金融市場與金融機(jī)構(gòu)基礎(chǔ)-Fabozzi-Chapter10

Copyright?2010PearsonEducationInc.PublishingasPrenticeHall

FoundationsofFinancialMarketsandInstitutions,4e(Fabozzi/Modigliani/Jones)

Chapter10TheLevelandStructureofInterestRates

MultipleChoiceQuestions

1TheTheoryofInterestRates

1)Aninterestrateisthepricepaidbya________toa________fortheuseofresourcesduringsomeinterval.

A)borrower;debtor

B)lender;creditor

C)borrower;lender

D)lender;borrower

Answer:C

Comment:Aninterestrateisthepricepaidbyaborrower(ordebtor)toalender(orcreditor)fortheuseofresourcesduringsomeinterval.

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.1Fisher'sclassicalapproachtoexplainingtheleveloftheinterestrate

2)Bythe________,wemeantherateonaloanwhoseborrowerwillnotdefaultonanyobligation.

A)risk-freerate

B)shortterm

C)realrate

D)longterm

Answer:A

Comment:Theinterestratethatprovidestheanchorforotherratesistheshort-termrate:risk-freeplusrealrate.Byshortterm,wemeantherateonaloanthathasoneyeartomaturity.(Allotherinterestratesdifferfromthisrateaccordingtoparticularaspectsoftheloan,suchasitsmaturityorriskofdefault,orbecauseofthepresenceofinflation.)Bytherisk-freerate,wemeantherateonaloanwhoseborrowerwillnotdefaultonanyobligation.Bytherealrate,wemeantheratethatwouldprevailintheeconomyiftheaveragepricesforgoodsandserviceswereexpectedtoremainconstantduringtheloan’slife.

Diff:1

Topic:10.1TheTheoryofInterestRates

Objective:10.4thestructureofFisher'sLaw,whichstatesthatthenominalandobservableinterestrateiscomposedoftwounobservablevariables;therealrateofinterestandthepremiumforexpectedinflation

3)Bythe________,wemeantheratethatwouldprevailintheeconomyiftheaveragepricesforgoodsandserviceswereexpectedtoremainconstantduringtheloan'slife.

A)risk-freerate

B)shortterm

C)realrate

D)longterm

Answer:C

Comment:Theinterestratethatprovidestheanchorforotherratesistheshort-termrate:risk-freeplusrealrate.Byshortterm,wemeantherateonaloanthathasoneyeartomaturity.(Allotherinterestratesdifferfromthisrateaccordingtoparticularaspectsoftheloan,suchasitsmaturityorriskofdefault,orbecauseofthepresenceofinflation.)Bytherisk-freerate,wemeantherateonaloanwhoseborrowerwillnotdefaultonanyobligation.Bytherealrate,wemeantheratethatwouldprevailintheeconomyiftheaveragepricesforgoodsandserviceswereexpectedtoremainconstantduringtheloan’slife.

Diff:1

Topic:10.1TheTheoryofInterestRates

Objective:10.4thestructureofFisher'sLaw,whichstatesthatthenominalandobservableinterestrateiscomposedoftwounobservablevariables;therealrateofinterestandthepremiumforexpectedinflation

4)Bythe________,wemeantherateonaloanthathasoneyeartomaturity.

A)risk-freerate

B)shortterm

C)realrate

D)longterm

Answer:B

Comment:Theinterestratethatprovidestheanchorforotherratesistheshort-termrate:risk-freeplusrealrate.Byshortterm,wemeantherateonaloanthathasoneyeartomaturity.(Allotherinterestratesdifferfromthisrateaccordingtoparticularaspectsoftheloan,suchasitsmaturityorriskofdefault,orbecauseofthepresenceofinflation.)Bytherisk-freerate,wemeantherateonaloanwhoseborrowerwillnotdefaultonanyobligation.Bytherealrate,wemeantheratethatwouldprevailintheeconomyiftheaveragepricesforgoodsandserviceswereexpectedtoremainconstantduringtheloan’slife.

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.1Fisher'sclassicalapproachtoexplainingtheleveloftheinterestrate

5)WhichofthebelowstatementsaboutconsumptionsandsavingsisFALSE?

A)Achiefinfluenceonthesavingdecisionistheindividual'smarginalrateoftimepreference,whichisthewillingnesstotradesomeconsumptionnowformorefutureconsumption.

B)Generally,highercurrentincomemeansthepersonwillsavemore,althoughpeoplewiththesameincomemayhavedifferenttimepreferences.

C)Avariableaffectingsavingsistherewardforsaving,ortherateofinterestonloansthatsaversmakewiththeirunconsumedincome.

D)Thetotalsavings(orthetotalsupplyofloans)availableatanytimeisthesumofeverybody'ssavingsandanegativefunctionoftheinterestrate.

Answer:D

Comment:Thetotalsavings(orthetotalsupplyofloans)availableatanytimeisthesumofeverybody’ssavingsandapositivefunctionoftheinterestrate.

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.2theroleinFisher'stheoryofthesaver'stimepreferenceandtheborrowingfirm'sproductivityofcapital

6)WhichofthebelowstatementsabouttherateofinterestandcostofcapitalisFALSE?

A)Themaximumthatafirmwillinvestdependsontherateofinterest,whichisthecostofloans;thefirmwillinvestonlyaslongasthemarginalproductivityofcapitalexceedsorequalstherateofinterest.

B)Firmswillrejectonlyprojectswhosegainisnotlessthantheircostoffinancing.

C)Thefirm'sdemandforborrowingisnegativelyrelatedtotheinterestrate;iftherateishigh,onlylimitedborrowingandinvestmentmakesense.

D)Atalowrateofinterest,moreprojectsofferaprofit,andthefirmwantstoborrowmore;hisnegativerelationshipexistsforeachandallfirmsintheeconomy.

Answer:B

Comment:Themaximumthatafirmwillinvestdependsontherateofinterest,whichisthecostofloans.Thefirmwillinvestonlyaslongasthemarginalproductivityofcapitalexceedsorequalstherateofinterest.Inotherwords,firmswillacceptonlyprojectswhosegainisnotlessthantheircostoffinancing.Thus,thefirm’sdemandforborrowingisnegativelyrelatedtotheinterestrate.Iftherateishigh,onlylimitedborrowingandinvestmentmakesense.Atalowrate,moreprojectsofferaprofit,andthefirmwantstoborrowmore.Thisnegativerelationshipexistsforeachandallfirmsintheeconomy.

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.2theroleinFisher'stheoryofthesaver'stimepreferenceandtheborrowingfirm'sproductivityofcapital

7)The________rateofinterestisdeterminedbyinteractionofthesupplyanddemandfunctions.Asacostofborrowingandarewardforlending,theratemustreachthepointwheretotalsupplyofsavings________totaldemandforborrowingandinvestment.

A)equilibrium;isgreater

B)minimum;equals

C)equilibrium;equals

D)minimum;isgreater

Answer:C

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.3themeaningofequilibriumandhowchangesinthedemandandsupplyfunctionaffecttheequilibriumleveloftheinterestrate

8)Intheabsenceofinflation,thenominalrate________therealrate.

A)equals

B)isgreaterthan

C)islessthan

D)greaterthanorequalto

Answer:A

Diff:1

Topic:10.1TheTheoryofInterestRates

Objective:10.3themeaningofequilibriumandhowchangesinthedemandandsupplyfunctionaffecttheequilibriumleveloftheinterestrate

9)Therelationshipbetweeninflationandinterestratesisthewell-knownFisher'sLaw,whichcanbeexpressedthisway:(1+i)=(1+r)×(1+i)where________.

A)risthenominalrate.

B)iistherealrate.

C)pistheexpectedpercentagechangeinthepricelevelofgoodsandservicesovertheloan'slife.

D)thenominalrate,p,reflectsboththerealrateandexpectedinflation.

Answer:C

Comment:Therelationshipbetweeninflationandinterestratesisthewell-knownFisher’sLaw,whichcanbeexpressedthisway:(1+i)=(1+r)×(1+i)whereiisthenominalrate,ristherealrate,andpistheexpectedpercentagechangeinthepricelevelofgoodsandservicesovertheloan’slife.Thisequationshowsthatthenominalrate,i,reflectsboththerealrateandexpectedinflation.

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.4thestructureofFisher'sLaw,whichstatesthatthenominalandobservableinterestrateiscomposedoftwounobservablevariables;therealrateofinterestandthepremiumforexpectedinflation

10)WhichofthebelowISconsideredbyFisher'stheory.

A)Fisher'stheorytakesintoaccountthepowerofthegovernment(inconcertwithdepositoryinstitutions)tocreatemoney.

