金融場(chǎng)與金融機(jī)構(gòu)基礎(chǔ)FabozziChapter10文檔良心出品

FoundationsofFinancialMarketsandInstitutions,4e(Fabozzi/Modigliani/Jones)

Chapter10TheLevelandStructureofInterestRates

MultipleChoiceQuestions

1TheTheoryofInterestRates

Aninterestrateisthepricepaidbya toa fortheuseofresourcesduring

someinterval.

borrower;debtor

lender;creditor

borrower;lender

lender;borrower

Answer:C

Comment:Aninterestrateisthepricepaidbyaborrower(ordebtor)toalender(orcreditor)fortheuseofresourcesduringsomeinterval.

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.1Fisher'sclassicalapproachtoexplainingtheleveloftheinterestrate

Bythe ,wemeantherateonaloanwhoseborrowerwillnotdefaultonany

obligation.

risk-freerate

shortterm

realrate

longterm

Answer:A

Comment:Theinterestratethatprovidestheanchorforotherratesistheshort-termrate:risk-freeplusrealrate.Byshortterm,wemeantherateonaloanthathasoneyeartomaturity.(Allotherinterestratesdifferfromthisrateaccordingtoparticularaspectsoftheloan,suchasitsmaturityorriskofdefault,orbecauseofthepresenceofinflation.)Bytherisk-freerate,wemeantherateonaloanwhoseborrowerwillnotdefaultonanyobligation.Bytherealrate,wemeantheratethatwouldprevailintheeconomyiftheaveragepricesforgoodsandserviceswereexpectedtoremainconstantduringtheloan 'slife.

Diff:1

Topic:10.1TheTheoryofInterestRates

Objective:10.4thestructureofFisher'sLaw,whichstatesthatthenominalandobservableinterestrateiscomposedoftwounobservablevariables;therealrateofinterestandthepremiumforexpectedinflation

Bythe ,wemeantheratethatwouldprevailintheeconomyiftheaveragepricesfor

goodsandserviceswereexpectedtoremainconstantduringtheloan'slife.

risk-freerate

shortterm

realrate

longterm

Answer:C

Comment:Theinterestratethatprovidestheanchorforotherratesistheshort-termrate:risk-freeplusrealrate.Byshortterm,wemeantherateonaloanthathasoneyeartomaturity.(Allotherinterestratesdifferfromthisrateaccordingtoparticularaspectsoftheloan,suchasitsmaturityorriskofdefault,orbecauseofthepresenceofinflation.)Bytherisk-freerate,wemeantherateonaloanwhoseborrowerwillnotdefaultonanyobligation.Bytherealrate,wemeantheratethatwouldprevailintheeconomyiftheaveragepricesforgoodsandserviceswereexpectedtoremainconstantduringtheloan 'slife.

Diff:1

Topic:10.1TheTheoryofInterestRates

Objective:10.4thestructureofFisher'sLaw,whichstatesthatthenominalandobservableinterestrateiscomposedoftwounobservablevariables;therealrateofinterestandthepremiumforexpectedinflation

Bythe ,wemeantherateonaloanthathasoneyeartomaturity.

risk-freerate

shortterm

realrate

longterm

Answer:B

Comment:Theinterestratethatprovidestheanchorforotherratesistheshort-termrate:risk-freeplusrealrate.Byshortterm,wemeantherateonaloanthathasoneyeartomaturity.(Allotherinterestratesdifferfromthisrateaccordingtoparticularaspectsoftheloan,suchasitsmaturityorriskofdefault,orbecauseofthepresenceofinflation.)Bytherisk-freerate,wemeantherateonaloanwhoseborrowerwillnotdefaultonanyobligation.Bytherealrate,wemeantheratethatwouldprevailintheeconomyiftheaveragepricesforgoodsandserviceswereexpectedtoremainconstantduringtheloan 'slife.

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.1Fisher'sclassicalapproachtoexplainingtheleveloftheinterestrate

2

WhichofthebelowstatementsaboutconsumptionsandsavingsisFALSE?

Achiefinfluenceonthesavingdecisionistheindividual'smarginalrateoftimepreference,whichisthewillingnesstotradesomeconsumptionnowformorefutureconsumption.

Generally,highercurrentincomemeansthepersonwillsavemore,althoughpeoplewiththesameincomemayhavedifferenttimepreferences.

Avariableaffectingsavingsistherewardforsaving,ortherateofinterestonloansthatsaversmakewiththeirunconsumedincome.

Thetotalsavings(orthetotalsupplyofloans)availableatanytimeisthesumofeverybody'ssavingsandanegativefunctionoftheinterestrate.

Answer:D

Comment:Thetotalsavings(orthetotalsupplyofloans)availableatanytimeisthesumofeverybody'ssavingsanpdoasitivefunctionoftheinterestrate.

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.2theroleinFisher'stheoryofthesaver'stimepreferenceandtheborrowingfirm'sproductivityofcapital

WhichofthebelowstatementsabouttherateofinterestandcostofcapitalisFALSE?

Themaximumthatafirmwillinvestdependsontherateofinterest,whichisthecostofloans;thefirmwillinvestonlyaslongasthemarginalproductivityofcapitalexceedsorequalstherateofinterest.

Firmswillrejectonlyprojectswhosegainisnotlessthantheircostoffinancing.

Thefirm'sdemandforborrowingisnegativelyrelatedtotheinterestrate;iftherateishigh,onlylimitedborrowingandinvestmentmakesense.

Atalowrateofinterest,moreprojectsofferaprofit,andthefirmwantstoborrowmore;hisnegativerelationshipexistsforeachandallfirmsintheeconomy.

Answer:B

Comment:Themaximumthatafirmwillinvestdependsontherateofinterest,whichisthecostofloans.Thefirmwillinvestonlyaslongasthemarginalproductivityofcapitalexceedsorequalstherateofinterest.Inotherwords,firmswillacceptonlyprojectswhosegainisnotlessthantheircostoffinancing.Thus,thefirm 'sdemandforborrowingisnegativelyrelatedtothe

interestrate.Iftherateishigh,onlylimitedborrowingandinvestmentmakesense.Atalowrate,moreprojectsofferaprofit,andthefirmwantstoborrowmore.Thisnegativerelationshipexistsforeachandallfirmsintheeconomy.

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.2theroleinFisher'stheoryofthesaver'stimepreferenceandtheborrowingfirm'sproductivityofcapital

3

The rateofinterestisdeterminedbyinteractionofthesupplyanddemandfunctions.

Asacostofborrowingandarewardforlending,theratemustreachthepointwheretotalsupplyofsavings totaldemandforborrowingandinvestment.

equilibrium;isgreater

minimum;equals

equilibrium;equals

minimum;isgreater

Answer:C

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.3themeaningofequilibriumandhowchangesinthedemandandsupplyfunctionaffecttheequilibriumleveloftheinterestrate

Intheabsenceofinflation,thenominalrate therealrate.

equals

isgreaterthan

islessthan

greaterthanorequalto

Answer:A

Diff:1

Topic:10.1TheTheoryofInterestRates

Objective:10.3themeaningofequilibriumandhowchangesinthedemandandsupplyfunctionaffecttheequilibriumleveloftheinterestrate

Therelationshipbetweeninflationandinterestratesisthewell-knownFisher'sLaw,whichcanbeexpressedthisway:(1+)=(1+r)>(1+i)where .

risthenominalrate.

iistherealrate.

pistheexpectedpercentagechangeinthepricelevelofgoodsandservicesovertheloan'slife.

thenominalrate,p,reflectsboththerealrateandexpectedinflation.

Answer:C

Comment:Therelationshipbetweeninflationandinterestratesisthewell-knownFisher'sLaw,whichcanbeexpressedthisway:(1+i)=(1+r)>(1+i)whereiisthenominalrate,ristherealrate,andpistheexpectedpercentagechangeinthepricelevelofgoodsandservicesovertheloan'slife.Thisequationshowsthatthenominail,raetfele,ctsboththerealrateandexpectedinflation.

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.4thestructureofFisher'sLaw,whichstatesthatthenominalandobservableinterestrateiscomposedoftwounobservablevariables;therealrateofinterestandthepremiumforexpectedinflation

WhichofthebelowISconsideredbyFisher'stheory.

Fisher'stheorytakesintoaccountthepowerofthegovernment(inconcertwithdepositoryinstitutions)tocreatemoney.

Fisher'stheoryconsidersthegovernment'softenlargedemandforborrowedfunds,whichisfrequentlyimmunetotheleveloftheinterestrate

Fisher'stheorytakesintoaccountthepossibilitythatindividualsandfirmsmightinvestincashbalances.

Fisher'stheoryconsidersaninterestrateonloansthatembodiesnopremiumfordefaultriskbecauseborrowingfirmsareassumedtomeetallobligations.

