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Q:
Explain the difference between the term structure of interest rates and the yield curve.
Q:
The risks that cause uncertainty about the return over some investment horizon are:a. The uncertainty about the price of a bond at the end of the investment horizon.b. The uncertainty about the rate at which the proceeds from a bond that matures prior to the maturity date can be reinvested until the maturity date.c. The uncertainty about the movement of equity prices relative to debt instruments.d. a and b only.e. All of the above.
Q:
Treasury securities are free of:a. Price risk.b. Default risk.c. Reinvestment risk.d. Yield variations.e. None of the above.
Q:
When the yield declines as maturity increases, the yield curve is said to be:a. Inverted.b. Downward sloping.c. Positive.d. Negative.e. a, b, and d only.
Q:
When the yield rises steadily as the maturity increases, the yield curve is said to be:a. Positive.b. Upward sloping.c. Normal.d. All of the above.e. None of the above.
Q:
Market participants tend to construct yield curves from observations of prices and yields in the:a. Bond market.b. Treasury market.c. Agency securities market.d. Money market.e. None of the above.
Q:
The market segmentation theory recognizes that investors have preferred habitats, which are dictated by:a. Saving flows.b. Investment flows.c. Cash flows.d. a and b only.e. All of the above.
Q:
The theory which adopts the view that the term structure reflects the future path of interest rates as well as a risk premium is the:a. The liquidity theory.b. The pure expectations theory.c. The preferred habitat theory.d. The market segmentation theory.e. None of the above.
Q:
According to the liquidity theory of the term structure, the forward rate should reflect both interest rate expectations and:a.a. A liquidity premium.a. A liquidity premium.b. A risk premium.c. A maturity premium.d. A marketability premium.e. None of the above.
Q:
If an investor has a six-month investment horizon, buying a 5-year, 10-year, or 20-year bond will produce the same six-month return. This interpretation of the pure expectations theory is referred to as the:a. Return-to-maturity expectation.b. Local expectations.c. Broadest interpretation.d. Liquidity theory.e. None of the above.
Q:
The risk associated with a bond whose proceeds are reinvested at an unknown rate is referred to as:a. Reinvestment rate risk.b. Interest rate risk.c. Price risk.d. Default risk.e. None of the above.
Q:
Price risk of a bond occurs when a bond must be sold prior to maturity at an uncertain price because the:a. Yield is determined by the Federal Reserve.b. Future return or yield is unknown.c. Future yield is expected to be less than the coupon rate.d. b and c only.e. None of the above.
Q:
Forward rates exclusively represent the expected future rates according to the:a. Market segmentation theory.b. Pure expectations theory.c. The liquidity theory.d. The preferred habitat theory.e. None of the above.
Q:
The shape of the yield curve can be explained by:a. The expectations theory.b. The liquidity theory.c. The preferred habitat theory.d. The market segmentation theory.e. All of the above.
Q:
Forward rates are also referred to as:a. Futures rates.b. Hedgeable rates.c. Implicit rates.d. Future oriented rates.e. None of the above.
Q:
The two elements of a forward rate are:a. The length of time for the rate.b. The implicit rate.c. When in the future the rate begins.d. a and c only.e. a and b only.
Q:
A future interest rate calculated from either the spot rates or the yield curve is called:a. An implicit forward rate.b. A forward rate.c. A theoretical future rate.d. a and b only.e. All of the above.
Q:
The current Treasury yield curve can be used to extrapolate the:a. Theoretical spot rates.b. The market's consensus of future interest rates.c. Discount rate.d. a and b only.e. All of the above.
Q:
Using spot rates, the theoretical value of a bond is calculated:a. As the present value of all expected future cash flows.b. By discounting a cash flow for a given period by the corresponding spot rate for that period.c. By discounting all future cash flows at the riskfree rate.d. By compounding all expected future cash flows.e. None of the above.
Q:
The graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities is known as:a. The yield curve.b. The term to maturity.c. The term structure of interest rates.d. The yield spread.e. None of the above.
Q:
The relationship between yield and maturity is referred to as:a. Yield curve.b. Term structure of interest rates.c. Term to maturity.d. Yield spread.e. None of the above.
Q:
Explain why the price/yield relationship of an option-free bond is convex.
Q:
Discuss the factors that cause the price of a bond to change.
Q:
Explain the difference between reinvestment risk and interest rate risk.
Q:
For all option-free bonds, the approximate percentage price change that is not explained by duration will have a:a. Positive value.b. Negative value.c. Unchanged value.d. Changed value.e. None of the above.
Q:
The convexity measure of a security refers to:a. Price volatility that relates maturity and coupon.b. The approximate change in price that is not explained by duration.*c. The shape of the price/yield relationship.d. The approximate percentage price change of a bond for a 100 basis point change in interest rates.e. None of the above.
Q:
Dollar duration of a bond measures the:a. Dollar price change.b. Percentage price change.c. Average price change.d. Change in yield.e. None of the above.
