FIN 350 Week 3 Quiz – Strayer


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Quiz 2 Chapter 3 and 4


Chapter 3—Structure of Interest Rates

     1.   In general, securities with ____ characteristics will offer ____ yields.
a.
favorable; higher
b.
favorable; lower
c.
unfavorable; lower
d.
none of the above


                                          
          
          

     2.   Default risk is likely to be highest for
a.
short-term Treasury securities.
b.
AAA corporate securities.
c.
long-term Treasury securities.
d.
BBB corporate securities.


                                          
          
          

     3.   Some financial institutions such as commercial banks are required by law to invest only in
a.
junk bonds.
b.
corporate stock.
c.
Treasury securities.
d.
investment-grade bonds.


                                          
          
          

     4.   Credit ratings are most commonly used to indicate which financial institutions have available funds that they can lend to borrowers.
a. True
b. False

                                          
                                          
          

     5.   If a security can easily be converted to cash without a loss in value, it
a.
is liquid.
b.
has a high after-tax yield.
c.
has high default risk.
d.
is illiquid.


                                          
          
          

     6.   Securities that offer ____ liquidity will need to offer a ____ yield.
a.
lower; higher
b.
lower; lower
c.
higher; higher
d.
B and C


                                          
          
          

     7.   If all other characteristics are similar, ____ would have to offer ____.
a.
taxable securities; a higher after-tax yield than tax-exempt securities
b.
taxable securities; a higher before-tax yield than tax-exempt securities
c.
tax-exempt securities; a higher after-tax yield than taxable securities
d.
tax-exempt securities; a higher before-tax yield than taxable securities


                                          
          


     8.   Assume an investor's tax rate is 25 percent. The before-tax yield on a security is 12 percent. What is the after-tax yield?
a.
16.00 percent
b.
9.25 percent
c.
9.00 percent
d.
3.00 percent
e.
none of the above


                                          
          
          

     9.   An investor's tax rate is 30 percent. What must the before-tax yield on a security be to have an after-tax yield of 11 percent?
a.
7.7 percent
b.
15.71 percent
c.
130 percent
d.
11.00 percent
e.
none of the above


                                          
          
          

   10.   A firm in the 35 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7 percent. To match this yield, taxable securities must offer a before-tax yield of
a.
7.0 percent.
b.
10.8 percent.
c.
20.0 percent.
d.
none of the above


                                          
          
          

   11.   Holding other factors such as risk constant, the relationship between the maturity and annualized yield of securities is called the
a.
term structure of interest rates.
b.
default structure of interest rates.
c.
liquidity structure of interest rates.
d.
tax structure of interest rates.
e.
none of the above


                                          
          
          

   12.   The term structure of interest rates defines the relationship
a.
between risk and return.
b.
between risk and maturity.
c.
between maturity and yield.
d.
between default risk ratings and maturity.


                                          
          
          

   13.   Interest income from municipal bonds is exempt from state taxes but is subject to federal taxes.
a. True
b. False

                                          
          
          

   14.   If shorter term securities have higher annualized yields than longer term securities, the yield curve
a.
is horizontal.
b.
is upward sloping.
c.
is downward sloping.
d.
cannot be determined unless we know additional information (such as the level of market interest rates).


                                          
          
          

   15.   Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to
a.
become inverted.
b.
become flat.
c.
become upward sloping.
d.
be unaffected.


                                          
          
          

   16.   If issuers of securities (borrowers) and investors suddenly expect interest rates to decrease, their actions to benefit from their expectations should cause
a.
long-term yields to rise.
b.
short-term yields to decrease.
c.
prices of long-term securities to decrease.
d.
A and B
e.
none of the above


                                          
          
          

   17.   Within the category of capital market securities, municipal bonds have the ____ before-tax yield, and their after-tax yield is typically ____ of Treasury bonds from the perspective of investors in high tax brackets.
a.
highest; below that
b.
lowest; above that
c.
highest; above that
d.
lowest; below that


                                          
          
          

   18.   The yield offered on a debt security is ____ related to the prevailing risk-free rate and ____ related to the security's risk premium.
a.
negatively; negatively
b.
positively; positively
c.
negatively; positively
d.
positively; negatively


                                          
          
          

   19.   The theory for the term structure of interest rates that says the shape of the yield curve is determined solely by expectations of future interest rates is called the
a.
segmented markets theory.
b.
liquidity premium theory.
c.
pure expectations theory.
d.
theory of rational expectations.


                                          
          
          

   20.   Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate according to the pure expectations theory?
a.
15.08 percent
b.
3.00 percent
c.
12.00 percent
d.
12.62 percent
e.
11.41 percent


                                          
          
          

   21.   Assume the yield curve is flat. If investors flood the short-term market and avoid the long-term market, they may cause the yield curve to
a.
remain flat.
b.
become upward sloping.
c.
become downward sloping.
d.
none of the above


                                          
          
          

   22.   According to pure expectations theory, if interest rates are expected to decrease, there will be ____ pressure on the demand for short-term funds by borrowers and ____ pressure on the demand for long-term funds issued by borrowers.
a.
upward; upward
b.
downward; downward
c.
upward; downward
d.
downward; upward


                                          

           

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