Answer:D

Comment:Fisher'stheoryisageneraloneandobvionueslgylectscertainpracticalmatters,suchasthepowerofthegovernment(inconcertwithdepositoryinstitutions)tocreatemoneyandthegovernment'softenlragedemandforborrowedfunds,whichisfrequentlyimmunetotheleveloftheinterestrate.Also,Fisher doesno'tcsonthseidoeryrthepossibilitythat

individualsandfirmsmightinvestincashbalances.ExpandingFisher 'stheorytoencomp

thesesituationsproducestheloanablefundstheoryofinterestrates.

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.4thestructureofFisher'sLaw,whichstatesthatthenominalandobservableinterestrateiscomposedoftwounobservablevariables;therealrateofinterestandthepremiumforexpectedinflation

Theloanablefundstheoryofinterestratesproposesthatthegenerallevelofinterestratesisdeterminedbythecomplexinteractionoftwoforces.WhichofthebelowisONEoftheseforces?

Oneforceisthatthetotaldemandforfundsbyfirms,governments,andhouseholds(orindividuals)isnegativelyrelatedtotheinterestrateincludingthegovernment'sdemand.

Oneforceaffectingtheleveloftheinterestrateisthetotalsupplyoffundsbyfirms,governments,banks,andindividualswithrisingratescausingbankstobelesseagertoextendmoreloans.

Oneforceisthatthetotaldemandforfundsbyfirms,governments,andhouseholds(orindividuals)ispositivelyrelatedtotheinterestrateexceptthegovernment'sdemand.

Oneforceaffectingtheleveloftheinterestrateisthetotalsupplyoffundsbyfirms,governments,banks,andindividualswithrisingratescausingfirmsandindividualstosaveandlendmore.

Answer:D

Comment:Theloanablefundstheoryofinterestratesproposesthatthegenerallevelofinterestratesisdeterminedbythecomplexinteractionoftwoforces.Thefirstisthetotaldemandforfundsbyfirms,governments,andhouseholds(orindividuals),whichcarryoutavarietyofeconomicactivitieswiththosefunds.Thisdemandisnegativelyrelatedtotheinterestrate(exceptforthegovernment'sdemand,whichmayfrequentlynotdependontheleveloftheinterestrate).Thesecondforceaffectingtheleveloftheinterestrateisthetotalsupplyoffundsbyfirms,governments,banks,andindividuals.Supplyispositivelyrelatedtothelevelofinterestrates,ifallothereconomicfactorsremainthesame.Withrisingrates,firmsandindividualssaveandlendmore,andbanksaremoreeagertoextendmoreloans.(Arisinginterestrateprobablydoesnotsignificantlyaffectthegovernment 'ssupplyofsavings.)

Diff:3

Topic:10.1TheTheoryofInterestRates

Objective:10.5theloanablefundstheory,whichisanexpansionofFisher'stheory

The ,originallydevelopedbyJohnMaynardKeynesa,nalyzestheequilibrium

leveloftheinterestratethroughtheinteractionofthesupplyofmoneyandthepublic'saggregatedemandforholdingmoney.

loanablefundstheoryofinterestrates

expectationtheoryofinterestrates

liquiditypreferencetheory

FishertheoryAnswer:CDiff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.6themeaningofliquiditypreferenceinKeynes'stheoryofthedeterminationofinterestrates

6

Thepublic(consistingofindividualsandfirms)holdsmoneyforseveralreasons.Whichofthebelowisthreeofthese?

Difficultyoftranslations,precautionagainstexpectedevents,andspeculationaboutpossiblerisesintheinterestrate.

Easeoftransactions,precautionagainstunexpectedevents,andspeculationaboutpossiblerisesintheinterestrate.

Easeofunexpectedevents,precautionagainsttransactions,andspeculationaboutpossiblerisesintheinterestrate.

Speculationabouttransactions,fearagainstunexpectedevents,andprecautionaboutpossiblerisesintheinterestrate.

Answer:B

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.6themeaningofliquiditypreferenceinKeynes'stheoryofthedeterminationofinterestrates

The representstheinitialreactionoftheinterestratetoachangeinthemoney

supply.

Incomeeffect

Priceexpectationeffect

Liquidityeffect

InterestrateeffectAnswer:CDiff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.7howanincreaseinthemoneysupplycanaffecttheleveloftheinterestratethroughanimpactonliquidity,income,andpriceexpectations

WhichofthebelowstatementsisFALSE?

Althoughanincreaseinthemoneysupplyisaneconomicallyexpansionarypolicy,theresultantincreaseinincomedependssubstantiallyontheamountofslackintheeconomyatthetimeoftheFed'saction.

