Deck 10: Interest Rates

Question 1

The Bank of Canada loans money to commercial banks at the _________ rate.

A) call money
B) overnight
C) bank
D) prime
E) LIBOR

Answer 1

C

Question 2

A basis point is defined as _________ percent.

A) 0.0001
B) 0.001
C) 0.01
D) 0.1
E) 1

Answer 2

C

Question 3

LIBOR is the interest rate offered by London commercial banks on:

A) overnight Eurodollar loans to other banks.
B) loans in euros to other countries.
C) euro denominated loans to creditworthy borrowers.
D) pound denominated loans to large corporations.
E) euro denominated loans to other banks.

Answer 3

A

Question 4

The prime rate is the interest rate that the largest commercial banks charge their most creditworthy _________ customers for _________ loans.

A) Individual; long-term
B) Individual; short-term
C) Corporate; long-term
D) Corporate; short-term
E) International; long-term

Question 5

Short-term, unsecured debt issued by large corporations is referred to as _________.

A) Eurodollars
B) commercial paper
C) certificate of deposit
D) banker's acceptance
E) call money securities

Question 6

STRIP bonds are:

A) offered for sale monthly by the Bank of Canada.
B) overnight loans to banks from the Bank of Canada.
C) short-term obligations of the Canadian government.
D) securities that have a relatively low coupon rate.
E) securities that have had the interest and principal payments separated.

Question 7

The relationship between the time to maturity and the interest rate on default-free, pure discount bonds is the _______.

A) yield structure
B) term structure
C) market return graph
D) yield curve
E) bond yield

Question 8

The interest rate banks charge brokerage firms for margin purchases is the _________ rate.

A) call money
B) overnight
C) discount
D) prime
E) LIBOR

Question 9

In Canada, the small-denomination, short-term certificates of deposit issued by banks and trust companies are called

A) Eurodollars
B) commercial papers
C) wholesale deposits
D) bankers' acceptance
E) GICs

Question 10

A _______ is a postdated cheque that has been guaranteed by a bank for payments.

A) Eurodollars
B) commercial paper
C) certificate of deposit
D) banker's acceptance
E) call money securities

Question 11

Quoted interest rates that have not been adjusted for inflation are referred to as _______ interest rates.

A) Real
B) Effective
C) Bank discount
D) Nominal
E) bond equivalent

Question 12

A deposit of more than $100,000 at a commercial bank for a specified period of time is a _________.

A) Eurodollars
B) commercial paper
C) certificate of deposit
D) banker's acceptance
E) call money security

Question 13

A bellwether rate is an interest rate

A) set by the Bank of Canada
B) A bank charges for home mortgages
C) A bank pays for time deposits by its largest customers
D) Which portrays the current market rate for short-term investments
E) Which serves as an indicator of future trends

Question 14

The most popular method for quoting interest rates on money market instruments is the ______ yield.

A) real
B) effective
C) bank discount
D) nominal
E) bond equivalent

Question 15

A Euro-Canadian dollar is a certificate of deposit offered at banks outside Canada denominated in _________.

A) Euros
B) Pounds
C) Yen
D) Canadian dollars
E) Any currency

Question 16

Treasury _______ are short-term Canadian government debt securities.

A) bills
B) bonds
C) notes
D) paper
E) repurchase agreements

Question 17

The _________ rate is the interest rate banks borrow and lend overnight funds to each other in the overnight market.

A) call money
B) overnight
C) discount
D) prime
E) LIBOR

Question 18

Real interest rates are rates that

A) Have been adjusted for risk
B) Have been adjusted for inflation
C) Have actually been paid as compared to those are anticipated
D) Are equal to the nominal rate minus the market risk premium
E) Are being paid on the Canadian Treasury securities in the current market

Question 19

A _______ makes only a single payment of face value at maturity.

A) Treasury bond
B) Treasury note
C) certificate of deposit
D) pure discount security
E) nominal security

Question 20

The _________ is a graph of Canadian government bond yields plotted against maturity.

A) yield structure
B) term structure
C) market return graph
D) yield curve
E) bond yield

Question 21

If the _______ regarding the shape of the yield curve is correct, an investor will receive the same return on average if they buy a two year STRIPS or two consecutive one year STRIPS.