B)Fisher'stheoryconsidersthegovernment'softenlargedemandforborrowedfunds,whichisfrequentlyimmunetotheleveloftheinterestrate

C)Fisher'stheorytakesintoaccountthepossibilitythatindividualsandfirmsmightinvestincashbalances.

D)Fisher'stheoryconsidersaninterestrateonloansthatembodiesnopremiumfordefaultriskbecauseborrowingfirmsareassumedtomeetallobligations.

Answer:D

Comment:Fisher’stheoryisageneraloneandobviouslyneglectscertainpracticalmatters,suchasthepowerofthegovernment(inconcertwithdepositoryinstitutions)tocreatemoneyandthegovernment’softenlargedemandforborrowedfunds,whichisfrequentlyimmunetotheleveloftheinterestrate.Also,Fisher’stheorydoesnotconsiderthepossibilitythatindividualsandfirmsmightinvestincashbalances.ExpandingFisher’stheorytoencompassthesesituationsproducestheloanablefundstheoryofinterestrates.

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.4thestructureofFisher'sLaw,whichstatesthatthenominalandobservableinterestrateiscomposedoftwounobservablevariables;therealrateofinterestandthepremiumforexpectedinflation

11)Theloanablefundstheoryofinterestratesproposesthatthegenerallevelofinterestratesisdeterminedbythecomplexinteractionoftwoforces.WhichofthebelowisONEoftheseforces?

A)Oneforceisthatthetotaldemandforfundsbyfirms,governments,andhouseholds(orindividuals)isnegativelyrelatedtotheinterestrateincludingthegovernment'sdemand.

B)Oneforceaffectingtheleveloftheinterestrateisthetotalsupplyoffundsbyfirms,governments,banks,andindividualswithrisingratescausingbankstobelesseagertoextendmoreloans.

C)Oneforceisthatthetotaldemandforfundsbyfirms,governments,andhouseholds(orindividuals)ispositivelyrelatedtotheinterestrateexceptthegovernment'sdemand.

D)Oneforceaffectingtheleveloftheinterestrateisthetotalsupplyoffundsbyfirms,governments,banks,andindividualswithrisingratescausingfirmsandindividualstosaveandlendmore.

Answer:D

Comment:Theloanablefundstheoryofinterestratesproposesthatthegenerallevelofinterestratesisdeterminedbythecomplexinteractionoftwoforces.Thefirstisthetotaldemandforfundsbyfirms,governments,andhouseholds(orindividuals),whichcarryoutavarietyofeconomicactivitieswiththosefunds.Thisdemandisnegativelyrelatedtotheinterestrate(exceptforthegovernment’sdemand,whichmayfrequentlynotdependontheleveloftheinterestrate).Thesecondforceaffectingtheleveloftheinterestrateisthetotalsupplyoffundsbyfirms,governments,banks,andindividuals.Supplyispositivelyrelatedtothelevelofinterestrates,ifallothereconomicfactorsremainthesame.Withrisingrates,firmsandindividualssaveandlendmore,andbanksaremoreeagertoextendmoreloans.(Arisinginterestrateprobablydoesnotsignificantlyaffectthegovernment’ssupplyofsavings.)

Diff:3

Topic:10.1TheTheoryofInterestRates

Objective:10.5theloanablefundstheory,whichisanexpansionofFisher'stheory

12)The________,originallydevelopedbyJohnMaynardKeynes,analyzestheequilibriumleveloftheinterestratethroughtheinteractionofthesupplyofmoneyandthepublic'saggregatedemandforholdingmoney.

A)loanablefundstheoryofinterestrates

B)expectationtheoryofinterestrates

C)liquiditypreferencetheory

D)Fishertheory

Answer:C

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.6themeaningofliquiditypreferenceinKeynes'stheoryofthedeterminationofinterestrates

13)Thepublic(consistingofindividualsandfirms)holdsmoneyforseveralreasons.Whichofthebelowisthreeofthese?

A)Difficultyoftranslations,precautionagainstexpectedevents,andspeculationaboutpossiblerisesintheinterestrate.

B)Easeoftransactions,precautionagainstunexpectedevents,andspeculationaboutpossiblerisesintheinterestrate.

C)Easeofunexpectedevents,precautionagainsttransactions,andspeculationaboutpossiblerisesintheinterestrate.

D)Speculationabouttransactions,fearagainstunexpectedevents,andprecautionaboutpossiblerisesintheinterestrate.

Answer:B

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.6themeaningofliquiditypreferenceinKeynes'stheoryofthedeterminationofinterestrates

14)The________representstheinitialreactionoftheinterestratetoachangeinthemoneysupply.

