Question 1

The theory of the term structure of interest rates, which suggests that long-term rates are determined by the average of short-term rates expected over the time that a long-term bond is outstanding is the:

Accepted Answer

The theory described in the question is known as the expectations hypothesis. It suggests that long-term rates are a reflection of the average expectations of short-term rates over the same period of time. This theory assumes that the main factor driving interest rate movements is expectations about future economic conditions, as opposed to liquidity factors or market segmentation.

Question 2

Publishing companies are characterized by:

Accepted Answer

Publishing companies are often characterized by seasonal sales, as the demand for books and other materials tends to vary throughout the year. The other choices are less common or not necessarily characteristic of the industry as a whole.

Question 3

The use of cash budgeting procedures:

Accepted Answer

Cash budgeting procedures help illustrate the fluctuating levels of current assets, such as cash, accounts receivable, and inventory, for a given production plan. This allows for better management of cash flow and ensures that the company has enough resources to cover expenses during periods of low revenue.

Question 4

If a firm uses level production with seasonal sales:

Accepted Answer

Level production means that the firm produces a constant amount of output regardless of seasonal fluctuations in demand. As sales decline during the off-season, inventory levels will naturally increase since the firm is still producing at the same rate. This excess inventory will need to be stored until demand picks up again, which may lead to additional costs for the firm.

Question 5

When actual sales are greater than forecasted sales:

Accepted Answer

If actual sales are greater than forecasted sales, it means that more units were sold than anticipated. This would result in a decrease in inventory as the goods are being sold instead of sitting in storage. Additionally, since more goods were sold, accounts receivable would increase as customers owe money for the additional sales.

Question 6

Which of the following is a true statement concerning interest rates?

Accepted Answer

The answer of Which of the following is a true...

Question 7

The term structure of interest rates:

Accepted Answer

The term structure of interest rates shows the relationship between interest rates and the time to maturity for a given borrower in a given currency. It changes daily to reflect the current supply and demand conditions in the money and capital markets, reflecting changes in expectations about future inflation, economic activity, and financial market trends. Choices B and C do not fully capture the term structure of interest rates, and choice D is too specific to be a comprehensive description.

Question 8

A conservatively financed firm would:

Accepted Answer

A conservatively financed firm would use long-term financing for permanent assets and capital assets and a portion of the short-term fluctuating assets and use short-term financing for all other short-term assets. This approach would ensure that there is enough long-term financing to cover the fixed assets and a portion of the short-term assets while still having the flexibility to use short-term financing for other short-term assets. It reduces the risk of default and improves overall financial stability of the firm.

Question 9

The term structure of interest rates:

Accepted Answer

The answer of The term structure of interest rates:
...

Question 10

The term structure of interest rates or the yield curve:

Accepted Answer

The answer of The term structure of interest rates or...

Question 11

Some analysts believe that the term structure of interest rates is determined by the behaviour of various types of financial institutions. This theory is called the:

Accepted Answer

The theory that the term structure of interest rates is determined by the behavior of various types of financial institutions is known as the segmentation theory. This theory suggests that different groups of investors have preferences for particular maturities of bonds, leading to segmented markets for different maturities of bonds. This segmentation leads to different interest rates for different maturities, which shapes the term structure of interest rates. The other options (expectations hypothesis, liquidity premium theory, theory of industry supply and demand for bonds) do not specifically relate to the behavior of financial institutions in determining the term structure of interest rates.

Question 12

The term structure of interest rates:

Accepted Answer

The term structure of interest rates is usually constructed with Government of Canada securities of varying maturities to depict the relationship between interest rates and time to maturity. It is also referred to as the yield curve, which shows the yields of bonds with different maturities over time.

Question 13

One advantage of level production is that:

Accepted Answer

Level production allows for a steady and consistent use of manpower and equipment, leading to more efficient and cost-effective production. This helps to avoid the seasonal bulges and sharp declines in current assets that can occur with other production methods. Additionally, by maintaining a consistent level of production, the risk of holding onto obsolete inventory decreases as there is less chance of producing too much of a specific product in a short period of time.

Question 14

Which of the following yield curves would be characteristic at peak periods of economic expansions?

Accepted Answer

The answer of Which of the following yield curves would...

Question 15

A firm will usually increase the ratio of short-term debt to long-term debt when:

Accepted Answer

When the term structure is inverted (short-term interest rates are higher than long-term rates) and is expected to shift down (meaning that short-term rates are expected to decrease), it makes sense for a firm to increase its ratio of short-term debt to long-term debt. This strategy allows the firm to take advantage of lower borrowing costs in the near future as short-term rates decline.

Question 16

The term structure of interest rates is not influenced by:

Accepted Answer

The term structure of interest rates refers to the relationship between interest rates and the time to maturity of debt securities. It is influenced by a variety of factors such as inflation, money supply, and Bank of Canada activities. However, the normal yield curve is not an influence on the term structure itself, rather it is a phenomenon that can be observed within the term structure. Therefore, D is the correct choice.

Question 17

When the term structure of interest rates is downward sloping and interest rates are expected to decline, the:

Accepted Answer

The answer of When the term structure of interest rates...

Question 18

The belief that investors require a higher return to entice them into holding long-term securities is the viewpoint of the:

Accepted Answer

The belief that investors require a higher return to entice them into holding long-term securities is the liquidity premium theory. This theory posits that investors will require a higher return for holding long-term securities to compensate them for the increased uncertainty and price risk that comes with holding these securities for an extended period. The expectations hypothesis, on the other hand, suggests that the yield curve reflects market expectations of future interest rates, while the segmentation theory argues that different groups of investors have different preferences for different maturities of securities. The market credit crunch theory is not a relevant theory for this question.

Question 19

An inverted yield curve would suggest that:

Accepted Answer

An inverted yield curve occurs when short-term interest rates are higher than long-term interest rates. This suggests that investors expect interest rates to fall in the future, which could potentially signal an economic slowdown or recession.

Question 20

Yield curves change daily to reflect:

Accepted Answer

Yield curves reflect changing conditions in the overall economy, such as inflation expectations and economic growth. They are not static and are updated regularly to reflect current market conditions.

Quiz 6: Working Capital and the Financing Decision

The theory of the term structure of interest rates, which suggests that long-term rates are determined by the average of short-term rates expected over the time that a long-term bond is outstanding is the:

Publishing companies are characterized by:

The use of cash budgeting procedures:

If a firm uses level production with seasonal sales:

When actual sales are greater than forecasted sales:

Which of the following is a true statement concerning interest rates?

The term structure of interest rates:

A conservatively financed firm would:

The term structure of interest rates:

The term structure of interest rates or the yield curve:

Some analysts believe that the term structure of interest rates is determined by the behaviour of various types of financial institutions. This theory is called the:

The term structure of interest rates:

One advantage of level production is that:

Which of the following yield curves would be characteristic at peak periods of economic expansions?

A firm will usually increase the ratio of short-term debt to long-term debt when:

The term structure of interest rates is not influenced by:

When the term structure of interest rates is downward sloping and interest rates are expected to decline, the:

The belief that investors require a higher return to entice them into holding long-term securities is the viewpoint of the:

An inverted yield curve would suggest that:

Yield curves change daily to reflect: