FIN 6320 - Summer 2004 test 1. Peter
Lewin
Multiple choice, 25 questions.
Of
the possible answers choose the best
alternative.
This
is a closed book test. Cheating will result in a zero among other possible sanctions.
Please
keep this test and hand in only your scantron. Use only a
882-ES Scantron.
Solution and Grade Distribution at end.
Consider
the following:
A
transportation firm has to transport a precious cargo, which contains 100
pieces of valuable gold bars, from point A to point B. There is a 5%
probability that the cargo will get hijacked along the way. The firm has two
transportation trucks and two drivers at its disposal. (Questions
1 through 4).
a.
.25
%
b. .5 %
c.
.10
%
d. .2 %
7.
If you use money to buy a new car, you are
using money as a
a.
means
of payment
b. form of credit
c.
source
of income
d. standard of value
8.
Which
of the following lists of assets is in the correct order from most liquid to
least liquid?
a.
a
dollar bill, government bonds, a house
b. a car, a small denomination
time deposit, a dollar bill
c.
government
bonds, apartment building, money market deposit account
d. government bonds, checking
accounts, parcel of land
9.
When
borrower-spenders raise funds in financial markets, they issue new securities
in
a.
an
intermediated market
b. the national market
c.
the
secondary market
d. the primary market
10. A secondary market is one
in which
a.
savers
place funds in financial intermediaries
b. existing securities can be
bought and sold
c.
new
securities are issued
d. financial intermediaries
make loans
11. The issuer of a bond is a
a.
lender
b. saver
c.
borrower
d. creditor
12. Which of the following
investments do not make interest payments annually but are sold at a discount
with the face value of the security paid at maturity?
a.
preferred
stock
b. zero coupon bonds
c.
preferred
bonds
d. convertible preferred stock
13. All securities share the
characteristic that they represent a claim to future
a.
dividend
payments
b. interest income
c.
cash
flows
d. ownership
14. An investor who anticipates
that interest rates will rise should
a.
buy
long on a bond futures contract
b. buy a variable-rate bond
c.
sell
short on a bond futures contract
d. buy preferred corporate
stock
15. That segment of the market
for securities which have original maturities of more than one year is called
the
a.
derivative
securities market
b. capital market
c.
money
market
d. stock market
16. An example of a financial
instrument in the capital market is
a.
commercial
paper
b. corporate bonds
c.
U.S.
Treasury bills
d. negotiable bank CDs
17. An example of a financial
instrument in the money market is
a.
corporate
bonds
b.
c.
residential
mortgages
d. negotiable bank CDs
18. Which of the following will
suffer the smallest loss in value from rising interest rates?
a.
a
U.S. Treasury bond
b. a commercial mortgage
c.
a
negotiable CD
d. a corporate bond
19. Which of the following will
suffer the largest loss in value from rising interest rates?
a.
a
U.S. Treasury bill
b. a corporate bond
c.
a
negotiable CD
d. commercial paper
20. The total amount of
interest collected after two years from a $6,000 loan with a simple annual
interest rate of 6 percent is equal to
a.
$12,360
b. $180
c.
$720
d. $6,360
21. The coupon rate is equal to
the
a.
present
value of the bond
b. face value divided by the
yield to maturity
c.
real
rate of return
d. interest rate printed on
the face of the bond
22. Suppose an individual pays
$4,000 for a $5,000-face-value coupon-bearing bond that pays $400 per year and
will be held until it matures in 10 years. The current yield on this bond is
a.
6
percent
b. 8 percent
c.
5
percent
d. 10 percent
23. The yield to maturity on a
bond is the
a.
coupon
payment multiplied by the number of payments
b. coupon payment divided by
the purchase price
c.
printed
interest rate
d. rate of discount that makes
the sum of present values for all future payments equal to the purchase price
24. Assume that a lottery
winner receives $20 million in equal payments spread out over twenty years. The
present value of the winnings is
a.
less
than $20 million
b. greater than $20 million
c.
either
greater than or less than $20 million, depending on the discount rate used for
the calculation
d. equal to $20 million
25. The yield to maturity on a
zero-coupon bond with a one-year maturity, a face value of $1,000, and a
purchase price of $900 is equal to
a.
9
percent
b. 10 percent
c.
11
percent
d. 5 percent
26. If the inflation rate is
expected to be 2 percent and creditors will lend only if the real interest rate
is 3 percent, the nominal interest rate will be
a.
1
percent
b. 12 percent
c.