Q:
Which of the following statements about duration is most correct?a. Duration for a coupon bond is greater than its maturity.b. For a zero-coupon bond, the duration is equal to its maturity.c. For bonds with the same maturity and selling at the same yield, the lower the coupon rate, the greater a bond's duration and volatility.d. For bonds with the same coupon rate and selling at the same yield, the longer the maturity, the larger the duration and price sensitivity.e. b, c, and d only.
Q:
A measure of price volatility that relates to coupon and maturity is:a. Duration.b. Convexity.c. Yield spread.d. Yield to maturity.e. None of the above.
Q:
Which of the following statements is false?a. For a given yield and coupon rate, the longer the maturity, the greater the price volatility.b. Fore a given yield and maturity, price volatility is greater, the higher the coupon rate.c. A bond's price volatility is affected by its maturity and coupon rate.d. There is an inverse relationship between the price and yield of a bond.e. None of the above.
Q:
The relationship between price and yield for any option-free bond is:a. Linear.b. Convex.c. Concave.d. Curvilinear.e. None of the above.
Q:
If a bond will have to be sold at a loss, it is said to have:a. Reinvestment risk.b. Interest rate risk.c. Price risk.d. a and c only.e. b and b only.
Q:
A bond investor will realize the yield to maturity at the time of purchase only if:a. The bond is held to maturity.b. All coupon payments are reinvested at the yield to maturity.c. The bond is sold prior to maturity. d. a and b only.e. All of the above.
Q:
The yield to maturity takes into account:a. The coupon income.b. Any cash dividends.c. Any capital gains or losses.d. a and c only.e. All of the above.
Q:
If the market price of a bond is less than the par value, then the coupon rate is:a. Less than the par yield.b. Greater than the required yield to maturity.c. Equal to the market interest rate.d. Below the riskless rate.e. None of the above.
Q:
If the Treasury rates does not change, but the yield spread between Treasury and non-Treasury securities changes, the price of a non-Treasury security will:a. Increase.b. Decrease.c. Change.d. Remain unchanged.e. None of the above.
Q:
Which of the following statements is most correct?a. The price of a bond will approach its par value as it moves toward its maturity.b. Over time, the price of a discount bond will rise if interest rate do not change.c. The price of a bond will rise if the perceived credit quality of the issuer deteriorates.d. a and b only.e. All of the above.
Q:
The value of a bond depends on:a. The issuer.b. The coupon rate.c. The maturity of the bond.d. Market interest rates.e. b, c, and d only.
Q:
If interest rates in the economy increase because of Fed policy, the price of a bond will:a. Increase.b. Decrease.c. Remain unchanged.d. Change.e. None of the above.
Q:
The yield to maturity is the discount rate that makes the present value of the cash flows of a bond equal to its:a. Par value.b. Redeemable value.c. Market value.d. Coupon rate.e. None of the above.
Q:
The price of a debt instrument must equal the sum of the:a. Present value of the payments that the debtor is required to make until maturity.b. Present value of all expected cash dividends.c. Present value of the maturity value.d. Future value of all expected future cash flows.e. None of the above.
Q:
Debt contracts with no periodic interest payments made to owners during the life of the contract are called:a. Fixed income bonds.b. Straight coupon bonds.c. Zero coupon bonds.d. Perpetual bonds.e. Discount bonds.
Q:
When the entire principal can be repaid at the maturity date, the debt contract is said to have a:a. Maturity.b. Bullet maturity.c. Par value.d. Face value.e. None of the above.
Q:
The rate earned on federal government debt instruments is usually characterized as the:a. Nominal rate.b. Riskless rate.c. Real rate of interest.d. Gross rate.e. None of the above.
Q:
Discuss the factors that affect the yield spread between a non-Treasury security and a Treasury security with the same maturity.
Q:
What is meant by Pareto optimality.
Q:
Explain Fisher's Law.
Q:
Which of the following statements is most correct?a. Municipalities are not permitted to tax the interest income from securities issued by the U.S. Treasury.b. Municipal bonds are securities issued by the U.S. Treasury.c. The equivalent taxable yield is the before-tax yield on Treasury securities.d. The yield on municipal bonds is more than that on Treasuries with the same maturity.e. None of the above.
Q:
A provision in a bond issue that grants the issuer the right to retire the debt, fully or partially, before the scheduled maturity date is called:a. A tax provision.b. A call provision.c. A put provision.d. A conversion provision.e. None of the above.
Q:
The term structure of interest rates is the relationship between the yields on comparable securities but different:a. Spreads.b. Maturities.c. Credit ratings.d. Provisions.e. None of the above.
Q:
The spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality is referred to as:a. Risk premium.b. Quality spread.c. Income spread.d. Credit spread.e. b and d only.
Q:
Investment-grade bonds are bond issues that are assigned a rating:a. In the top four rating categories.b. Below the top four rating categories.c. Of zero.d. Junk.e. None of the above.
Q:
The risk that the issuer of a bond may not be able to make timely interest and principal payments is called:a. Credit risk.b. Default risk.c. Market risk.d. a and b only.e. All of the above.
Q:
Within the corporate market sector, issuers are classified as:a. Utilities.b. Industrials.c. Finance.d. Banks.e. All of the above.
