1|Page
FINC514 EXAM 2 NEWEST 2025 ACTUAL EXAM|
COMPLETE 170 QUESTIONS AND CORRECT
DETRAILED ANSWERS (VERIFIED ANSWERS)
ALREADY GRADED A+| NEW!!
This premium is added when a security lacks marketability, because it
cannot be bought and sold quickly without losing value. - ANSWER -
Liquidity risk premium (LP)
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)
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)
This is the rate on short-term US Treasury securities, assuming there is
no inflation. - ANSWER - Real risk-free rate (r*)
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)
pg. 1
,2|Page
It is calculated by adding the inflation premium to r*. - ANSWER -
Nominal risk-free rate (Rrf)
In addition, the yield spread between corporate and Treasury bonds is
_______ the longer the maturity. - ANSWER - larger
This occurs because longer-term corporate bonds have _______ default
and liquidity risk than shorter-term bonds, and both of these premiums
are ________ in Treasury bonds. - ANSWER - more
absent
The __________ theory states that the shape of the yield curve depends
on investors' expectations about future interest rates. The theory assumes
that bond traders establish bond prices and interest rates strictly on the
basis of expectations for future interest rates and that they are indifferent
to maturity because they don't view long-term bonds as being riskier
than short-term bonds. - ANSWER - pure expectations
The Federal Reserve Board controls the money supply. To stimulate the
economy, the Fed ______ the money supply. - ANSWER - increases
The initial effect would be to cause short-term rates to decline; however,
a _______ money supply might lead to an increase in expected future
inflation, which would cause long-term rates to rise even as short-term
rates fell. The reverse is true when the Fed ______ the money supply. -
ANSWER - larger
tightens
pg. 2
,3|Page
If the government spends more than it takes in as taxes, it runs a _____,
which must be covered by additional borrowing or by printing money. -
ANSWER - deficit
If the government borrows money, this ______ the demand for funds
and ______ interest rates. - ANSWER - increases
increases
If the government prints money, the result will be ______, which will
_______ interest rates. - ANSWER - increased
increased
So, the larger the federal ______ , other things held constant, the
_______ the level of interest rates. - ANSWER - deficit
higher
If U.S. businesses and individuals buy more goods from abroad than
they sell (more imports than exports), the U.S. is running a foreign trade
______, which must be financed. - ANSWER - deficit
This generally means that the US borrows from nations with export
________. - ANSWER - surplus
If the coupon interest rate remains constant from the time of issue until
the bond matures, then the bond is called a _______ bond. - ANSWER -
fixed-rate
pg. 3
, 4|Page
The contract that describes the terms of a borrowing arrangement
between a firm that sells a bond issue and the investors who purchase the
bonds is called the _______ . - ANSWER - indenture
The larger the trade ________ , the higher the tendency to borrow, so
U.S. interest rates become highly dependent on interest rate levels
abroad. Consequently, this interdependency ________ the Fed's ability
to use monetary policy to control U.S. economic activity. - ANSWER -
deficit
constrains
Business conditions influence interest rates. During a ________ , the
demand for money and the inflation rate tend to fall and the Fed tends to
________ the money supply to stimulate the economy. - ANSWER -
recession
increase
An original issue discount (OID) bond is any bond originally offered at a
price _____ par value. - ANSWER - below
________ bonds are exchangeable at the option of the holder for the
issuing firm's common stock. Bonds can be issued with warrants giving
the holder the option to purchase the firm's stock for a stated price,
thereby providing a capital gain if the stock's price rises. - ANSWER -
Convertible
pg. 4
FINC514 EXAM 2 NEWEST 2025 ACTUAL EXAM|
COMPLETE 170 QUESTIONS AND CORRECT
DETRAILED ANSWERS (VERIFIED ANSWERS)
ALREADY GRADED A+| NEW!!
This premium is added when a security lacks marketability, because it
cannot be bought and sold quickly without losing value. - ANSWER -
Liquidity risk premium (LP)
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)
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)
This is the rate on short-term US Treasury securities, assuming there is
no inflation. - ANSWER - Real risk-free rate (r*)
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)
pg. 1
,2|Page
It is calculated by adding the inflation premium to r*. - ANSWER -
Nominal risk-free rate (Rrf)
In addition, the yield spread between corporate and Treasury bonds is
_______ the longer the maturity. - ANSWER - larger
This occurs because longer-term corporate bonds have _______ default
and liquidity risk than shorter-term bonds, and both of these premiums
are ________ in Treasury bonds. - ANSWER - more
absent
The __________ theory states that the shape of the yield curve depends
on investors' expectations about future interest rates. The theory assumes
that bond traders establish bond prices and interest rates strictly on the
basis of expectations for future interest rates and that they are indifferent
to maturity because they don't view long-term bonds as being riskier
than short-term bonds. - ANSWER - pure expectations
The Federal Reserve Board controls the money supply. To stimulate the
economy, the Fed ______ the money supply. - ANSWER - increases
The initial effect would be to cause short-term rates to decline; however,
a _______ money supply might lead to an increase in expected future
inflation, which would cause long-term rates to rise even as short-term
rates fell. The reverse is true when the Fed ______ the money supply. -
ANSWER - larger
tightens
pg. 2
,3|Page
If the government spends more than it takes in as taxes, it runs a _____,
which must be covered by additional borrowing or by printing money. -
ANSWER - deficit
If the government borrows money, this ______ the demand for funds
and ______ interest rates. - ANSWER - increases
increases
If the government prints money, the result will be ______, which will
_______ interest rates. - ANSWER - increased
increased
So, the larger the federal ______ , other things held constant, the
_______ the level of interest rates. - ANSWER - deficit
higher
If U.S. businesses and individuals buy more goods from abroad than
they sell (more imports than exports), the U.S. is running a foreign trade
______, which must be financed. - ANSWER - deficit
This generally means that the US borrows from nations with export
________. - ANSWER - surplus
If the coupon interest rate remains constant from the time of issue until
the bond matures, then the bond is called a _______ bond. - ANSWER -
fixed-rate
pg. 3
, 4|Page
The contract that describes the terms of a borrowing arrangement
between a firm that sells a bond issue and the investors who purchase the
bonds is called the _______ . - ANSWER - indenture
The larger the trade ________ , the higher the tendency to borrow, so
U.S. interest rates become highly dependent on interest rate levels
abroad. Consequently, this interdependency ________ the Fed's ability
to use monetary policy to control U.S. economic activity. - ANSWER -
deficit
constrains
Business conditions influence interest rates. During a ________ , the
demand for money and the inflation rate tend to fall and the Fed tends to
________ the money supply to stimulate the economy. - ANSWER -
recession
increase
An original issue discount (OID) bond is any bond originally offered at a
price _____ par value. - ANSWER - below
________ bonds are exchangeable at the option of the holder for the
issuing firm's common stock. Bonds can be issued with warrants giving
the holder the option to purchase the firm's stock for a stated price,
thereby providing a capital gain if the stock's price rises. - ANSWER -
Convertible
pg. 4
