Question 1

You are considering the purchase of a tax-exempt security that is paying a yield of 10.08 percent. You are in the 28 percent tax bracket. To match this after-tax yield, you would consider taxable securities that pay
A)31.1 percent.
B)19 percent.
C)12.5 percent.
D)14 percent.

Accepted Answer

The answer of You are considering the purchase of a...

Question 2

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place ____ pressure on the demand for long-term funds issued by borrowers and the yield curve will be ____ sloping.
A)upward; downward
B)downward; upward
C)upward; upward
D)downward; downward

Accepted Answer

According to segmented markets theory, if investors have long-term funds and borrowers want short-term funds, there will be less demand for long-term funds, putting downward pressure on their demand and causing the yield curve to slope downward.

Question 3

The forward rate is commonly used to represent the market's forecast of the future interest rate.

Accepted Answer

The forward rate is indeed used as an indicator of the market's expectations for future interest rates, reflecting the yield on a bond that will start in the future for a specific period of time.

Question 4

Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large number of short-term Treasury securities (Treasury bills or T-bills). This action will ____ the supply of T-bills in the market and place ____ pressure on the yield of T-bills.
A)decrease; downward
B)decrease; upward
C)increase; upward
D)increase; downward

Accepted Answer

The answer of Assume that the Treasury experiences a large...

Question 5

Vaughn Corporation is considering the issue of commercial paper and would like to know the yield it should offer on its commercial paper. The corporation believes that a 0.2 percent credit risk premium, a 0.1 percent liquidity premium, and a 0.3 percent tax adjustment are necessary to sell its commercial paper to investors. Furthermore, annualized rates on  short-term Treasury securities (T-bills)are 7 percent. Based on this information, Vaughn should offer ____ percent on its commercial paper.
A)8.0
B)7.6
C)7.5
D)7.9
E)None of these are correct.

Accepted Answer

Vaughn should offer a yield that combines the T-bill rate with the additional premiums it believes are necessary. The total yield is calculated as 7% (T-bill rate) + 0.2% (credit risk premium) + 0.1% (liquidity premium) + 0.3% (tax adjustment) = 7.6%.

Question 6

Some types of debt securities always offer a higher yield than others.

Accepted Answer

Some types of debt securities, such as high-yield bonds, offer a higher yield than others, such as investment-grade bonds, due to their higher risk of default.

Question 7

If liquidity influences the yield curve, the forward rate underestimates the market's expectation of the future interest rate.

Accepted Answer

The forward rate may either underestimate or overestimate the market's expectation of the future interest rate, as it reflects not only expectations about future interest rates but also premiums for bearing risk, such as liquidity risk.

Question 8

The higher a bond rating, the lower the perceived credit risk.

Accepted Answer

A higher bond rating indicates that the bond is considered to be of higher credit quality, suggesting that the issuer is more likely to meet its financial obligations, thus representing a lower perceived credit risk.

Question 9

The annualized yield on a two-year security is below the annualized one-year interest rate. The one-year forward rate as of one year ahead is ______________.
A)zero
B)negative
C)positive, but below the annualized one-year interest rate
D)None of these are correct

Accepted Answer

Given that the annualized yield on a two-year security is below the annualized one-year interest rate, the one-year forward rate one year from now must be positive to compensate for the lower yield on the two-year security, but it will be below the current annualized one-year interest rate to reflect the expectation of lower rates in the future.

Question 10

According to the text, research on the term structure of interest rates has found that maturity markets are not even partially segmented, because investors view various maturities as adequate substitutes for each other.

Accepted Answer

Research on the term structure of interest rates often includes the segmented market theory, which suggests that markets for different maturities are indeed partially segmented because investors typically do not view various maturities as perfect substitutes due to preferences, regulatory requirements, or other factors.

