UNL Fina 361 Final Exam Questions And Answers Verified 100% Correct

UNL Fina 361 Final Exam Questions And Answers Verified 100% Correct As the economy grows, interest rates tend to rise because - ANSWER -firms have more investment opportunities and so the firms issue more bonds and the increased supply of these bonds will cause the price of the bonds to decrease and bond prices and interest rates move in opposite directions. Assume you have a portfolio of bonds that consists of $10,000 in 1 year bonds and $10,000 in 10 year bonds. You expect that next month market interest rates are going to rise. If you continue to own these bonds, then next month you would expect to have a - ANSWER -capital loss on both your 1 year and 10 year bonds with a larger loss on the 10 year bonds. If investors expect the rate of inflation to increase, most bonds become - ANSWER -a less good investment because bond coupons and face value are paid in nominal terms. If the government places a tax on ONLY long term bond income, but NOT on short term bond income, then one would expect the slope of term structure to - ANSWER -Increase, because the price of long term bonds would decrease. According to the Segmented Market Hypothesis of the term structure - ANSWER -different types of bond investors limit themselves to buying only bonds of a certain maturity. According to the Liquidity Preference Model of the Term Structure the term structure slopes upwards because (all else equal) short term bonds are more liquid than long term bonds and their higher liquidity - ANSWER -raises short term bond prices and lowers short term bond interest rate. Higher expected inflation will _________ the demand for bonds which will ________ the price of bonds which will ________ the interest rate on bonds. - ANSWER -lower; decrease; increase Long maturity bonds usually have _________ price risk and _______ reinvestment risk than short term maturity bonds. - ANSWER -more; more Any asset gives return from two possible sources. These are - ANSWER Delaying consumption and bearing risk Which of the following contributes to the DEMAND for bonds? - ANSWER Time preference of consumption Investors make choices of which assets to use for savings based on which two factors. - ANSWER -risk aversion and the asset's risk characteristics All else equal, HIGHER expected inflation will _________ the nominal riskless interest rate. - ANSWER -increase The MORE risk-averse an investor is the __________ she will pay for a risky asset and the _________ the required expected return on the asset will be. - ANSWER -less; greater Which of the following contributes to the SUPPLY of bonds? - ANSWER Production opportunities Would a callable bond sell for more or less than a similar bond without a call feature? - ANSWER -A callable bond would sell for LESS Investor and consumers ultimately are concerned with - ANSWER -Real rates of return When investors in a country become more patient there will be pressure on interest rates in that country - ANSWER -to be low Where you save (i.e., the assets you invest in) depends on - ANSWER -your risk aversion AND the risk characteristics of the asset Illiquid assets tend to be - ANSWER -Heterogeneous with high information costs Which of the following contributes to the real riskless interest rate? - ANSWER Production Opportunities According to modern finance principles, the price of any asset is equal to - ANSWER -the present value of the expected cash-flows provided by the asset. At maturity the bond's price is equal to - ANSWER -par value, because the price of any asset is the PV of its expected cash-flows When a loan is initially made, the dollar amount of the loan should equal - ANSWER -the present value of the loan payments where the discount rate used is the interest rate on the loan. One way to protect your bond investments from "price risk" is to change the proportion that is invested in long-term bonds and in short-term bonds. If you expect interest rates to rise what can you do to minimize the price risk effect on your bond investments? - ANSWER -Sell your long-term bonds and use the proceeds to buy more short-term bonds The coupons associated with a bond are most closely related to the time value of money (TVM) concept of - ANSWER -an annuity Firms issue callable bonds to give them financing flexibility in case future interest rates - ANSWER -fall In a typical bond arrangement, a firm issues a bond to the investing public. In this arrangement who is the borrower and who is the lender? - ANSWER -The firm is the borrower AND the investor is the lender According to modern finance principles, the price of any asset is equal to - ANSWER -the present value of the expected cash-flows provided by the asset. If two annuities are identical in every way except that one is an "ordinary" annuity and the other is an "annuity due", the annuity due will sell at a ____________ price because its cash-flows come __________. - ANSWER -higher; sooner One problem with IRR is that - ANSWER -It does not take into account the size of the project When the IRR is greater than the WACC, the NPV - ANSWER -positive