A) maturity preference theory
B) Fisher hypothesis
C) expectations theory
D) market segmentation theory
E) forward rate theory

Question 22

Which of the following will increase the price of a money market instrument computed using a discount yield?
I) increase in discount yield
II) decrease in discount yield
III) increase in days to maturity
IV) decrease in days to maturity

A) I only
B) I and III only
C) I and IV only
D) II and III only
E) II and IV only

Question 23

The yield curve shows the relationship between:

A) the bond coupon and time to maturity.
B) coupon bond yields and time to maturity.
C) the yield on a bond and its coupon rate.
D) pure discount bonds and time to maturity.
E) the yield on pure discount bonds and coupon bonds.

Question 24

A normal yield curve is:

A) upward sloping.
B) flat.
C) downward sloping.
D) humped.
E) U-shaped.

Question 25

According to the Fisher hypothesis,

A) nominal interest rates will reflect the current real interest rate plus a risk premium.
B) nominal interest rates change inversely with inflation.
C) real interest rates will always remain constant, only nominal interest rates will change.
D) nominal interest rates follow the general level of inflation.
E) interest rates are independent of inflation rates.

Question 26

The _________ theory states that various markets for debt exist based on the time to maturity with each market establishing its own rate of interest.

A) modern term structure
B) expectations
C) maturity preference
D) preferred habitat
E) market segmentation

Question 27

The _________ theory states that the shape of the yield curve reveals the financial market's projection of future interest rates.

A) modern term structure
B) expectations
C) maturity preference
D) preferred habitat
E) market segmentation

Question 28

The _________ theory states that to induce investors to hold long-term securities they must be paid a higher interest rate than they would require on short-term securities.

A) modern term structure
B) expectations
C) maturity preference
D) preferred habitat
E) market segmentation

Question 29

An inverted yield curve is:

A) upward sloping.
B) flat.
C) downward sloping.
D) humped.
E) U-shaped.

Question 30

Canadian T-bills rates are quoted using:

A) bank discount yield.
B) annual percentage rate.
C) effective annual rate.
D) bond equivalent yield.
E) bid yield.

Question 31

The additional return to compensate lenders for assuming the risk of failed payments is called the

A) Liquidity premium
B) Inflation premium
C) Default premium
D) Interest-rate risk premium
E) None of the above

Question 32

The market rate on a bond fell from 8.76 percent to 8.73 percent. This is a decline of how many basis points?

A) .0003
B) 0.0030
C) 0.03
D) 0.3
E) 3

Question 33

Bonds issued by the Government of Canada which guarantee a fixed rate of return in excess of inflation are called:

A) high-yield bonds.
B) real return bonds.
C) adjustable debentures.
D) guaranteed yield bonds.
E) variable principal bonds.

Question 34

Money market securities are sometimes referred to as "pure discount securities" because

A) they mature in less than a year.
B) the coupon payments are discounted from the price the buyers pays.
C) their yield is based upon the bank rate.
D) their yield is equal to the discount rate set by the Bank of Canada.
E) they don't have coupons they always sell at a discount to their face value.

Question 35

The combination of the maturity preference theory and the market segmentation theory is known as the _______ theory.

A) modern term structure
B) expectations
C) maturity preference
D) preferred habitat
E) market segmentation

Question 36

Bond equivalent yield is the method for quoting Canadian treasury bills based on the securities' _________ value with _________ days in a year.

A) Market; 365
B) Par; 365
C) Market; 360
D) Par; 360
E) None of the above

Question 37

The Fisher hypothesis states that

A) Nominal interest rates are relatively constant for all maturity periods.
B) Long-term interest rates are based on current inflation rates
C) Nominal interest rates are directly influenced by inflation rates
D) Nominal interest rates are inversely related to inflation rates
E) Interest rates are independent of inflation rates

Question 38

The expected future interest rate implied by current interest rates is a(n) _________ rate.

A) discount
B) real
C) expected
D) future
E) forward

Question 39

The extra return required by investors in long-term securities to offset the risk that the securities will decrease more in price when interest rates rise is the _________ risk premium.

A) interest rate
B) default
C) term structure
D) inflation
E) liquidity

Question 40

Which of the follow is NOT a reason for the Bank of Canada to increase the bank rate?

A) Promote stable economic growth.
B) Indicate a tightening of monetary policy.
C) Send a signal regarding the direction of future monetary policy.
D) Stimulate economic activity
E) Control inflation from increasing

Question 41

You are calculating the bank discount yield of a US Treasury bill on March 15, 2008. 2008 is a leap year. You would use __________ days in the calculation.

A) 360
B) 365
C) 366
D) 365 or 366
E) Insufficient information.

Question 42

The Bank of Montreal needs to borrow $4 million from the TD-Canada Trust overnight. The rate that BOM will have to pay for this loan is called the __________ rate.

A) Money market
B) Bank
C) Over-night
D) Prime
E) Treasury

Question 43

The rate that you actually earn on a Canadian T-bill is called the __________ rate

A) Discount
B) Treasury
C) Bill
D) Annual percentage
E) Effective annual

Question 44

Assuming that the yield curve and term structure are both flat at all maturities, which of the following debt instruments will probably have the lowest interest rate as measured by its yield to maturity?

A) 20-year maturity Quebec STRIP bonds.
B) 3-month Canadian T-bills.
C) 2-year maturity, high quality municipal bonds.
D) 10-year maturity Canadian government bonds.
E) 20-year, AAA rated corporate bond

Question 45

The term structure of interest rates is:

A) Based on zero-coupon corporate bonds.
B) A relationship between time to maturity and bond quality.
C) Equivalent to the yield curve.
D) Based on default-free, pure discount bonds.
E) None of the above.

Question 46

The yield curve shows the rates that a __________ will pay for various maturity ranges.

A) Large corporation
B) Municipal government
C) Bank's best customer
D) High-risk borrower
E) Default-free borrower

Question 47

The asked yield on a Canadian Treasury bill is

A) The yield you will receive if you sell your T-bill
B) Quoted on a discount basis based on a 365-or 366-day year
C) Not comparable to yields on other money securities
D) A bond equivalent yield that is based on a 365-or 366-day year
E) A bond equivalent yield that is based on a 360-day year

Question 48

Assuming the yield curve and the term structure are both upward sloping at all maturities, which of the following will have the highest interest rate as measured by their yield to maturity?

A) 20-year maturity STRIP bonds.
B) 2-year maturity Canadian government bonds.
C) 5-year maturity municipal bonds.
D) 3-month maturity Canadian T-bills.
E) Insufficient information.

Question 49

Banks frequently quote loan rates to customers as the __________ rate plus a spread.

A) Money market
B) Prime
C) Discount
D) Commercial paper
E) Bank

Question 50

You are calculating the bank discount yield of a Canadian Treasury bill on March 15, 2009. You would use __________ days in the calculation.

A) 360
B) 365
C) 366
D) 365 or 366
E) Insufficient information.

Question 51

The current price of a bond will increase if the bank discount yield __________ or if the days to maturity __________.

A) Decreases; decrease
B) Decreases; increase
C) Increases; decrease
D) Increase; increase
E) None of the above

Question 52

Investors purchase Treasury bills at the __________ quote and dealers purchase Treasuries at the __________ quote.

A) Ask; ask
B) Ask; bid
C) Bid; ask
D) Bid; bid
E) None of the above

Question 53

You are calculating the bank discount yield of a bond on March 15, 2008. 2008 is a leap year. You would use __________ days in the calculation.

A) 360
B) 365
C) 366
D) 365 or 366
E) Insufficient information.

Question 54

Assuming that the expectations theory is true, a normal yield curve implies that interest rates will:

A) be lower in the future.
B) be the same in the future.
C) increase in the short-term, and then decrease.
D) be higher in the future.
E) decrease in the short-term, and then increase.

Question 55

Which of the following is generally considered as the bellwether rate for bank loans to business firms?

A) Money market rate
B) Bank rate
C) Call money rate
D) Prime rate
E) Commercial paper rate

Question 56

According to modern term structure theory, which of the following factors is most likely to determine whether the term structure of interest rates is upward or downward sloping?

A) The default premium.
B) The inflation premium.
C) The interest rate risk premium.
D) The nominal interest rate.
E) The liquidity premium.

Question 57

The return an investor receives after accounting for the effects of inflation (i.e., the increase in buying power) is known as the:

A) effective annual return.
B) nominal return.
C) annual percentage return.
D) real rate.
E) bond equivalent yield.

Question 58

An investor is considering the purchase of a bond. The investor is concerned that it may be difficult to sell the bond since the market in that bond is not active. The investor will demand a _______ premium.

A) interest rate risk
B) Inflation
C) Liquidity
D) Sale
E) Default

Question 59

According to modern term structure theory, which of the following is not represented in the term structure of interest rates?

A) A liquidity premium.
B) A coupon rate premium.
C) An interest rate risk premium.
D) A default premium.
E) A real rate of interest.

Question 60

Based on the modern term structure theory, interest rates will increase with decrease in

A) Inflation rates
B) Default risk
C) Liquidity
D) Real interest rates
E) Interest rate volatility

Question 61

Risk-averse short-term investors will buy long-term bonds over short-term bonds only if

A) yields on long-term bonds exceed implied forward rates.
B) expected prices on long-term bonds are less than expected prices of short-term bonds.
C) expected returns on long-term bonds are less than expected returns on short-term bonds.
D) expected returns on long-term bonds are greater than implied forward rates.
E) none of the above.

