Question 1

A bond that pays no annual interest (or coupons)  and has a face value at maturity will fetch a price today that is equal to the:

Accepted Answer

A)   Future value of its face value
B)   Number of years in the life of the bond times its face value
C)   Present value of the number of years in the life of the bond times its face value
D)   Present value of its face valueE) All of the above
F) A) and C)

Question 2

Which of the following statements is true about investing in stocks and bonds?

Accepted Answer

A)   Issuers of stocks can default on their stock obligations
B)   Investing in stocks involve less risk because the future payments are less uncertain
C)   In case of bankruptcy, bondholders get paid first ahead of stockholders
D)   Bankruptcy occurs when the issuing firm is unable to fulfill its stock obligationsE) A) and B)
F) C) and D)

Question 3

If we observe that many investors are selling Bond A and buying a similar Bond B, this suggests that the expected returns on:

Accepted Answer

A)   Bond A will start falling
B)   Bond B will start rising
C)   Bond A was higher than that of Bond B
D)   Bond A will start risingE) None of the above
F) A) and B)

Question 4

The primary risk that bondholders face is that:

Accepted Answer

A)   The bond will reduce in price
B)   The bond issuer will default
C)   Inflation will decrease
D)   The rate of return will increaseE) A) and D)
F) B) and D)

Question 5

The buying and selling activities that tend to equalize the rates of return on identical or nearly identical assets is called:

Accepted Answer

A)   Beta
B)   Risk
C)   Arbitrage
D)   DiversificationE) A) and B)
F) A) and C)

Question 6

If the Fed raises the interest rates on short-term U.S. government bonds, then the Security Market Line shifts:

Accepted Answer

A)   Downward as the risk-free interest rate increases
B)   Downward as the risk-free interest rate decreases
C)   Upward as the risk-free interest rate increases
D)   Upward as the risk-free interest rate decreasesE) None of the above
F) A) and C)

Question 7

Roger has the opportunity to invest $100,000 in two different assets. The investment in Asset #1 will have a present value of $120,000. The investment in Asset #2 is expected to have a future value of $140,000 in four years. If the market interest rate is 5 percent a year, which one would be the better investment?

Accepted Answer

A)   Asset #2, because its future value is greater than the present value of Asset #1
B)   Asset #1, because its present value is greater than the future value of Asset #2
C)   Asset #2, because its present value is greater than the present value of Asset #1
D)   Asset #1, because its present value is greater than the present value of Asset #2E) B) and C)
F) B) and D)

Question 8

Diversification is an investment strategy that seeks to reduce the overall risk in an investment portfolio by selecting a group of assets whose risks differ from one another.

Accepted Answer

A) True 
 B)False

Question 9

Refer to the graph above. The bracket A represents the:

Accepted Answer

A)   Rate of return for an asset
B)   Rate of return for the risk-free asset
C)   Risk premium for an asset with a certain risk level
D)   Compensation for time preference for an asset with a certain risk levelE) None of the above
F) B) and D)

Question 10

The U.S. Federal government is unlikely to default on its bonds because:

Accepted Answer

A)   The bonds are all long term bonds and they are insured
B)   The Federal government has the ability to collect taxes and to sell securities to the Fed
C)   Foreigners are willing to buy the Federal government bonds and lend to the U.S. government
D)   The Federal government can always borrow from the states and from businessesE) A) and D)
F) A) and C)

Question 11

If the Federal Reserve uses open-market operations to lower the interest rates on short-term U.S. government bonds, then as a consequence asset prices:

Accepted Answer

A)   Increase, and the average expected rate of return on assets decreases
B)   Decrease, and the average expected rate of return on assets increases
C)   Increase, and the average expected rate of return on assets increases
D)   Decrease, and the average expected rate of return on assets decreasesE) None of the above
F) C) and D)

Question 12

The current price of an asset is equal to the future value of its expected returns or income streams.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements best describes the relationship between asset prices and average expected returns?

