Davidson; Management - 3rd Australasian Edition



1.
Which of the following statements about bonds is not true?
A.
The greater the default risk, the greater the yield.
B.
Bonds selling at premium are especially high quality.
C.
The less marketable a bond, the higher the yield.
D.
Municipal bonds have lower yields than similar corporate bonds.


2.
Which of the following statements is true?
A.
Interest rates move inversely with economic activity.
B.
Default risk premiums vary inversely with economic activity.
C.
Municipal bond yields are usually higher than similar risk corporate yields.
D.
Treasury bond yields are always higher than Treasury bill yields.


3.
A bond investor is more likely to exercise a put option in a bond contract if
A.
interest rates increase.
B.
interest rates decrease.
C.
the default risk of a bond decreases.
D.
tax-free municipals are now available.


4.
The term structure of interest rates
A.
describes the relationship between maturity and yield for similar securities.
B.
ranks security yield according to the default risk structure.
C.
describes how interest rates vary over time.
D.
describes the pattern of interest rates over the business cycle.


5.
The yield curve is a plot of
A.
maturity changes as risk changes.
B.
yields by varied risk-taking of varied bond issuers.
C.
yields by maturity of securities with similar default risk.
D.
interest rates over time past.


6.
An upward sloping yield curve indicates that security investors expect future interest rates to _____ and security prices to ______.
A.
fall; fall.
B.
fall; rise.
C.
rise; fall.
D.
rise; rise.


7.
A downward sloping yield curve indicates that future short-term rates are expected to ______ and outstanding security prices will _______.
A.
fall; rise.
B.
fall; fall.
C.
rise; rise.
D.
rise; fall.


8.
According to the expectation theory of the term structure of interest rates
A.
investors prefer holding short-term securities.
B.
the shape of the yield curve is determined by investors' expectations of future short-term interest rates.
C.
institutional investors' maturity preferences determine the shape of the yield curve.
D.
both a and b are true.


9.
Calculate the one-year forward rate three years from now if three- and four-year rates are 5.50% and 5.80%, respectively?
A.
The rate cannot be calculated from the information above.
B.
6.2%
C.
6.7%
D.
5.6%


10.
Default risk premiums vary _______ with the ________ of the security?
A.
directly; default risk
B.
inversely; default risk
C.
similar; price
D.
forward; size


11.
Bonds are called speculative grade or junk bond if their Moody's and Standard & Poor's rating is
A.
above Baa (BBB).
B.
Baa (BBB) and below.
C.
B1 (B+) and below.
D.
A1 (A+) and below


12.
Which of the following statements about interest rates is true?
A.
Interest rates generally tend to move together.
B.
The expected rate of inflation influences the level of interest rates.
C.
At the bottom of the business cycle, the yield curve is typically upward sloping.
D.
all the above are true


13.
Bond A is not callable; bond B is callable. Investors will want a higher yield on bond __ and will pay ____ for the bond.
A.
A; less
B.
A; more
C.
B; less
D.
B; more


14.
Yield differences between two securities may be explained by differences in
A.
maturity.
B.
default risk.
C.
marketability.
D.
call provision.
E.
all of the above


15.
The liquidity premium theory of the term structure of interest rates is best supported by what type of yield curve?
A.
a decreasing curve over time.
B.
a flat yield curve.
C.
an increasing yield curve over time.
D.
none of the above.


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