1. Classify each of the following in terms of their effect on interest rates (increase or decrease):

i. Covenants on borrowing become more restrictive

ii. The Federal Reserve increases the money supply

iii. Total household wealth increases

A. i decreases; ii decreases; iii decreases

B. i increases; ii decreases; iii decreases

C. i decreases; ii increases; iii increases

D. i increases; ii increases; iii increases

2. Duration works best when:

A. The changes in interest rates are very small

B. When interest rates move significantly

C. When convexity can be ruled out completely

D. Duration is a cure all and works best in any circumstances.

3. You go to the Wall Street Journal and notice that yields on almost all corporate and Treasury bonds have decreased. The yield decreases may be explained by which one of the following?

A. Increases in the U.S. govt budget deficit

B. Decreased Japanese purchases of U.S. Treasury bills/bonds

C. An increase in current and expected future returns of real corporate investments

D. Newly expected decline in the value of the dollar

E. A decrease in U.S. inflationary expectations

4. Bank and Consumer Loans are considered to be:

A. Money market instruments

B. Capital market instruments

C. Over the counter instruments

D. Liquidity based instruments

5. Match the intermediary with the characteristic that best describes its function

i. Provide protection from adverse events

ii. Pool funds of small savers and invest in either money or capital markets

iii. Provide consumer loans and real estate loans funded by deposits

iv. Accumulate and transfer wealth from work period to retirement period

v. Underwrite and trade securities and provide brokerage services

1. Thrifts

2. Insurers

3. Pension funds

4. Securities firms and investment banks

5. Mutual funds

A. 1,3,2,5,4

B. 4,2,3,5,1

C. 2,5,1,3,4

D. 2,4,5,3,1

E. 5,1,3,2,4