1. Considering the value of a financial instrument, the bigger the size of the p
ID: 1097137 • Letter: 1
Question
1. Considering the value of a financial instrument, the bigger the size of the promised payment?
A. The less valuable the financial instrument because risk must be greater
B. The longer an investor has to wait for the payment
C. The more valuable the financial instrument
D. The greater the risk
2. Rising inflation expectations lead to rising nominal rates because
A. rising inflation expectations lead to falling bond demand and supply
B. rising inflation expectations lead to rising bond demand and supply
C. rising inflation expectations lead to falling bond demand and rising bind supply
D. rising inflation expectations lead to rising bond demand and falling bond supply
3. If a mutual fund manager is earning above-average returns and markets are effcient, on epossible explanation for this is:
A. the manager is taking on more risk
B. the manager is using technical analysis
C. the manager is more experienced
D. al of the above
4. The risk structure of interest rate says:
A. interest rates on different bonds are not correlated
B. lower rated bonds will have lower yields
C. lower rate bonds will have higher yield
D. interest rates never compensate for risk
5. The yield curve plots:
A. yields on bonds for varioous bond ratings
B. yields on bonds for various tax treatments
C. treasury yields for various maturities at a given point in time
D. treasury yields over time
6.All of the following are true about risk spread EXCEPT:
A. It should be higher for highly speculative bonds than investment grade bonds
B. It should have a direct relationship with the bond's yield
C. It should have a direct relationship with the bond's price
D. It should have a inverse relationship with the bond's price
7. A pension fund manager who plans on selling bonds in the future:
A. wants to insure against the price of bonds falling
B. can offset the risk of bond prices rising by selling a futures contract
C. will the long position in a futures contract
D.will take the short position in a futures contract
8. Unlike futures contracts, a major risk for swaps is that:
A. interest rates will not change
B. one of the parties will default
C. they are highly liquid and the market price will change
D. high U.S. government deficits will limit the availability of swaps.
9. Consider the choice between $25,000 today or $1,000 per year for 30 years, with investors caring only about the time value of money. Which of the following is true?
A. at an interest rate of 0% an investor will odayprefer $25,000 t
B. an ivestor choosing $25,000 today has a higher discount rate than an investor choosing $1,000/yr.
C. an ivestor choosing $25,000 today has a lower discount rate than an investor choosing $1,000/yr.
D. Both A and C
10. In which of the following situations would you rather be LENDING?
A. the nominal interest rate is 20% and expected inflation rate is 15%
B. the nominal interest rate is 12% and expected inflation rate is 10%
C. the nominal interest rate is 11% and expected inflation rate is 5%
D.the nominal interest rate is 4% and expected inflation rate is 1%
11. Suppose purchasing power parity holds between Canada and the U.S., and the exchange rate is C$1.20/US $1. A Big Mac that costs $3.40 in the US should cost______ in Canada
A. C$ 2.20
B. C$ 2.83
C. C$ 4.08
D.C$ 4.60
12. Assuming risk averse behavior, which of the following is NOT true?
A. An investor will never prefer an investment with a lower expected return
B. An investor will always prefer an investment with a certain return to one with the same expected return but any amount of uncertainty
C. An investor will sometimes accept higher risk in exchange for a higher expected return
D.An investor will compare the risk and expected return and the tradeoff involved
13. The fact that a financial intermediary can hire a lawyer to write one contract that works for many customers is an example of:
A. Economies of scale
B. the law of diminishing marginal returns
C. the law of increasing opportunity cost
D.the law of demand
14. By pooling the funds of many smaller saver, financial intermediaries:
A. obtainthe funds necessary to make loans to borrowers seeking large amounts
B. obtain substantial fee income from small savers
C. raise their transaction costs of obtaining funds
D.hedge their interest rate risk
15. Requiring an applicant to have a significant net worth is one way lenders deal with the problem of:
A. free-riders
B. adverse selection
C. moral hazard
D.the lemons market
Explanation / Answer
1.C. the bigger size of the financial instruments we means taht the larger value of the finacial asset.
2.D. rising infaltion will lead to the expectation of bond prices will be lowered and interest rates would be increased.
3.D
4. the risk structure of intrest says that the yield on a security to its risk of default at various points in the meturity spectrum.
5. he yield curve is a line graph rhat plots the relationship between yied to meturity and time to meturity for bonds of the same asset class and credit quality.
6.option C
7.option B
8.the major risk of swaps are:1.credit risk 2.exchange rate risk 3.mismatch risk 4.soveriegn risk
9. the time value apprach discussed that the value of a property equals the present value of anticipated future benefits. this is also defined as fiancial principle assumed that a positive interest can be earned on an investment,therefore,money recieved in today is more valuable than money recieved in the future
10.C.nominal interest rate is the real interst rate plus expected inflation rate.
11.option C
12.risk aversion behaviour we means that firms optmized the expected utility of profits rather than to maximize the profits itself
13.A
14.pooling the savings of many savers enables financial intermedairies to maintain sufficient funds to lend on a longer term basis while satisfying the needs of individuals savers to withdraw savings on short notice.
15.A
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