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| 1 | |
If a bond's rating improves: |
| | A) | It should cause the bond's price and yield to increase, all other factors constant. |
| | B) | It should cause the bond's price and yield to decrease, all other factors constant. |
| | C) | It should cause the bond's price to increase and its yield to decrease, all other factors constant. |
| | D) | None of the above. |
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| 2 | |
An investor earning 6% from a tax-exempt bond, who is in a 25% tax bracket, holding risk constant: |
| | A) | Would be indifferent to a taxable bond with a 7.5% yield. |
| | B) | Would be indifferent to a taxable bond with an 8.0% yield. |
| | C) | Would be indifferent to a taxable bond with a 4.5% yield. |
| | D) | None of the above. |
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| 3 | |
When the yield curve is downward sloping: |
| | A) | People are expecting an economic slowdown. |
| | B) | Short term yields are lower than long term yields. |
| | C) | This is impossible, since the yield curve always slopes upward. |
| | D) | People could be expecting a loosening in monetary policy. |
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| 4 | |
Assume the Expectation Hypothesis regarding the term structure of interest rates. If the current one-year interest rate is 4% and the current two-year interest rate is 6%, then: |
| | A) | Investors are expecting the future one-year rate to be 4%. |
| | B) | Investors are expecting the future one-year rate to be 8%. |
| | C) | Investors are expecting the future one-year rate to be 6%. |
| | D) | None of the above. |
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| 5 | |
Which of the following statements is (are) true?: |
| | A) | Conforming mortgages are mortgages for which the borrowers do not meet standards of creditworthiness. |
| | B) | Subprime mortgages are often made to individuals with low credit scores or income levels that are relatively low when compared to the price of the home. |
| | C) | Subprime mortgages are never used in mortgage backed securities because of their riskiness. |
| | D) | All of the above. |
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| 6 | |
Assume an investor has a choice of 3 consecutive one-year bonds or one 3-year bond. Assuming the Expectations Hypothesis of the term structure of interest rates: |
| | A) | The average interest rate of the three consecutive one-year bonds should be less than the 3-year bond to reflect the risk premium. |
| | B) | The interest rate of the 3-year bond should equal the average interest rate of the 3 one-year bonds. |
| | C) | The three consecutive one-year bonds must have the same interest rate. |
| | D) | The current one-year interest rate must equal the current 3-year interest rate. |
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| 7 | |
We would expect the risk spread between Baa bonds and U.S. Treasury securities of the same maturities to: |
| | A) | Widen during periods of economic recession. |
| | B) | To remain relatively constant over the business cycle. |
| | C) | To decrease during economic slowdowns. |
| | D) | To increase during economic growth periods. |
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| 8 | |
Increased borrowing by the U.S. Treasury to finance growing budget deficits will: |
| | A) | Result in U.S. Treasury yields being higher than high grade corporate bonds. |
| | B) | Result in the price of U.S. Treasury bonds rising. |
| | C) | Because the yield on U.S. Treasury bonds to increase, but still be lower than corporate bonds. |
| | D) | Result in lower yields on corporate bonds. |
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| 9 | |
Imagine a scandal that finds the officers of bond rating agencies have been taking bribes to inflate the rating of specific bonds. This should: |
| | A) | Have no impact on the bond market since bond markets are highly efficient. |
| | B) | Decrease the demand for all bonds. |
| | C) | Increase the demand for U.S. Treasury securities and decrease the demand for corporate bonds. |
| | D) | Decrease the risk spread. |
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| 10 | |
A proposed increase in the federal income tax rates may actually be viewed favorably by many mayors of cities because: |
| | A) | It will allow them to also raise their tax rates. |
| | B) | It will cause the demand for Municipal bonds to increase and their yields to increase. |
| | C) | People will pay less attention to local taxes. |
| | D) | It will cause the price of municipal bonds to increase and their yields to decrease. |
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| 11 | |
Bonds rated as "highly speculative": |
| | A) | Are rated so because they guarantee high returns for the buyer. |
| | B) | Are commonly referred to as junk bonds. |
| | C) | Are ranked just below investment grade by Standard & Poor's. |
| | D) | Are rated so because they do not have any default risk. |
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| 12 | |
Ratings problems contributed to the financial crisis of 2007-2009 because: |
| | A) | Ratings agencies sharply downgraded the ratings of MBS as housing prices declined, reinforcing the decline in the prices of MBS. |
| | B) | MBS issuers consulted ratings agencies to structure MBS to get the highest ratings, causing a conflict of interest. |
| | C) | Ratings agencies were compensated by the issuers of the MBS, causing the incentive for favorable ratings. |
| | D) | All of the above. |
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| 13 | |
An investor in a 30% marginal tax bracket, earning $10 in interest annually for a $100 U.S. Treasury bond: |
| | A) | Earns a 10% after-tax return because interest on U.S. Treasury bonds is tax exempt at the federal level. |
| | B) | Earns a 3% return after-tax. |
| | C) | Would be indifferent between this bond and a municipal bond offering $7 annually per $100 of face value, assuming the same default risk. |
| | D) | Earns a 1% return after-tax. |
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| 14 | |
Commercial paper refers to: |
| | A) | The financial publications read by the CEO's of public corporations. |
| | B) | Any debt security with a maturity exceeding one year. |
| | C) | Short-term collateralized securities issued only by corporations. |
| | D) | Unsecured short-term debt issued by corporations and governments. |
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| 15 | |
The addition of the Liquidity Premium Theory to the Expectations Hypothesis allows us to explain why: |
| | A) | Yield curves usually slope upward. |
| | B) | Interest rates on bonds of different maturities move together. |
| | C) | Long-term interest rates are less volatile than short term interest rates. |
| | D) | Yield curves are flat. |
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