Test Bank for Ch 04 and 05
1.
2.
3.
Risk that is associated with a government holding too much debt would be considered
A) part of foreign exchange risk; B) country risk; C) translation exposure; D) uncovered.
When investigating the term structure of interest rates, the bonds compared are
A) identical except for their maturity dates; B) identical in maturity, but differ in terms of liquidity
and risk; C) identical in terms of risk, but differ in terms of tax characteristics; D). identical except for
their liquidity
Which of the following theories does not help to explain the why the yield curve follows its
traditional shape?
A) the Segmented Markets theory; B) the Rational Expectations theory; C) the Preferred Habitat
theory; D) All of these help to explain the yield curve's shape.
4.
Which of the following bond offerings would be most likely to experience excess returns?
A) a Vietnam bond offering in Dong; B) a German bond offering in euros; C) a Japanese bond offering
in yen; D) an Australian bond offering in British pounds
5.
Real interest rate parity implies that
A) real rates of return will be equal when expected inflation rates converge; B) uncovered interest rate
parity will never hold; C) real rates of return on similar financial instruments in two different nations
should be equal; D) absolute purchasing power parity holds.
6.
7.
Which securities will require for higher default risk premium?
A) US Treasury bond; B) Mexico government bonds; C) Apple’s corporate bonds; D) A corporate
bond issued by a small company.
If an investor expects to get a higher yield for a longer-termed instrument, it is called a
A) risk preference; B) risk premium; C) yield curve; D) term premium.
8.
If the nominal interest rate is 1% and the expected rate of inflation is 3.5%, then the real interest rate
is
A) -2.5%; B) 0%; C) 2.5%; D) 4.5%.
9.
How do you determine is a foreign exchange market is efficient?
A) See if the market rates adjust quickly to new and relevant information; B) See if systematic profit
opportunities are quickly eliminated; C) See if forward rates are equal to expected future spot rates; D)
All of the above should be true if a foreign exchange market is efficient.
10. Based on the covered interest parity (CIP) model analysis, investors move their capital from abroad
to domestic economy. You will observe that
A) a rise in domestic interest rate; B) a rise in foreign interest rate; C) a depreciation in domestic
currency; D) an appreciation in foreign currency.
11. What is the difference between international money markets and international capital markets?
A) the direction of financial flows in the market; B) the risk premium of the instruments in the market;
C) the length of maturities for the instruments; D) the countries that participate in the markets
12. A Eurocurrency is a
A) bank account located in England; B) bank account in the eurozone; C) bank account denominated in
euros in the EU; D) bank account denominated in a currency other than the nation in which the deposit
is located.
13. Suppose an individual firm is comparing two investments, a one year bond from a U.S. firm paying
4% or a one year bond from a German firm which is paying 6%. The current dollars-per-euro rate is
0.75, and the expected rate in one year is 0.72. If the expected rate is correct, which investment will
receive the higher return?
A) The U.S. Bond; B) The German Bond; C) They will have the same return; D) This cannot be
determined from the information given.
14.
Maturity
Yield
1 year
1.1
2 years
1.05
5 years
1.025
10 years
1.01
30 years
1
Suppose the table above represents the average current yield for various international bonds, what would
the shape of the yield curve show?
A) a normal, upward sloping yield curve
B) a normal, inverted yield curve
C) an unusually inverted yield curve
D) a downward sloping yield curve