ECN 324 Test 1
Summer 2014 Chp 1-8
Dr. Moffett
Student: _______________________________________
1. The largest deficit unit is (are)
a.
households and businesses.
b.
foreign financial institutions.
c.
the U.S. Treasury.
d.
foreign nonfinancial sectors.
2. Which of the following is a money market security?
a. Treasury note
b. municipal bond
c. Mortgage
d. Commercial paper
3.
a.
b.
c.
d.
If security prices fully reflect all available information, the markets for these securities
are
efficient.
primary.
overvalued.
undervalued.
4. Which of the following is a nondepository financial institution?
a. savings banks
b. commercial banks
c. savings and loan associations
d. mutual funds
5. The main reason that depository institutions experienced financial problems during the
credit crisis was their investment in:
a. Subprime mortgages.
b. money market securities.
c. stock.
d. Treasury bonds.
6. The quantity of loanable funds supplied is normally
a. highly interest elastic.
b. more interest elastic than the demand for loanable funds.
c. less interest elastic than the demand for loanable funds.
d. equally interest elastic as the demand for loanable funds.
7. Which of the following is likely to cause a decrease in the equilibrium U.S. interest rate,
other things being equal?
a. a decrease in savings by foreign savers
b. an increase in inflation
c. pessimistic economic projections that cause businesses to reduce expansion plans
d. a decrease in savings by U.S. households
8. The federal government demand for funds is said to be____________.
a. Interest rate inelastic
b. insensitive
c. relatively sensitive as compared to other sectors
d. Interest rate elastic
9. According to the Fisher effect, expectations of higher inflation cause savers to require a
____ on savings.
a. higher nominal interest rate
b. higher real interest rate
c. lower nominal interest rate
d. lower real interest rate
10.
a.
b.
c.
d.
Default risk is likely to be highest for
short-term Treasury securities.
AAA corporate securities.
long-term Treasury securities.
BBB corporate securities.
11,
a.
b.
c.
d.
If a security can easily be converted to cash without a loss in value, it
is liquid.
has a high after-tax yield.
has high default risk.
is illiquid.
12. 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
13. 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).
14. According to the liquidity premium theory, the expected yield on a two-year security will
____ the expected yield from consecutive investments in one-year securities.
a. equal
b. be less than
c. be greater than
d. B and C are possible, depending on the size of the liquidity premium
15. The theory of the term structure of interest rates, which states that investors and borrowers
choose securities with maturities that satisfy their forecasted cash needs, is the
a. pure expectations theory.
b. liquidity premium theory.
c. segmented markets theory.
d. liquidity habitat theory.
16.
a.
b.
c.
d.
The yield curve for corporate bonds.
would typically lie below the Treasury yield curve.
is identical to the Treasury yield curve.
typically has the same slope as the Treasury yield curve.
is irrelevant to investors.
17.
a.
b.
c.
d.
e.
All ____ are required to be members of the Federal Reserve System.
state banks
national banks
savings and loan associations
finance companies
A and B
18. The ____ is made up of seven individual members, and each member is appointed by the
president of the U.S.
a. Board of Governors
b. Federal Reserve district bank
c. Federal Open Market Committee (FOMC)
d. Securities and Exchange Commission
19. Which of the following is an action that the Fed uses to increase or decrease the money
supply?
a. buying or selling Treasury securities in the secondary market
b. adjusting the tax rate imposed on income earned on Treasury securities
c. adjusting the coupon rate on Treasury bonds
d. selling Treasury securities in the primary market
20.
a.
b.
c.
d.
To decrease money supply, the Fed could ____ the reserve requirement ratio.
increase
stabilize
reduce
eliminate
21.
a.
b.
c.
d.
In general, there is:
a positive relationship between unemployment and inflation.
an inverse relationship between unemployment and inflation.
an inverse relationship between GNP and inflation.
a positive relationship between GNP and unemployment.
22.
a.
b.
c.
d.
____ serves as the most direct indicator of economic growth in the United States.
Gross domestic product (GDP)
National income
The unemployment rate
The industrial production index
23. If the federal government is willing to pay whatever is necessary to borrow loanable
funds, but the private sector is not, this reflects
a. the crowding-out effect.
b. dynamic open market operations.
c. defensive open market operations.
d. monetizing the debt.
24. When the Fed uses open market operations by selling some of its Treasury securities to
investors in the U.S., there will be
a. an outward shift in the supply schedule of loanable funds.
b. an inward shift in the supply schedule of loanable funds.
c. no shift in the supply schedule of loanable funds.
d. an outward shift in the demand schedule for loanable funds.
25.
a.
b.
c.
d.
____ are sold at an auction at a discount from par value.
Treasury bills
Repurchase agreements
Banker's acceptances
Commercial paper
26. Slim Pickens, a private investor, purchases a Treasury bill with a $10,000 par value for
$9,645. One hundred days later, Slim sells the T-bill for $9,719. What is Slim's expected
annualized yield from this transaction?
a. 13.43 percent
b. 2.78 percent
c. 10.55 percent
d. 2.80 percent
e. none of the above
27. A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day
maturity. What is the discount?
a. 10.26 percent
b. 0.26 percent
c. $2,500
d. 10.00 percent
e. 11.00 percent
28.
a.
b.
c.
d.
An increase in inflation will, in an efficient market, result in
A decrease in rates
An increase in rates
A decrease in stock prices
none of the above
29.
a.
b.
c.
d.
When a bank guarantees a future payment to a firm, the financial instrument used is called
a repurchase agreement.
a negotiable CD.
a banker's acceptance.
commercial paper.
30.
a.
b.
c.
d.
Interest earned from Treasury bonds is
exempt from all income tax.
exempt from federal income tax.
exempt from state and local taxes.
subject to all income taxes.
31.
a.
b.
c.
d.
A call provision on bonds normally
allows the firm to sell new bonds at par value.
gives the firm to sell new bonds above market value.
allows the firm to sell bonds to the Treasury.
allows the firm to buy back bonds that it previously issued.
32.
a.
b.
c.
d.
Some bonds are "stripped," which means that
they have defaulted.
the call provision has been eliminated.
they are separated into principal-only and interest-only securities.
their maturities have been reduced.
33. Everything else being equal, which of the following bond ratings is associated with the
highest yield?
a. Baa
b. A
c. Aa
d. Aaa
34.
a.
b.
c.
d.
If the coupon rate equals the required rate of return, the price of the bond
should be above its par value.
should be below its par value.
should be equal to its par value.
is negligible.
35.
a.
b.
c.
d.
The US tax code is said to favor.
Equities
Debt
Non-profits
In substance defeasance
36. The relationship reflecting the actual response of a bond's price to a change in bond yields
is
a. concave.
b. convex.
c. linear.
d. quadratic.
37. Suppose a bond has a Macaulay Duration of 11 years, and a current yield to maturity of
8%. If the yield to maturity increases to 8.75%, what is the resulting percentage change in
the price of the bond?
a. -5.29%
b. 5.29%
c. -7.20%
d. -6.88%
PV 
C
C
C  par

