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

Accepted Answer

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

Question 2

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

Accepted Answer

The answer of According to the expectations theory and the...

Question 3

Which one of the following statements is correct?
A) The yield curve relates time to maturity to interest rates on zero-coupon bonds.
B) The yield curve is based on Treasury bill yields.
C) The term structure of interest rates is based on default-free, pure discount securities.
D) The term structure of interest rates is based on default-free, coupon bonds.
E) The yield curve ignores default risk while the term structure includes a default risk premium.

Accepted Answer

The term structure of interest rates is based on default-free, pure discount securities, while the yield curve relates time to maturity to interest rates on all types of bonds, including coupon bonds. Additionally, the yield curve may incorporate a default risk premium, while the term structure assumes default-free securities.

Question 4

Treasury STRIPS are: A) zero-coupon bonds issued by the U.S. Treasury with maturities of one year or less. B) currently quoted in 32^nd^s of a dollar. C) zero-coupon securities. D) a type of mortgage bond. E) coupon securities created from the interest and principal payments of Treasury bonds.

Accepted Answer

Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) are zero-coupon securities. They are created by separating the interest and principal payments of Treasury bonds and selling them as individual securities. This allows investors to buy the interest and principal components separately, which can be useful for certain investment strategies.

Question 5

The bond equivalent yield adjusts for leap years by using 366 days starting with:
A) January 1 of the leap year and ending with December 31 of the leap year.
B) February 1 of the year prior to the leap year and ending with February 29 of the leap year.
C) March 1 of the year prior to the leap year and ending with February 29 of the leap year.
D) the second quarter of the year prior to the leap year and ending with the first quarter of the leap year.
E) February 1 of the leap year and ending with February 29 of the leap year.

Accepted Answer

The bond equivalent yield adjusts for leap years by using 366 days starting with March 1 of the year prior to the leap year and ending with February 29 of the leap year. This is because the leap day of February 29 falls within the calculation period, and using March 1 as the starting point ensures that all days of the leap year are included.

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

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 is used by Treasury dealers to indicate the price they are willing to pay to purchase a Treasury bill?
A) par rate
B) bid discount
C) face rate
D) asked discount
E) bank discount

Accepted Answer

Bid discount is the price that Treasury dealers are willing to pay to purchase a Treasury bill. Par rate refers to the interest rate at which the price of a bond is equal to its face value. Face rate is the interest rate stated on the face of a bond or other debt instrument. Asked discount refers to the price at which Treasury dealers are willing to sell a Treasury bill. Bank discount is a method used for calculating the interest rate on short-term debt instruments such as Treasury bills.

Question 8

Which one of the following debt instruments guarantees investors a positive real rate of return?
A) zero-coupon bond
B) default-free, pure-discount bond
C) T-bill
D) TIPS
E) T-bond

Accepted Answer

TIPS (Treasury Inflation-Protected Securities) guarantee investors a positive real rate of return by adjusting their principal value based on changes in the Consumer Price Index (CPI). This means that the interest payments received by the investor will also increase with inflation, ensuring a hedge against inflation and a positive real rate of return.

Question 9

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

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 10

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.

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 11

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 coupon rate.
A) II and III only
B) III and IV only
C) I, II, and III only
D) I, II, and IV only
E) I, II, III, and IV

Accepted Answer

Inflation-indexed Treasury securities adjust their principal amount on an annual basis to account for inflation, which means that statement (I) is true. These securities are issued by the US government and are considered default-free, which means that statement (II) is also true. Inflation-indexed Treasury securities offer a positive real rate of return, which means that statement (III) is also true. However, these securities have a fixed coupon rate, which means that statement (IV) is false. Therefore, the best choice is option A, which includes only statements II and III.

Question 12

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.
A) volatile
B) flat
C) downward sloping
D) upward sloping
E) vertical

Accepted Answer

Expectations theory states that the shape of the term structure of interest rates depends on investors' expectations of future interest rates. If investors believe that interest rates will be higher in the future than they are today, they will demand higher yields on longer-term bonds to compensate for the higher interest rate risk. This results in an upward sloping yield curve. Therefore, the correct answer is (D) upward sloping.

