1.If you are comparing a corporate bond yield of 12% with a Treasury bond yield of 6%, then the default risk premium is

A. 6%

B. 24%

C. 18%

D. 12%

2. The term structure of interest rates explains why

A. yields differ for financial instruments with differing maturities

B. the Treasury yield curve always slopes upward

C. yields differ for financial instruments with the same maturities

D. yields are held constant along a given Treasury yield curve

3. The segmented markets theory

A. provides an explanation of the upward slope of the Treasury yield curve, but cannot explain parallel shifts in the curve

B. explains why bonds of different maturities are perfect substitutes

C. cannot explain the upward slope of the Treasury yield curve

D. provides a logical explanation of why parallel shifts occur in the Treasury yield curve

4. If market participants believe that the default risk is increasing,the likely result will be a

A. fall in default risk-free bond prices

B. fall in demand for default risk-free bonds, a rise in demand for high default-risk bonds, and a smaller risk premium

C. rise in demand for default risk-free bonds, a fall in demand for high-default-risk bonds, and a larger risk premium

5. The preferred-habitat theory

A. can explain the upward shift of the yield curve, but cannot explain the parallel shifts in the curve as in the case of the expectations theory

B. shows a more significant expected decline in short-term rates than the expectation theory shows

C. shows the same pattern of future short-term rates as shown by the expectations theory

6. A schedule of one-year interest rates for bonds maturing in 1, 2, 3,and 4 years, successively, is 8%, 9%, 10%, and 11%. According to the expectations theory, the expected one year rate two years ahead is

A. 12%

B. 17%

C. 8.5%

D. 10%

7. If a Treasury yield curve slopes upward to the right, what is the correct interpretation?

A. Lower yields imply higher demand and higher bond prices.

B. Lower yields imply lower demand and lower bond prices.

C. Higher yields imply higher demand and higher bond prices.

8. If the fluctuations in expected real interest rates are small, then which of the following statements provides an explanation of how the upward-sloping yield curve can be used for economic forecasting?

A. An upward sloping yield curve provides a signal that a recession is likely.

B. If real interest rates are constant, then an upward sloping yield curve suggests that lower inflation is expected.

C. If real interest rates are constant, then an upward sloping yield curve means higher inflation is expected.

9. If you believed strongly in the expectations theory, you would likely

A. agree with the conclusion that the expectations theory explains the upward slope of the yield curve, but not parallel shifts in the curve

B. change your relative demand for instruments of different maturities to take advantage of different yields

C. believe that expected returns would be about equal for bonds of different maturities

D. be unable to infer expectations of future short-term rates from current long-term rates

10. Which of the following statements best defines the default risk premium?

A. The default-risk premium is the lower yield an investor requires for higher default risk.

B. The default-risk premium is also known as the market-risk premium.

C. The default-risk premium is the higher yield an investor requires for higher default risk.

1.Under conditions of exchange rate market equilibrium, if the nominal interest rates on U.S. assets and Australian assets differ, the rate difference is most likely attributable to expected

A. changes in liquidity between the two countries

B. changes in risk between the two countries

C. changes in information costs between the two countries

D. fluctuations in the exchange rate between the two countries

2. If the U.S. imposes higher import quotas on Japanese autos, then the

A. long-run exchange rate for the dollar will fall

B. exports of U.S. autos to Japan will rise

C. long-run exchange rate for the dollar will rise

D. quantity of U.S. made autos sold in the U.S. will fall

3. The currency premium in foreign-exchange markets

A. helps to offset anticipated increases in exchange rates

B. indicates investors' collective preference for financial instruments

C. rises as domestic interest rates fall

D. helps to offset anticipated declines in exchange rates

4. An increase in the expected inflation rate in the U.S. will

A. cause the U.S. exchange rate to appreciate

B. cause the U.S. exchange rate to depreciate

C. increase the budget deficit in the U.S. relative to the budget deficits of foreign governments

D. reduce the nominal interest rate in the U.S.

5. Suppose that during the next year you expect the dollar will appreciate against the pound from 0.5 pound to the dollar to 0.75 pound to the dollar. How much will you expect to make on an investment of$10,000 in British government securities that will mature in one year and pay interest of 8%?