InFisher'sterms,theinterestratereflectstheinteractionofthesavers'marginalrateoftimepreferenceandborrowers'marginalproductivityofcapital.

Changesinthemoneysupplycanaffectthelevelofinterestratesthroughtheliquidityeffect,theincomeeffect,andthepriceexpectationseffect;theirrelativemagnitudesdependuponthelevelofeconomicactivityatthetimeofthechangeinthemoneysupply.

Becausethepricelevel(andexpectationsregardingitschanges)affectsthemoneydemandfunction,theliquidityeffectisanincreaseintheinterestrate.

Answer:D

Comment:Becausethepricelevel(andexpectationsregardingitschanges)affectsthemoneydemandfunction,thepriceexpectationseffectisanincreaseintheinterestrate.

Diff:2

Topic:10.1TheTheoryofInterestRates

Objective:10.7howanincreaseinthemoneysupplycanaffecttheleveloftheinterestratethroughanimpactonliquidity,income,andpriceexpectations

7

2TheDeterminantsoftheStructureofInterestRates

A isaninstrumentinwhichtheissuer(debtor/borrower)promisestorepaytothe

lender/investortheamountborrowedplusinterestoversomespecifiedperiodoftime.

bond

commonstock

preferredstock

T-bill

Answer:A

Diff:1

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.8thefeaturesofabondissue

The shouldreflectthecouponinterestthatwillbeearnedpluseither(1)anycapital

gainthatwillberealizedfromholdingthebondtomaturity,or(2)anycapitallossthatwillberealizedfromholdingthebondtomaturity.

yieldonabondinvestment

dividendyieldonabondinvestment

bid-askspread

yieldonastockinvestment

Answer:A

Diff:1

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.8thefeaturesofabondissue

The themarketprice,thehighertheyieldtomaturity.

higher

lessrisky

moresafe

lower

Answer:D

Diff:1

Topic:10.2TheDeterminantsoftheStructureofInterestRatesObjective:10.8thefeaturesofabondissue

The ofabondistheamountthattheissueragreestorepaythebondholderatthe

maturitydate.

principalvalue(orsimplyprincipal)

facevalue

redemptionvalue

AlloftheseAnswer:D

Comment:Theprincipalvalue(orsimplyprincipal)ofabondistheamountthattheissueragreestorepaythebondholderatthematuritydate.Thisamountisalsoreferredtoastphaervalue,maturityvalue,redemptionvalue,orfacevalue.

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.8thefeaturesofabondissue

Theyieldtomaturityisdeterminedbyatrial-and-errorprocess.Thefirststepinthistrialanderrorprocessis .

Computethepresentvalueofeachcashflowusingthebestguessinterestrate.

Totalthepresentvalueofthecashflowsusingthebestguessinterestrate.

Selectaninterestrate.

Comparethetotalpresentvalueusingthebestguessinterestratewiththemarketpriceofthebond.

Answer:C

Comment:Theyieldtomaturityisdeterminedbyatrial-and-errorprocess.Eventhealgorithminacalculatororcomputerprogram,whichcomputestheyieldtomaturity(orinternalrateofreturn)inanapparentlydirectway,usesatrial-and-errorprocess.Thestepsinthatprocessareasfollows:

Step1:Selectaninterestrate.

Step2:ComputethepresentvalueofeachcashflowusingtheinterestrateselectedinStep1.Step3:TotalthepresentvalueofthecashflowsfoundinStep2.

Step4:ComparethetotalpresentvaluefoundinStep3withthemarketpriceofthebondand,ifthetotalpresentvalueofthecashflowsfoundinStep3is

?equaltothemarketprice,thentheinterestrateusedinStep1istheyieldtomaturity;?greaterthanthemarketprice,thentheinterestrateisnottheyieldtomaturity.Therefore,gobacktoStep1anduseahigherinterestrate;

?lessthanthemarketprice,thentheinterestrateisnottheyieldtomaturity.Therefore,gobacktoStep1andusealowerinterestrate.

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRatesObjective:10.9howtheyieldtomaturityofabondiscalculated

Thereareseveralinterestingpointsabouttherelationshipamongthecouponrate,marketprice,andyieldtomaturity.WhichofthebelowisNOToneofthese.

Ifthemarketpriceisequaltotheparvalue,thentheyieldtomaturityisequaltothecouponrate.

Ifthemarketpriceislessthantheparvalue,thentheyieldtomaturityisgreaterthanthecouponrate.

