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Exam 6: Understanding Financial Markets and Institutions

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Question 31

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Which of these money market instruments are short-term funds transferred between financial institutions, usually for no more than one day?

A) treasury bills
B) federal funds
C) commercial paper
D) banker acceptances

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Question 32

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Suppose we observe the following rates: ₁R₁ = 8 percent, ₁R₂ = 10 percent, and E(₂r₁) = 8 percent. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L₂?

A) 1.02 percent
B) 4.04 percent
C) 6.15 percent
D) 12.03 percent

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Question 33

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Why would foreign participants borrow from U.S. financial markets?

Which of the following factors cause the supply of funds curve to shift?

Which of the following statements is correct?

All of the following are factors that influence interest rates for individual securities EXCEPT

Which of these is the interest rate that would exist on a default-free security if no inflation were expected?

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. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities?

A particular security's default risk premium is 3 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 4.2 percent. The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. The security has no special covenants. Calculate the security's equilibrium rate of return.

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

In the United States, which of these financial institutions arrange most primary market transactions for businesses?

All of the following are benefits that financial institutions provide to our economy EXCEPT

How is the shadow banking system the same as the traditional banking system?

Assume that you observe the following rates on long-term bonds: U.S. Treasury bonds = 4.15 percent AAA Corporate bonds = 6.2 percent BBB The main reason for the differences in the interest rates is:

Which of the following theories argues that individual investors and financial institutions have specific maturity preferences, and to encourage buyers to hold securities with maturities other than their most preferred requires a higher interest rate?

One-year Treasury bills currently earn 3.15 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.65 percent and that two years from now, one-year Treasury bill rates will increase to 4.05 percent. If the unbiased expectations theory is correct, what should the current rate be on three-year Treasury securities?

A two-year Treasury security currently earns 5.13 percent. Over the next two years, the real interest rate is expected to be 2.15 percent per year and the inflation premium is expected to be 1.75 percent per year. Calculate the maturity risk premium on the two-year Treasury security.

All of the following special provisions benefit security holders EXCEPT

When monetary policy objectives are to contract the economic growth, which of the following occurs?

You are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that one-year T-bills are currently earning 3.50 percent. Your broker has determined the following information about economic activity and the corporation's bonds: Real interest rate = 2.50 percent Default risk premium = 1.75 percent Liquidity risk premium = 0.70 percent Maturity risk premium = 1.50 percent What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds?