Page 1 of 58
FINC514 EXAM 2 NEWEST 2025 ACTUAL EXAM|
COMPLETE 170 QUESTIONS AND CORRECT DETRAILED
ANSWERS (VERIFIED ANSWERS) ALREADY GRADED
A+| NEW!!
Chapter 6 .....ANSWER..... Chapter 6
Which tend to be more volatile, short- or long-term interest
rates? .....ANSWER..... Short-term interest rates
If the inflation rate was 3.00% and the nominal interest rate was
4.60% over the last year, what was the real rate of interest over
the last year? Disregard cross-product terms; that is, if averaging
is required, use the arithmetic average. .....ANSWER..... The
nominal interest rate consists of the real rate of interest and
inflation. In this case, the nominal interest rate is 4.60%, and the
inflation rate is 3.00%.
So the real rate of interest is 4.60% - 3.00% = 1.60%.
,Page 2 of 58
Based on your understanding of the determinants of interest
rates, if everything else remains the same, which of the following
will be true?
- The yield on U.S. Treasury securities always remains static.
- In theory, the yield on a bond with a longer maturity will be
higher than the yield on a bond with a shorter maturity.
.....ANSWER..... In theory, the yield on a bond with a longer
maturity will be higher than the yield on a bond with a shorter
maturity.
Suppose the real risk-free rate and inflation rate are expected
to remain at their current levels throughout the foreseeable
future. Consider all factors that affect the yield curve. Then
identify which of the following shapes that the US Treasury yield
curve can take. Check all that apply.
,Page 3 of 58
- Inverted yield curve
- Upward-sloping yield curve
- Downward-sloping yield curve
.....ANSWER..... - Inverted yield curve
- Upward-sloping yield curve
- Downward-sloping yield curve
If inflation is expected to decrease in the future and the real rate
is expected to remain steady, then the Treasury yield curve is
downward sloping. (Assume MRP = 0.) .....ANSWER..... True
The default risk on Walmart's short-term debt will be higher than
the default risk on its long-term debt. .....ANSWER..... False
The yield curve for a BBB-rated corporate bond is expected to
be above the US Treasury bond yield curve. .....ANSWER..... True
Yield curves of highly liquid assets will be lower than yield curves
of relatively illiquid assets. .....ANSWER..... True
, Page 4 of 58
The pure expectations theory assumes that a one-year bond
purchased today will have the same return as a one-year bond
purchased five years from now. .....ANSWER..... False
The pure expectations theory assumes that the maturity risk
premium is zero (MRP = 0). This suggests that investing
consecutively in short-term bonds will provide the same return as
a long-term bond.
This premium is added when a security lacks marketability,
because it cannot be bought and sold quickly without losing
value. .....ANSWER..... Liquidity risk premium (LP)
As interest rates rise, bond prices fall, and as interest rates fall,
bond prices rise. Because interest rate changes are uncertain, this
premium is added as a compensation for this uncertainty.
.....ANSWER..... Maturity risk premium (MRP)
FINC514 EXAM 2 NEWEST 2025 ACTUAL EXAM|
COMPLETE 170 QUESTIONS AND CORRECT DETRAILED
ANSWERS (VERIFIED ANSWERS) ALREADY GRADED
A+| NEW!!
Chapter 6 .....ANSWER..... Chapter 6
Which tend to be more volatile, short- or long-term interest
rates? .....ANSWER..... Short-term interest rates
If the inflation rate was 3.00% and the nominal interest rate was
4.60% over the last year, what was the real rate of interest over
the last year? Disregard cross-product terms; that is, if averaging
is required, use the arithmetic average. .....ANSWER..... The
nominal interest rate consists of the real rate of interest and
inflation. In this case, the nominal interest rate is 4.60%, and the
inflation rate is 3.00%.
So the real rate of interest is 4.60% - 3.00% = 1.60%.
,Page 2 of 58
Based on your understanding of the determinants of interest
rates, if everything else remains the same, which of the following
will be true?
- The yield on U.S. Treasury securities always remains static.
- In theory, the yield on a bond with a longer maturity will be
higher than the yield on a bond with a shorter maturity.
.....ANSWER..... In theory, the yield on a bond with a longer
maturity will be higher than the yield on a bond with a shorter
maturity.
Suppose the real risk-free rate and inflation rate are expected
to remain at their current levels throughout the foreseeable
future. Consider all factors that affect the yield curve. Then
identify which of the following shapes that the US Treasury yield
curve can take. Check all that apply.
,Page 3 of 58
- Inverted yield curve
- Upward-sloping yield curve
- Downward-sloping yield curve
.....ANSWER..... - Inverted yield curve
- Upward-sloping yield curve
- Downward-sloping yield curve
If inflation is expected to decrease in the future and the real rate
is expected to remain steady, then the Treasury yield curve is
downward sloping. (Assume MRP = 0.) .....ANSWER..... True
The default risk on Walmart's short-term debt will be higher than
the default risk on its long-term debt. .....ANSWER..... False
The yield curve for a BBB-rated corporate bond is expected to
be above the US Treasury bond yield curve. .....ANSWER..... True
Yield curves of highly liquid assets will be lower than yield curves
of relatively illiquid assets. .....ANSWER..... True
, Page 4 of 58
The pure expectations theory assumes that a one-year bond
purchased today will have the same return as a one-year bond
purchased five years from now. .....ANSWER..... False
The pure expectations theory assumes that the maturity risk
premium is zero (MRP = 0). This suggests that investing
consecutively in short-term bonds will provide the same return as
a long-term bond.
This premium is added when a security lacks marketability,
because it cannot be bought and sold quickly without losing
value. .....ANSWER..... Liquidity risk premium (LP)
As interest rates rise, bond prices fall, and as interest rates fall,
bond prices rise. Because interest rate changes are uncertain, this
premium is added as a compensation for this uncertainty.
.....ANSWER..... Maturity risk premium (MRP)
