FIN 501 CHAPTERS 11, 12, 13 EXAM QUESTIONS AND 100% CORRECT ANSWERS

FIN 501 CHAPTERS 11, 12, 13 EXAM QUESTIONS
AND 100% CORRECT ANSWERS
The required return on a bond is equal to
A) the real rate of return plus a risk premium plus an expected inflation premium.
B) the real rate of return plus the coupon rate plus an inflation rate.
C) the risk-free rate plus a risk premium plus an expected inflation premium.
D) the real rate plus a risk premium.
A
The risk-free rate of return is equal to the
A) real rate plus a risk premium.
B) required return minus the inflation premium.
C) real rate plus the inflation premium.
D) required return minus the real rate.
C
Which of the following tend to raise interest rates?
I. an increase in the money supply
II. an increase in the expected rate of inflation
III. Federal Reserve actions taken to lower expected rates of inflation
IV. an increase in investing activities by businesses
II, III and IV only
Interest rates in the U.S. and in major foreign economies
A) are uncorrelated or very weakly correlated.
B) tend to move in opposite directions.
C) tend to move in the same direction.
D) are the same when adjusted for inflation.
C
Which of the following factors influence short-term interest rates on government
securities?
I. Federal Reserve actions
II. interest rate risk
III. expected future inflation
IV. the real rate of return
I, III and IV only
Which of the following risks are included in the risk premium?
I. interest rate risk
II. liquidity risk

,III. financial risk
IV. purchasing power risk
II and III only
Which one of the following will tend to cause domestic interest rates to rise?
A) an increase in the money supply
B) a decrease in the rate of inflation
C) a decrease in the federal budget deficit
D) an increase in interest rates overseas
D
The single most important factor that influences the behavior of market interest rates is
A) inflation.
B) business profits.
C) the supply of new bonds.
D) the stock market.
A
Which one of the following statements concerning interest rates is correct?
A) A decrease in the money supply will cause interest rates to decline.
B) A federal budget surplus will cause interest rates to decline.
C) Economic expansions will cause interest rates to decline.
D) Rising interest rates in foreign countries will cause U.S. interest rates to decline.
B
The yield curve depicts the relationship between a bond's yield to maturity and its
A) duration.
B) term to call.
C) term to maturity.
D) volatility.
C
An inverted yield curve
A) means that long-term bonds are yielding more than short-term bonds.
B) results when investor demand for longer maturities exceeds the demand for shorter
maturities.
C) rewards long-term investors for the additional risk they are assuming.
D) sometimes results from actions by the Federal Reserve to control inflation.
D
The expectations hypothesis states that investors
A) require higher long-term interest rates today if they expect higher inflation rates in the
future.

,B) expect higher long-term interest rates because of the lack of liquidity for long-term
bonds.
C) require the real rate of return to rise in direct proportion to the length of time to
maturity.
D) normally expect the yield curve to be downsloping.
A
According to expectations theory if the 1 year interest is 3% this year and expected to be
5% next year, the 2 year interest rate should be approximately
A) 8%.
B) 5%.
C) 4%.
D) 3%.
C
According to expectations theory if the 2 year interest rate is 4% and the 1 year rate is now
3%, the 1 year rate next year is expected to be
A) 8%.
B) 5%.
C) 4%.
D) 3%.
B
Downward sloping or flat yield curves often indicate
A) a recession in the near future.
B) an economic expansion in the near future.
C) higher inflation in the near future.
D) a weaker dollar in the foreign exchange markets.
A
Long-term bonds are ________ than short-term bonds.
A) less risky
B) more liquid
C) subject to more uncertainty
D) less sensitive to interest rate changes
C
When compared to the yield curve for Treasury securities, the yield curve for corporate
securities should
A) slope in the opposite direction.
B) be similar in shape but higher.
C) be similar in shape but lower.
D) be nearly identical.

, B
The liquidity preference theory supports ________ yield curves.
A) upward sloping
B) flat
C) humped
D) downward sloping
A
The market segmentation theory holds that
A) an increase in demand for long-term borrowings leads to an inverted yield curve.
B) expectations about the future level of interest rates is the major determinant of the
shape of the yield curve.
C) the yield curve reflects the maturity preferences of financial institutions and investors.
D) the shape of the yield curve is always downsloping.
C
Market segmentation theory explains the typical upward sloping shape of yield curves as a
function of
A) normally greater demand for long-term bonds than for short-term notes.
B) normally greater demand for short term notes than for long-term bonds.
C) expectations that inflation will be higher in the future than it is now.
D) the greater liquidity of short-term notes as compared to long-term bonds.
B
At any given time, the yield curve is affected by
I. lender preferences.
II. inflationary expectations.
III. liquidity preferences.
IV. short- and long-term supply and demand conditions.
I, II, III and IV
Which of the following theories is consistent with yield curves sloping upward most of the
time?
I. market segmentation theory
II. expectations theory
III. liquidity preference theory
IV. theory of evolution
I and III only
If the yield curve begins to rise sharply, it is usually an indication that
A) stocks are offering low returns as the economy enters a recession.
B) inflation rates have peaked and are about to decline.