Question 1

Which of the following statements is correct?

Accepted Answer

Option A is incorrect because the default risk premium of Baa 20-year corporate bonds over Aaa 20-year corporate bonds can vary depending on the company's credit rating and market conditions. Option C is incorrect because real interest rates are adjusted for inflation and are not necessarily the rates quoted in the news. Option D is incorrect because only option B is correct. The market segmentation theory assumes investors are unwilling to move from one maturity sector to another without being compensated with an interest rate premium.

Question 2

All of the following are factors that affect nominal interest rates EXCEPT

Accepted Answer

Foreign exchange rates affect the value of investments in foreign currencies but do not directly affect the nominal interest rate of a financial instrument. Nominal interest rates are influenced by factors such as time to maturity, the real interest rate, and specific features of the financial instrument like convertibility options, but not by foreign exchange rates.

Question 3

All of the following are secondary market transactions EXCEPT

Accepted Answer

Option A describes a primary market transaction, as GE is issuing new preferred stock. The other options all involve buying and selling securities in existing markets, which is the definition of a secondary market transaction.

Question 4

The Wall Street Journal states that the yield curve for Treasuries is downward sloping and there is no liquidity premium or maturity risk premium.Given this information,which of the following statements is correct?

Accepted Answer

A downward sloping yield curve for Treasuries indicates that long-term rates are lower than short-term rates. Therefore, a five-year corporate bond must have a higher yield than a 30-year Treasury bond because the former is comparable to the short-term Treasury rates while the latter is comparable to the long-term Treasury rates. Option A is incorrect because it assumes that corporate bonds are immune to the Treasury yield curve, while Option C is also incorrect because it does not account for differences in credit risk between a Treasury bond and a corporate bond.

Question 5

Which of the following statements is correct?

Accepted Answer

An IPO (initial public offering) refers to the first sale of stock by a company to the public, which is an example of a primary market transaction where the securities are sold directly from the issuer to the investor.

B is incorrect because money market instruments are generally considered less risky than capital market instruments due to their short-term maturity and higher liquidity.

C is incorrect because financial institutions provide various services that facilitate the transfer of funds, such as payment systems, clearing and settlement systems, and intermediation between borrowers and lenders.

D is incorrect because the market segmentation theory argues that investors have different preferences for maturity and therefore demand different securities, resulting in different interest rates for each maturity segment.

Question 6

All of the following are types of financial institutions EXCEPT

Accepted Answer

The Federal Reserve is not a type of financial institution; it is the central bank of the United States responsible for monetary policy and regulating banks. The other options are all types of financial institutions.

Question 7

Which of the following statements is correct?

Accepted Answer

The answer of Which of the following statements is correct?
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Question 8

One-year interest rates are 3 percent.The market expects one-year rates to be 5 percent one year from now.The market also expects one-year rates to be 7 percent two years from now.Assume that the unbiased expectations theory holds.Which of the following is correct?

Accepted Answer

According to the unbiased expectations theory, the forward rate between years 1 and 2 is calculated as follows:
(1+0.05)^2 = (1+0.03)(1+f(1,2))
f(1,2) = 0.07
Since the forward rate is higher than the current one-year rate, the yield curve is upward sloping.

Question 9

Which of the following is NOT correct with respect to derivative securities?

Accepted Answer

All the statements provided about derivative securities are correct, making option D the incorrect choice as it suggests otherwise. Derivatives can indeed be very risky, are used for hedging, and include futures, options, and swaps among their examples.

Question 10

Which of the following statements is correct?

Accepted Answer

All of the statements are correct.

A) A flat yield curve occurs when the yield-to-maturity is virtually unaffected by the term-to-maturity: this is true as a flat yield curve indicates that the shorter-term and longer-term interest rates are the same or very similar.

B) Real interest rates are generally lower than nominal interest rates: this is true since nominal interest rates include an inflation premium while real interest rates do not.

C) Liquidity risk is the risk that a security may be difficult to sell on short notice for its true value: this is true as investors face liquidity risk when they need to sell a security quickly and it cannot be sold for its fair market value.

Question 11

All of the following are factors that influence interest rates for individual securities EXCEPT

Accepted Answer

The home mortgage rate is not a factor that directly influences interest rates for individual securities, as it is a separate interest rate that pertains specifically to mortgages. Factors that do influence interest rates for individual securities include their term to maturity, inflation, and any special provisions or factors relating to the issuer of the security.