Question 13

The variable f_1,1 as used in the expectations theory is interpreted as the forward rate for one year: A) based on the prior one-year rate. B) at 1 percent. C) based on a 1 percent increase from the current rate. D) commencing in one year. E) based on a 1 percent probability of occurrence.

Accepted Answer

The variable f_1,1 represents the one-year forward rate commencing in one year, which means it is the rate that will apply starting one year from today. Therefore, the best choice is D.

Question 14

Which one of the following statements is correct concerning a Treasury bill?
A) The asked discount indicates the amount a bond dealer is willing to pay to purchase a Treasury bill.
B) The asked yield on a Treasury bill is a bond equivalent yield.
C) The asked discount for a Treasury bill is greater than the bid discount.
D) The asked yield for a Treasury bill is computed based on a 360-day year.
E) The bid price on a Treasury bill is computed based on a 365, or 366-day year.

Accepted Answer

The asked yield on a Treasury bill is a bond equivalent yield, which is an annualized yield expressed as a percentage. The discount is the difference between the face value of the bill and the purchase price. The bid discount is typically greater than the asked discount. The yield calculation is based on a 365-day year, not a 360-day year.

Question 15

Which one of the following statements is correct?
A) All real interest rates will be positive as long as the inflation rate is positive.
B) Real rates must exceed inflation rates.
C) Short-term interest rates are affected by future inflation expectations.
D) Treasury bill returns tend to vary in direct relation to inflation rates.
E) The Fisher hypothesis advocates that real interest rates follow inflation rates.

Accepted Answer

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

Question 16

Which one of the following borrowers will pay the rates depicted on a Treasury yield curve?
A) large corporation
B) municipal government
C) bank's best customers
D) high-risk borrower
E) default-free borrower

Accepted Answer

The rates depicted on a Treasury yield curve are indicative of the rates paid by default-free borrowers, such as the US government. Therefore, borrowers who are perceived to have a very low probability of defaulting on their debt will pay rates in line with the Treasury yield curve, as investors view these borrowers as safe and less risky.

Question 17

The approximate nominal interest rate is computed as the real rate:
A) minus the risk-free rate.
B) minus the inflation rate.
C) plus the risk-free rate.
D) plus the inflation rate.
E) divided by the inflation rate.

Accepted Answer

The approximate nominal interest rate is computed by adding the real rate of return to the inflation rate. This is because the nominal interest rate consists of the real rate plus inflation expectations. Therefore, the answer is D which represents adding the inflation rate to the real rate of return.

Question 18

Which of the following statements 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.
A) II only
B) III only
C) I and III only
D) III and IV only
E) I, III, and IV only

Accepted Answer

U.S. agency debt is often subject to state taxes, unlike Treasury debt which is exempt. It is not equally risky as Treasury debt and does not have the same credit guarantee, as it is not backed by the full faith and credit of the U.S. government. It generally has a higher yield than Treasury debt due to the slightly higher risk.

Question 19

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

Accepted Answer

The answer of Consider a money market instrument with 50...

Question 20

Which one of the following is correct when computing the price of a debt security when using a discount yield?
A) The price will exceed the face value.
B) An increase in the discount yield will increase the current price.
C) The current price will decrease as the days to maturity decrease.
D) The computation will be based on a 360-day year.
E) The computation will consider leap years.

Accepted Answer

Discount yield is typically calculated based on a 360-day year, which is a common convention in finance for simplifying interest calculations.

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 statements is correct?

Treasury STRIPS are:

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

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

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

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 applies to "Yankee bonds"?

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 coupon rate.

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.

The variable f_1,1 as used in the expectations theory is interpreted as the forward rate for one year:

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

Which one of the following statements is correct?

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

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

Which of the following statements 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.

Which one of the following is correct when computing the price of a debt security when using a discount yield?

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 statements is correct?

Treasury STRIPS are:

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

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

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

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 applies to "Yankee bonds"?

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 coupon rate.

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.

The variable f1,1 as used in the expectations theory is interpreted as the forward rate for one year:

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

Which one of the following statements is correct?

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

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

Which one of the following is correct when computing the price of a debt security when using a discount yield?

The variable f_1,1 as used in the expectations theory is interpreted as the forward rate for one year: