Question 1

Which yield curve theory is based on the premises that financial instruments of different terms are not substitutable and therefore the supply and demand in the markets for short-term and long-term instruments is determined largely independently?

Question 1 options:

a. All of these answers.

b. The segmented market hypothesis.

c. The liquidity premium theory.

d. The expectation hypothesis.

Question 2

Which of the following statements regarding the relationship between economic factors and the nominal inflation rate is true?

Question 2 options:

a. If the inflationary expectation goes up, the market interest rate decreases.

b. If there is an inflationary gap, there will be a corresponding reduction in interest rates.

c. All of these answers.

d. For every 1% increase in inflation, the nominal interest rate should be raised by more than 1%.

Question 3

Which of the following predictions based on a description of the yield curve is correct?

Question 3 options:

a. A normal yield curve suggests that interest rates will be raised in the future.

b. All of these answers.

c. An inverted yield curve suggests that interest rates will be dramatically cut.

d. A flat yield curve suggest that interest rates will be cut.

Question 4

The terms of a bond allows its issuer to redeem the security at anytime. This type of bond is _____.

Question 4 options:

a. an American callable.

b. a Bermudan callable.

c. an Asian callable.

d. a European callable.

Question 5

A company issues a bond with a coupon rate of 5%. Since the bond was issued, market interest rates have decreased. What effect will this decrease have on the bond's market price and its current yield?

Question 5 options:

a. The bond will trade above par and its current yield will decrease.

b. The bond will trade below par and its current yield will increase.

c. The bond will trade below par and its current yield will decrease.

d. The bond will trade above par and its current yield will increase.

Question 6

Which of the following describes a difference between stocks and bonds?

Question 6 options:

a. Stocks can be resold on a secondary market, while bonds cannot.

b. Stockholders generally have an equity stake in the business while bondholders have a creditor stake.

c. All of these answers.

d. Bonds always have a defined term while stocks may be outstanding indefinitely.

Question 7

Which of the following are debt instruments that companies use as investments? Choose one answer.

Question 7 options:

a. Unpaid Accounts

b. Bank Loans

c. Stocks

d. Bonds

Question 8

Which of the following statements about the disadvantages of bonds as investments is correct?

Question 8 options:

a. All of these answers.

b. When a bond issuer is able to pay off a bond early, the bond is subject to event risk.

c. Bonds are subject to prepayment risk, credit risk, reinvestment risk, and yield curve risk.

d. Interest rate risk is only a problem if the bondholder decides to hold the bond until it matures.

Question 9

Which of the following statements regarding the advantages of bonds as an investment, are true?

Question 9 options:

a. Bonds are more liquid than stock.

b. All of these answers.

c. The market price of bonds are less volatile than stocks.

d. If a company goes bankrupt, its bondholders will recover the entirety of the bond's principal.

Question 10

Which of the following statements about zero coupon bonds is NOT true?

Question 10 options:

a. Zero coupon bonds are particularly popular with pension and insurance companies.

b. The impact of interest rate fluctuations on zero coupon bonds is higher than for coupon bonds.

c. U.S. Treasury bills and saving bonds are example of zero coupon bonds.

d. When a bond is "stripped," it is split into two parts; the principal and the coupons, or "residue."

Question 11

Which of the following statements about floating rate bonds (FRBs) is NOT true?

Question 11 options:

a. An FRBs spread is a rate that remains constant.

b. FRBs carry significant interest rate risk; its price declines as market rates rise.

c. An FRB with a maximum coupon is called a "capped FRB."

d. In Europe, FRBs are generally issued by banks.

Question 12

Given an inflation rate of 3% and a real rate of 5%, what is the corresponding nominal rate?

Question 12 options:

a. 9.2%

b. 108%

c. 8%

d. 4%

Question 13

A bond has a coupon rate of 7% and a yield to maturity rate of 8%. The bond is ____.

Question 13 options:

a. selling at yield

b. selling at par.

c. selling at a discount.

d. selling at a premium.

Question 14

A bond grants its holder the option to sell the bond back to the issuer at a fixed price at a fixed date prior to the bond's maturity. When evaluating the bond's value, the company should calculate the bond's _____.

Question 14 options:

a. yield to put.

b. yield to discount.

c. yield to call.

d. yield to worst.

Question 15

Which of the following statements regarding the calculation and use of inflation premiums is true?

Question 15 options:

a. The inflation premium varies based on each analyst's expectations regarding future inflation.

b. An inflation premium is caused by lender compensating for expected inflation.

c. All of these answers.

d. Actual interest rates are viewed as being the nominal interest rate minus the inflation premium.

Question 16

A zero-coupon bond has a face value of $1000 and a market value of $800. The bond will mature in 5 years. What is its yield to maturity?

Question 16 options:

a. 104.56%

b. -4.37%

c. 4.56%

d. 205.17%

Question 17

Which of the following statements regarding a bond's time to maturity is true?

Question 17 options:

a. The fair price of a "straight bond" is the sum of its discounted expected cash flows.

b. A bond with a shorter maturity generally has a higher price than one with a longer maturity.

c. United States Treasury Bonds have maturities between six to twelve years.

d. All of these answers.

Question 18

Which of the following is NOT a class of credit ratings that a Nationally Recognized Statistical Rating Organization (NRSRO) can register to review?

Question 18 options:

a. Issuers of government securities.

b. Individuals.

c. Financial institutions, brokers, and dealers.

d. Insurance companies.

Question 19

When an issuing company goes bankrupt, the bondholders are always paid before which of the following the parties?

Question 19 options:

a. All of these answers.

b. The company's trade creditors.

c. The bank lenders.

d. The company's shareholders.

Question 20

Which of the following is NOT a type of bond?

a. Corporate bonds.

b. Treasuries

c. Certificate of deposits (CDs)

d. Municipal bonds.