Ifthemarketpriceisgreaterthantheparvalue,thentheyieldtomaturityisgreaterthanthecouponrate.

Ifthemarketpriceisgreaterthantheparvalue,thentheyieldtomaturityislessthanthecouponrate.

Answer:C

Comment:Thereareseveralinterestingpointsabouttherelationshipamongthecouponrate,marketprice,andyieldtomaturityassummarizedbelow.

Ifthemarketpriceisequaltotheparvalue,thentheyieldtomaturityisequaltothecouponrate;

Ifthemarketpriceislessthantheparvalue,thentheyieldtomaturityisgreaterthanthecouponrate,and;

Ifthemarketpriceisgreaterthantheparvalue,thentheyieldtomaturitiyslessthanthecouponrate.

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.9howtheyieldtomaturityofabondiscalculated

Consideran20-yearbondwithacouponrateof8%andaparvalueof$1,000.Thecashflowforthisbondis everysixmonthsforthefirst39semi-annualperiodsandthen

forthelast(or40th)six-monthperiod.

$1,040;$40

$40;$1,040

$80;$1,080

$80;$1,000

Answer:B

Comment:Consideran20-yearbondwithacouponrateof8%andaparvalueof$1,000.Thecashflowforthisbondis$40everysixmonthsforthefirst39semi-annualperiodsandthen$1,040forthelast(or40th)six-monthperiod.

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.8thefeaturesofabondissue

10

Thedifferencebetweentheyieldonanytwobondissuesiscalleda .

yielddifference

differencespread

couponratespread

yieldspread

Answer:D

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.13whatfactorsaffecttheyieldspreadbetweentwobonds

Treasurysecuritiesareusedtodevelopthebenchmarkinterestrates.TherearetwocategoriesofU.S.Treasurysecurities: .

discountandcouponsecurities.

discountandcouponstocks.

interestrateandcouponsecurities.

discountandcompoundsecurities.

Answer:A

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.1Fisher'sclassicalapproachtoexplainingtheleveloftheinterestrate

ThemostrecentlyauctionedTreasuryissuesforeachmaturityarereferredtoas .

off-the-runissuesorcurrentcouponissues.

minimuminterestrateorbaseinterestrate

on-the-runorcurrentcouponissues.

benchmarkinterestrateorminimuminterestrate.

Answer:C

Comment:ThemostrecentlyauctionedTreasuryissuesforeachmaturityarereferredtoason-the-runorcurrentcouponissues.Issuesauctionedpriortothecurrentcouponissuesaretypicallyreferredtoasoff-the-runissues;theyarenotasliquidason-the-runissues,and,therefore,offerahigheryieldthanthecorrespondingon-the-runTreasuryissue.Thmeinimuminterestrateorbaseinterestratethatinvestorswilldemandforinvestinginanon-Treasurysecurityistheyieldofferedonacomparablematurityon-the-runTreasurysecurity.Thebaseinterestrateisalsoreferredtoasthebenchmarkinterestrate.

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.10whyhistoricallytheyieldsonsecuritiesissuedbytheU.S.DepartmentoftheTreasuryhavebeenusedasthebenchmarkinterestratesthroughouttheworld

11

Marketparticipantstalkofinterestratesonnon-Treasurysecuritiesas toa

particularon-the-runTreasurysecurity(oraspreadtoanyparticularbenchmarkinterestrateselected).ThisspreadreflectstheadditionalriskstheinvestorfacesbyacquiringasecuritythatisnotissuedbytheU.S.governmentand,therefore,canbecalleda .

"tradingatapremium";riskpremium

"tradingataspread";riskpremium

"tradingatapremium";riskspread

"tradingatadiscount";discountpremium

Answer:B

Comment:Marketparticipantstalkofinterestratesonnon-Treasurysecuritiesa“stradingataspread”toaparticularon-the-runTreasurysecurity(oraspreadtoanyparticularbenchmarkinterestrateselected).Forexample,iftheyieldona10-yearnon-TreasurysecurityonMay20,2008,is4.78%,thenthespreadis100basispointsoverthe3.78%Treasuryyield.ThisspreadreflectstheadditionalriskstheinvestorfacesbyacquiringasecuritythatisnotissuedbytheU.S.governmentand,therefore,canbecalledraiskpremium.

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.13whatfactorsaffecttheyieldspreadbetweentwobonds

Thefactorsthataffectthespreadinclude .

thetypeofissuerandtheexpectedliquidityoftheissue

theprovisionsthatgranteithertheissuerortheinvestortheobligationtodosomethingandthetaxabilityoftheinterestreceivedbytheissuer

theinvestor'sperceivedcreditworthinessandthetermormaturityoftheinvestor'shorizon.