Question 12

All of the following are benefits that financial institutions provide to our economy EXCEPT

Accepted Answer

Financial institutions do not provide increased price risk to the economy. In fact, their role is often to help mitigate risk and uncertainty in the financial system. The other options, increased liquidity, monitoring, and funds flow, are all benefits that financial institutions provide to the economy.

Question 13

All of the following special provisions benefit security holders EXCEPT

Accepted Answer

Callability is a provision that benefits the issuer of the security, not the holder. It allows the issuer to repurchase the security before its maturity date, often at a premium. This can be disadvantageous to holders if the security is called away during favorable market conditions. Tax-free status and convertibility, on the other hand, are benefits for the security holders.

Question 14

The theory that argues that individual investors and financial institutions have specific maturity preferences is called the

Accepted Answer

The market segmentation theory suggests that the bond market is segmented on the basis of the maturity of the bonds, and investors have specific maturity preferences that influence their investment choices. This theory explains why short, intermediate, and long-term interest rates do not necessarily move in parallel.

Question 15

Which of the following is NOT correct with respect to financial institutions?

Accepted Answer

Financial institutions primarily channel funds from those with surplus funds to those with shortages, not the other way around. This process involves collecting funds from savers and lending them to borrowers, thereby facilitating the flow of money within the economy.

Question 16

The theory that states that the yield curve reflects the market's current expectations of future short-term rates is called the

Accepted Answer

The unbiased expectations theory, also known as the pure expectations theory or the expectations hypothesis, posits that long-term interest rates are determined by the market's expectations of future short-term interest rates. This theory assumes that investors have no preference for any maturity of bond and will only invest based on which maturity will provide the highest overall return. Therefore, the yield curve reflects the market's expectations of future short-term rates.

Question 17

Which of the following statements is incorrect?

Accepted Answer

The over-the-counter market does not operate in a fixed location, but rather refers to a decentralized network of dealers who trade securities electronically or over the phone. The statement is incorrect as it suggests that the over-the-counter market operates like a traditional stock exchange.

Question 18

In 20XX,the 10-year Treasury rate was 4.5 percent while the average 10-year Aaa corporate bond debt carried an interest rate of 6.0 percent.What is the average default risk premium on Aaa corporate bonds?

Accepted Answer

6.0 − 4.5 = 1.5.

Question 19

The real interest rate is

Accepted Answer

The real interest rate is the rate that a security would pay if no inflation were expected over its holding period. This is because inflation erodes the purchasing power of money over time, so the real interest rate accounts for the impact of inflation on the rate of return. The rate charged to corporations with the best credit rating or least amount of default risk is the risk-free rate, and the rate that a security would pay if it had no maturity risk is the nominal interest rate.

Question 20

Which of the following statements is incorrect?

Accepted Answer

All of these choices are correct. Governments can influence foreign exchange rates through various economic policies, such as altering interest rates or direct intervention in the foreign exchange market. Foreign currency exchange rates are determined by the demand and supply of the two currencies in the market. Ultimately, all the statements are correct.

Quiz 6: Understanding Financial Markets and Institutions

Which of the following statements is correct?

All of the following are factors that affect nominal interest rates EXCEPT

All of the following are secondary market transactions EXCEPT

The Wall Street Journal states that the yield curve for Treasuries is downward sloping and there is no liquidity premium or maturity risk premium.Given this information,which of the following statements is correct?

Which of the following statements is correct?

All of the following are types of financial institutions EXCEPT

Which of the following statements is correct?

One-year interest rates are 3 percent.The market expects one-year rates to be 5 percent one year from now.The market also expects one-year rates to be 7 percent two years from now.Assume that the unbiased expectations theory holds.Which of the following is correct?

Which of the following is NOT correct with respect to derivative securities?

Which of the following statements is correct?

All of the following are factors that influence interest rates for individual securities EXCEPT

All of the following are benefits that financial institutions provide to our economy EXCEPT

All of the following special provisions benefit security holders EXCEPT

The theory that argues that individual investors and financial institutions have specific maturity preferences is called the

Which of the following is NOT correct with respect to financial institutions?

The theory that states that the yield curve reflects the market's current expectations of future short-term rates is called the

Which of the following statements is incorrect?

In 20XX,the 10-year Treasury rate was 4.5 percent while the average 10-year Aaa corporate bond debt carried an interest rate of 6.0 percent.What is the average default risk premium on Aaa corporate bonds?

The real interest rate is

Which of the following statements is incorrect?