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Practice Test
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1
Which of the following transactions takes place in the primary markets? (LG1)
A)IBM issues $200 million of new common stock.
B)IBM sells $5 million of GM preferred stock out of its marketable securities portfolio.
C)The Magellan Fund buys $100 million of previously issued IBM bonds.
D)Prudential Insurance Co. sells $10 million of GM common stock.
2
Which of the following financial instruments is a money market security? (LG2)
A)Corporate Bonds – capital market security
B)Common Stock – capital market security
C)Federal Funds – money market security
D)Mortgages – capital market security
E)U.S. Treasury Notes – capital market security
3
IDM Corporation 15-year bonds have an equilibrium rate of return is 9 percent. For all securities, the inflation risk premium is 2.25 percent and the real interest rate is 2.5 percent. The security's liquidity risk premium is 0.50 percent and maturity risk premium is 0.75 percent. The security has no special covenants. Calculate the bond's default risk premium. (LG4)
A)4.75%
B)3.00%
C)4.25%
D)3.75%
4
One-year Treasury bills currently earn 4.25 percent. You expected that one year from now, one-year Treasury bill rates will increase to 4.50 percent. If the unbiased expectations theory is Correct, what should the current rate be on two-year Treasury securities? (LG5)
A)1.9125%
B)19.125%
C)8.94%
D)4.37%
5
Based on economists' forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:

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Using the liquidity premium hypothesis, calculate the current rate on a three-year Treasury security. (LG5)
A)5.47%
B)5.22%
C)5.67%
D)5.42%
6
Mandy's Clothes Corp's 10-year bonds are currently yielding a return of 10.25 percent. The expected inflation premium is 3.25 percent annually and the real interest rate is expected to be 2.75 percent annually over the next 10 years. The liquidity risk premium on Nikki G's bonds is 0.35 percent. The maturity risk premium is 0.25 percent on 2-year securities and increases by 0.05 percent for each additional year to maturity. Calculate the default risk premium on Mandy's Clothes 10-year bonds. (LG4)
A)3.00%
B)3.65%
C)3.45%
D)3.25%
7
Suppose we observe the following rates: 1R1 = 5%, 1R2 = 7%. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now, E(2r1)? (LG4)
A)19.04%
B)13.04%
C)9.04%
D)3.04%
8
Suppose we observe the following rates: 1R1 = 6%, 1R2 = 8.5%, and E(2r1) = 10.5%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L2? (LG5)
A)0.559%
B)1.00559%.
C)0.0694%
D)1.00694%.
9
You note the following yield curve in The Wall Street Journal. According to the unbiased expectations hypothesis, what is the one-year forward rate for the period beginning one year from today, 2f1? (LG6)

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A)2.54%
B)1.91%
C)9.91%
D)8.54%
10
On March 11, 20XX, the existing or current (spot) one-year, two-year, three-year, and four-year zero-coupon Treasury security rates were as follows:

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Using the unbiased expectations theory, calculate the one-year forward rates on zero-coupon Treasury bonds for years three and four as of March 11, 20XX. (LG6)
A)6.86% and 4.15%
B)5.85% and 6.86%
C)4.15% and 5.85%
D)3.75% and 6.86%







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