FIN 201 Exam Chapter 3 with all Correct & 100% Verified
Answers |Actual Complete Update |Already Graded A+
In general, securities with ____ characteristics will offer ____ yields. ✔Correct Answer-
favorable; lower
Credit (default) risk is likely to be highest for: ✔Correct Answer-BBB corporate securities
Some financial institutions such as commercial banks typically invest only in: ✔Correct
Answer-investment-grade bonds
If a security can easily be converted to cash without a loss in value, it ✔Correct Answer-is
liquid.
Interest rate movements across countries tend to be _________ correlated as a result of
____________ financial markets. ✔Correct Answer-positively; internationally integrated
If all other characteristics are similar, ____ would have to offer ____. ✔Correct Answer-
taxable securities; a higher before-tax yield than tax-exempt securities
According to the segmented markets theory, if most investors suddenly preferred to invest in
long-term securities and most borrowers suddenly preferred to issue short-term securities,
there would be ✔Correct Answer-downward pressure on the yield of long-term securities.
A firm in the 35 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7
percent. To match this yield, taxable securities must offer a before-tax yield of: ✔Correct
Answer-10.8 percent
Holding other factors such as risk constant, the relationship between the maturity and the
annualized yield of debt securities is called the: ✔Correct Answer-term structure of interest
rates
If shorter-term securities have higher annualized yields than longer-term securities, the yield
curve ✔Correct Answer-is downward sloping.
Assume that annualized yields of short-term and long-term securities are equal. If investors
suddenly believe interest rates will increase, their actions may cause the yield curve to
✔Correct Answer-become upward sloping.
If issuers of securities (borrowers) and investors suddenly expect interest rates to decrease,
their actions to benefit from their expectations should cause ✔Correct Answer-None of these
are correct.
, The yield offered on a debt security is related to the prevailing risk-free rate and related to the
security's risk premium. ✔Correct Answer-positively; positively
The theory for the term structure of interest rates that says the shape of the yield curve is
determined solely by expectations of future interest rates is called the ✔Correct Answer-pure
expectations theory.
Assume investors are indifferent among security maturities. Today, the annualized 2-year
interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate
according to the pure expectations theory? ✔Correct Answer-15.08 percent
According to pure expectations theory, if interest rates are expected to decrease, there will be
____ pressure on the demand for short-term funds by borrowers and ____ pressure on the
demand for long-term funds issued by borrowers. ✔Correct Answer-upward; downward
The degree to which the Treasury's debt management policy could affect the term structure of
interest rates is greatest if ✔Correct Answer-maturity markets are segmented.
According to the pure expectations theory of the term structure of interest rates, the ____ the
difference between the implied one-year forward rate and today's one-year interest rate, the
____ is the expected change in the one-year interest rate. ✔Correct Answer-greater; greater
AND less; less
Assume that a yield curve is influenced by interest rate expectations and a liquidity premium.
Assume the yield curve is initially flat. If liquidity suddenly was no longer important, the yield
curve would now have a ____ (assuming no other changes). ✔Correct Answer-slight
downward slope
According to the liquidity premium theory, the expected yield on a two-year security will ____
the expected yield from consecutive investments in one-year securities. ✔Correct Answer-be
greater than
Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-
year security is 7 percent. If the liquidity premium on a two-year security is 0.4 percent, then
the one-year forward rate is ✔Correct Answer-7.6 percent.
If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting
____ in interest rates. ✔Correct Answer-a slight decrease
The theory of the term structure of interest rates, which states that investors and borrowers
choose securities with maturities that satisfy their forecasted cash needs, is the ✔Correct
Answer-segmented markets theory.
Answers |Actual Complete Update |Already Graded A+
In general, securities with ____ characteristics will offer ____ yields. ✔Correct Answer-
favorable; lower
Credit (default) risk is likely to be highest for: ✔Correct Answer-BBB corporate securities
Some financial institutions such as commercial banks typically invest only in: ✔Correct
Answer-investment-grade bonds
If a security can easily be converted to cash without a loss in value, it ✔Correct Answer-is
liquid.
Interest rate movements across countries tend to be _________ correlated as a result of
____________ financial markets. ✔Correct Answer-positively; internationally integrated
If all other characteristics are similar, ____ would have to offer ____. ✔Correct Answer-
taxable securities; a higher before-tax yield than tax-exempt securities
According to the segmented markets theory, if most investors suddenly preferred to invest in
long-term securities and most borrowers suddenly preferred to issue short-term securities,
there would be ✔Correct Answer-downward pressure on the yield of long-term securities.
A firm in the 35 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7
percent. To match this yield, taxable securities must offer a before-tax yield of: ✔Correct
Answer-10.8 percent
Holding other factors such as risk constant, the relationship between the maturity and the
annualized yield of debt securities is called the: ✔Correct Answer-term structure of interest
rates
If shorter-term securities have higher annualized yields than longer-term securities, the yield
curve ✔Correct Answer-is downward sloping.
Assume that annualized yields of short-term and long-term securities are equal. If investors
suddenly believe interest rates will increase, their actions may cause the yield curve to
✔Correct Answer-become upward sloping.
If issuers of securities (borrowers) and investors suddenly expect interest rates to decrease,
their actions to benefit from their expectations should cause ✔Correct Answer-None of these
are correct.
, The yield offered on a debt security is related to the prevailing risk-free rate and related to the
security's risk premium. ✔Correct Answer-positively; positively
The theory for the term structure of interest rates that says the shape of the yield curve is
determined solely by expectations of future interest rates is called the ✔Correct Answer-pure
expectations theory.
Assume investors are indifferent among security maturities. Today, the annualized 2-year
interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate
according to the pure expectations theory? ✔Correct Answer-15.08 percent
According to pure expectations theory, if interest rates are expected to decrease, there will be
____ pressure on the demand for short-term funds by borrowers and ____ pressure on the
demand for long-term funds issued by borrowers. ✔Correct Answer-upward; downward
The degree to which the Treasury's debt management policy could affect the term structure of
interest rates is greatest if ✔Correct Answer-maturity markets are segmented.
According to the pure expectations theory of the term structure of interest rates, the ____ the
difference between the implied one-year forward rate and today's one-year interest rate, the
____ is the expected change in the one-year interest rate. ✔Correct Answer-greater; greater
AND less; less
Assume that a yield curve is influenced by interest rate expectations and a liquidity premium.
Assume the yield curve is initially flat. If liquidity suddenly was no longer important, the yield
curve would now have a ____ (assuming no other changes). ✔Correct Answer-slight
downward slope
According to the liquidity premium theory, the expected yield on a two-year security will ____
the expected yield from consecutive investments in one-year securities. ✔Correct Answer-be
greater than
Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-
year security is 7 percent. If the liquidity premium on a two-year security is 0.4 percent, then
the one-year forward rate is ✔Correct Answer-7.6 percent.
If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting
____ in interest rates. ✔Correct Answer-a slight decrease
The theory of the term structure of interest rates, which states that investors and borrowers
choose securities with maturities that satisfy their forecasted cash needs, is the ✔Correct
Answer-segmented markets theory.
