TEST 1 FI 412 University of Alabama
Questions with 100% Correct Answers
When yield curves are steeply upward-sloping Correct Answer: long-term
interest rates are above short-term interest rates.
An open market sale of securities by the Fed will Correct Answer: decrease
liabilities of the Fed and not affect assets of the banking system
If the Federal Reserve wants to expand reserves in the banking system, it will
Correct Answer: purchase government securities
According to the expectations theory of the term structure Correct Answer:
interest rates on bonds of different maturities move together over time.
A discount loan by the Fed to a bank causes a(n) ________ in reserves in the
banking system and a(n) ________ in the monetary base Correct Answer:
increase; increase
According to the expectations theory of the term structure, Correct Answer:
when the yield curve is steeply upward-sloping, short-term interest rates are
expected to rise in the future.
B) when the yield curve is downward-sloping, short-term interest rates are
expected to decline in the future.
Treasury bonds are subject to ________ risk but are free of ________ risk. Correct
Answer: interest-rate; default
Call provisions will be exercised when interest rates ________ and bond values
________. Correct Answer: fall; rise
,Callable bonds usually have a higher yield than comparable non-callable
bonds. Correct Answer: true
Convertible bonds are attractive to bondholders and sell for a higher price than
comparable nonconvertible bonds. Correct Answer: true
Preferred stockholders hold a claim on assets that has priority over the claims of
Correct Answer: common stockholders, but after that of bondholders
Suppose the average industry PE ratio for auto parts retailers is 20. What is the
current price of Auto Zone stock if the retailer's earnings per share is projected to
be $1.85? Correct Answer: $37
If a 15 year Treasury Bond is "stripped" (into Treasury STRIPS), the number of
securities will be trading after the process is_____? (Assuming semiannual
coupon payment) Correct Answer: 31
Goldman Sachs repos $10 million par value of a Treasury note to J.P. Morgan for
30 days. The market value of this Treasury note is $12 million. If J.P. Morgan takes
a 5% haircut, and the repo rate is 3%, how much does Goldman Sachs need to
pay back in 30 days in order to receive the Treasury note? (repo rate is quoting
on a 360 day basis) Correct Answer: $11.4285 million
The Department of Treasury announced on Thursday that it would auction $3
billion par value 182-day Treasury Bills. The following bids (both competitive and
non- competitive) were received from the primary dealers. Please state below
which primary dealers will receive the awards, what is the price, and what is the
quantity that each primary dealer receives Correct Answer: 1. Look at largest
bid amount
2. Look at bid price associated with that price
3. Any prices above chosen bid price are viable
, The principal-agent problem Correct Answer: would not arise if the owners of
the firm had complete information about the activities of the managers.
If face value and selling price of a bond are the same, Correct Answer: YTM is
same as coupon rate
A perpetuity pays you $200 each year forever. If the price of this perpetuity now
is $4,000, what is the yield to maturity for this loan? Correct Answer: 5%
If price of a bond is below face value, then Correct Answer: YTM is greater than
coupon rate
In the presence of principal-agent problem, equity contract is superior to debt
contract Correct Answer: False
What problem of debt contract is shown when one switches projects based off
a better payoff when project is being financed by debt? Correct Answer: Risk
Shifting
Formula for calculating price tomorrow Correct Answer: P=
C(1/i+1/i(1+i)^n+F/(1+i)^n
Sum of weights should equal... Correct Answer: 1
Financial markets have the basic function of___________ Correct Answer:
bringing together people with funds to lend and people who want to borrow
funds. B) generating liquidity
Which of the following can be described as involving direct finance? Correct
Answer: A corporation sells its stock to investors through an IPO.
Which of the following can be described as involving indirect finance? Correct
Answer: A corporation takes out loans from a bank. A pension fund manager
buys stocks from the secondary market.
Questions with 100% Correct Answers
When yield curves are steeply upward-sloping Correct Answer: long-term
interest rates are above short-term interest rates.
An open market sale of securities by the Fed will Correct Answer: decrease
liabilities of the Fed and not affect assets of the banking system
If the Federal Reserve wants to expand reserves in the banking system, it will
Correct Answer: purchase government securities
According to the expectations theory of the term structure Correct Answer:
interest rates on bonds of different maturities move together over time.
A discount loan by the Fed to a bank causes a(n) ________ in reserves in the
banking system and a(n) ________ in the monetary base Correct Answer:
increase; increase
According to the expectations theory of the term structure, Correct Answer:
when the yield curve is steeply upward-sloping, short-term interest rates are
expected to rise in the future.
B) when the yield curve is downward-sloping, short-term interest rates are
expected to decline in the future.
Treasury bonds are subject to ________ risk but are free of ________ risk. Correct
Answer: interest-rate; default
Call provisions will be exercised when interest rates ________ and bond values
________. Correct Answer: fall; rise
,Callable bonds usually have a higher yield than comparable non-callable
bonds. Correct Answer: true
Convertible bonds are attractive to bondholders and sell for a higher price than
comparable nonconvertible bonds. Correct Answer: true
Preferred stockholders hold a claim on assets that has priority over the claims of
Correct Answer: common stockholders, but after that of bondholders
Suppose the average industry PE ratio for auto parts retailers is 20. What is the
current price of Auto Zone stock if the retailer's earnings per share is projected to
be $1.85? Correct Answer: $37
If a 15 year Treasury Bond is "stripped" (into Treasury STRIPS), the number of
securities will be trading after the process is_____? (Assuming semiannual
coupon payment) Correct Answer: 31
Goldman Sachs repos $10 million par value of a Treasury note to J.P. Morgan for
30 days. The market value of this Treasury note is $12 million. If J.P. Morgan takes
a 5% haircut, and the repo rate is 3%, how much does Goldman Sachs need to
pay back in 30 days in order to receive the Treasury note? (repo rate is quoting
on a 360 day basis) Correct Answer: $11.4285 million
The Department of Treasury announced on Thursday that it would auction $3
billion par value 182-day Treasury Bills. The following bids (both competitive and
non- competitive) were received from the primary dealers. Please state below
which primary dealers will receive the awards, what is the price, and what is the
quantity that each primary dealer receives Correct Answer: 1. Look at largest
bid amount
2. Look at bid price associated with that price
3. Any prices above chosen bid price are viable
, The principal-agent problem Correct Answer: would not arise if the owners of
the firm had complete information about the activities of the managers.
If face value and selling price of a bond are the same, Correct Answer: YTM is
same as coupon rate
A perpetuity pays you $200 each year forever. If the price of this perpetuity now
is $4,000, what is the yield to maturity for this loan? Correct Answer: 5%
If price of a bond is below face value, then Correct Answer: YTM is greater than
coupon rate
In the presence of principal-agent problem, equity contract is superior to debt
contract Correct Answer: False
What problem of debt contract is shown when one switches projects based off
a better payoff when project is being financed by debt? Correct Answer: Risk
Shifting
Formula for calculating price tomorrow Correct Answer: P=
C(1/i+1/i(1+i)^n+F/(1+i)^n
Sum of weights should equal... Correct Answer: 1
Financial markets have the basic function of___________ Correct Answer:
bringing together people with funds to lend and people who want to borrow
funds. B) generating liquidity
Which of the following can be described as involving direct finance? Correct
Answer: A corporation sells its stock to investors through an IPO.
Which of the following can be described as involving indirect finance? Correct
Answer: A corporation takes out loans from a bank. A pension fund manager
buys stocks from the secondary market.
