Question 1

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.

Question 2

Money market rates are generally one or the other of which two rates?
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 Money market rates are generally one or...

Question 3

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 do adjust the principal amount on an annual basis and are default-free. They also offer a positive real rate of return, as the coupon rate adjusts with inflation to provide investors with a return that keeps up with the rising cost of living. However, the coupon rate is not variable but rather fixed based on the adjusted principal amount, meaning IV is incorrect.

Question 4

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

According to expectations theory, if investors believe that interest rates will be higher in the future, they will demand a higher yield on longer-term bonds to compensate for the increased risk. This results in an upward-sloping yield curve, where longer-term bonds have higher yields than shorter-term bonds. Therefore, the term structure of interest rates will be upward sloping anytime investors believe that interest rates will be higher in the future.

Question 5

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 the real rate plus inflation. Therefore, the correct answer is D, which states that the nominal rate is computed by adding the inflation rate to the real rate.

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 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. A Treasury bill is a short-term debt security issued by the U.S. Treasury with a maturity of one year or less. The yield on a Treasury bill is quoted as a bond equivalent yield, which is an annualized yield computed using a 365-day year, regardless of whether it is a leap year or not. The bid discount and asked discount refer to the difference between the bid price and the asked price, respectively, and the bid price on a Treasury bill is calculated based on a 360-day year.

Question 8

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. This means that the interest rates are based on the length of time to maturity for securities that do not have any risk of default, and they are issued at a discount to their face value. The yield curve relates the time to maturity to interest rates on bonds, but not necessarily zero-coupon bonds, and may include securities with default risk. Therefore, options A, B, and E are incorrect. Option D is also incorrect because the term structure of interest rates is based on pure discount securities, not coupon bonds.

Question 9

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 10

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

Question 11

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 forward rate for one year that starts one year from now. This means that it is commencing in one year, which corresponds to option D.

Question 12

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^nds 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 Securities) are zero-coupon securities that are created from a pool of Treasury bonds. The coupons and principal from the bonds are separated and sold as individual securities, allowing investors to buy and sell the interest and principal payments separately. They are not limited to maturities of one year or less and are not quoted in 32^nds of a dollar.

Question 13

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 14

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) are the only debt instrument out of the given options that guarantees investors a positive real rate of return, as they are indexed to inflation. The other options may have positive nominal rates of return but may not keep up with inflation, resulting in a negative real rate of return.

Question 15

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 the rates at which default-free borrowers (such as the U.S. government) can borrow. Therefore, a default-free borrower would be the only one of the given options to pay those rates.

Question 16

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 17

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. It is the discount rate that brings the purchase price of the bill down to its face value at maturity. Par rate refers to the coupon rate of a bond or the interest rate used to discount cash flows to their present value. Face rate is not a commonly used term in finance. Asked discount and bank discount are not relevant in the context of Treasury bill purchases.

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

The answer of Which of the following statements are true...

Question 19

Consider a money market instrument with 48 days to maturity and a quoted ask price of 99.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 48...

Question 20

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...

Quiz 9: Interest Rates

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

Money market rates are generally one or the other of which two rates? I.bank discount rate II.bond equivalent rate III.annual percentage rate IV.effective annual rate

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 approximate nominal interest rate is computed as the real rate:

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 concerning a Treasury bill?

Which one of the following statements is correct?

Which one of the following statements is correct?

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

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

Treasury STRIPS are:

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 debt instruments guarantees investors a positive real rate of return?

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

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

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

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