Question 62

Modern term structure theory states that the nominal rate on default-free securities is computed by combining a real interest rate with a(n) __________ premium. I) interest rate risk
II) liquidity
III) inflation
IV) default

A) I
B) I and III
C) II and III
D) II and IV
E) I, II and III

Question 63

A downward sloping yield curve generally implies

A) interest rates are expected to increase in the future
B) longer-term bonds are riskier than short-term bonds
C) interest rates are expected to decline in the future
D) shorter-term bonds are less risky than longer-term bonds
E) none of the above

Question 64

A bond had a nominal return of 14 percent last year and the inflation rate was 4.6 percent. What was the approximate real return?

A) 18.6%
B) 14.0%
C) 13.2.%
D) 9.4%
E) 10.6%

Question 65

What is the dollar price of a $100 face value STRIPS with six years to maturity, and a yield-to-maturity of 8.4 percent?

A) $62.25
B) $63.12
C) $61.04
D) $65.32
E) $64.18

Question 66

Assume the market segmentation theory is true. If investors believe that inflation will be higher in the future than it is now, then the term structure of interest rates will be:

A) upward sloping.
B) flat.
C) downward sloping.
D) humped.
E) Any of the above.

Question 67

Which of the following is a monetary tool of the Bank of Canada?

A) STRIPS.
B) The bellwether rate.
C) The call money rate.
D) The bank rate.
E) The Treasury bill rate.

Question 68

Which one of the following applies to "Yankee bonds"?

A) U.S. corporate bonds that are sold internationally
B) U.S. corporate bonds denominated in a foreign currency
C) U.S. government bonds that are sold internationally
D) any bond that is denominated in U.S. dollars
E) foreign-issued bonds sold in the U.S. denominated in U.S. dollars

Question 69

The maturity of money market instruments is:

A) less than one month.
B) less than six months.
C) less than one year.
D) between one year and 10 years.
E) greater than 10 years.

Question 70

A twenty-year maturity STRIP bond can be stripped into __________ instruments.

A) 20
B) 21
C) 40
D) 41
E) 10

Question 71

The highest historical interest rates in Canada occurred during the:

A) 1940s.
B) 1950s.
C) 1960s.
D) 1970s.
E) 1980s.

Question 72

Overnight loans, usually collateralized by Treasury bills, are called:

A) discount loans.
B) Yankee loans.
C) LIBOR agreements.
D) repurchase agreements.
E) commercial paper.

Question 73

A $10,000 face value, 15-year maturity STRIPS has a quoted price of 38.50. What is its yield-to-maturity?

A) 6.46%
B) 7.53%
C) 8.34%
D) 7.48%
E) 8.39%

Question 74

A $1,000,000 face value STRIPS has a yield to maturity of 6.8 percent. If the maturity is in 13 years, what is the dollar price of the STRIPS?

A) $419,243
B) $417,867
C) $405,321
D) $412,634
E) $425,181

Question 75

A STRIPS has a face value of $1,000 and 15 years to maturity. If the yield-to-maturity is 6.3 percent, what is the current dollar value of the STRIPS?

A) $391.32
B) $394.39
C) $386.24
D) $399.95
E) $405.87

Question 76

A $25,000 face value STRIPS is quoted at 93.400. What is the dollar price

A) $23,067.50
B) $23,210.94
C) $23,215.00
D) $23,277.78
E) $23,350.00

Question 77

When future interest rate movements are known with certainty and bonds are fairly priced,

A) all yields-to-maturity will be the same.
B) all bonds are sold for the same price.
C) all bond equivalent yields will be the same.
D) all of the above.
E) none of the above.

Question 78

A $1,000 face value STRIPS with 12 years to maturity is quoted at 54.75. What is its yield to maturity?

A) 5.08%
B) 4.93%
C) 5.86%
D) 2.04%
E) 3.09%

Question 79

An asset had a real return of 12.6 percent and a nominal return of 15.3 percent. What was the approximate inflation rate for the year?

A) 2.7%
B) 27.9%
C) 13.2%
D) 3.9%
E) 4.6%

Question 80

Your portfolio had a 10.2 percent real return last year. If the inflation rate was 4.3 percent, what was the approximate nominal return of your portfolio?

A) 12.8%
B) 14.5%
C) 6.7%
D) 10.2%
E) 5.9%