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| 1 | |
The concept of arbitrage |
| | A) | explains why it is impossible to predict stock market prices accurately |
| | B) | only applies to the foreign currency market |
| | C) | implies that financial markets are inefficient |
| | D) | implies that, in equilibrium, prices will make financial investors equally willing to buy or sell an asset |
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| 2 | |
Why is it so important to understand the workings of financial markets? |
| | A) | rates of return in financial markets can affect consumption and capital investments |
| | B) | many peoples' pension benefits will be affected if there are wide swings in the stock market |
| | C) | financial markets link government policy changes to peoples' ability to pay for a new house or a new car |
| | D) | all of the above |
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| 3 | |
On average, which of the following financial securities tends to have the lowest yield? |
| | A) | a three-month Treasury bill |
| | B) | a long-term government bond |
| | C) | a corporate bond |
| | D) | a share of stock in a major corporation |
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| 4 | |
The yield of a financial security is generally affected by |
| | A) | the default risk of the corporation that issued the security |
| | B) | the term to maturity |
| | C) | the degree of liquidity |
| | D) | all of the above |
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| 5 | |
The term structure of interest rates |
| | A) | specifies why yields on stocks tend to be higher than yields on bonds |
| | B) | specifies why compounded interest makes your money grow |
| | C) | refers to the relation between interest rates of different maturities |
| | D) | explains why short-term interest rates are always lower than long-term interest rates |
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| 6 | |
The yield curve |
| | A) | depicts the term structure of interest rates |
| | B) | depicts interest rate differentials between government bonds and corporate bonds |
| | C) | is most often downward sloping |
| | D) | ranks different stocks according to their risk and expected yield |
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| 7 | |
If a previously upward-sloping yield curve becomes downward sloping, it is likely that |
| | A) | the yield on corporate bonds is lower than the yield on Treasury bills |
| | B) | the economy will enter a recession |
| | C) | stock prices will go up |
| | D) | there will be a depreciation of the domestic currency |
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| 8 | |
Today's interest rate on a long-term bond depends on |
| | A) | the current short-term bond yield |
| | B) | future expected short-term bond yields |
| | C) | the degree of risk involved |
| | D) | all of the above |
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| 9 | |
Assume you put $5,000 in a savings account and leave it there for four years. If you get a compounded yearly interest rate of 4%, approximately how much will be in the account after the four years? |
| | A) | $6,000 |
| | B) | $5,850 |
| | C) | $5,750 |
| | D) | $5,650 |
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| 10 | |
Assume you put $8,000 in a savings account and leave it there for three years. If you get a compounded yearly interest rate of 6% the first year, 5% for the second year, and 4% for the third year, approximately how much will be in the account after the three years? |
| | A) | $9,060 |
| | B) | $9,160 |
| | C) | $9,260 |
| | D) | $9,360 |
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| 11 | |
Assume you signed an IOU, promising to pay someone $66,550 three years from now. How much money would you have to put in a bank now at a compounded yearly interest rate of 10%, to be able to pay your debt after the three years? |
| | A) | $60,000 |
| | B) | $55,000 |
| | C) | $52,000 |
| | D) | $50,000 |
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| 12 | |
Assume a two-year maturity bond with a face value of $12,100 and a coupon rate of 5%. If the market interest rate is expected to be i = 10%, over the next two years, the price of this bond should be about |
| | A) | $10,000 |
| | B) | $11,050 |
| | C) | $11,500 |
| | D) | $12,100 |
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| 13 | |
Assume a five-year maturity bond with a face value of $1,000 and a coupon rate of 10%. If you bought this bond for $900, then the current market interest rate is likely to be |
| | A) | lower than 10% |
| | B) | 10% |
| | C) | higher than 10% |
| | D) | we can't tell from this information |
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| 14 | |
If the current price of a share of preferred stock that pays a fixed dividend of $4.00 for each year you own it is $50, what is the current market interest rate? |
| | A) | 8.0% |
| | B) | 6.0% |
| | C) | 4.0% |
| | D) | 2.0% |
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| 15 | |
The random walk theory of stock prices predicts that |
| | A) | surprise information will not affect stock prices significantly |
| | B) | financial markets are inefficient and therefore stock prices are highly volatile |
| | C) | financial investors react only slowly to interest rate changes |
| | D) | financial investors cannot consistently outperform the stock market |
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| 16 | |
A well-established fact in economics is that |
| | A) | changes in stock prices are essentially unpredictable |
| | B) | investing in stocks is much safer than investing in bonds |
| | C) | long-term government bonds have no interest rate risk |
| | D) | financial markets are not linked to the goods market at all |
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| 17 | |
Which of the following statements is FALSE? |
| | A) | even an expert cannot always predict the timing of large stock market swings accurately |
| | B) | volatility in stock prices is seen as a sign of market inefficiency |
| | C) | the stock market is heavily influenced by long-term interest rates |
| | D) | asset prices and interest rates are inversely related |
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| 18 | |
In the equation Pt = a + Pt - 1 + є that shows current stock prices (Pt) as a function of stock prices from 1 month ago (Pt - 1), the term "a" refers to |
| | A) | the surprise change in stock value |
| | B) | the risk premium |
| | C) | the net present value of the stock |
| | D) | the expected return from holding the stock |
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| 19 | |
Uncovered interest parity refers to the relationship between |
| | A) | bond yields and stock returns |
| | B) | bonds yields and bond prices |
| | C) | the interest rate differentials between domestic and foreign bonds |
| | D) | exchange rate changes and the interest rate differential between two countries |
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| 20 | |
Assume U.S. interest rates increase but interest rates in other countries remain the same. Which of the following is likely to happen? |
| | A) | the U.S. will experience an outflow of funds |
| | B) | the value of U.S. stocks will increase |
| | C) | the U.S. dollar will appreciate |
| | D) | the U.S. dollar will depreciate |
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