Allofthese

Answer:A

Comment:Thefactorsthataffectthespreadare(1)thetypeofissuer,(2)thisesuer'sperceivedcreditworthiness,(3)thetermormaturityoftheinstrument,(4)provisionsthatgranteithertheissuerortheinvestortheoptiontodosomething,(5)thetaxabilityoftheinterestreceivedbyinvestors,and(6)theexpectedliquidityoftheissue.

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.13whatfactorsaffecttheyieldspreadbetweentwobonds

Withinthecorporatemarketsector,issuersareclassifiedas .

(1)utilities,(2)industrials,(3)finance,and(4)banks.

(1)high-risk,(2)medium-risk,(3)low-risk,and(4)no-risk.

(1)foreign,(2)domestic,(3)European,and(4)Asian.

(1)intramarket,(2)extramarket,(3)ultramarket,and(4)intermarket.

Answer:A

Comment:Withinthecorporatemarketsector,issuersareclassifiedasfollows:(1)utilities,(2)industrials,(3)finance,and(4)banks.

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.12thedifferenttypesofbonds

12

Thehighest-gradebondsaredesignatedbyMoody'sbythesymbol .

Ba

A

Aa

Aaa

Answer:D

Comment:Inallsystems,thetermhighgrademeanslowcreditrisk,orconversely,highprobabilityoffuturepayments.Thehighest-gradebondsaredesignatedbyMoody 'sbythe

symbolAaa,andbyS&PandFitchbythesymbolAAA.ThenexthighestgradeisdenotedbythesymbolAa(Moody's)orAA(S&PandFitch);forthethirdgrade,allratingsystemsuseA.ThenextthreegradesareBaaorBBB,BaorBB,andB,respectively.TherearealsoCgrades.Moody'suses1,2,or3toprodveianarrowercreditqualitybreakdownwithineachclass,andS&PandFitchuseplusandminussignsforthesamepurpose.

Diff:1

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.12thedifferenttypesofbonds

WhichofthebelowstatementsisFALSE?

ThespreadbetweenTreasurysecuritiesandnon-Treasurysecuritiesthatareidenticalinallrespectsexceptforcreditqualityisreferredtoasacreditspread.

Thespreadbetweenanytwomaturitysectorsofthemarketiscalledamaturityspreadoryieldcurvespread.

Anoptionthatisincludedinabondissueisreferredtoasaprepaymentoption.

Themostcommontypeofoptioninabondissueisacallprovision.

Answer:C

Comment:Itisnotuncommonforabondissuetoincludeaprovisionthatgiveseitherthebondholderand/ortheissueranoptiontotakesomeactionagainsttheotherparty.Anoptionthatisincludedinabondissueisreferredtoasanembeddedoption.

Diff:2

Topic:10.2TheDeterminantsoftheStructureofInterestRates

Objective:10.12thedifferenttypesofbonds

True/FalseQuestions

1TheTheoryofInterestRates

TheliquiditypreferencetheoryisKeynes'sviewthattherateofinterestissetinthemarketformoneybalances.

Answer:TRUE

Diff:1

Topic:10.1TheTheoryofInterestRates

Objective:10.6themeaningofliquiditypreferenceinKeynes'stheoryofthedeterminationofinterestrates

13

Interestisthepricepaidforthepermanentuseofresources,andtheamountofaloanisitsprincipal.

Answer:FALSE

Comment:Interestisthepricepaidforthetemporaryuseofresources,andtheamountofaloanisitsprincipal.

Diff:1

Topic:10.1TheTheoryofInterestRates

Objective:10.7howanincreaseinthemoneysupplycanaffecttheleveloftheinterestratethroughanimpactonliquidity,income,andpriceexpectations

InFisher'sterms,theinterestratereflectstheinteractionofthesavers'marginalproductivityofcapitalandborrowers'marginalrateoftimepreference.

Answer:FALSE

Comment:InFisher'sterms,theinterestratereflectstheinteractionofthesamvaerrgsinalrateoftimepreferenceandborrowersm'arginalproductivityofcapital.

Diff:1

Topic:10.1TheTheoryofInterestRates

Objective:10.2theroleinFisher'stheoryofthesaver'stimepreferenceandtheborrowingfirm'sproductivityofcapital

TheloanablefundstheoryisanextensionofFisher'stheoryandpro