Test 2 Quizzes Flashcards
Bonds that offer no periodic coupon payments are referred to as \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_. Zero-coupon bonds Coupon bonds Consol bonds TIPS
Zero-coupon bonds
What is the price of a one-year Treasury bill that pays $100 at maturity if the yield to maturity on the bond is 4%?
$96.15
If the price of a $100 face value bond with an annual coupon rate of 4% is $97.50, what is the current yield?
4.1%
If the price of a $100 face value bond is $104.35, _______________.
The yield to maturity equals the coupon rate
The yield to maturity is greater than the coupon rate
The current yield is greater than the coupon rate
The current yield is greater than the yield to maturity
The current yield is greater than the yield to maturity
Assume an investor purchases a long-term bond with the following characteristics: $100 face value, 6.5% coupon rate, and semi-annual coupon payments. If the investor buys the bond for $102.35 and sells the bond one year later at a price of $99.50, what is the investor’s holding period return? Hint: the investor received two coupon payments (assume the coupon payments are not reinvested).
3.57%
\_\_\_\_\_\_\_\_\_\_\_\_\_ is the risk that the issuer of a bond may not make the promised payments Inflation risk Default risk Interest-rate risk Inversion risk
Default risk
Generally speaking, which of the following characteristics would create a higher level of interest-rate risk in a bond? Another way of saying this is which of the following characteristics would make the price of a bond more volatile in the face of changing yields to maturity? A high coupon rate A long time to maturity A high current yield Low inflation risk
A long time to maturity
See picture from Ch. 6 Quiz: Any increase in the government’s borrowing needs \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_. Shifts the supply of bonds to the left Shifts the supply of bonds to the right Shifts the demand for bonds to the left Shifts the demand for bonds to the right
Shifts the supply of bonds to the right
See picture from Ch. 6 Quiz: Increases in wealth in the general population \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_. Shift the supply of bonds to the left Shift the supply of bonds to the right Shift the demand for bonds to the left Shift the demand for bonds to the right
Shift the demand for bonds to the right
See picture from Ch. 6 Quiz: Assume market participants’ (investors and borrowers alike) expectations for inflation rise considerably. What effect(s) will this have on bond markets?
I. The supply of bonds will shift to the right
II. The demand for bonds will shift to the left
III. The prices on bonds will decrease I I and II I and III II and III I, II, and III
I, II, III
See picture from Ch. 6 Quiz:
Assume the borrowing needs of the US government increase considerably. Simultaneously, bonds become increasingly risky investments relative to stocks. What is/are the likely effect(s) in the bond markets?
I. The demand for bonds will shift to the right
II. The supply of bonds will shift to the right
III. The yields to maturity on bonds will increase I I and II I and III II and III I, II, and III
II and III
Credit ratings issued by Moody’s and Standard & Poor’s measure the \_\_\_\_\_\_\_\_\_\_\_\_ risk of a bond. Inflation Default Interest-rate Liquidity
Default
The top four categories, Aaa down to Baa in the Moody’s scheme, are considered \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ bonds. Investment-grade Speculative-grade Non-investment-grade Subprime-grade
Investment-grade
Which of the following is most commonly used as the benchmark when comparing bond yields to determine risk (credit) spreads? Municipal bonds Commercial paper Junk bonds US Treasury bonds
US Treasury bonds
Junk bonds that were once investment-grade bonds are known as \_\_\_\_\_\_\_\_\_\_\_\_. Sliders Fallen angels Broken vessels TIPS
Fallen angels
The general rule in the United State is that _____________________.
