Question 1

Which of the following will increase the price of a money market instrument computed using a discount yield?
I. bank discount rate
II. bond equivalent rate
III. annual percentage rate
IV. effective annual rate

Accepted Answer

The answer of Which of the following will increase the...

Question 2

Which one of the following is used by Treasury dealers to indicate the price they are willing to pay to purchase a Treasury bill?

Accepted Answer

Bid discount is the price that Treasury dealers are willing to pay to purchase a Treasury bill. The bid discount represents the percentage discount from the face value of the bill that the dealer is willing to pay. The asked discount, on the other hand, represents the price at which dealers are willing to sell a Treasury bill. Par rate and face rate are not commonly used terms in Treasury bill trading, and bank discount is another term for the bid discount.

Question 3

Which one of the following borrowers will pay the rates depicted on a Treasury yield curve?

Accepted Answer

The Treasury yield curve represents the rates paid by default-free borrowers, which includes the U.S. government. Therefore, only a borrower who is default-free would pay the rates depicted on the Treasury yield curve.

Question 4

According to the expectations theory and the Fisher hypothesis, a downward-sloping term structure is indicative of which of the following based on market expectations?
I. nominal interest rates are expected to increase
II. nominal interest rates are expected to decline
III. inflation rates are expected to increase
IV. inflation rates are expected to decrease

Accepted Answer

A downward-sloping term structure suggests that nominal interest rates and inflation rates are expected to decline.

Question 5

Based on expectations theory, the term structure of interest rates will be ________ anytime investors believe that interest rates will be higher in the future than they are today.

Accepted Answer

Per expectations theory, if investors expect interest rates to rise in the future, they will demand a higher yield for longer-term bonds to compensate them for the risk of holding those bonds until maturity. This higher demand for longer-term bonds will push up their prices, which will, in turn, lower their yields. As a result, the yield curve will slope upward, reflecting the expectation of higher interest rates in the future.

Question 6

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

Accepted Answer

An increase in the discount yield actually decreases the price of a money market instrument, as the price and yield of such instruments are inversely related. Therefore, a decrease in discount yield (II) will increase the price. Similarly, a decrease in days to maturity (IV) increases the price, as the price approaches par value as maturity nears.

Question 7

Which one of the following statements is correct?

Accepted Answer

The answer of Which one of the following statements is...

Question 8

Consider a money market instrument with 50 days to maturity and a quoted ask price of 98. Which two of the following statements are correct as they relate to this instrument?
I. The bond equivalent yield is an effective annual rate.
II. The bank discount rate is lower than the bond equivalent yield.
III. The bank discount rate is an effective annual rate.
IV. The bond equivalent yield is lower than the effective annual rate.

Accepted Answer

The bank discount rate is typically lower than the bond equivalent yield because it is based on the face value rather than the purchase price. The bond equivalent yield is lower than the effective annual rate because it does not account for compounding within the year.

Question 9

Inflation-indexed Treasury securities:
I. adjust the principal amount on an annual basis.
II. are default free.
III. offer a positive real rate of return.
IV. have a variable principal amount.

Accepted Answer

I. adjust the principal amount on an annual basis - Correct. Inflation-indexed Treasury securities adjust their principal amount on an annual basis based on the current inflation rate.
II. are default free - Correct. These securities are issued and backed by the US government, making them default-free.
III. offer a positive real rate of return - Correct. Inflation-indexed Treasury securities offer a real rate of return on top of the inflation adjustment.
IV. have a variable principal amount - Incorrect. These securities have an adjusted principal amount, but it is not variable in the sense that it can fluctuate independently of inflation. Therefore, choice B and E are eliminated. Choice C and D are eliminated because they contain incorrect statements.

Question 10

Which one of the following debt instruments guarantees investors a positive real rate of return?

Accepted Answer

TIPS (Treasury Inflation-Protected Securities) guarantee investors a positive real rate of return because the interest payments and principal value of the bond are adjusted for inflation. This ensures that the investor's purchasing power is protected from inflation. The other choices may provide a positive nominal return, but they do not adjust for inflation and may not necessarily provide a positive real return.

Question 11

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

Accepted Answer

Yankee bonds are foreign-issued bonds that are sold in the U.S. market. They are denominated in U.S. dollars and are subject to American regulations, allowing U.S. investors to invest in foreign companies without the risk of currency fluctuations.

Question 12

The approximate nominal interest rate is computed as the real rate:

Accepted Answer

The nominal interest rate is the sum of the real interest rate (what the lender gets paid for forgoing consumption) and the expected inflation rate (probability that the money repaid at the end of the loan period will have less purchasing power). Therefore, the approximate nominal interest rate is calculated by adding the real interest rate to the expected inflation rate, resulting in D) plus the inflation rate.

