QUESTION 1

1. Once firms issue financial instruments in primary markets, these same stocks and bonds are then traded in which of these?

   		secondary markets
   		initial public offerings
   		over-the-counter stocks
   		direct transfers

QUESTION 2

1. Which of these feature debt securities or instruments with maturities of one year or less?

   	1.	primary markets
   	2.	money markets
   	3.	over-the-counter stocks
   	4.	secondary markets

QUESTION 3

1. Which of the following is/are NOT a capital market security

   	1.	Corporate bonds
   	2.	Banker's acceptances
   	3.	Corporate stocks
   	4.	State and local government bonds

2 points

QUESTION 4

1. Which of these statements is true?

   	1.	The higher the default risk, the higher the interest rate that securities buyers will demand.
   	2.	The lower the default risk, the higher the interest rate that securities buyers will demand.
   	3.	The higher the default risk, the lower the interest rate that securities buyers will demand.
   	4.	The default risk does not impact the interest rate that securities buyers will demand.

2 points

QUESTION 5

1. A particular security's default risk premium is 3 percent. For all securities, the inflation risk premium is 2 percent and the real interest rate is 2.25 percent. The security's liquidity risk premium is 0.75 percent and maturity risk premium is 0.90 percent. The security has no special covenants. What is the security's equilibrium rate of return?

   	1.	3.95 percent
   	2.	17.8 percent
   	3.	1.78 percent
   	4.	8.90 percent

3 points

QUESTION 6

1. Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:

   1R1 = 5%,

   E(2r1) = 5.5%,

   E(3r1) = 6.5%,

   E(4r1) = 7.0%

   Using the unbiased expectations theory, what is the current (long-term) rate for four-year-maturity Treasury securities?

   	1.	6.33 percent
   	2.	7.00 percent
   	3.	6.75 percent
   	4.	6.00 percent

3 points

QUESTION 7

1. One-year Treasury bills currently earn 5.50 percent. You expect that one year from now, one-year Treasury bill rates will increase to 5.75 percent. The liquidity premium on two-year securities is 0.075 percent. If the liquidity theory is correct, what should the current rate be on two-year Treasury securities?

   	1.	3.775 percent
   	2.	5.625 percent
   	3.	11.325 percent
   	4.	5.662 percent

QUESTION 8

1. The Wall Street Journal reports that the rate on three-year Treasury securities is 4.75 percent and the rate on four-year Treasury securities is 5.00 percent. The one-year interest rate expected in three years is E(4r1), 5.25 percent. According to the liquidity premium theory, what is the liquidity premium on the four-year Treasury security, L4?

   	1.	0.0375 percent
   	2.	5.04 percent
   	3.	0.504 percent
   	4.	5.01 percent

QUESTION 9

1. A bond's main characteristics include?

   	1.	All of the above
   	2.	The coupon rate
   	3.	The par value of each bond
   	4.	The date the principal will be paid

QUESTION 10

1. The interest rate used to compute the bond's interest payment each year refers to:

   	1.	Bond price
   	2.	None of the above
   	3.	Par value
   	4.	Coupon rate

QUESTION 11

1. Which of the following is a true statement?

   	1.	If interest rates fall, U.S. Treasury bonds will have decreasing values.
   	2.	If interest rates fall, no bonds will enjoy rising values.
   	3.	If interest rates fall, all bonds will enjoy rising values.
   	4.	If interest rates fall, corporate bonds will have decreasing values.