7
percent
d. 5 percent
27. An increase in interest
rates causes _____________ the demand-for-loanable funds curve
a.
movement
up along
b. a rightward shift in
c.
movement
down along
d. a leftward shift in
28. The supply of loanable
funds is equivalent to the
a.
demand
for securities
b. demand for loanable funds
c.
supply
of securities
d. supply of bonds
29. Which of the following
would NOT cause an increase in the demand for loanable funds?
a.
an
increase in business borrowing
b. an increase in the public
debt
c.
a
decrease in interest rates
d. a decrease in mortgage
borrowing
30. What will cause the
quantity of loanable funds supplied to increase?
a.
a
decrease in interest rates
b. an increase in interest
rates
c.
a
decrease in inflationary expectations
d. an increase in inflationary
expectations
31. Which of these will cause
the equilibrium interest rate to rise?
a.
a
decrease in the demand for loanable funds
b. a decrease in the quantity
of loanable funds supplied
c.
a
decrease in the supply of loanable funds
d. a decrease in the quantity
of loanable funds demanded
32. An increase in saving by
households will
a.
raise
the equilibrium interest rate
b. lower the price of
securities
c.
have
no effect on the equilibrium interest rate
d. lower the equilibrium
interest rate
33. The equilibrium interest
rate will fall if the
a.
demand
for securities increases
b. supply of loanable funds
decreases
c.
inflation
rate increases
d. demand for loanable funds
decreases
34. An increase in the expected
rate of inflation causes
a.
a
decrease in the demand for loanable funds
b. interest rates to fall
c.
interest
rates to rise
d. an increase in the supply
of loanable funds
35. Creditors expecting lower
inflation will
a.
supply
more loanable funds at each real interest rate
b. supply less loanable funds
at each nominal interest rate
c.
supply
less loanable funds at each real interest rate
d. supply more loanable funds
at each nominal interest rate
36. During the expansion phase
of the business cycle
a.
bond
prices tend to rise
b. interest rates tend to rise
c.
the
demand for loanable funds tends to fall
d. inflationary expectations
tend to fall
37. The term structure of
interest rates provides a framework for analyzing securities of the same
a.
class
b. yield
c.
corporation
d. maturity
38. If the yield on long-term
securities is greater than the yield on comparable short-term securities, the
yield curve will be
a.
undefined
b. in the negative quadrant
c.
negatively
sloped
d. positively sloped
39. Assume that two-year
securities are yielding 6 percent and comparable one-year securities are
yielding 8 percent. According to the pure expectations theory, the market
expects next year's comparable one-year securities to yield
a.
6
percent
b. 4 percent
c.
8
percent
d. 14 percent
40. If one-year securities are
yielding 5 percent but the market anticipates rates for one-year securities
will rise to 7 percent, then according to the expectations theory, current
two-year securities should be yielding
a.
12
percent
b. 5 percent
c.
6
percent
d. 7 percent
41. Using the pure expectations
theory of term structure, a negatively sloped yield curve indicates that
investors expect
a.
rising
short term interest rates
b. falling short term interest
rates
c.
falling
long term interest rates
d. rising long term interest
rates
42. Compared with long-term
securities, the prices of short-term securities are always
a.
higher
b. lower
c.
less
volatile
d. more volatile
43. The original maturity on
U.S. Treasury notes is between
a.
ten
and thirty years
b. one and ten years
c.
three
months and one year
d. six months and three years
44. Which of the following is the most destructive of economic
stability?
a.
high interest rates
b. inflation
c.
deflation
d. foreign exchange
45. Commercial paper is to corporate bonds as Treasury Bills are to
a.
stocks
b. money
c.
Treasury bonds
d. a and c of the above
46. Some types of risk are not subject to reduction by
diversification. This is known as
a.
systematic risk
b. non-systematic risk
c.
non-reducible risk
d. paradoxical risk
47. The manager-stockholder
conflict generally becomes less severe
a.
the
smaller the firm
b. the larger the firm
c.
is
unaffected by the size of the firm
d. none of the above
48. The stockholder-lender
conflict refers to situations in which
a.
firm
owners have an incentive to understate their true riskiness in order to borrow
on more favorable terms
b. firm owners have an
incentive to overstate their true riskiness in order to borrow on more
favorable terms
c.
firm
owners have an incentive to accurately reveal their true riskiness in order to
borrow on more favorable terms
d. firms (managers and owners)
have an incentive to become riskier after their loans are funded
e.
a
and d of the above
49. The manager-stockholder
conflict refers to situations in which
a.
ownership
and control are separated
b. ownership and control are
united
c.
the
owner is the only shareholder
d. none of the above
50. The fact that a potential borrower has more knowledge about the
likely risks associated with the use of funds than a potential lender is known
as the problem of:
a.
moral
hazard
b. adverse selection
c.
asymmetric
information
d. default risk
Grade distribution:
If your score was greater than or equal to your grade is:
|
42 |
A |
|
35 |
B |
|
Else |
C |
Solution: (07/11 - I made some changes and have
adjusted the scores).
1.
a
2.
b
3.
e
4.
b
5.
d
6.
a
7.
a
8.
a
9.
d
10.
b
11.
c
12.
b
13.
c
14.
c
15.
b
16.
b
17.
d
18.
c
19.
b
20.
c
21.
d
22.
d
23.
d
24.
a
25.
c
26.
d
27.
a
28.
a
29.
c or d
30.
b
31.
c
32.
d
33.
d
34.
c
35.
a
36.
b
37.
a
38.
d
39.
b
40.
c
41.
b
42.
c
43.
b
44.
b
45.
c
46.
a
47.
a
48.
e
49.
a
50.
b