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1 | |
The use of portfolio immunization means that: |
| | A) | investors will get the highest returns possible. |
| | B) | investors will get the lowest returns possible. |
| | C) | investors earn identical total earnings whether interest rates go up or down. |
| | D) | investors receive a higher and more stable return, while not using portfolio immunization normally results in a lower and more volatile return. |
| | E) | none of the above |
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2 | |
The term structure of interest rates plots yield versus: |
| | A) | all maturities of a particular risk class of bonds at a point in time. |
| | B) | a single maturity of a particular risk class of bonds over time. |
| | C) | all maturities of one category of bonds (e.g. all corporate bonds) at a point in time. |
| | D) | all risk classes of bonds at a point in time. |
| | E) | all risk classes of a single maturity over time. |
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3 | |
The published or quoted rate of interest attached to a loan or security is called the: |
| | A) | nominal rate |
| | B) | risk-free rate |
| | C) | real rate |
| | D) | promised rate |
| | E) | none of the above |
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4 | |
According to the textbook, studies looking for evidence of the Fisher effect across countries find that nations with faster rates of price inflation generally experience: |
| | A) | higher interest rates |
| | B) | lower interest rates |
| | C) | more volatile interest rates |
| | D) | less volatile interest rates |
| | E) | none of the above |
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5 | |
Agreements that fix the time and terms in current dollars under which a business firm will compensate its employees, creditors, and other suppliers are known as: |
| | A) | inflation-adjusted agreements |
| | B) | purchasing-power contracts |
| | C) | nominal contracts |
| | D) | inflation-linked contracts |
| | E) | none of the above |
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6 | |
When the risk that interest-rate changes will affect the total dollar return from a security portfolio is reduced to zero, this is referred to as: |
| | A) | hedging |
| | B) | portfolio immunization |
| | C) | duration |
| | D) | zero price elasticity |
| | E) | none of the above |
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7 | |
Recently, the Japanese economy has experienced signs of deflation, which can be defined as: |
| | A) | a decline in the overall rate of price inflation |
| | B) | the difference between real and nominal growth |
| | C) | a declining average price level |
| | D) | all of the above |
| | E) | none of the above |
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8 | |
The statement that in periods of rapid inflation the true cost of using up capital equipment is understated, thus inflating business income, is known as the: |
| | A) | inflation effect |
| | B) | Fisher effect |
| | C) | liquidity effect |
| | D) | depreciation effect |
| | E) | risk effect |
| | F) | segmented markets effect |
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9 | |
The contention that there is a direct (positive) relationship between liquidity premiums and the level of market interest rates is known as the: |
| | A) | price-risk hypothesis |
| | B) | money-substitutes hypothesis |
| | C) | unbiased expectation hypothesis |
| | D) | Fisher Hypothesis |
| | E) | none of the above |
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10 | |
According to the inflation-caused depreciation effect: |
| | A) | the true cost of using up existing capital equipment is understated when there is deflation. |
| | B) | the true cost of using up existing capital equipment is overstated when there is deflation. |
| | C) | after-tax profits are higher with inflation. |
| | D) | depreciation methods understate the true replacement cost of capital goods. |
| | E) | none of the above |
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11 | |
Yield curve studies of the yield spread between long-term and short-term government securities are being used to predict: |
| | A) | the probability of a recession |
| | B) | the near-term growth in Gross Domestic Product (GDP) |
| | C) | the size of government budget deficits |
| | D) | choices a and c only |
| | E) | choices a and b only |
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12 | |
The relationship between an asset's change in market price and its change in yield or interest rate is called its |
| | A) | yield curve |
| | B) | convexity |
| | C) | duration |
| | D) | price volatility |
| | E) | price elasticity |
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13 | |
The ______ theory states that investors choose a particular maturity range based on risk preferences, tax exposure, and other factors. |
| | A) | market segmentation |
| | B) | liquidity preference |
| | C) | preferred habitat |
| | D) | Harrod-Keynes |
| | E) | term structure |
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14 | |
The contention that liquidity premiums are inversely related to the level of market interest rates is known as the: |
| | A) | price-risk hypothesis |
| | B) | money-substitutes hypothesis |
| | C) | unbiased expectation hypothesis |
| | D) | Fisher Hypothesis |
| | E) | none of the above |
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15 | |
According to the liquidity premium view of the yield curve, most yield curves should have a ____ slope. Which choice below correctly fills in the blank in the preceding sentence? |
| | A) | negative |
| | B) | positive |
| | C) | zero |
| | D) | either positive or zero |
| | E) | The yield curve's slope is indeterminate according to the liquidity premium view. |
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16 | |
Recent studies of the linkages between stock prices and inflation generally find a _____ relationship. The choice below that correctly fills in the blank in the preceding sentence is: |
| | A) | positive |
| | B) | negative |
| | C) | spurious |
| | D) | stable |
| | E) | none of the above |
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17 | |
The view that the nominal interest-rate need not be affected by inflation, but the real rate will be affected by inflation is known as the: |
| | A) | Fisher Effect |
| | B) | Harrod-Keynes Effect |
| | C) | Darby Effect |
| | D) | Inflation-caused Wealth Effect |
| | E) | none of the above |
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18 | |
In 1997, the U.S. Treasury issued inflation-indexed bonds, known as Treasury Inflation Protection Securities (TIPS). Reasons for doing so include: |
| | A) | the Treasury expected a protracted period of high inflation |
| | B) | to save the Treasury money |
| | C) | so that investors could separate inflation risk exposure from interest-rate risk exposure |
| | D) | choices a and b only |
| | E) | none of the above |
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19 | |
An investor facing an upward-sloping yield curve buys a six-month Treasury bill with the intent of selling it three months later. This investor _______. |
| | A) | has determined that the six-month Treasury bill is underpriced. |
| | B) | has determined that the three-month Treasury bill is underpriced. |
| | C) | expects long-term interest rates to rise in the next three months. |
| | D) | is riding the yield curve. |
| | E) | is reluctant to buy short-term securities, fearing a decline in interest rates. |
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20 | |
One of the following statements is not part of the segmented markets (hedging-pressure) theory of the yield curve. Which one is not? |
| | A) | All maturities of securities are perfect substitutes in the minds of investors. |
| | B) | Many large institutional investors are risk minimizers. |
| | C) | Many investing institutions follow the hedging principle. |
| | D) | The market for medium-term securities attracts different investor groups than the long-term security market. |
| | E) | All of the above statements are consistent with the segmented-market theory. |
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