FINC514
Exam 2
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QUESTIONS AND CORRECT DETAILED ANSWERS
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QUESTION 1
Q: CHAPTER 6 Over the past several years, Germany, Japan, and Switzerland have had
lower interest rates than the United States due to lower values of this premium.
■ ANSWER:
Inflation premium (IP)
QUESTION 2
Q: It is calculated by adding the inflation premium to r*.
■ ANSWER:
Nominal risk-free rate (Rrf)
QUESTION 3
Q: As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise.
Because interest rate changes are uncertain, this premium is added as a compensation
for this uncertainty.
■ ANSWER:
Maturity risk premium (MRP)
QUESTION 4
,Q: This is the difference between the interest rate on a US Treasury bond and a
corporate bond of the same profile—that is, the same maturity and marketability.
■ ANSWER:
Default risk premium (DRP)
QUESTION 5
Q: This is the rate on short-term US Treasury securities, assuming there is no inflation.
■ ANSWER:
Real risk-free rate (r*)
QUESTION 6
Q: Countries with strong balance sheets and declining budget deficits tend to have
lower interest rates.
■ ANSWER:
True
QUESTION 7
Q: Which tend to be more volatile, short- or long-term interest rates?
■ ANSWER:
Short-term interest rates
, QUESTION 8
Q: If the inflation rate was 3.00% and the nominal interest rate was 4.60% over the last
year, what was the real rate of interest over the last year? Disregard crossproduct terms;
that is, if averaging is required, use the arithmetic average.
■ ANSWER:
The nominal interest rate consists of the real rate of interest and inflation. In this case, the nominal
interest rate is 4.60%, and the inflation rate is 3.00%. So the real rate of interest is 4.60% - 3.00% =
1.60%.
QUESTION 9
Q: Based on your understanding of the determinants of interest rates, if everything else
remains the same, which of the following will be true? - The yield on U.S. Treasury
securities always remains static. - In theory, the yield on a bond with a longer maturity
will be higher than the yield on a bond with a shorter maturity.
■ ANSWER:
In theory, the yield on a bond with a longer maturity will be higher than the yield on a bond with a
shorter maturity.
QUESTION 10
Q: Suppose the real risk-free rate and inflation rate are expected to remain at their
current levels throughout the foreseeable future. Consider all factors that affect the yield
curve. Then identify which of the following shapes that the US Treasury yield curve can
take. Check all that apply. - Inverted yield curve - Upward-sloping yield curve -
Downward-sloping yield curve
Exam 2
LATEST ACTUAL EXAM WITH COMPLETE
QUESTIONS AND CORRECT DETAILED ANSWERS
(100% VERIFIED ANSWERS)
| ALREADY GRADED A+ |
|| PROFESSOR VERIFIED ||
|| BRANDNEW!!! ||
Premium Colored Edition • Extra Spacing • Numbered Questions • No Overlap
, FINC514 Exam 2 – Complete Numbered Study Guide
QUESTION 1
Q: CHAPTER 6 Over the past several years, Germany, Japan, and Switzerland have had
lower interest rates than the United States due to lower values of this premium.
■ ANSWER:
Inflation premium (IP)
QUESTION 2
Q: It is calculated by adding the inflation premium to r*.
■ ANSWER:
Nominal risk-free rate (Rrf)
QUESTION 3
Q: As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise.
Because interest rate changes are uncertain, this premium is added as a compensation
for this uncertainty.
■ ANSWER:
Maturity risk premium (MRP)
QUESTION 4
,Q: This is the difference between the interest rate on a US Treasury bond and a
corporate bond of the same profile—that is, the same maturity and marketability.
■ ANSWER:
Default risk premium (DRP)
QUESTION 5
Q: This is the rate on short-term US Treasury securities, assuming there is no inflation.
■ ANSWER:
Real risk-free rate (r*)
QUESTION 6
Q: Countries with strong balance sheets and declining budget deficits tend to have
lower interest rates.
■ ANSWER:
True
QUESTION 7
Q: Which tend to be more volatile, short- or long-term interest rates?
■ ANSWER:
Short-term interest rates
, QUESTION 8
Q: If the inflation rate was 3.00% and the nominal interest rate was 4.60% over the last
year, what was the real rate of interest over the last year? Disregard crossproduct terms;
that is, if averaging is required, use the arithmetic average.
■ ANSWER:
The nominal interest rate consists of the real rate of interest and inflation. In this case, the nominal
interest rate is 4.60%, and the inflation rate is 3.00%. So the real rate of interest is 4.60% - 3.00% =
1.60%.
QUESTION 9
Q: Based on your understanding of the determinants of interest rates, if everything else
remains the same, which of the following will be true? - The yield on U.S. Treasury
securities always remains static. - In theory, the yield on a bond with a longer maturity
will be higher than the yield on a bond with a shorter maturity.
■ ANSWER:
In theory, the yield on a bond with a longer maturity will be higher than the yield on a bond with a
shorter maturity.
QUESTION 10
Q: Suppose the real risk-free rate and inflation rate are expected to remain at their
current levels throughout the foreseeable future. Consider all factors that affect the yield
curve. Then identify which of the following shapes that the US Treasury yield curve can
take. Check all that apply. - Inverted yield curve - Upward-sloping yield curve -
Downward-sloping yield curve