A. -59.5%

B. 8%

C. -28%

D. 28%

6. If the price of a pair of Levi's jeans is $30 in the U.S. and 5,000 Yen in Japan, and the nominal exchange rate is 100 Yen to the dollar,the real exchange rate is

A. 0.6 pair of jeans in Japan per American pair of jeans

B. 6 pairs of jeans in Japan per American pair of jeans

C. 1.66 pairs of jeans in Japan per American pair of jeans

7. The explanation of exchange rate determination in the short run is based on the assumption that

A. short-run exchange rates are based on equivalent exchanges of actual goods and services

B. changes in price levels are unimportant in the short run

C. the short-run exchange rate is defined as the price of financial assets in one currency relative to the price of financial assets in another currency

D. nominal exchange rates remain constant in the short run

8. If the dollar can be exchanged for fewer pesos today than yesterday,we say the dollar has

A. become more valuable relative to the peso

B. depreciated

C. appreciated

D. remained constant in value

9. If the forward exchange rate for the pound in terms of dollars is higher than today's spot rate, then we would expect the

A. pound to depreciate

B. dollar to depreciate

C. dollar to appreciate

10. Which of the following statements about purchasing power parity is correct?

A. Purchasing power parity assumes that real exchange rates are constant, so fluctuations in nominal exchange rates are due to changes in inflation rates between two countries.

B. Purchasing power parity assumes that nominal exchange rates remain constant.

C. Purchasing power parity assumes that inflation rates between two countries are constant.

D. Purchasing power parity assumes that if the U.S. price level rises 5% more than the French price level, the U.S. exchange rate will rise.

1.If, as a lender, you are concerned that interest rates might rise during the term for which you wish to make a loan, you can hedge against this possible rise by

A. buying futures contracts on Treasury bills

B. increasing the size of your loan

C. selling futures contracts on Treasury bills

D. buying call options on Treasury bills

2. Index arbitrage refers to

A.simultaneous trading in stock index futures and the underlying stocks

B. selling futures contracts and buying options contracts on the same stock

C. selling futures contracts on stocks and buying equivalent futures contracts on bonds.

D. buying futures contracts and selling options contracts on the same stock

3. Derivative financial instruments are

A. loans made by banks at an interest rate derived from the market interest rate

B. assets that derive their value from underlying assets

C. financial assets whose value is derived from prices set in the stock market

D. assets whose values are derived from primary financial markets

4. The seller of a futures contract

A. assumes the long position

B. may, at his or her option, deliver or receive the underlying financial instrument at the specified date

C. has the obligation to deliver the underlying financial instrument at the specified date

D. has the obligation to receive the underlying financial instrument at the specified future date

5. The intrinsic value of an option is

A. the amount the option is actually worth if it is immediately exercised

B. the amount the option is expected to be worth on its expiration date

C. equal to the option premium

D. impossible to determine in the absence of information on the future prices of the underlying asset

6. If a futures contract for U.S. Treasury bonds increases by "18" in the financial quotes, the value of the contract increased by

A.$5,625

B. $56,250

C. $562.50

D. $56.25

7. One advantage of buying an option contract is that

A. an options contract involves lower cost than a futures contract

B. an option contract provides fewer insurance benefits than a futures contract

C. an options contract provides less opportunity for gain than a futures contract

D. the maximum loss is the option premium

8. Which of the following statements best expresses the role of speculators in financial markets

A. speculators reduce liquidity for hedgers in markets

B. speculators disrupt markets by raising prices to higher levels than would exist in their absence

C. speculators increase liquidity for hedgers in markets

D. speculators make high profits by assuming the same market positions that hedgers assume

9. An important difference between futures and options contracts is that

A. futures contracts have symmetric rights while options contracts have asymmetric rights

B. futures contracts have asymmetric rights while options contracts have symmetric rights

C. the buyer of a futures contract assumes the long position, while the buyer of an options contract assumes the short position

D. futures contracts are traded primarily in commodity markets,while options contracts are traded primarily in financial markets

10. Basis risk is a problem in hedging when

A. hedgers fail to fulfill their futures contracts

B. financial markets are highly liquid

C. imperfect correlation exists between the rate on the hedged instrument and on the instrument actually traded in the futures market

D. perfect correlation exists between the rate on the hedged instrument and on the instrument actually traded in the futures market