Question 11

Which of the following established the Office of Credit Ratings and mandated that credit rating agencies establish internal controls to make their ratings process more transparent?
A)Financial Reform Act of 2010
B)Consumer Protection Act of 2008
C)Federal Ratings Commission Act of 2014
D)None of the above is correct.

Accepted Answer

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established the Office of Credit Ratings at the SEC and mandated that credit rating agencies enhance their ratings process transparency through internal controls.

Question 12

An upward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.
A)longer; lower
B)longer; higher
C)shorter; similar (short-term and long-term annualized yields are the same)
D)shorter; higher

Accepted Answer

An upward-sloping yield curve indicates that longer-term investments have higher annualized yields compared to shorter-term investments. This is typically a sign of a healthy, growing economy where investors demand higher returns for longer commitments of their capital.

Question 13

Investors will always prefer the purchase of risk-free Treasury securities, since other securities have a higher level of risk.

Accepted Answer

Investors have different risk tolerances and investment objectives, and some may seek higher returns that come with higher risk securities, rather than settling for the lower returns of risk-free Treasury securities.

Question 14

According to the segmented markets theory, the term structure of interest rates is determined solely by expectations of future interest rates.

Accepted Answer

The segmented markets theory suggests that the term structure of interest rates is determined by the supply and demand for securities within each segment of the maturity spectrum, not solely by expectations of future interest rates.

Question 15

The graphic comparison of maturities and annualized yields is known as the interest rate curve.

Accepted Answer

The answer of The graphic comparison of maturities and annualized...

Question 16

The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate one year ahead is ____ percent.
A)2.8
B)115
C)103
D)15.1

Accepted Answer

The forward rate can be calculated using the formula that equates the return from investing in a long-term bond to the return from rolling over short-term bonds. Given a three-year bond at 13% annualized yield, a two-year bond at 12%, and a one-year bond at 9%, we can calculate the one-year forward rate one year from now as follows:Let $F$ be the forward rate we are looking for. The idea is to make the investment outcomes equivalent whether we invest for three years directly or invest for one year and then invest the proceeds for two more years at the forward rate.Investing in the three-year security at 13% for three years gives us a return factor of $(1 + 0.13)^3$.Investing in the one-year security at 9% for one year and then investing the proceeds for two more years at the forward rate $F$ gives us a return factor of $(1 + 0.09) \times (1 + F)^2$.Setting these equal to each other:$$(1 + 0.13)^3 = (1 + 0.09) \times (1 + F)^2$$Solving for $F$ gives us the forward rate. Without going through the algebraic steps here (since the calculation detail was not requested), following the correct procedure will lead you to find that $F$ is approximately 15.1%, which corresponds to choice D.

Question 17

Other things being equal, an expected decrease in interest rates will increase the demand for long-term funds by borrowers.

Accepted Answer

The answer of Other things being equal, an expected decrease...

Question 18

If research showed that all investors attempt to purchase securities that perfectly match the time for which they will have available funds, this would specifically support the argument made by the
A)liquidity premium theory.
B)real interest rate theory.
C)expectations theory.
D)segmented markets theory.

Accepted Answer

The segmented markets theory suggests that the bond market is segmented on the basis of maturity, with investors choosing bonds that match their specific time needs for funds. This theory would be supported by research showing investors attempt to purchase securities that perfectly match the time for which they will have available funds, as it aligns with the idea that investors have preferences for bonds of specific maturities based on their individual investment horizons.

Question 19

Treasury securities are exempt from federal and state income taxes.

Accepted Answer

Treasury securities are exempt from state and local income taxes, but they are subject to federal income taxes.

Question 20

The term structure of interest rates defines the relationship between maturity and annualized yield, holding other factors such as risk constant.

Accepted Answer

The term structure of interest rates, often represented by the yield curve, shows the relationship between the yield (interest rates) of bonds of the same credit quality but different maturities, assuming other factors like risk are constant.

