QUESTIONS
1. A financial intermediary is a corporation that takes funds from investors and then provides those
funds to those who need capital. A bank that takes in demand deposits and then uses that money
to make long-term mortgage loans is one example of a financial intermediary. a. True
b. False
2. A share of common stock is not a derivative, but an option to buy the stock is a derivative
because the value of the option is derived from the value of the stock.
a. True
b. False
3. Financial institutions are more diversified today than they were in the past, when federal laws
kept investment banks, commercial banks, insurance companies, and similar organizations quite
separate. Today the larger financial services corporations offer a variety of services, ranging from
checking accounts, to insurance, to underwriting securities, to stock brokerage. a. True
b. False
4. Money markets are markets for
a. Foreign currencies
b. Consumer automobile loans
c. Common stocks
d. Long-term bonds
e. Short-term debt securities such as Treasury bills and commercial paper
5. Which of the following statements is CORRECT?
a. If you purchase 100 shares of Disney stock from your brother-in-law, this is an example
of a primary market transaction.
b. If Disney issues additional shares of common stock through an investment banker, this
would be a secondary market transaction.
c. The NYSE is an example of an over-the-counter market.
d. Only institutions, and not individuals, can engage in derivative market transactions.
e. As they are generally defined, money market transactions involve debt securities with
maturities of less than one year.
6. You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is
an example of:
a. A money market transaction
b. A primary market transaction
c. A secondary market transaction
d. A futures market transaction
e. An over-the-counter market transaction
7. Which of the following statements is CORRECT?
a. The term "IPO" stands for Introductory Price Offered, and it is the price at which shares
of a new company are offered to the public.
b. IPO prices are generally established by the market, and buyers of the new stock must pay
the price that prevails at the close of trading on the day the stock is offered to the public.
, c. In a "Dutch auction," investors who want to buy shares in an IPO submit bids indicating
how many shares they want to buy and the price they are willing to pay. The company
determines how many shares it wants to sell. The highest price that enables the company
to sell the desired number of shares is the price that all buyers must pay.
d. It is possible that the price set in an IPO is so high that investors will refuse to buy the
number of shares that the company wants to sell. In this situation, the IPO is said to be
oversubscribed.
e. It is possible that the price set in an IPO is so low that investors will want to buy more
shares than the company wants to sell. In that case, the company will have to issue more
shares than it wants to sell.
8. Which of the following statements is CORRECT?
a. The New York Stock Exchange is an auction market, and it has a physical location.
b. Home mortgage loans are traded in the money market.
c. If an investor sells shares of stock through a broker, then it would be a primary market
transaction.
d. Capital markets deal only with common stocks and other equity securities.
e. While the distinctions are blurring, investment banks generally specialize in lending
money, whereas commercial banks generally help companies raise capital from other
parties.
9. During periods when inflation is increasing, interest rates tend to increase, while interest rates
tend to fall when inflation is declining.
a. True
b. False
10. If investors expect a zero rate of inflation, then the nominal rate of return on a very short-term
U.S. Treasury bond should be equal to the real risk-free rate, r*.
a. True
b. False
11. The risk that interest rates will increase, and that increase will lead to a decline in the prices of
outstanding bonds, is called "interest rate risk," or "price risk."
a. True
b. False
12. Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate,
r*, will remain constant. Which of the following statements is CORRECT, other things held
constant?
a. If the pure expectations theory holds, the Treasury yield curve must be downward
sloping.
b. If the pure expectations theory holds, the corporate yield curve must be downward
sloping.
c. If there is a positive maturity risk premium, the Treasury yield curve must be upward
sloping.
d. If inflation is expected to decline, there can be no maturity risk premium.
e. The expectations theory cannot hold if inflation is decreasing.
, 13. Which of the following factors would be most likely to lead to an increase in nominal interest
rates?
a. Households reduce their consumption and increase their savings.
b. A new technology like the Internet has just been introduced, and it increases investment
opportunities.
c. There is a decrease in expected inflation.
d. The economy falls into a recession.
e. The Federal Reserve decides to try to stimulate the economy.
14. Suppose the U.S. Treasury issued $50 billion of short-term securities and sold them to the public.
Other things held constant, what would be the most likely effect on short-term securities' prices
and interest rates?
a. Prices and interest rates would both rise.
b. Prices would rise and interest rates would decline.
c. Prices and interest rates would both decline.
d. Prices would decline and interest rates would rise.
e. There is no reason to expect a change in either prices or interest rates.
15. Which of the following statements is CORRECT?
a. If the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve
must be upward sloping.
b. If the maturity risk premium (MRP) equals zero, the Treasury bond yield curve must be
flat.
c. If inflation is expected to increase in the future and the maturity risk premium (MRP) is
greater than zero, the Treasury bond yield curve must be upward sloping.
d. If the expectations theory holds, the Treasury bond yield curve will never be downward
sloping.
e. Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury
bonds will always be higher than yields on short-term T-bonds.
16. Assume that the current corporate bond yield curve is upward sloping. Under this condition, then
we could be sure that
a. Inflation is expected to decline in the future.
b. The economy is not in a recession.
c. Long-term bonds are a better buy than short-term bonds.
d. Maturity risk premiums could help to explain the yield curve's upward slope.
e. Long-term interest rates are more volatile than short-term rates.
17. Which of the following statements is CORRECT?
a. The higher the maturity risk premium, the higher the probability that the yield curve will
be inverted.
b. The most likely explanation for an inverted yield curve is that investors expect inflation
to increase.
c. The most likely explanation for an inverted yield curve is that investors expect inflation
to decrease.
d. If the yield curve is inverted, short-term bonds have lower yields than long-term bonds.
