct.
c. 9.00 percent
According to the segmented markets theory, if most investors suddenly preferred to invest in long-term securities and most borrowers suddenly preferred to issue short-term securities, there would be
a. downward pressure on the price of long-term securities.
b. downward pressure on the short-term yields.
c. downward pressure on the yield of long-term securities.
d. downward pressure on the price of long-term securities AND downward pressure on the yield of long-term securities.
b. downward pressure on the short-term yields.
A firm in the 35 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7 percent. To match this yield, taxable securities must offer a before-tax yield of:
a. 7.0 percent
b. 10.8 percent
c. 20.0 percent
d. None of these are correct.
a. 7.0 percent
Holding other factors such as risk constant, the relationship between the maturity and the annualized yield of debt securities is called the:
a. term structure of interest rates
b. default structure of interest rates
c. liquidity structure of interest rates
d. tax structure of interest rates
e. None of these are correct.
a. term structure of interest rates
The term structure of interest rates defines the relationship
a. between risk and return.
b. between risk and maturity.
c. between maturity and yield.
d. between default risk ratings and maturity.
c. between maturity and yield.
If shorter-term securities have higher annualized yields than longer-term securities, the yield curve
a. is horizontal.
b. is upward sloping.
c. is downward sloping.
d. cannot be determined unless we know additional information (such as the level of market interest rates).
c. is downward sloping.
Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to
a. become inverted.
b. become flat.
c. become upward sloping.
d. be unaffected.
c. become upward sloping.
If issuers of securities (borrowers) and investors suddenly expect interest rates to decrease, their actions to benefit from their expectations should cause
a. long-term yields to rise.
b. short-term yields to decrease.
c. prices of long-term securities to decrease.
d. long-term yields to rise AND short-term yields to decrease.
e. None of these are correct.
e. None of these are correct.
Within the category of capital market securities, municipal bonds have the before-tax yield, and
their after-tax yield is typically brackets.
a. highest; below that
b. lowest; above that
c. highest; above that
d. lowest; below that
b. lowest; above that
The yield offered on a debt security is__________
related to the prevailing risk-free rate and ________ related to the security’s risk premium.
a. negatively; negatively
b. positively; positively
c. negatively; positively
d. positively; negatively
b. positively; positively
The theory for the term structure of interest rates that says the shape of the yield curve is determined solely by expectations of future interest rates is called the
a. segmented markets theory.
b. liquidity premium theory.
c. pure expectations theory.
d. theory of rational expectations.
c. pure expectations theory.
Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate according to the pure expectations theory?
a. 15.08 percent
b. 3.00 percent
c. 12.00 percent
d. 12.62 percent
e. 11.41 percent
a. 15.08 percent
Assume the yield curve is flat. If investors flood the short-term market and avoid the long-term market, they may cause the yield curve to:
a. remain flat.
b. become upward sloping.
c. become downward sloping.
d. None of these are correct.
b. become upward sloping.
According to pure expectations theory, if interest rates are expected to decrease, there will be ____ pressure on the demand for short-term funds by borrowers and ____ pressure on the demand for long- term funds issued by borrowers.
a. upward; upward
b. downward; downward
c. upward; downward
d. downward; upward
c. upward; downward
The degree to which the Treasury’s debt management policy could affect the term structure of interest rates is greatest if
a. most debt is financed by foreign investors.
b. the Treasury’s debt level is small.
c. maturity markets are segmented.
d. most debt is financed by foreign investors AND the Treasury’s debt level is small.
c. maturity markets are segmented.
- According to the pure expectations theory of the term structure of interest rates, the______ the
difference between the implied one-year forward rate and today’s one-year interest rate, the ______ is the
expected change in the one-year interest rate.
a. greater; less
b. less; greater
c. greater; greater
d. less; less
e. greater; greater AND less; less
e. greater; greater AND less; less
Assume that today, the annualized two-year interest rate is 12 percent, and the one-year interest rate is 9 percent. A three-year security has an annualized interest rate of 14 percent. What is the one-year forward rate two years from now?
a. 12.67 percent
b. 113 percent
c. 195 percent
d. 15.67 percent
e. None of these are correct.
e. None of these are correct.