Accepted Answer

A)   More risky assets will have similar prices as less risky assets
B)   Less risky assets will have lower prices than more risky assets
C)   Less risky assets will have higher prices than more risky assets
D)   More risky assets will have higher prices than less risky assetsE) A) and B)
F) All of the above

Question 14

The decision of the Federal Reserve to reduce the short-term interest rate will shift the Security Market Line upward.

Accepted Answer

A) True 
 B)False

Question 15

The so-called risk-free rate essentially measures the investors':

Accepted Answer

A)   Risk aversion
B)   Risk preference
C)   Time preference
D)   Expected rate of returnE) B) and C)
F) None of the above

Question 16

The key difference between bonds and stocks is that stocks' income streams are more predictable than those of bonds.

Accepted Answer

A) True 
 B)False

Exam 17: Financial Economics

If we observe that many investors are selling Bond A and buying a similar Bond B, this suggests that the expected returns on:

Correct Answer
verified

Refer to the graph above. The bracket A represents the:

Correct Answer
verified

The buying and selling activities that tend to equalize the rates of return on identical or nearly identical assets is called:

Correct Answer
verified

The so-called risk-free rate essentially measures the investors':

Correct Answer
verified

Which of the following statements best describes the relationship between asset prices and average expected returns?

Correct Answer
verified

If the Fed raises the interest rates on short-term U.S. government bonds, then the Security Market Line shifts:

Correct Answer
verified

Which of the following statements is true about investing in stocks and bonds?

Correct Answer
verified

The key difference between bonds and stocks is that stocks' income streams are more predictable than those of bonds.

Correct Answer
verified

The current price of an asset is equal to the future value of its expected returns or income streams.

Correct Answer
verified

The decision of the Federal Reserve to reduce the short-term interest rate will shift the Security Market Line upward.

Correct Answer
verified

Diversification is an investment strategy that seeks to reduce the overall risk in an investment portfolio by selecting a group of assets whose risks differ from one another.

Correct Answer
verified

The U.S. Federal government is unlikely to default on its bonds because:

Correct Answer
verified

Correct Answer
verified

A bond that pays no annual interest (or coupons) and has a face value at maturity will fetch a price today that is equal to the:

Correct Answer
verified

If the Federal Reserve uses open-market operations to lower the interest rates on short-term U.S. government bonds, then as a consequence asset prices:

Correct Answer
verified

The primary risk that bondholders face is that:

Correct Answer
verified

Exam 17: Financial Economics

If we observe that many investors are selling Bond A and buying a similar Bond B, this suggests that the expected returns on:

Correct AnswerverifiedShow Answer

Refer to the graph above. The bracket A represents the:

Correct AnswerverifiedShow Answer

The buying and selling activities that tend to equalize the rates of return on identical or nearly identical assets is called:

Correct AnswerverifiedShow Answer

The so-called risk-free rate essentially measures the investors':

Correct AnswerverifiedShow Answer

Which of the following statements best describes the relationship between asset prices and average expected returns?

Correct AnswerverifiedShow Answer

If the Fed raises the interest rates on short-term U.S. government bonds, then the Security Market Line shifts:

Correct AnswerverifiedShow Answer

Which of the following statements is true about investing in stocks and bonds?

Correct AnswerverifiedShow Answer

The key difference between bonds and stocks is that stocks' income streams are more predictable than those of bonds.

Correct AnswerverifiedShow Answer

The current price of an asset is equal to the future value of its expected returns or income streams.

Correct AnswerverifiedShow Answer

The decision of the Federal Reserve to reduce the short-term interest rate will shift the Security Market Line upward.

Correct AnswerverifiedShow Answer

Diversification is an investment strategy that seeks to reduce the overall risk in an investment portfolio by selecting a group of assets whose risks differ from one another.

Correct AnswerverifiedShow Answer

The U.S. Federal government is unlikely to default on its bonds because:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A bond that pays no annual interest (or coupons) and has a face value at maturity will fetch a price today that is equal to the:

Correct AnswerverifiedShow Answer

If the Federal Reserve uses open-market operations to lower the interest rates on short-term U.S. government bonds, then as a consequence asset prices:

Correct AnswerverifiedShow Answer

The primary risk that bondholders face is that:

Correct AnswerverifiedShow Answer

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