1. A financial intermediary is a corporation that takes funds from investors and then provides those
funds to those who need capital. A bank that takes in demand deposits and then uses that money
to make long-term mortgage loans is one example of a financial intermediary. a. True
b. False
2. A share of common stock is not a derivative, but an option to buy the stock is a derivative
because the value of the option is derived from the value of the stock.
a. True
b. False
3. Financial institutions are more diversified today than they were in the past, when federal laws
kept investment banks, commercial banks, insurance companies, and similar organizations quite
separate. Today the larger financial services corporations offer a variety of services, ranging from
checking accounts, to insurance, to underwriting securities, to stock brokerage. a. True
b. False
4. Money markets are markets for
a. Foreign currencies
b. Consumer automobile loans
c. Common stocks
d. Long-term bonds
e. Short-term debt securities such as Treasury bills and commercial paper
5. Which of the following statements is CORRECT?
a. If you purchase 100 shares of Disney stock from your brother-in-law, this is an example
of a primary market transaction.
b. If Disney issues additional shares of common stock through an investment banker, this
would be a secondary market transaction.
c. The NYSE is an example of an over-the-counter market.
d. Only institutions, and not individuals, can engage in derivative market transactions.
e. As they are generally defined, money market transactions involve debt securities with
maturities of less than one year.
6. You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is
an example of:
a. A money market transaction
b. A primary market transaction
c. A secondary market transaction
d. A futures market transaction
e. An over-the-counter market transaction
7. Which of the following statements is CORRECT?
a. The term "IPO" stands for Introductory Price Offered, and it is the price at which shares
of a new company are offered to the public.
b. IPO prices are generally established by the market, and buyers of the new stock must pay
the price that prevails at the close of trading on the day the stock is offered to the public.
, c. In a "Dutch auction," investors who want to buy shares in an IPO submit bids indicating
how many shares they want to buy and the price they are willing to pay. The company
determines how many shares it wants to sell. The highest price that enables the company
to sell the desired number of shares is the price that all buyers must pay.
d. It is possible that the price set in an IPO is so high that investors will refuse to buy the
number of shares that the company wants to sell. In this situation, the IPO is said to be
oversubscribed.
e. It is possible that the price set in an IPO is so low that investors will want to buy more
shares than the company wants to sell. In that case, the company will have to issue more
shares than it wants to sell.
8. Which of the following statements is CORRECT?
a. The New York Stock Exchange is an auction market, and it has a physical location.
b. Home mortgage loans are traded in the money market.
c. If an investor sells shares of stock through a broker, then it would be a primary market
transaction.
d. Capital markets deal only with common stocks and other equity securities.
e. While the distinctions are blurring, investment banks generally specialize in lending
money, whereas commercial banks generally help companies raise capital from other
parties.
9. During periods when inflation is increasing, interest rates tend to increase, while interest rates
tend to fall when inflation is declining.
a. True
b. False
10. If investors expect a zero rate of inflation, then the nominal rate of return on a very short-term
U.S. Treasury bond should be equal to the real risk-free rate, r*.
a. True
b. False
11. The risk that interest rates will increase, and that increase will lead to a decline in the prices of
outstanding bonds, is called "interest rate risk," or "price risk."
a. True
b. False
12. Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate,
r*, will remain constant. Which of the following statements is CORRECT, other things held
constant?
a. If the pure expectations theory holds, the Treasury yield curve must be downward
sloping.
b. If the pure expectations theory holds, the corporate yield curve must be downward
sloping.
c. If there is a positive maturity risk premium, the Treasury yield curve must be upward
sloping.
d. If inflation is expected to decline, there can be no maturity risk premium.
e. The expectations theory cannot hold if inflation is decreasing.
, 13. Which of the following factors would be most likely to lead to an increase in nominal interest
rates?
a. Households reduce their consumption and increase their savings.
b. A new technology like the Internet has just been introduced, and it increases investment
opportunities.
c. There is a decrease in expected inflation.
d. The economy falls into a recession.
e. The Federal Reserve decides to try to stimulate the economy.
14. Suppose the U.S. Treasury issued $50 billion of short-term securities and sold them to the public.
Other things held constant, what would be the most likely effect on short-term securities' prices
and interest rates?
a. Prices and interest rates would both rise.
b. Prices would rise and interest rates would decline.
c. Prices and interest rates would both decline.
d. Prices would decline and interest rates would rise.
e. There is no reason to expect a change in either prices or interest rates.
15. Which of the following statements is CORRECT?
a. If the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve
must be upward sloping.
b. If the maturity risk premium (MRP) equals zero, the Treasury bond yield curve must be
flat.
c. If inflation is expected to increase in the future and the maturity risk premium (MRP) is
greater than zero, the Treasury bond yield curve must be upward sloping.
d. If the expectations theory holds, the Treasury bond yield curve will never be downward
sloping.
e. Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury
bonds will always be higher than yields on short-term T-bonds.
16. Assume that the current corporate bond yield curve is upward sloping. Under this condition, then
we could be sure that
a. Inflation is expected to decline in the future.
b. The economy is not in a recession.
c. Long-term bonds are a better buy than short-term bonds.
d. Maturity risk premiums could help to explain the yield curve's upward slope.
e. Long-term interest rates are more volatile than short-term rates.
17. Which of the following statements is CORRECT?
a. The higher the maturity risk premium, the higher the probability that the yield curve will
be inverted.
b. The most likely explanation for an inverted yield curve is that investors expect inflation
to increase.
c. The most likely explanation for an inverted yield curve is that investors expect inflation
to decrease.
d. If the yield curve is inverted, short-term bonds have lower yields than long-term bonds.