A)Incomeeffect

B)Priceexpectationeffect

C)Liquidityeffect

D)Interestrateeffect

Answer:C

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.7howanincreaseinthemoneysupplycanaffecttheleveloftheinterestratethroughanimpactonliquidity,income,andpriceexpectations

15)WhichofthebelowstatementsisFALSE?

A)Althoughanincreaseinthemoneysupplyisaneconomicallyexpansionarypolicy,theresultantincreaseinincomedependssubstantiallyontheamountofslackintheeconomyatthetimeoftheFed'saction.

B)InFisher'sterms,theinterestratereflectstheinteractionofthesavers'marginalrateoftimepreferenceandborrowers'marginalproductivityofcapital.

C)Changesinthemoneysupplycanaffectthelevelofinterestratesthroughtheliquidityeffect,theincomeeffect,andthepriceexpectationseffect;theirrelativemagnitudesdependuponthelevelofeconomicactivityatthetimeofthechangeinthemoneysupply.

D)Becausethepricelevel(andexpectationsregardingitschanges)affectsthemoneydemandfunction,theliquidityeffectisanincreaseintheinterestrate.

Answer:D

Comment:Becausethepricelevel(andexpectationsregardingitschanges)affectsthemoneydemandfunction,thepriceexpectationseffectisanincreaseintheinterestrate.

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.7howanincreaseinthemoneysupplycanaffecttheleveloftheinterestratethroughanimpactonliquidity,income,andpriceexpectations

2TheDeterminantsoftheStructureofInterestRates

1)A________isaninstrumentinwhichtheissuer(debtor/borrower)promisestorepaytothelender/investortheamountborrowedplusinterestoversomespecifiedperiodoftime.

A)bond

B)commonstock

C)preferredstock

D)T-bill

Answer:A

Diff:1

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.8thefeaturesofabondissue

2)The________shouldreflectthecouponinterestthatwillbeearnedpluseither(1)anycapitalgainthatwillberealizedfromholdingthebondtomaturity,or(2)anycapitallossthatwillberealizedfromholdingthebondtomaturity.

A)yieldonabondinvestment

B)dividendyieldonabondinvestment

C)bid-askspread

D)yieldonastockinvestment

Answer:A

Diff:1

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.8thefeaturesofabondissue

3)The________themarketprice,thehighertheyieldtomaturity.

A)higher

B)lessrisky

C)moresafe

D)lower

Answer:D

Diff:1

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.8thefeaturesofabondissue

4)The________ofabondistheamountthattheissueragreestorepaythebondholderatthematuritydate.

A)principalvalue(orsimplyprincipal)

B)facevalue

C)redemptionvalue

D)Allofthese

Answer:D

Comment:Theprincipalvalue(orsimplyprincipal)ofabondistheamountthattheissueragreestorepaythebondholderatthematuritydate.Thisamountisalsoreferredtoastheparvalue,maturityvalue,redemptionvalue,orfacevalue.

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.8thefeaturesofabondissue

5)Theyieldtomaturityisdeterminedbyatrial-and-errorprocess.Thefirststepinthistrialanderrorprocessis________.

A)Computethepresentvalueofeachcashflowusingthebestguessinterestrate.

B)Totalthepresentvalueofthecashflowsusingthebestguessinterestrate.

C)Selectaninterestrate.

D)Comparethetotalpresentvalueusingthebestguessinterestratewiththemarketpriceofthebond.

Answer:C

Comment:Theyieldtomaturityisdeterminedbyatrial-and-errorprocess.Eventhealgorithminacalculatororcomputerprogram,whichcomputestheyieldtomaturity(orinternalrateofreturn)inanapparentlydirectway,usesatrial-and-errorprocess.Thestepsinthatprocessareasfollows:

Step1:Selectaninterestrate.

Step2:ComputethepresentvalueofeachcashflowusingtheinterestrateselectedinStep1.

Step3:TotalthepresentvalueofthecashflowsfoundinStep2.

Step4:ComparethetotalpresentvaluefoundinStep3withthemarketpriceofthebondand,ifthetotalpresentvalueofthecashflowsfoundinStep3is

?equaltothemarketprice,thentheinterestrateusedinStep1istheyieldtomaturity;

?greaterthanthemarketprice,thentheinterestrateisnottheyieldtomaturity.Therefore,gobacktoStep1anduseahigherinterestrate;

?lessthanthemarketprice,thentheinterestrateisnottheyieldtomaturity.Therefore,gobacktoStep1andusealowerinterestrate.

