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Chapter 5: Interest Rates & Bond Valuation

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Quiz on Chapter 5: Interest Rates & Bond Valuation , created by Angie Koslowski on 01/10/2015.
Angie Koslowski
Quiz by Angie Koslowski, updated more than 1 year ago
Angie Koslowski
Created by Angie Koslowski over 8 years ago
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Resource summary

Question 1

Question
The nominal rate of interest does not take into account a risk premium
Answer
  • True
  • False

Question 2

Question
The market segmentation theory states that borrowers want long term loans, while lenders want to make short-term loans
Answer
  • True
  • False

Question 3

Question
The cost of borrowing funds is most commonly called the interest rate
Answer
  • True
  • False

Question 4

Question
A normal yield curve slopes upward to reflect the higher long-term borrowing costs
Answer
  • True
  • False

Question 5

Question
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!!)
Answer
  • True
  • False

Question 6

Question
As the market interest rate increases, the price of a bond decreases
Answer
  • True
  • False

Question 7

Question
The pure expectations theory explains why the yield curve would normally be upward sloping
Answer
  • True
  • False

Question 8

Question
The cost of borrowing funds is most commonly called the interest rate
Answer
  • True
  • False

Question 9

Question
If corporate profits increase in the aggregate, interest rates will rise
Answer
  • True
  • False

Question 10

Question
The real rate of return is the compensation you require delaying consumption
Answer
  • True
  • False

Question 11

Question
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
Answer
  • True
  • False

Question 12

Question
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.
Answer
  • True
  • False

Question 13

Question
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.
Answer
  • True
  • False

Question 14

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

Question 15

Question
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.
Answer
  • True
  • False

Question 16

Question
The __________ rate of interest is typically the required rate of return on a 3 month US Treasury Bill
Answer
  • real
  • risk-free
  • premium
  • nominal

Question 17

Question
A(n) ________ yield curve would indicate that investors believe interest rates may increase in the future.
Answer
  • negative
  • downward sloping
  • flat
  • upward sloping

Question 18

Question
The ________ rate of interest has been adjusted for inflation and risk
Answer
  • long-term
  • nominal
  • real
  • required

Question 19

Question
The possibility that the issuer of debt will not pay the principle is scheduled as
Answer
  • default risk
  • maturity risk
  • liquidity risk
  • contractual risk

Question 20

Question
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%.
Answer
  • 7.7%
  • 9.7%
  • 8.2%
  • 3.5%

Question 21

Question
Historically, what has had the greatest effect on interest rates?
Answer
  • business risk
  • corporate bonds
  • Treasury notes
  • inflation

Question 22

Question
A(n) ______ explains to the borrower different conditions of the loan
Answer
  • business plan
  • indenture
  • portfolio
  • return policy

Question 23

Question
Historically, what is the recurrence of a business cycle?
Answer
  • 1-3 years
  • 5-10 years
  • 10-20 years
  • every 30 years

Question 24

Question
The degree of ________ risk decreases as the amount of debt held by a firm decreases
Answer
  • financial
  • firm
  • business
  • industry

Question 25

Question
The ______ is a graphical representation of the term structure of interest rates
Answer
  • security market line
  • yield curve
  • demand curve
  • inflation curve

Question 26

Question
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?
Answer
  • 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

Question 27

Question
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?
Answer
  • 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

Question 28

Question
According to the Fisher equation, nominal interest rate equals to the real rate plus
Answer
  • liquidity premium
  • maturity risk premium
  • expected rate of interest
  • broker profit rate

Question 29

Question
Inflation, recession, and high interest rates are economic events which are characterized as
Answer
  • diversified company specific risk
  • market risk
  • diversified system risk
  • diversifiable risk

Question 30

Question
the degree of _____ is how cash flows from operations fluctuate over time
Answer
  • financial risk
  • default risk
  • interest rate risk
  • business risk
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