FINA 3317 COMPREHENSIVE ANSWERS AND
QUESTIONS SET A+
✔✔Which are capital-market instruments?
A. 10-year corporate bonds
B. 20-year Treasury bonds
C. 15-year U.S. agency bonds
D. 30-year mortgages
E. all of these - ✔✔All of these choices are correct.
Capital-market instruments have original maturities longer than one year and include
long-term bonds, mortgages, and equity.
✔✔Commercial paper is a:
A. bank-guaranteed time draft to a seller
B. overnight interbank fund transfer
C. real-estate loan
D. short-term unsecured promissory note issued by a company
E. marketable bank-issued time deposit - ✔✔A short-term unsecured promissory note
issued by a company.
Commercial paper is a short-term corporate borrowing instrument, usually unsecured
and often issued at a discount.
✔✔A negotiable CD is a:
A. short-term corporate promissory note
B. overnight interbank fund transfer
C. bank-guaranteed trade draft
D. marketable bank-issued time deposit with a stated rate and maturity
E. real-estate loan - ✔✔A marketable bank-issued time deposit that specifies the
interest rate earned and a fixed maturity date.
,CDs are bank deposits with a committed maturity and stated return.
✔✔Financial intermediaries' ability to reduce the average cost of collecting information
because of efficient operations allows them to take advantage of:
A. economies of scope
B. economies of scale
C. standardization
D. transformational trading
E. asset transformation - ✔✔Economies of scale.
Fixed information and operating costs can be spread over a larger volume of
transactions and customers.
✔✔The real risk-free rate is the increment to purchasing power that the lender earns to
induce them to forego current consumption.
True
False - ✔✔True.
The real rate measures the increase in purchasing power after accounting for inflation.
✔✔Earning 0.5% per month in a bank account is the same as earning a 6% annual
interest rate with annual compounding.
True
False - ✔✔False.
Monthly compounding earns interest on prior interest, so 0.5% per month produces an
effective annual rate greater than 6%.
✔✔Simple-interest calculations assume that interest earned is never reinvested.
True
False - ✔✔True.
Simple interest is calculated only on principal; accumulated interest does not itself earn
interest.
✔✔An investor earned a 5% nominal risk-free rate while prices rose 2%. The investor's
real risk-free rate was less than the nominal rate.
True
False - ✔✔True.
, Approximate real rate = 5% - 2% = 3%; exact real rate = 1.05/1.02 - 1 ≈ 2.94%.
✔✔Earning 5% with annual compounding is better than earning 4.95% with semiannual
compounding.
True
False - ✔✔False.
4.95% compounded semiannually has an effective annual return of about 5.0113%,
slightly above 5%.
✔✔For any positive interest rate, the PV of a given annuity is less than the sum of its
cash flows, and the FV is greater than the sum of its cash flows.
True
False - ✔✔True.
Positive rates discount future cash flows below their undiscounted sum and compound
them to a future value above that sum.
✔✔With a zero interest rate, both the PV and FV of an N-payment annuity equal N ×
payment.
True
False - ✔✔True.
With i=0, there is no discounting or compounding, so both values equal the simple sum
of all payments.
✔✔All else equal, households generally supply more funds to markets as their income
and wealth increase.
True
False - ✔✔True.
Higher income and wealth generally increase households' ability to save and supply
loanable funds.
✔✔An increase in the perceived riskiness of investments would cause a movement up
along the supply curve.
True
False - ✔✔False.
QUESTIONS SET A+
✔✔Which are capital-market instruments?
A. 10-year corporate bonds
B. 20-year Treasury bonds
C. 15-year U.S. agency bonds
D. 30-year mortgages
E. all of these - ✔✔All of these choices are correct.
Capital-market instruments have original maturities longer than one year and include
long-term bonds, mortgages, and equity.
✔✔Commercial paper is a:
A. bank-guaranteed time draft to a seller
B. overnight interbank fund transfer
C. real-estate loan
D. short-term unsecured promissory note issued by a company
E. marketable bank-issued time deposit - ✔✔A short-term unsecured promissory note
issued by a company.
Commercial paper is a short-term corporate borrowing instrument, usually unsecured
and often issued at a discount.
✔✔A negotiable CD is a:
A. short-term corporate promissory note
B. overnight interbank fund transfer
C. bank-guaranteed trade draft
D. marketable bank-issued time deposit with a stated rate and maturity
E. real-estate loan - ✔✔A marketable bank-issued time deposit that specifies the
interest rate earned and a fixed maturity date.
,CDs are bank deposits with a committed maturity and stated return.
✔✔Financial intermediaries' ability to reduce the average cost of collecting information
because of efficient operations allows them to take advantage of:
A. economies of scope
B. economies of scale
C. standardization
D. transformational trading
E. asset transformation - ✔✔Economies of scale.
Fixed information and operating costs can be spread over a larger volume of
transactions and customers.
✔✔The real risk-free rate is the increment to purchasing power that the lender earns to
induce them to forego current consumption.
True
False - ✔✔True.
The real rate measures the increase in purchasing power after accounting for inflation.
✔✔Earning 0.5% per month in a bank account is the same as earning a 6% annual
interest rate with annual compounding.
True
False - ✔✔False.
Monthly compounding earns interest on prior interest, so 0.5% per month produces an
effective annual rate greater than 6%.
✔✔Simple-interest calculations assume that interest earned is never reinvested.
True
False - ✔✔True.
Simple interest is calculated only on principal; accumulated interest does not itself earn
interest.
✔✔An investor earned a 5% nominal risk-free rate while prices rose 2%. The investor's
real risk-free rate was less than the nominal rate.
True
False - ✔✔True.
, Approximate real rate = 5% - 2% = 3%; exact real rate = 1.05/1.02 - 1 ≈ 2.94%.
✔✔Earning 5% with annual compounding is better than earning 4.95% with semiannual
compounding.
True
False - ✔✔False.
4.95% compounded semiannually has an effective annual return of about 5.0113%,
slightly above 5%.
✔✔For any positive interest rate, the PV of a given annuity is less than the sum of its
cash flows, and the FV is greater than the sum of its cash flows.
True
False - ✔✔True.
Positive rates discount future cash flows below their undiscounted sum and compound
them to a future value above that sum.
✔✔With a zero interest rate, both the PV and FV of an N-payment annuity equal N ×
payment.
True
False - ✔✔True.
With i=0, there is no discounting or compounding, so both values equal the simple sum
of all payments.
✔✔All else equal, households generally supply more funds to markets as their income
and wealth increase.
True
False - ✔✔True.
Higher income and wealth generally increase households' ability to save and supply
loanable funds.
✔✔An increase in the perceived riskiness of investments would cause a movement up
along the supply curve.
True
False - ✔✔False.
