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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
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