FIN 501 CHAPTERS 11, 12, 13 (LATEST UPDATE) REAL
QUESTIONS AND VERIFIED ANSWERS |100% CORRECT |
ALREADY GRADED A
The required return on a bond is equal to
A) the real rate of return plus a risk premium plus an expected inflation
premium.
B) the real rate of return plus the coupon rate plus an inflation rate.
C) the risk-free rate plus a risk premium plus an expected inflation
premium.
D) the real rate plus a risk premium. Ans✓✓✓A
The risk-free rate of return is equal to the
A) real rate plus a risk premium.
B) required return minus the inflation premium.
C) real rate plus the inflation premium.
D) required return minus the real rate. Ans✓✓✓C
Which of the following tend to raise interest rates?
I. an increase in the money supply
II. an increase in the expected rate of inflation
III. Federal Reserve actions taken to lower expected rates of inflation
IV. an increase in investing activities by businesses Ans✓✓✓II, III and
IV only
,Interest rates in the U.S. and in major foreign economies
A) are uncorrelated or very weakly correlated.
B) tend to move in opposite directions.
C) tend to move in the same direction.
D) are the same when adjusted for inflation. Ans✓✓✓C
Which of the following factors influence short-term interest rates on
government securities?
I. Federal Reserve actions
II. interest rate risk
III. expected future inflation
IV. the real rate of return Ans✓✓✓I, III and IV only
Which of the following risks are included in the risk premium?
I. interest rate risk
II. liquidity risk
III. financial risk
IV. purchasing power risk Ans✓✓✓II and III only
Which one of the following will tend to cause domestic interest rates to
rise?
A) an increase in the money supply
B) a decrease in the rate of inflation
,C) a decrease in the federal budget deficit
D) an increase in interest rates overseas Ans✓✓✓D
The single most important factor that influences the behavior of market
interest rates is
A) inflation.
B) business profits.
C) the supply of new bonds.
D) the stock market. Ans✓✓✓A
Which one of the following statements concerning interest rates is
correct?
A) A decrease in the money supply will cause interest rates to decline.
B) A federal budget surplus will cause interest rates to decline.
C) Economic expansions will cause interest rates to decline.
D) Rising interest rates in foreign countries will cause U.S. interest rates
to decline. Ans✓✓✓B
The yield curve depicts the relationship between a bond's yield to
maturity and its
A) duration.
B) term to call.
C) term to maturity.
D) volatility. Ans✓✓✓C
, An inverted yield curve
A) means that long-term bonds are yielding more than short-term bonds.
B) results when investor demand for longer maturities exceeds the
demand for shorter maturities.
C) rewards long-term investors for the additional risk they are assuming.
D) sometimes results from actions by the Federal Reserve to control
inflation. Ans✓✓✓D
The expectations hypothesis states that investors
A) require higher long-term interest rates today if they expect higher
inflation rates in the future.
B) expect higher long-term interest rates because of the lack of liquidity
for long-term bonds.
C) require the real rate of return to rise in direct proportion to the length
of time to maturity.
D) normally expect the yield curve to be downsloping. Ans✓✓✓A
According to expectations theory if the 1 year interest is 3% this year
and expected to be 5% next year, the 2 year interest rate should be
approximately
A) 8%.
B) 5%.
C) 4%.
D) 3%. Ans✓✓✓C
QUESTIONS AND VERIFIED ANSWERS |100% CORRECT |
ALREADY GRADED A
The required return on a bond is equal to
A) the real rate of return plus a risk premium plus an expected inflation
premium.
B) the real rate of return plus the coupon rate plus an inflation rate.
C) the risk-free rate plus a risk premium plus an expected inflation
premium.
D) the real rate plus a risk premium. Ans✓✓✓A
The risk-free rate of return is equal to the
A) real rate plus a risk premium.
B) required return minus the inflation premium.
C) real rate plus the inflation premium.
D) required return minus the real rate. Ans✓✓✓C
Which of the following tend to raise interest rates?
I. an increase in the money supply
II. an increase in the expected rate of inflation
III. Federal Reserve actions taken to lower expected rates of inflation
IV. an increase in investing activities by businesses Ans✓✓✓II, III and
IV only
,Interest rates in the U.S. and in major foreign economies
A) are uncorrelated or very weakly correlated.
B) tend to move in opposite directions.
C) tend to move in the same direction.
D) are the same when adjusted for inflation. Ans✓✓✓C
Which of the following factors influence short-term interest rates on
government securities?
I. Federal Reserve actions
II. interest rate risk
III. expected future inflation
IV. the real rate of return Ans✓✓✓I, III and IV only
Which of the following risks are included in the risk premium?
I. interest rate risk
II. liquidity risk
III. financial risk
IV. purchasing power risk Ans✓✓✓II and III only
Which one of the following will tend to cause domestic interest rates to
rise?
A) an increase in the money supply
B) a decrease in the rate of inflation
,C) a decrease in the federal budget deficit
D) an increase in interest rates overseas Ans✓✓✓D
The single most important factor that influences the behavior of market
interest rates is
A) inflation.
B) business profits.
C) the supply of new bonds.
D) the stock market. Ans✓✓✓A
Which one of the following statements concerning interest rates is
correct?
A) A decrease in the money supply will cause interest rates to decline.
B) A federal budget surplus will cause interest rates to decline.
C) Economic expansions will cause interest rates to decline.
D) Rising interest rates in foreign countries will cause U.S. interest rates
to decline. Ans✓✓✓B
The yield curve depicts the relationship between a bond's yield to
maturity and its
A) duration.
B) term to call.
C) term to maturity.
D) volatility. Ans✓✓✓C
, An inverted yield curve
A) means that long-term bonds are yielding more than short-term bonds.
B) results when investor demand for longer maturities exceeds the
demand for shorter maturities.
C) rewards long-term investors for the additional risk they are assuming.
D) sometimes results from actions by the Federal Reserve to control
inflation. Ans✓✓✓D
The expectations hypothesis states that investors
A) require higher long-term interest rates today if they expect higher
inflation rates in the future.
B) expect higher long-term interest rates because of the lack of liquidity
for long-term bonds.
C) require the real rate of return to rise in direct proportion to the length
of time to maturity.
D) normally expect the yield curve to be downsloping. Ans✓✓✓A
According to expectations theory if the 1 year interest is 3% this year
and expected to be 5% next year, the 2 year interest rate should be
approximately
A) 8%.
B) 5%.
C) 4%.
D) 3%. Ans✓✓✓C
