Angie Koslowski
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Quiz on Chapter 5: Interest Rates & Bond Valuation , created by Angie Koslowski on 01/10/2015.

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Angie Koslowski
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Chapter 5: Interest Rates & Bond Valuation

Question 1 of 30

1

The nominal rate of interest does not take into account a risk premium

Select one of the following:

  • True
  • False

Explanation

Question 2 of 30

1

The market segmentation theory states that borrowers want long term loans, while lenders want to make short-term loans

Select one of the following:

  • True
  • False

Explanation

Question 3 of 30

1

The cost of borrowing funds is most commonly called the interest rate

Select one of the following:

  • True
  • False

Explanation

Question 4 of 30

1

A normal yield curve slopes upward to reflect the higher long-term borrowing costs

Select one of the following:

  • True
  • False

Explanation

Question 5 of 30

1

A farmer recently sold 2 of his chicken farms and farm equipment to reduce his financial risk (sorry guys but this is a very bizarre question!!)

Select one of the following:

  • True
  • False

Explanation

Question 6 of 30

1

As the market interest rate increases, the price of a bond decreases

Select one of the following:

  • True
  • False

Explanation

Question 7 of 30

1

The pure expectations theory explains why the yield curve would normally be upward sloping

Select one of the following:

  • True
  • False

Explanation

Question 8 of 30

1

The cost of borrowing funds is most commonly called the interest rate

Select one of the following:

  • True
  • False

Explanation

Question 9 of 30

1

If corporate profits increase in the aggregate, interest rates will rise

Select one of the following:

  • True
  • False

Explanation

Question 10 of 30

1

The real rate of return is the compensation you require delaying consumption

Select one of the following:

  • True
  • False

Explanation

Question 11 of 30

1

If the Federal Reserve tightens the money supply, other things held constant, short-term interest rates will be pushed upward, and this increase will probably be greater than the increase in rates in the long-term market

Select one of the following:

  • True
  • False

Explanation

Question 12 of 30

1

Long-term interest rates reflect expectations about future inflation. Inflation has varied significantly from year to year during the last 10 years, and, as a result, long-term rates have fluctuated more than short-term rates.

Select one of the following:

  • True
  • False

Explanation

Question 13 of 30

1

If you have information that a recession is ending, and the economy is about to enter a boom, and your firm needs to borrow money, it should probably issue long-term rather than short-term debt.

Select one of the following:

  • True
  • False

Explanation

Question 14 of 30

1

During or near peaks of business activity, yield curves that are flat or downward sloping (possible with humps) are often prevalent.

Select one of the following:

  • True
  • False

Explanation

Question 15 of 30

1

If the liquidity preference theory of the term structure is correct, we would expect the size of the maturity risk premium to increase with maturity. Thus, we might observe an upward sloping yield curve, even if future short-term rates are expected to decrease.

Select one of the following:

  • True
  • False

Explanation

Question 16 of 30

1

The __________ rate of interest is typically the required rate of return on a 3 month US Treasury Bill

Select one of the following:

  • real

  • risk-free

  • premium

  • nominal

Explanation

Question 17 of 30

1

A(n) ________ yield curve would indicate that investors believe interest rates may increase in the future.

Select one of the following:

  • negative

  • downward sloping

  • flat

  • upward sloping

Explanation

Question 18 of 30

1

The ________ rate of interest has been adjusted for inflation and risk

Select one of the following:

  • long-term

  • nominal

  • real

  • required

Explanation

Question 19 of 30

1

The possibility that the issuer of debt will not pay the principle is scheduled as

Select one of the following:

  • default risk

  • maturity risk

  • liquidity risk

  • contractual risk

Explanation

Question 20 of 30

1

The nominal rate is ________, if r=2%, inflation is 1.5%, the LP is 1.2%, the DRP is 3% and the MRP is 2%.

Select one of the following:

  • 7.7%

  • 9.7%

  • 8.2%

  • 3.5%

Explanation

Question 21 of 30

1

Historically, what has had the greatest effect on interest rates?

Select one of the following:

  • business risk

  • corporate bonds

  • Treasury notes

  • inflation

Explanation

Question 22 of 30

1

A(n) ______ explains to the borrower different conditions of the loan

Select one of the following:

  • business plan

  • indenture

  • portfolio

  • return policy

Explanation

Question 23 of 30

1

Historically, what is the recurrence of a business cycle?

Select one of the following:

  • 1-3 years

  • 5-10 years

  • 10-20 years

  • every 30 years

Explanation

Question 24 of 30

1

The degree of ________ risk decreases as the amount of debt held by a firm decreases

Select one of the following:

  • financial

  • firm

  • business

  • industry

Explanation

Question 25 of 30

1

The ______ is a graphical representation of the term structure of interest rates

Select one of the following:

  • security market line

  • yield curve

  • demand curve

  • inflation curve

Explanation

Question 26 of 30

1

If the yield curve is downward sloping, what is the yield to maturity on a 10-year Treasury coupon bond, relative to that on a 1-year T-bond?

Select one of the following:

  • the yield on the 10 year bond is less than that of the 1 year bond

  • the yield on the 1 year bond is less than that of the 10 year bond

  • the yields on the two bonds are equal

  • Impossible to tell without knowing the coupon rates of the bonds

Explanation

Question 27 of 30

1

If the expectations theory of the term structure of interest rates is correct, and if the other term structure theories are invalid, and we observe a downward sloping yield curve, which of the following is a true statement?

Select one of the following:

  • investors expect short-term rates to be constant over time

  • investors expect short-term rates to increase in the future

  • investors expect short term rates to decrease in the future

  • the maturity risk premium must be positive

Explanation

Question 28 of 30

1

According to the Fisher equation, nominal interest rate equals to the real rate plus

Select one of the following:

  • liquidity premium

  • maturity risk premium

  • expected rate of interest

  • broker profit rate

Explanation

Question 29 of 30

1

Inflation, recession, and high interest rates are economic events which are characterized as

Select one of the following:

  • diversified company specific risk

  • market risk

  • diversified system risk

  • diversifiable risk

Explanation

Question 30 of 30

1

the degree of _____ is how cash flows from operations fluctuate over time

Select one of the following:

  • financial risk

  • default risk

  • interest rate risk

  • business risk

Explanation

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