 ... 
1
2
1  k  1  k 
1  k n
Modified Duration 
Macaulay Duration
YTM 

1 

2 

Pct. Change in Bond Price  Duration 
YT 
SP  PP 365

PP
n
Pct. Change in Bond Price  - Modified Duration  Change in YTM
YT 
Change in YTM
1  YTM
2

Par  PP 360

PP
n

ANSWER KEY
1. The largest deficit unit is (are)
a. households and businesses.
b. foreign financial institutions.
c. the U.S. Treasury.
d. foreign nonfinancial sectors.
ANS: C
2. Which of the following is a money market security?
a. Treasury note
b. municipal bond
c. Mortgage
d. Commercial paper
ANS: D
3.
a.
b.
c.
d.
If security prices fully reflect all available information, the markets for these securities are
efficient.
primary.
overvalued.
undervalued.
ANS:
4.
a.
b.
c.
d.
A
Which of the following is a nondepository financial institution?
savings banks
commercial banks
savings and loan associations
mutual funds
ANS:
D
5. The main reason that depository institutions experienced financial problems during the
credit crisis was their investment in:
a. Subprime mortgages.
b. money market securities.
c. stock.
d. Treasury bonds.
ANS:
6.
a.
b.
c.
d.
e.
A
The quantity of loanable funds supplied is normally
highly interest elastic.
more interest elastic than the demand for loanable funds.
less interest elastic than the demand for loanable funds.
equally interest elastic as the demand for loanable funds.
A and B
ANS:
C
7. Which of the following is likely to cause a decrease in the equilibrium U.S. interest rate,
other things being equal?
a. a decrease in savings by foreign savers
b. an increase in inflation
c. pessimistic economic projections that cause businesses to reduce expansion plans
d. a decrease in savings by U.S. households
ANS:
8.
a.
b.
c.
d.
C
The federal government demand for funds is said to be____________.
Interest rate inelastic
insensitive
relatively sensitive as compared to other sectors
Interest rate elastic
ANS:
A
9. According to the Fisher effect, expectations of higher inflation cause savers to require a
____ on savings.
a. higher nominal interest rate
b. higher real interest rate
c. lower nominal interest rate
d. lower real interest rate
ANS:
10.
a.
b.
c.
d.
Default risk is likely to be highest for
short-term Treasury securities.
AAA corporate securities.
long-term Treasury securities.
BBB corporate securities.
ANS:
11,
a.
b.
c.
d.
A
D
If a security can easily be converted to cash without a loss in value, it
is liquid.
has a high after-tax yield.
has high default risk.
is illiquid.
ANS:
A
12. 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
ANS:
C
13. 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).
ANS:
C
14. According to the liquidity premium theory, the expected yield on a two-year security will
____ the expected yield from consecutive investments in one-year securities.
a. equal
b. be less than
c. be greater than
d. B and C are possible, depending on the size of the liquidity premium
ANS:
C
15. The theory of the term structure of interest rates, which states that investors and borrowers
choose securities with maturities that satisfy their forecasted cash needs, is the
a. pure expectations theory.
b. liquidity premium theory.
c. segmented markets theory.
d. liquidity habitat theory.
ANS:
16.
a.
b.
c.
d.
The yield curve for corporate bonds.
would typically lie below the Treasury yield curve.
is identical to the Treasury yield curve.
typically has the same slope as the Treasury yield curve.
is irrelevant to investors.
ANS:
17.
a.
b.
c.
d.
e.
C
C
All ____ are required to be members of the Federal Reserve System.
state banks
national banks
savings and loan associations
finance companies
A and B
ANS:
B
18. The ____ is made up of seven individual members, and each member is appointed by the
president of the U.S.
a. Board of Governors
b. Federal Reserve district bank
c. Federal Open Market Committee (FOMC)
d. Securities and Exchange Commission
ANS:
A
19. Which of the following is an action that the Fed uses to increase or decrease the money
supply?
a. buying or selling Treasury securities in the secondary market
