Financial Markets need done in 4 hours no extensions

Mid-Term Assessment

FIN 204

Financial Markets

25 Questions Plus 1 Extra-Credit

Total of 100 Points (each question is worth 4 points)

1. The appropriate discount rate for valuing any bond is the

a. bond's coupon rate.

b. bond's coupon rate adjusted for the expected inflation rate over the life of the bond.

c. Treasury bill rate with an adjustment to include a risk premium if one exists.

d. yield that could be earned on alternative investments with similar risk and

maturity.

2. The main provider(s) of funds to the U.S. Treasury is (are)

a. households and businesses.

b. foreign financial institutions.

c. the Federal Reserve System.

d. foreign nonfinancial sectors.

3. The appropriate discount rate for valuing any bond is the

a. bond's coupon rate.

b. bond's coupon rate adjusted for the expected inflation rate over the life of the bond.

c. Treasury bill rate with an adjustment to include a risk premium if one exists.

d. yield that could be earned on alternative investments with similar risk and

maturity.

4. You are considering the purchase of a tax-exempt security that is paying a yield of 10.08

percent. You are in the 28 percent tax bracket. To match this after-tax yield, you would

consider taxable securities that pay

a. 31.1 percent.

b. 19 percent.

c. 12.5 percent.

d. 14 percent.

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

a. favorable; higher

b. favorable; lower

c. unfavorable; lower

d. none of the above

6. Which of the following is not true with respect to the Federal Reserve Act of 1913?

a. It established reserve requirements for member commercial banks.

b. It specified fourteen districts across the United States as well as a city in each

district where a Federal Reserve district bank was to be established.

c. Each district focused on its particular district, without much concern for other

districts.

d. All of the above are true.

7. When open market operations are used to ____ bank funds, the yield on debt instruments

____.

a. reduce; decreases

b. reduce; increases

c. increase; increases

d. none of the above

8. Which of the following is an action that the Fed uses to increase or decrease the money

supply?

a. buying or selling Treasury securities in the secondary market

b. adjusting the tax rate imposed on income earned on Treasury securities

c. adjusting the coupon rate on Treasury bonds

d. selling Treasury securities in the primary market

9. Which of the following is true?

a. Federal deficits require that the Fed purchase government securities.

b. Federal deficits will always result in an increase in money supply.

c. The Federal Reserve monetizes debt by selling securities which ultimately

increases money supply.

d. An agreement between the Fed and the Treasury exists whereby the Fed is directly

responsible for monetizing the debt whenever the deficit increases.

e. None of the above.

10. A high budget deficit tends to place ____ pressure on interest rates; the Fed's tightening

of the money supply tends to place ____ pressure on interest rates.

a. upward; upward

b. upward; downward

c. downward; downward

d. downward; upward

11. If the level of inflation is expected to ____, there will be ____ pressure on interest rates

and ____ pressure on the required rate of return on bonds.

a. increase; upward; downward

b. decrease; upward; downward

c. decrease; upward; upward

d. increase; downward; upward

e. increase; upward; upward

12. Which of the following is not an indicator of inflation?

a. housing price indexes

b. wage rates

c. oil prices

d. consumer confidence surveys

13. In general, there is:

a. a positive relationship between unemployment and inflation.

b. an inverse relationship between unemployment and inflation.

c. an inverse relationship between GNP and inflation.

d. a positive relationship between GNP and unemployment.

14. (Financial calculator required.) Paul can purchase bonds with 15 years remaining until

maturity, a par value of $1,000, and a 9 percent annual coupon rate for $1,100. Paul's

yield to maturity is ____ percent.

a. 9.33

b. 7.84

c. 9.00

d. none of the above

15. The Fed can ____ the level of spending as a means of stimulating the economy by ____

the money supply.

a. increase; decreasing

b. decrease; increasing

c. decrease; decreasing

d. increase; increasing

16. When a firm sells its commercial paper at a ____ price than projected, their cost of

raising funds will be ____ than what they initially anticipated.

a. higher; higher

b. lower; lower

c. higher; lower

d. lower; higher

e. Answers C and D are correct.

17. Which of the following is true of money market instruments?

a. Their yields are highly correlated over time.

b. They typically sell for par value when they are initially issued (especially T-bills

and commercial paper).

c. Treasury bills have the highest yield.

d. They all make periodic coupon (interest) payments.

e. A and B

18. If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and

holds it to maturity, what is the annualized yield?

a. about 13.4 percent

b. about 12.5 percent

c. about 11.3 percent

d. about 11.6 percent

e. about 10.7 percent

19. A ten-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5

percent. During the first six months since the bond was issued, the inflation rate was 2

percent. Based on this information, the coupon payment after six months will be $____.

a. 250

b. 255

c. 500

d. 510

20. If interest rates suddenly ____, those existing bonds that have a call feature are ____

likely to be called.

a. decline; more

b. decline; less

c. increase; more

d. none of the above

21. Julia just purchased a $1,000 par value bond with a 10 percent annual coupon rate and a

life of twenty years. The bond has four years remaining until maturity, and the yield to

maturity is 12 percent. How much did Julia pay for the bond?

a. $1,063.40

b. $1,000

c. $939.25

d. none of the above

22. When financial institutions expect interest rates to ____, they may ____.

a. increase; sell bonds and buy short-term securities

b. increase; sell short-term securities and buy bonds

c. decrease; sell bonds and buy short-term securities

d. B and C

23. A bond with a 12 percent quarterly coupon rate has a yield to maturity of 16 percent. The

bond has a par value of $1,000 and matures in 20 years. Based on this information, a fair

price of this bond is $____.

a. 1,302

b. 763

c. 761

d. 1,299

24. The term structure of interest rates defines the relationship

a. between risk and return.

b. between risk and maturity.

c. between maturity and yield.

d. between default risk ratings and maturity.

25. A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4

years, and annual coupon payments are made at the end of each year. Present annual

yields on similar bonds are 6 percent. What should be the current price?

a. $1,069.31

b. $1,000.00

c. $9712

d. $927.66

e. none of the above

Extra Credit

26. Money market securities generally have ____. Capital market securities are typically

expected to have a ____.

a. less liquidity; higher annualized return

b. more liquidity; lower annualized return

c. less liquidity; lower annualized return

d. more liquidity; higher annualized return