Deck 4: The Pricing of Financial Assets

Question 1

Which of the following affect the interest rate used to discount future cash flows?

A) The degree of impatience or time preference on the part of surplus units
B) The returns that deficit units can earn on investment projects
C) The interaction of a and b
D) All of the above

Answer 1

All of the above

Question 2

A 10-year Treasury note with a 2.75 percent coupon is selling at 99. This means that

A) Its current yield is 2.75 percent
B) Its current yield is above 2.75 percent
C) Its current yield is below 2.75 percent
D) There is not enough information to make a determination

Answer 2

Its current yield is above 2.75 percent

Question 3

Interest rate (price) risk occurs when

A) The maturity of an instrument is less than the investor's holding period
B) The maturity of an instrument is greater than the investor's holding period
C) The maturity of an instrument is the same as the investor's holding period
D) The yield curve slopes upward

Answer 3

The maturity of an instrument is greater than the investor's holding period

Question 4

A drop in interest rates

A) Affects the prices of short-term securities more than long-term securities
B) Affects the prices on short-term securities less than long-term securities
C) Affects the prices of short-term securities the same as long-term securities
D) Cannot affect prices of securities

Question 5

Which of the following cause a coupon security's duration to fall?

A) A shorter maturity
B) Higher interest rates
C) Higher bond prices
D) Both a and b

Question 6

Under the Fisher effect

A) Lower inflation is associated with lower nominal interest rates
B) Lower inflation is associated with higher nominal interest rates
C) Higher inflation is associated with longer duration
D) All of the above

Question 7

A zero-coupon security's duration

A) Is equal to its maturity
B) Does not vary with interest rates
C) Is longer than that of a comparable-maturity coupon security
D) All of the above

Question 8

The yield on a 10-year Treasury note is 2.74 percent and that on a 10-year TIPS note is 0.50 percent. Inflation compensation (mostly inflation expectations) is

A) 2.24 percent
B) -2.24 percent
C) 3.24 percent
D) Cannot tell from the above information

Question 9

An amortized financial instrument is one that

A) Enables the lender to acquire an equity position in the collateral
B) Finances only real estate transactions
C) Involves regular payments by the borrower that cover both interest and principal
D) Another term for a zero-coupon security

Question 10

In comparison with a 10-year Treasury coupon note, a 10-year Treasury zero-coupon security has

A) A shorter duration
B) A longer duration
C) The same duration
D) No value to investors

Question 11

The present value formula is used to

A) Determine the current price of an asset when the cash flows and discount rate are known
B) Determine the amount of regular fixed payments on a loan when the interest rate and loan amount are known
C) Determine the yield to maturity on a financial instrument when the current price and cash flows are known
D) All of the above

Question 12

When the price of a bond increases

A) Its yield to maturity also increases
B) Its yield to maturity is unchanged
C) Its yield to maturity falls
D) A default has occurred