FINANCE 301 PSU EXAM 3 QUESTIONS
AND ANSWERS. VERIFIED 2025/2026.
What is a stock market index? - ANS A measure of market performance.
What are some of the most regularly quoted stock market indices? - ANS American Dow
Jones Industrial Average, S&P 500, the NASDAQ Composite, etc...
Who issues treasury bills? What is their risk? - ANS The U.S government. They are as safe as
an investment you can make.
Long-term treasury bonds are certain... - ANS To be repaid when they mature, but the prices
of these securities fluctuate more as interest rate changes.
When interest rates fall the value of long term treasury bonds securities... - ANS Rise. Making
interest rates and long term treasury bond securities an inverse relationship.
Common Stocks compared to Treasury securities? - ANS Riskier, but have historically offered
much greater returns.
What is the yield curve? - ANS A graph of the relationship between time to maturity and yield
to maturity.
What is the real risk-free rate of interest? - ANS The interest rate that would exist for a
security with no risk, if no inflation were expected.
1 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
, What is the nominal risk-free rate? - ANS The real risk-free rate + a premium for expected
inflation.
What is an inflation premium? - ANS A premium that investors build into the interest rate to
compensate for inflation.
What is a default risk premium? - ANS A premium that investors build into the interest rate to
compensate for the risk that a borrower will default.
What is a liquidity premium? - ANS A premium that investors build into the interest rate to
compensate for the lack of an investment's liquidity.
What is a maturity risk premium? - ANS A premium investors build into the interest rate to
compensate for the possible decline in a long-term bond's price.
When interest rates rise... - ANS The price of long-term bonds decline.
On short-term U.S Treasury securities... - ANS Only the inflation premium would be included
in the interest rate.
On long-term U.S Treasury securities... - ANS The inflation premium and a maturity risk
premium would be included in the interest rate.
On short-term corporate securities... - ANS Only the inflation premium and default risk
premium would be included in the interest rate.
On long-term corporate securities... - ANS The inflation premium, default risk premium and
the maturity risk premium would be included in the interest rate, assuming that an active
market exists where the securities could be easily liquidated.
2 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
AND ANSWERS. VERIFIED 2025/2026.
What is a stock market index? - ANS A measure of market performance.
What are some of the most regularly quoted stock market indices? - ANS American Dow
Jones Industrial Average, S&P 500, the NASDAQ Composite, etc...
Who issues treasury bills? What is their risk? - ANS The U.S government. They are as safe as
an investment you can make.
Long-term treasury bonds are certain... - ANS To be repaid when they mature, but the prices
of these securities fluctuate more as interest rate changes.
When interest rates fall the value of long term treasury bonds securities... - ANS Rise. Making
interest rates and long term treasury bond securities an inverse relationship.
Common Stocks compared to Treasury securities? - ANS Riskier, but have historically offered
much greater returns.
What is the yield curve? - ANS A graph of the relationship between time to maturity and yield
to maturity.
What is the real risk-free rate of interest? - ANS The interest rate that would exist for a
security with no risk, if no inflation were expected.
1 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
, What is the nominal risk-free rate? - ANS The real risk-free rate + a premium for expected
inflation.
What is an inflation premium? - ANS A premium that investors build into the interest rate to
compensate for inflation.
What is a default risk premium? - ANS A premium that investors build into the interest rate to
compensate for the risk that a borrower will default.
What is a liquidity premium? - ANS A premium that investors build into the interest rate to
compensate for the lack of an investment's liquidity.
What is a maturity risk premium? - ANS A premium investors build into the interest rate to
compensate for the possible decline in a long-term bond's price.
When interest rates rise... - ANS The price of long-term bonds decline.
On short-term U.S Treasury securities... - ANS Only the inflation premium would be included
in the interest rate.
On long-term U.S Treasury securities... - ANS The inflation premium and a maturity risk
premium would be included in the interest rate.
On short-term corporate securities... - ANS Only the inflation premium and default risk
premium would be included in the interest rate.
On long-term corporate securities... - ANS The inflation premium, default risk premium and
the maturity risk premium would be included in the interest rate, assuming that an active
market exists where the securities could be easily liquidated.
2 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
