FIN 375 EXAM 1 QUESTIONS AND
ANSWERS ALL CORRECT
Which value is not needed to calculate the price of a bond? - Answer- premium
Assuming all the following bonds were issued at the same time with the same maturity
by the same issuer, and that each bond's yield is now higher than its coupon rate, which
should trade at the deepest discount from par? - Answer- zero coupon bond
Each type of bond listed in #5 above was equally weighted as to par value in the same
issuer's capital structure when issued. The issuer decides to retire (buy back) one fourth
of the market value of the bonds it has outstanding. In what order should the issuer
retire the bonds? - Answer- retire all the zero coupon bonds, then as many of the annual
coupon bonds as possible
An important difference between "yield to maturity" and "expected yield" is that -
Answer- expected yield requires an interest rate forecast
An important difference between "realized yield" and "total return" is that - Answer- total
return accounts for reinvestment of interest coupons at varying rates
For the same bond, the 4 yield measures should become nearer approximations of
each other as - Answer- time to maturity shortens
Which was not a direct contributor to the growth of "subprime" mortgage lending?
Deposit insurance
Housing boom
Deregulation
Relaxed credit standards
Securitization - Answer- Deposit insurance
The Federal Government eased regulation of "Fannie Mae" and "Freddie Mac" in order
to - Answer- increase home ownership
Credit ratings on mortgage-backed securities were in many cases flawed because -
Answer- the agencies' mathematical models underestimated default risk
A bond's price would likely fall as a result of any of the following - Answer- downgrade of
the issuer's credit rating
contraction of the supply of loanable funds
, strengthening of the demand for loanable funds
A bond's price volatility will vary - Answer- inversely with its coupon and directly with its
time to maturity
Interest rate risk is the probability that - Answer- yield to maturity will have exceeded
total return
Each of the following bonds was issued at the same time by the same issuer with the
same maturity. Which has the shortest duration?
annual coupon bond
semiannual coupon bond
quarterly coupon bond
zero coupon bond
need more information - Answer- quarterly coupon bond
If the financial system is working properly, - Answer- all necessary projects are funded
Which of the following is not one of the four groups of economic units? - Answer-
depository institutions
The principal SSUs in the economy are - Answer- households
"Direct financing" means that - Answer- DSUs borrow directly from SSUs
For investment banks, a major consequence of the 2008 financial crisis was that -
Answer- they became subject to strict Federal Reserve oversight
A DSU obtains the most direct and predictable financial benefit by - Answer- issuing
financial claims in a primary market
Public and private markets differ significantly in all the following except - Answer-
ultimate purpose
Money and capital markets differ significantly in all the following except - Answer-
importance of the economy
An important difference between indirect finance and direct finance is that - Answer-
indirect finance requires a financial intermediary
To understand why financial intermediaries exist, we need to understand the role of -
Answer- transactions costs and information costs
Asymmetric information problems occur in two forms: - Answer- adverse selection and
moral hazard
ANSWERS ALL CORRECT
Which value is not needed to calculate the price of a bond? - Answer- premium
Assuming all the following bonds were issued at the same time with the same maturity
by the same issuer, and that each bond's yield is now higher than its coupon rate, which
should trade at the deepest discount from par? - Answer- zero coupon bond
Each type of bond listed in #5 above was equally weighted as to par value in the same
issuer's capital structure when issued. The issuer decides to retire (buy back) one fourth
of the market value of the bonds it has outstanding. In what order should the issuer
retire the bonds? - Answer- retire all the zero coupon bonds, then as many of the annual
coupon bonds as possible
An important difference between "yield to maturity" and "expected yield" is that -
Answer- expected yield requires an interest rate forecast
An important difference between "realized yield" and "total return" is that - Answer- total
return accounts for reinvestment of interest coupons at varying rates
For the same bond, the 4 yield measures should become nearer approximations of
each other as - Answer- time to maturity shortens
Which was not a direct contributor to the growth of "subprime" mortgage lending?
Deposit insurance
Housing boom
Deregulation
Relaxed credit standards
Securitization - Answer- Deposit insurance
The Federal Government eased regulation of "Fannie Mae" and "Freddie Mac" in order
to - Answer- increase home ownership
Credit ratings on mortgage-backed securities were in many cases flawed because -
Answer- the agencies' mathematical models underestimated default risk
A bond's price would likely fall as a result of any of the following - Answer- downgrade of
the issuer's credit rating
contraction of the supply of loanable funds
, strengthening of the demand for loanable funds
A bond's price volatility will vary - Answer- inversely with its coupon and directly with its
time to maturity
Interest rate risk is the probability that - Answer- yield to maturity will have exceeded
total return
Each of the following bonds was issued at the same time by the same issuer with the
same maturity. Which has the shortest duration?
annual coupon bond
semiannual coupon bond
quarterly coupon bond
zero coupon bond
need more information - Answer- quarterly coupon bond
If the financial system is working properly, - Answer- all necessary projects are funded
Which of the following is not one of the four groups of economic units? - Answer-
depository institutions
The principal SSUs in the economy are - Answer- households
"Direct financing" means that - Answer- DSUs borrow directly from SSUs
For investment banks, a major consequence of the 2008 financial crisis was that -
Answer- they became subject to strict Federal Reserve oversight
A DSU obtains the most direct and predictable financial benefit by - Answer- issuing
financial claims in a primary market
Public and private markets differ significantly in all the following except - Answer-
ultimate purpose
Money and capital markets differ significantly in all the following except - Answer-
importance of the economy
An important difference between indirect finance and direct finance is that - Answer-
indirect finance requires a financial intermediary
To understand why financial intermediaries exist, we need to understand the role of -
Answer- transactions costs and information costs
Asymmetric information problems occur in two forms: - Answer- adverse selection and
moral hazard