Q:
The factors that affect the yield spread between a non-Treasury security and a comparable Treasury security are:a. The type of issuer.b. The issuer's perceived creditworthiness.c. The maturity of the instrument.d. The expected liquidity of the issue.e. All of the above.
Q:
The yield spread between a non-Treasury security and a Treasury security of comparable maturity is called a:a. Risk premium.b. Treasury spread.c. Income spread.d. Government option spread.e. None of the above.
Q:
The minimum yield sought on an investment as measured by the yield on an on-the-run Treasury security with comparable maturity is referred to as the:a. Base interest rate.b. Benchmark interest rate.c. Bond-equivalent interest rate.d. a and b only.e. B and c only.
Q:
According to Fisher's Law, the nominal gross rate is equal to:a. The product of the gross real rate and one plus the inflation rate.b. The sum of the gross real rate and the inflation rate.c. The difference between the real gross rate and the inflation rate.d. a and b only.e. None of the above.
Q:
If it is not possible to reallocate inputs and outputs in such a way that some will be better off while nobody will lose, this property is referred to by economists as:a. Non-Pareto optimal.b. Pareto optimal.c. Efficient.d. Inefficient.e. None of the above.
Q:
The market-clearing interest rate is found:a. At the intersection of the saving and investment function.b. At the intersection of supply and demand.c. At the point where borrowing and saving take place.d. At the point where the transformation curve has a slope equal to R.e. None of the above.
Q:
A most important property resulting from the existence of a perfect loan market is that:a. It separates the current consumption decision from the current income position by opening the possibility to save and dissave.b. It frees the investment from the saving decision.c. a and b only.d. Borrowing and lending rates are equal.e. All of the above.
Q:
The optimum rate of investment for a firm is found at the point where:a. The marginal productivity of capital equals the market gross rate.b. The supply of capital equals the demand for capital.c. Total investment equals total savings.d. The firm's indifference curve is just tangent to the market line.e. None of the above.
Q:
The consumer has several decisions to make regarding:a. How much to invest.b. How much to lend.c. How much to consume now and later.d. a and b only.e. All of the above.
Q:
The transformation curve or production function:a. Rises from the left to the right.b. Assumes that the more is invested, the more will be the resulting future output.c. Assumes decreasing returns to scale.d. Has a slope, which measures the marginal productivity of capital.e. All of the above.
Q:
A large endowment of the current commodity relative to the future will make people:a. More eager to lend.b. Raise the supply curve for loans.c. Reduce R.d. All of the above.e. a and b only.
Q:
The marginal rate of substitution between current and future consumption is the slope of the:a. Security market line.b. Capital market line.c. Indifference curve.d. Efficient frontier.e. None of the above.
Q:
The rate that would prevail in the economy if price levels remain constant is referred to as the:a. Real rate.b. Short-term interest rate.c. Nominal rate.d. Effective rate.e. None of the above.
Q:
A FLEX option is a contract whereby the terms of the contract can be customized with respect to:a. Strike price.b. Expiration date.c. Settlement style.d. Underlying instrument.e. All of the above.
Q:
The exercise provision of the S&P 100 index option is that:a. It cannot be exercised until expiration.b. It can be exercised any time up to and including the expiration date.c. It cannot be exercised early.d. a and c only.e. None of the above.
Q:
The value of a stock index option is equal to:a. The index value multiplied by $100.b. The index value multiplied by the number of shares purchased.c. The index value multiplied by the contract multiple.d. The share price divided by the index value.e. None of the above.
Q:
To settle a stock index option, the exchange-assigned option writer:a. Delivers all the stocks that make up the index.b. Pays cash to the option buyer.*c. Takes an offsetting position.d. Lets the option expire worthless.e. None of the above.
Q:
A contract's open interest is used to measure:a. The level of trading volume.b. The liquidity of a contract.c. The number of contracts that have been entered into but not yet liquidated.d. b and c only.e. All of the above.
Q:
Stock index options are regulated by:a. The Commodity Futures Trading Commission. b. The Securities and Exchange Commission.c. Stock index options are self-regulated.d. The clearinghouse.e. None of the above.
Q:
Options written on a stock index include:a. Stock index options.b. Stock index futures.c. Equity swaps.d. Equity options.e. None of the above.
Q:
Explain what an equity swap is and how it can be used.
Q:
What is the role of stock index options and futures in financial markets?
Q:
Explain the investment features of stock index options and futures.
Q:
Which of the following statements is false?a. Index-related trading has increase stock price volatility.b. The stock index options market has become the price discovery market.c. Evidence suggests that index-related trading was responsible for Black Monday.d. b and c only.e. None of the above.
Q:
When counterparties agree to exchange the return on some stock index for an interest rate, the arrangement is called:a. Equity swap.b. Interest rate swap.c. Currency swap.d. Credit swap.e. None of the above.
Q:
A strategy that seeks to enhance returns as a result of the mispricing of the futures contract relative to the cash index is known as:a. Program trading.b. Index arbitrage.c. Dynamic hedging.d. Riskless investing.e. None of the above.