Fin 385 Quiz 3

Question 11 pts

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

	be unaffected.
	become upward sloping.

	become inverted.
	become flat.

 

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Question 21 pts

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

	negatively; positively
	negatively; negatively

	positively; negatively
	positively; positively

 

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Question 31 pts

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 according to the pure expectations theory?

	11.41 percent
	12.62 percent

	3.00 percent
	15.08 percent

12.00 percent

 

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Question 41 pts

Assume that a yield curve is influenced by interest rate expectations and a liquidity premium. Assume the yield curve is initially flat. If liquidity suddenly was no longer important, the yield curve would now have a ____ (assuming no other changes).

	slight downward slope
	steep downward slope

	slight upward slope
	steep upward slope

 

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Question 51 pts

Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-year security is 7 percent. If the liquidity premium on a two-year security is 0.4 percent, then the one-year forward rate is

	3.0 percent.
	7.0 percent.

	8.0 percent.
	7.6 percent.

 

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Question 61 pts

If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting ____ in interest rates.

	a large increase
	a slight increase

	a slight decrease
	no changes

 

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Question 71 pts Skip to question text.

Assume that the Treasury bond yield today is 2% higher than it was one year ago. Also assume that the credit (default) risk premium of an A-rated bond declined by 0.4% since one year ago. A newly issued A-rated bond will likely offer a yield today that is ____ the yield that was offered on an A-rated bond issued one year ago.

	greater than
	equal to

	less than
	A or B are both common

 

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Question 81 pts

Securities that offer ____ liquidity will offer a ____ yield to be preferred.

	lower; higher
	B and C

	lower; lower
	higher; higher

 

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Question 91 pts

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

	taxable securities; a higher after-tax yield than tax-exempt securities
	tax-exempt securities; a higher before-tax yield than taxable securities

	tax-exempt securities; a higher after-tax yield than taxable securities
	taxable securities; a higher before-tax yield than tax-exempt securities

 

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Question 101 pts

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?

	7.7 percent
	none of the above

	15.71 percent
	130 percent

11.00 percent