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.9howtheyieldtomaturityofabondiscalculated

6)Thereareseveralinterestingpointsabouttherelationshipamongthecouponrate,marketprice,andyieldtomaturity.WhichofthebelowisNOToneofthese.

A)Ifthemarketpriceisequaltotheparvalue,thentheyieldtomaturityisequaltothecouponrate.

B)Ifthemarketpriceislessthantheparvalue,thentheyieldtomaturityisgreaterthanthecouponrate.

C)Ifthemarketpriceisgreaterthantheparvalue,thentheyieldtomaturityisgreaterthanthecouponrate.

D)Ifthemarketpriceisgreaterthantheparvalue,thentheyieldtomaturityislessthanthecouponrate.

Answer:C

Comment:Thereareseveralinterestingpointsabouttherelationshipamongthecouponrate,marketprice,andyieldtomaturityassummarizedbelow.

1.Ifthemarketpriceisequaltotheparvalue,thentheyieldtomaturityisequaltothecouponrate;

2.Ifthemarketpriceislessthantheparvalue,thentheyieldtomaturityisgreaterthanthecouponrate,and;

3.Ifthemarketpriceisgreaterthantheparvalue,thentheyieldtomaturityislessthanthecouponrate.

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.9howtheyieldtomaturityofabondiscalculated

7)Consideran20-yearbondwithacouponrateof8%andaparvalueof$1,000.Thecashflowforthisbondis________everysixmonthsforthefirst39semi-annualperiodsandthen________forthelast(or40th)six-monthperiod.

A)$1,040;$40

B)$40;$1,040

C)$80;$1,080

D)$80;$1,000

Answer:B

Comment:Consideran20-yearbondwithacouponrateof8%andaparvalueof$1,000.Thecashflowforthisbondis$40everysixmonthsforthefirst39semi-annualperiodsandthen$1,040forthelast(or40th)six-monthperiod.

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.8thefeaturesofabondissue

8)Thedifferencebetweentheyieldonanytwobondissuesiscalleda________.

A)yielddifference

B)differencespread

C)couponratespread

D)yieldspread

Answer:D

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.13whatfactorsaffecttheyieldspreadbetweentwobonds

9)Treasurysecuritiesareusedtodevelopthebenchmarkinterestrates.TherearetwocategoriesofU.S.Treasurysecurities:________.

A)discountandcouponsecurities.

B)discountandcouponstocks.

C)interestrateandcouponsecurities.

D)discountandcompoundsecurities.

Answer:A

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.1Fisher'sclassicalapproachtoexplainingtheleveloftheinterestrate

10)ThemostrecentlyauctionedTreasuryissuesforeachmaturityarereferredtoas________.

A)off-the-runissuesorcurrentcouponissues.

B)minimuminterestrateorbaseinterestrate

C)on-the-runorcurrentcouponissues.

D)benchmarkinterestrateorminimuminterestrate.

Answer:C

Comment:ThemostrecentlyauctionedTreasuryissuesforeachmaturityarereferredtoason-the-runorcurrentcouponissues.Issuesauctionedpriortothecurrentcouponissuesaretypicallyreferredtoasoff-the-runissues;theyarenotasliquidason-the-runissues,and,therefore,offerahigheryieldthanthecorrespondingon-the-runTreasuryissue.Theminimuminterestrateorbaseinterestratethatinvestorswilldemandforinvestinginanon-Treasurysecurityistheyieldofferedonacomparablematurityon-the-runTreasurysecurity.Thebaseinterestrateisalsoreferredtoasthebenchmarkinterestrate.

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.10whyhistoricallytheyieldsonsecuritiesissuedbytheU.S.DepartmentoftheTreasuryhavebeenusedasthebenchmarkinterestratesthroughouttheworld

11)Marketparticipantstalkofinterestratesonnon-Treasurysecuritiesas________toaparticularon-the-runTreasurysecurity(oraspreadtoanyparticularbenchmarkinterestrateselected).ThisspreadreflectstheadditionalriskstheinvestorfacesbyacquiringasecuritythatisnotissuedbytheU.S.governmentand,therefore,canbecalleda________.