Quiz 3: Structure of Interest Rates

You are considering the purchase of a tax-exempt security that is paying a yield of 10.08 percent. You are in the 28 percent tax bracket. To match this after-tax yield, you would consider taxable securities that pay

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place pressure on the demand for long-term funds issued by borrowers and the yield curve will be sloping.

The forward rate is commonly used to represent the market's forecast of the future interest rate.

Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large number of short-term Treasury securities (Treasury bills or T-bills) . This action will the supply of T-bills in the market and place pressure on the yield of T-bills.

Some types of debt securities always offer a higher yield than others.

If liquidity influences the yield curve, the forward rate underestimates the market's expectation of the future interest rate.

The higher a bond rating, the lower the perceived credit risk.

The annualized yield on a two-year security is below the annualized one-year interest rate. The one-year forward rate as of one year ahead is ______________.

According to the text, research on the term structure of interest rates has found that maturity markets are not even partially segmented, because investors view various maturities as adequate substitutes for each other.

Which of the following established the Office of Credit Ratings and mandated that credit rating agencies establish internal controls to make their ratings process more transparent?

An upward-sloping yield curve indicates that Treasury securities with maturities offer annualized yields.

Investors will always prefer the purchase of risk-free Treasury securities, since other securities have a higher level of risk.

According to the segmented markets theory, the term structure of interest rates is determined solely by expectations of future interest rates.

The graphic comparison of maturities and annualized yields is known as the interest rate curve.

The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate one year ahead is ____ percent.

Other things being equal, an expected decrease in interest rates will increase the demand for long-term funds by borrowers.

If research showed that all investors attempt to purchase securities that perfectly match the time for which they will have available funds, this would specifically support the argument made by the

Treasury securities are exempt from federal and state income taxes.

The term structure of interest rates defines the relationship between maturity and annualized yield, holding other factors such as risk constant.

Quiz 3: Structure of Interest Rates

You are considering the purchase of a tax-exempt security that is paying a yield of 10.08 percent. You are in the 28 percent tax bracket. To match this after-tax yield, you would consider taxable securities that pay

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place ____ pressure on the demand for long-term funds issued by borrowers and the yield curve will be ____ sloping.

The forward rate is commonly used to represent the market's forecast of the future interest rate.

Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large number of short-term Treasury securities (Treasury bills or T-bills) . This action will ____ the supply of T-bills in the market and place ____ pressure on the yield of T-bills.

Some types of debt securities always offer a higher yield than others.

If liquidity influences the yield curve, the forward rate underestimates the market's expectation of the future interest rate.

The higher a bond rating, the lower the perceived credit risk.

The annualized yield on a two-year security is below the annualized one-year interest rate. The one-year forward rate as of one year ahead is ______________.

According to the text, research on the term structure of interest rates has found that maturity markets are not even partially segmented, because investors view various maturities as adequate substitutes for each other.

Which of the following established the Office of Credit Ratings and mandated that credit rating agencies establish internal controls to make their ratings process more transparent?

An upward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.

Investors will always prefer the purchase of risk-free Treasury securities, since other securities have a higher level of risk.

According to the segmented markets theory, the term structure of interest rates is determined solely by expectations of future interest rates.

The graphic comparison of maturities and annualized yields is known as the interest rate curve.

The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate one year ahead is ____ percent.

Other things being equal, an expected decrease in interest rates will increase the demand for long-term funds by borrowers.

If research showed that all investors attempt to purchase securities that perfectly match the time for which they will have available funds, this would specifically support the argument made by the

Treasury securities are exempt from federal and state income taxes.

The term structure of interest rates defines the relationship between maturity and annualized yield, holding other factors such as risk constant.

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place pressure on the demand for long-term funds issued by borrowers and the yield curve will be sloping.

Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large number of short-term Treasury securities (Treasury bills or T-bills) . This action will the supply of T-bills in the market and place pressure on the yield of T-bills.

An upward-sloping yield curve indicates that Treasury securities with maturities offer annualized yields.