Structure Of Interest Rates

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Question 1
Free
Multiple Choice

In general, securities with ____ characteristics will offer ____ yields.

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A

favorable; higher

B

favorable; lower

C

unfavorable; lower

D

none of the above

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Question 2
Free
Multiple Choice

Credit (default) risk is likely to be highest for

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A

short-term Treasury securities.

B

AAA corporate securities.

C

long-term Treasury securities.

D

BBB corporate securities.

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Question 3
Free
Multiple Choice

Some financial institutions such as commercial banks typically invest only in

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A

junk bonds

B

corporate bonds rated B or higher.

C

Treasury securities

D

investment-grade bonds.

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Question 4
Free
Multiple Choice

If a security can easily be converted to cash without a loss in value, it

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A

is liquid

B

has a high after-tax yield.

C

has high credit risk.

D

is illiquid.

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Question 5
Free
Multiple Choice

Interest rate movements across countries tend to be _________ correlated as a result of ____________ financial markets.

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A

positively; internationally integrated

B

positively; fully segmented

C

negatively; partially segmented

D

negatively; internationally integrated

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Question 6
Multiple Choice

If all other characteristics are similar, ____ would have to offer ____ .

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A
taxable securities; a higher after-tax yield than tax-exempt securities
B
taxable securities; a higher before-tax yield than tax-exempt securities
C
tax-exempt securities; a higher after-tax yield than taxable securities
D
tax-exempt securities; a higher before-tax yield than taxable securities
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Question 7
Multiple Choice

Assume an investor's tax rate is 25 percent. The before-tax yield on a security is 12 percent. What is the after-tax yield?

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A
16.00 percent
B
9.25 percent
C
9.00 percent
D
3.00 percent
E
none of the above
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Question 8
Multiple Choice

An investor's tax rate is 30 percent. What must the before-tax yield on a security be to have an after-tax yield of 11 percent?

Choose correct answer/s
A
7.7 percent
B
15.71 percent
C
130 percent
D
11.00 percent
E
none of the above
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Question 9
Multiple Choice

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

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A
7.0 percent.
B
10.8 percent.
C
20.0 percent.
D
none of the above
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Question 10
Multiple Choice

Holding other factors such as risk constant, the relationship between the maturity and the annualized yield of debt securities is called the

Choose correct answer/s
A
term structure of interest rates.
B
default structure of interest rates.
C
liquidity structure of interest rates.
D
tax structure of interest rates.
E
none of the above
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Question 11
Multiple Choice

The term structure of interest rates defines the relationship

Choose correct answer/s
A
between risk and return.
B
between risk and maturity.
C
between maturity and yield.
D
between default risk ratings and maturity.
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Question 12
Multiple Choice

If shorter-term securities have higher annualized yields than longer-term securities, the yield curve

Choose correct answer/s
A
is horizontal.
B
is upward sloping.
C
is downward sloping.
D
cannot be determined unless we know additional information (such as the level of market interest rates).
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Question 13
Multiple Choice

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

Choose correct answer/s
A
become inverted.
B
become flat.
C
become upward sloping.
D
be unaffected.
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Question 14
Multiple Choice

If issuers of securities (borrowers) and investors suddenly expect interest rates to decrease, their actions to benefit from their expectations should cause

Choose correct answer/s
A
long-term yields to rise.
B
short-term yields to decrease.
C
prices of long-term securities to decrease.
D
A and B
E
none of the above
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Question 15
Multiple Choice

Within the category of capital market securities, municipal bonds have the before-tax yield, and their after-tax yield is typically of Treasury bonds from the perspective of investors in high tax brackets.

Choose correct answer/s
A
highest; below that
B
lowest; above that
C
highest; above that
D
lowest; below that
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Question 16
Multiple Choice

The yield offered on a debt security is related to the prevailing risk-free rate and related to the security's risk premium.

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A
negatively; negatively
B
positively; positively
C
negatively; positively
D
positively; negatively
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Question 17
Multiple Choice

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

Choose correct answer/s
A
segmented markets theory.
B
liquidity premium theory.
C
pure expectations theory.
D
theory of rational expectations.
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Question 18
Multiple Choice

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 accordingto the pure expectations theory?

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A
15.08 percent
B
3.00 percent
C
12.00 percent
D
12.62 percent
E
11.41 percent
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Question 19
Multiple Choice

Assume the yield curve is flat. If investors flood the short-term market and avoid the long-term market, they may cause the yield curve to

Choose correct answer/s
A
remain flat.
B
become upward sloping.
C
become downward sloping.
D
none of the above
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Question 20
Multiple Choice

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 demandforlong-term funds issued by borrowers.

Choose correct answer/s
A
upward; upward
B
downward; downward
C
upward; downward
D
downward; upward
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