Question 13

The bond equivalent yield adjusts for leap years by using 366 days starting with:

Accepted Answer

The answer of The bond equivalent yield adjusts for leap...

Question 14

Which of the following statements are true?
I. Lenders have a preference for shorter maturities.
II. Lenders have a preference for longer maturities.
III. Borrowers have a preference for shorter maturities.
IV. Borrowers have a preference for longer maturities.

Accepted Answer

Lenders typically have a preference for shorter maturities as it allows them to re-lend the money and earn interest again sooner. Borrowers, on the other hand, have a preference for longer maturities as it allows them to spread out their payments over a longer period of time and potentially pay a lower interest rate. Therefore, statement I and IV are true, while statement II and III are false.

Question 15

The variable ƒ_1,1 as used in the expectations theory is interpreted as the forward rate for one year:

Accepted Answer

The variable ƒ_1,1 as used in the expectations theory is interpreted as the forward rate for one year commencing in one year. Therefore, the best choice is D.

Question 16

Treasury STRIPS are:

Accepted Answer

Treasury STRIPS are created by separating the principal payments and coupons of Treasury notes and bonds. They are essentially a zero coupon bond, where the investor purchases the bond at a discount to its face value and receives the full face value upon maturity. They do not have maturities of one year or less, as stated in option A, nor are they quoted in 32nds of a dollar, as stated in option B. They are not a type of mortgage bond, as stated in option D, nor are they coupon securities, as stated in option E.

Question 17

Which one of the following statements is correct concerning a Treasury bill?

Accepted Answer

The asked yield on a Treasury bill is a bond equivalent yield, which is calculated on a 365-day basis. The asked discount represents the amount an investor can purchase the bill for less than its face value, and it is typically lower than the bid discount. The bid and asked prices for Treasury bills are quoted in terms of their discount from face value, and they are not computed based on a specific year basis.

Question 18

Which two of the following are the largest categories of fixed-income securities in the U.S.?
I. U.S. government debt
II. corporate debt
III. municipal government debt
IV. real estate mortgage debt

Accepted Answer

U.S. government debt and real estate mortgage debt are the largest categories of fixed-income securities in the U.S. U.S. government debt includes Treasury bonds, notes, and bills, which are substantial due to the government's borrowing needs. Real estate mortgage debt encompasses both residential and commercial mortgages, making it a significant portion of the fixed-income market.

Question 19

Which one of the following statements is correct?

Accepted Answer

The answer of Which one of the following statements is...

Question 20

Which of the following statements is/are true as applied to U.S. agency debt?
I. It is equally as risky as Treasury debt.
II. It is frequently subject to state taxes.
III. It has the same credit guarantee as U.S. Treasury debt.
IV. It generally has a lower yield than U.S. Treasury debt with the same maturity.

Accepted Answer

II onlyU.S. agency debt does not have the same credit guarantee as U.S. Treasury debt, making it slightly riskier, which is why it generally offers a higher yield than Treasury debt of the same maturity. However, it is frequently subject to state taxes, distinguishing it from U.S. Treasury debt which is often exempt from state and local taxes.

Quiz 9: Interest Rates

Which of the following will increase the price of a money market instrument computed using a discount yield? I. bank discount rate II. bond equivalent rate III. annual percentage rate IV. effective annual rate

Which one of the following is used by Treasury dealers to indicate the price they are willing to pay to purchase a Treasury bill?

Which one of the following borrowers will pay the rates depicted on a Treasury yield curve?

Based on expectations theory, the term structure of interest rates will be ________ anytime investors believe that interest rates will be higher in the future than they are today.

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

Which one of the following statements is correct?

Inflation-indexed Treasury securities: I. adjust the principal amount on an annual basis. II. are default free. III. offer a positive real rate of return. IV. have a variable principal amount.

Which one of the following debt instruments guarantees investors a positive real rate of return?

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

The approximate nominal interest rate is computed as the real rate:

The bond equivalent yield adjusts for leap years by using 366 days starting with:

Which of the following statements are true? I. Lenders have a preference for shorter maturities. II. Lenders have a preference for longer maturities. III. Borrowers have a preference for shorter maturities. IV. Borrowers have a preference for longer maturities.

The variable ƒ1,1 as used in the expectations theory is interpreted as the forward rate for one year:

Treasury STRIPS are:

Which one of the following statements is correct concerning a Treasury bill?

Which two of the following are the largest categories of fixed-income securities in the U.S.? I. U.S. government debt II. corporate debt III. municipal government debt IV. real estate mortgage debt

Which one of the following statements is correct?

The variable ƒ_1,1 as used in the expectations theory is interpreted as the forward rate for one year: