FIN 350 Week 3 Quiz – Strayer
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Quiz 2 Chapter 3 and 4
Chapter
3—Structure of Interest Rates
1. In
general, securities with ____ characteristics will offer ____ yields.
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a.
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favorable; higher
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b.
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favorable; lower
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c.
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unfavorable; lower
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d.
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none of the above
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2. Default
risk is likely to be highest for
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a.
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short-term Treasury securities.
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b.
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AAA corporate securities.
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c.
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long-term Treasury securities.
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d.
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BBB corporate securities.
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3. Some
financial institutions such as commercial banks are required by law to invest
only in
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a.
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junk bonds.
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b.
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corporate stock.
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c.
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Treasury securities.
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d.
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investment-grade bonds.
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4. Credit
ratings are most commonly used to indicate which financial institutions have
available funds that they can lend to borrowers.
a.
True
b.
False
5. If
a security can easily be converted to cash without a loss in value, it
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a.
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is liquid.
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b.
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has a high after-tax yield.
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c.
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has high default risk.
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d.
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is illiquid.
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6. Securities
that offer ____ liquidity will need to offer a ____ yield.
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a.
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lower; higher
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b.
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lower; lower
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c.
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higher; higher
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d.
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B and C
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7. If
all other characteristics are similar, ____ would have to offer ____.
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a.
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taxable securities; a higher after-tax yield than
tax-exempt securities
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b.
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taxable securities; a higher before-tax yield than
tax-exempt securities
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c.
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tax-exempt securities; a higher after-tax yield
than taxable securities
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d.
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tax-exempt securities; a higher before-tax yield
than taxable securities
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8. 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.
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16.00 percent
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b.
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9.25 percent
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c.
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9.00 percent
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d.
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3.00 percent
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e.
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none of the above
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9. 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?
|
a.
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7.7 percent
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b.
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15.71 percent
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c.
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130 percent
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d.
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11.00 percent
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e.
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none of the above
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10. 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.
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7.0 percent.
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b.
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10.8 percent.
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c.
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20.0 percent.
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d.
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none of the above
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11. Holding
other factors such as risk constant, the relationship between the maturity and
annualized yield of securities is called the
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a.
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term structure of interest rates.
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b.
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default structure of interest rates.
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c.
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liquidity structure of interest rates.
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d.
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tax structure of interest rates.
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e.
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none of the above
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12. The
term structure of interest rates defines the relationship
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a.
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between risk and return.
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b.
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between risk and maturity.
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c.
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between maturity and yield.
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d.
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between default risk ratings and maturity.
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13. Interest
income from municipal bonds is exempt from state taxes but is subject to
federal taxes.
a.
True
b.
False
14. If
shorter term securities have higher annualized yields than longer term
securities, the yield curve
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a.
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is horizontal.
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b.
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is upward sloping.
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c.
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is downward sloping.
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d.
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cannot be determined unless we know additional
information (such as the level of market interest rates).
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15. 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
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a.
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become inverted.
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b.
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become flat.
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c.
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become upward sloping.
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d.
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be unaffected.
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16. If
issuers of securities (borrowers) and investors suddenly expect interest rates
to decrease, their actions to benefit from their expectations should cause
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a.
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long-term yields to rise.
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b.
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short-term yields to decrease.
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c.
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prices of long-term securities to decrease.
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d.
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A and B
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e.
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none of the above
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