The interest income from a bond issued by one government is not taxed by another government
The yield to maturity on municipal bonds is higher than the yield to maturity on US Treasury bonds
The interest income from municipal bonds is taxed by the federal government but not by the states that issued the bonds
The interest income from zero-coupon bonds is taxed by states but not by the federal government
The interest income from a bond issued by one government is not taxed by another government
The relationship among bonds with the same risk characteristics but different maturities is called the \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ of interest rates Term structure Risk structure Ratings structure Maturity structure
term structure
The \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ explains why yields on bonds of different times to maturity tend to move together but does NOT explain why the yield curve slopes upwards. Liquidity premium theory Expectations hypothesis Mark-to-market hypothesis Indeterminate theory
expectations hypothesis
The key to understanding why the yield curve generally slopes upwards is the fact that longer-term Treasury bonds have higher __________ than shorter-term Treasury bonds and bills.
Inflation risk
Interest-rate risk
Default risk
1 and 2
The risk (credit) spread __________________.
Measures the difference between the yields of US Treasury bonds and corporate bonds
Is a reliable concurrent signal of moderate to severe recessions
Offers more frequent data than GDP reports
1, 2, 3
When the yield curve becomes inverted, ______________________.
The economy tends to enter a period of expansion roughly a year later
The economy tends to enter a period of expansion immediately
The economy tends to go into a recession roughly a year later
The economy tends to go into a recession immediately
The economy tends to go into a recession roughly a year later
According to the text, which of the following was the clearest concurrent indicator or predictor of the 2007-2008 recession? The yield curve Statements by the Federal Reserve The risk spread The 2008 presidential election
The risk spread
Which of the following is not one of the primary functions of financial intermediaries
Pooling the resources of small savers
Provide lobbying services to steer important financial regulation
Provide ways to diversify risk
Collecting and processing information in ways that reduce information costs
Provide lobbying services to steer important financial regulation
Much of what financial intermediaries do (to reduce transaction costs) takes advantage of what are known as \_\_\_\_\_\_\_\_\_\_\_\_, in which the average cost of producing a good or service falls as the quantity produced increases. Marginal decay Economies of scope Negative externalities Economies of scale
Economies of scale
Borrowers who want to issue bonds and firms that want to issue stock know much more about their business prospects and their willingness to work than potential lenders or investors. This is known as \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_. Collateral Disclosure paralysis Information asymmetry Intention masking
Info asymmetry
Sellers on eBay have much more information about the items they are selling and their own reliability. Aware of this problem, the people who started eBay took two steps. Which of the following was one of those steps?
They forced sellers to accept prices that represent extreme discounts relative to market prices
They offered insurance to protect buyers who don’t receive their purchases
They allowed buyers the power of suspending the account of a seller
They policed activities on the site and arranged the arrest of any sellers found violating the site’s policies or contracts
They offered insurance to protect buyers who don’t receive their purchases
\_\_\_\_\_\_\_\_\_ is something of value pledged by a borrower to the lender in the event of the borrower’s default. Goodwill Usury Reverse credit Collateral
Collateral
Which of the following is an example of adverse selection in the financial markets?
When considering lending to two potential borrowers, a bank cannot tell which of the
two borrowers is a higher credit risk
GM defaulting on its bonds in 2009 and filing for bankruptcy
After lending money to your brother to start a restaurant, he is seriously injured in an
auto accident and is unable to repay your loan
After several years of strong performance, a CEO inexplicably begins to embezzle
millions of dollars from the company’s bank account
When considering lending to two potential borrowers, a bank cannot tell which of the
two borrowers is a higher credit risk
Private information services face what is called a \_\_\_\_\_\_\_\_\_\_\_\_\_\_ problem. Lone ranger Moral hazard Free rider Sweetheart
Free rider
The phrase moral hazard originated when economists who were studying insurance noted that ______________________________.
People generally do not like to use insurance
An insurance policy changes the behavior of the person who is insured
Insurance policies are generally too complex for the average person to understand
Doctors prefer to see patients who are insured
An insurance policy changes the behavior of the person who is insured
The separation of ownership and management is known as \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ and is a prime example of moral hazard in equity contracts. The distant-ownership strain The absentia dilemma The cat-and- mouse conundrum The principal-agent problem
principal-agent prob
Most companies seeking to raise capital in the stock or bond markets would be unsuccessful without the assistance and reputation of a well-known investment bank (such as Goldman Sachs or JP Morgan) backing them up. This is an example of financial intermediaries providing \_\_\_\_\_\_\_\_\_\_\_\_ to reduce adverse selection. Certification Monitoring Counseling Reputational capital
Certification
One of the common ways that CalPERS monitors the companies in which it invests is by _________________.
