Quiz 2 Finance

Which of the following occurs as domestic economic conditions experience a period of growth especially relative to other countries?

Market participants are willing to borrow more heavily; at every interest rate the supply of loanable funds increases; AND at every interest rate the demand for loanable funds increases.

Which statement is NOT true of the loanable funds theory?

It is a model that is rarely used to explain interest rates and interest rate movement.

Which of the following are suppliers of loanable funds?

Households, government units, AND foreign investors.

Which of the following factors cause the supply of funds curve to shift?

Total wealth, risk of the financial security, AND future spending needs.

Which of the following occurs as the nonprice restrictions put on borrowers as a condition of borrowing increase?

The willingness of market participants to borrow decreases.

Which of the following factors cause the demand for funds curve to shift?

Utility derived from assets purchased with borrowed funds, restrictiveness of non-price conditions of borrowing, AND domestic and foreign economic conditions.

Which of the following statements is correct?

A flat yield curve occurs when the yield-to-maturity is virtually unaffected by the term-to-maturity; real interest rates are generally lower than nominal interest rates; AND liquidity risk is the risk that a security may be difficult to sell on short notice for its true value.

Assume you observe a long-term U.S. Treasury bond rated AAA and a long-term corporate bond rated BBB, with the corporate bond having a higher interest rate. What is the main reason for the difference in interest rates?

Default risk premium.

Which of the following statements is correct regarding market segmentation theory?

The market segmentation theory assumes that borrowers and investors do not want to shift from one maturity sector to another without an interest rate premium.

Which risk is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments?

Default risk.

Which of the following statements about financial markets is incorrect?

The over-the-counter market operates in a fixed location to conduct trades for local stocks.

If the yield curve is downward sloping, what is the yield to maturity on a 30-year Treasury bond relative to a 10-year Treasury bond?

The yield on the 10-year bond must be greater than the yield on the 30-year bond.

What is a comparison of market yields on securities, assuming all characteristics except maturity are the same?

Term structure of interest rates.

All of the following are common shapes for the yield curve EXCEPT:

Elliptical.

The theory that states that the yield curve reflects the market's current expectations of future short-term rates is called what?

Unbiased expectations theory.

According to which theory of the term structure of interest rates does the yield curve reflect the market's current expectations of future short-term rates?

Unbiased expectations theory.

Which of the following statements is correct regarding corporate bonds versus Treasury securities?

The rate on a 10-year corporate bond can never be less than the rate on a 10-year Treasury.

If the yield curve for Treasuries is downward sloping and there is no liquidity premium or maturity risk premium, which statement is correct?

A five-year corporate bond must have a higher yield than a 30-year Treasury bond.

The theory that argues that individual investors and financial institutions have specific maturity preferences is called what?

Market segmentation theory.

Which theory argues that individual investors and financial institutions have specific maturity preferences, and that encouraging buyers to hold securities with maturities other than their most preferred requires a higher interest rate?

Market segmentation theory.

Which statement is correct about the unbiased expectations theory?

If the unbiased expectations theory is correct, the maturity risk premium is zero.

Investment grade bonds include those bonds with ratings

From AAA to BBB.

Under which conditions will an investor demand a larger return (yield) on a bond?

The bond issue is downgraded from A to BBB.

Junk bonds are those bonds with a credit rating of

BB and lower.

Which Standard & Poor’s bond credit rating does the following description belong to: “Currently highly vulnerable to non-payment.” Most speculative

CC.

Which of the following issues Treasury Inflation Protected Securities (TIPS)?

U.S. Treasury.

To increase the liquidity for the home mortgage market, Fannie Mae and Freddie Mac purchased home mortgages from banks and other lenders. They combined the mortgages into diversified portfolios of loans and issued

Mortgage-backed securities.

Which of the following bonds makes no interest payments?

Zero-coupon bond.

Bonds are issued by which of the following?

Corporations; federal government or its agencies; AND state and local governments.

Which of the following is a debt security whose payments originate from other loans, such as credit card debt, auto loans, and home equity loans?

Asset-backed securities.

Which of the following statement(s) below is false regarding asset-backed securities?

The investors are given a choice between the par value or a specified number of shares of stock.

Which of the following statements is true?

Interest payments paid to municipal bondholders are not taxed at the federal level, or by the state for which the bond is issued.

Which of the following is true regarding U.S. Government Agency Securities?

They do not carry the federal government's full faith and credit guarantee.

Which of the following is incorrect with respect to preferred stock?

Preferred stock is largely owned by other companies rather than individual investors; preferred stock takes preference over common stock in bankruptcy proceedings; AND preferred stock dividends do not grow.

Which of the following statements is incorrect?

Preferred stock prices fluctuate with market interest rates and behave like corporate bond prices; common stock prices change with the value of the company's underlying business; AND preferred stockholders have higher precedence for repayment than common stock in the event of firm liquidation from bankruptcy.

When residual cash flows are high, stock values will be

High.

Which of the following statements is incorrect?

The Dow Jones Industrial Average includes 35 of the largest companies in the United States.

At any given time, the market value of a firm's common stock depends upon

The company's profitability and growth prospects for the future; AND current market interest rates and conditions in the overall stock market.

To list a stock on the NYSE, a company must meet minimum requirements that include all of the following EXCEPT

P/E ratio.

Which of the following statements regarding NASDAQ is not true?

Instead of using an electronic trading system, the NASDAQ has a trading floor.

Which of the following characteristics describe the NASDAQ stock market?

It is an electronic stock market without a physical trading floor; ranks second behind the NYSE in terms of total dollar value; AND lists approximately 3,500 domestic and foreign companies.

Which of the following is an electronic stock market without a physical trading floor?

NASDAQ Stock Market.

Individuals who use their own stock inventory and capital to buy and sell the stocks they represent are called

Market makers.

Trading at physical exchanges like the New York Stock Exchange and the American Stock Exchange takes place

At brokers' trading posts.