A)"tradingatapremium";riskpremium

B)"tradingataspread";riskpremium

C)"tradingatapremium";riskspread

D)"tradingatadiscount";discountpremium

Answer:B

Comment:Marketparticipantstalkofinterestratesonnon-Treasurysecuritiesas“tradingataspread”toaparticularon-the-runTreasurysecurity(oraspreadtoanyparticularbenchmarkinterestrateselected).Forexample,iftheyieldona10-yearnon-TreasurysecurityonMay20,2008,is4.78%,thenthespreadis100basispointsoverthe3.78%Treasuryyield.ThisspreadreflectstheadditionalriskstheinvestorfacesbyacquiringasecuritythatisnotissuedbytheU.S.governmentand,therefore,canbecalledariskpremium.

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.13whatfactorsaffecttheyieldspreadbetweentwobonds

12)Thefactorsthataffectthespreadinclude________.

A)thetypeofissuerandtheexpectedliquidityoftheissue

B)theprovisionsthatgranteithertheissuerortheinvestortheobligationtodosomethingandthetaxabilityoftheinterestreceivedbytheissuer

C)theinvestor'sperceivedcreditworthinessandthetermormaturityoftheinvestor'shorizon.

D)Allofthese

Answer:A

Comment:Thefactorsthataffectthespreadare(1)thetypeofissuer,(2)theissuer’sperceivedcreditworthiness,(3)thetermormaturityoftheinstrument,(4)provisionsthatgranteithertheissuerortheinvestortheoptiontodosomething,(5)thetaxabilityoftheinterestreceivedbyinvestors,and(6)theexpectedliquidityoftheissue.

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.13whatfactorsaffecttheyieldspreadbetweentwobonds

13)Withinthecorporatemarketsector,issuersareclassifiedas________.

A)(1)utilities,(2)industrials,(3)finance,and(4)banks.

B)(1)high-risk,(2)medium-risk,(3)low-risk,and(4)no-risk.

C)(1)foreign,(2)domestic,(3)European,and(4)Asian.

D)(1)intramarket,(2)extramarket,(3)ultramarket,and(4)intermarket.

Answer:A

Comment:Withinthecorporatemarketsector,issuersareclassifiedasfollows:(1)utilities,(2)industrials,(3)finance,and(4)banks.

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.12thedifferenttypesofbonds

14)Thehighest-gradebondsaredesignatedbyMoody'sbythesymbol________.

A)Ba

B)A

C)Aa

D)Aaa

Answer:D

Comment:Inallsystems,thetermhighgrademeanslowcreditrisk,orconversely,highprobabilityoffuturepayments.Thehighest-gradebondsaredesignatedbyMoody’sbythesymbolAaa,andbyS&PandFitchbythesymbolAAA.ThenexthighestgradeisdenotedbythesymbolAa(Moody’s)orAA(S&PandFitch);forthethirdgrade,allratingsystemsuseA.ThenextthreegradesareBaaorBBB,BaorBB,andB,respectively.TherearealsoCgrades.Moody’suses1,2,or3toprovideanarrowercreditqualitybreakdownwithineachclass,andS&PandFitchuseplusandminussignsforthesamepurpose.

Diff:1

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.12thedifferenttypesofbonds

15)WhichofthebelowstatementsisFALSE?

A)ThespreadbetweenTreasurysecuritiesandnon-Treasurysecuritiesthatareidenticalinallrespectsexceptforcreditqualityisreferredtoasacreditspread.

B)Thespreadbetweenanytwomaturitysectorsofthemarketiscalledamaturityspreadoryieldcurvespread.

C)Anoptionthatisincludedinabondissueisreferredtoasaprepaymentoption.

D)Themostcommontypeofoptioninabondissueisacallprovision.

Answer:C

Comment:Itisnotuncommonforabondissuetoincludeaprovisionthatgiveseitherthebondholderand/ortheissueranoptiontotakesomeactionagainsttheotherparty.Anoptionthatisincludedinabondissueisreferredtoasanembeddedoption.

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.12thedifferenttypesofbonds

True/FalseQuestions

1TheTheoryofInterestRates

1)TheliquiditypreferencetheoryisKeynes'sviewthattherateofinterestissetinthemarketformoneybalances.

Answer:TRUE

Diff:1

Topic:10.1TheTheoryofInterestRates

Objective:10.6themeaningofliquiditypreferenceinKeynes'stheoryofthedeterminationofinterestrates

2)Interestisthepricepaidforthepermanentuseofresources,andtheamountofaloanisitsprincipal.

Answer:FALSE

Comment:Interestisthep