Directing the SEC to investigate the companies
Placing CalPERS representatives on the companies’ boards of directors
Requiring the companies to pay CalPERS a 5% dividend
Hiring an independent auditor to perform quarterly audits of the companies
Placing CalPERS representatives on the companies’ boards of directors
Banks hold reserves because regulation requires it and because prudent business practice dictates it. Reserves include the cash in the bank’s vault (and currency in its ATMs), called vault cash, as well as _________________________.
Cash items in process of collection
The bank’s deposits at other banks
The bank’s deposits at the Federal Reserve System
Corporate stocks held by the bank
The bank’s deposits at the Federal Reserve System
Since securities are often very liquid, we sometimes refer to them as \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_. Water Secondary reserves Cash Primary funding
Secondary reserves
Which of the following is correct? Checking account = Time deposit Savings account = Time deposit Savings account = Passbook savings Checking deposit = Passbook savings
Savings account = Passbook savings
Capital is the cushion that banks have against ______________________.
A surge in the amount of deposits placed with the bank
Unexpected early repayment of loans by customers
A sudden increase in the value of their assets
Unexpected withdrawals of liabilities
Unexpected withdrawals of liabilities
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ are amounts the bank sets aside to cover potential losses from defaulted loans. Provisions for uncollectible accounts Contingency accounts Bad loan provisions Loan loss reserves
Loan loss reserves
uppose a bank customer unexpectedly withdraws $10 million. Which of the following is the quickest PLAUSIBLE method the bank will use to meet this withdrawal demand?
The bank will simply pull the money from its reserves
The bank will sell T-bills and other liquid securities
The bank will sell a bundle of loans to another bank
The bank will sell some of the stock it owns
The bank will sell T-bills and other liquid securities
For a typical U.S. bank, prior to the financial crisis of 2007 – 2009, the return on assets was about 1.3%, while the return on equity was 10 to 12 times that high. Which of the following words or phrases best explains this phenomenon? Subsidies Fraud Leverage Luck
Leverage
Banks use which of the following to try to mitigate credit risk? (1 or more)
I. Diversification
II. Interest-Rate Swaps
III. Credit Risk Analysis
1 and 3
Managers must compute an estimate of the change in the bank’s profit for each one-percentage-point change in the interest rate. This procedure is called \_\_\_\_\_\_\_\_ analysis. SWOT Operational Chasm Gap
Gap
The problem is that traders normally share in the profits from good investments, but the bank pays for the losses. Heads, the trader wins; tails, the bank loses. This arrangement creates ________________.
An incentive for traders to be too conservative in their trading
Excessive profits for the bank
Moral hazard
Adverse selection
Moral hazard
When the World Trade Center Towers collapsed on September 11, 2001, the Bank of New York was shut down for several days and recovered very slowly. Which of the following was the primary reason for their problems? Foreign exchange risk Sovereign risk Operational risk Credit risk
Operational risk
Current yield equation
Yearly coupon payment
/
Price Paid
Price of zero-coupon bond equation
Face value
/
(1 + i)^n
(i is int rate and n is years until payment is made)
Coupon rate vs. current yield vs. yield to maturity comparison:
Bond Price < Face Value:
Coupon rate < Current yield < YTM
Coupon rate vs. current yield vs. yield to maturity comparison:
Bond Price = Face Value:
Coupon rate = Current yield = YTM
Coupon rate vs. current yield vs. yield to maturity comparison:
Bond Price > Face Value:
Coupon rate > Current yield > YTM