b. adjusting the tax rate imposed on income earned on Treasury securities
c. adjusting the coupon rate on Treasury bonds
d. selling Treasury securities in the primary market
ANS:
A
20. To decrease money supply, the Fed could ____ the reserve requirement ratio.
a. increase
b. stabilize
c. reduce
d. eliminate
ANS:
21.
a.
b.
c.
d.
In general, there is:
a positive relationship between unemployment and inflation.
an inverse relationship between unemployment and inflation.
an inverse relationship between GNP and inflation.
a positive relationship between GNP and unemployment.
ANS:
22.
a.
b.
c.
d.
A
B
____ serves as the most direct indicator of economic growth in the United States.
Gross domestic product (GDP)
National income
The unemployment rate
The industrial production index
ANS:
A
23. If the federal government is willing to pay whatever is necessary to borrow loanable funds,
but the private sector is not, this reflects
a. the crowding-out effect.
b. dynamic open market operations.
c. defensive open market operations.
d. monetizing the debt.
ANS:
A
24. When the Fed uses open market operations by selling some of its Treasury securities to
investors in the U.S., there will be
a. an outward shift in the supply schedule of loanable funds.
b. an inward shift in the supply schedule of loanable funds.
c. no shift in the supply schedule of loanable funds.
d. an outward shift in the demand schedule for loanable funds.
ANS:
25.
a.
b.
c.
d.
B
____ are sold at an auction at a discount from par value.
Treasury bills
Repurchase agreements
Banker's acceptances
Commercial paper
ANS:
A
26. Slim Pickens, a private investor, purchases a Treasury bill with a $10,000 par value for
$9,645. One hundred days later, Slim sells the T-bill for $9,719. What is Slim's expected
annualized yield from this transaction?
a. 13.43 percent
b. 2.78 percent
c. 10.55 percent
d. 2.80 percent
e. none of the above
ANS:
D
27. A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day maturity.
What is the discount?
a. 10.26 percent
b. 0.26 percent
c. $2,500
d. 10.00 percent
e. 11.00 percent
ANS:
28.
a.
b.
c.
d.
And increase in inflation will, in an efficient market, result in
A decrease in rates
An increase in rates
A decrease in stock prices
none of the above
ANS:
29.
a.
b.
c.
d.
C
A call provision on bonds normally
allows the firm to sell new bonds at par value.
gives the firm to sell new bonds above market value.
allows the firm to sell bonds to the Treasury.
allows the firm to buy back bonds that it previously issued.
ANS:
32.
a.
b.
c.
d.
C
Interest earned from Treasury bonds is
exempt from all income tax.
exempt from federal income tax.
exempt from state and local taxes.
subject to all income taxes.
ANS:
31.
a.
b.
c.
d.
B
When a bank guarantees a future payment to a firm, the financial instrument used is called
a repurchase agreement.
a negotiable CD.
a banker's acceptance.
commercial paper.
ANS:
30.
a.
b.
c.
d.
A
D
Some bonds are "stripped," which means that
they have defaulted.
the call provision has been eliminated.
they are transferred into principal-only and interest-only securities.
their maturities have been reduced.
ANS:
C
33. Everything else being equal, which of the following bond ratings is associated with the
highest yield?
a.
b.
c.
d.
Baa
A
Aa
Aaa
ANS:
34.
a.
b.
c.
d.
If the coupon rate equals the required rate of return, the price of the bond
should be above its par value.
should be below its par value.
should be equal to its par value.
is negligible.
ANS:
35.
a.
b.
c.
d.
A
C
The US tax code is said to favor.
Equities
Debt
Non-profits
In substance defeasance
ANS:
B
36. The relationship reflecting the actual response of a bond's price to a change in bond yields
is
a. concave.
b. convex.
c. linear.
d. quadratic.
ANS:
B
37. Suppose a bond has a Macaulay Duration of 11 years, and a current yield to maturity of
8%. If the yield to maturity increases to 8.75%, what is the resulting percentage change in
the price of the bond?
a. -5.29%
b. 5.29%
c. -7.20%
d. -6.88%
ANS: C