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Q:
Considering the S&P 500 Index, if each company's stock price increased by 10%: A. the weights in the index would remain the same.B. the companies with the most shares outstanding would have even greater weight after the increase.C. the companies with fewer shares would gain more weight at the expense of the companies with greater shares.D. the weights in the index would change to reflect the percentage changes in the prices of the various stocks.
Q:
The Standard & Poor's 500 Index: A. gives more weight to large companies than small companies.B. actually includes more than 500 of the largest corporations in the U.S.C. is a price-weighted index.D. assigns equal weight to all the prices of all the stocks in the index.
Q:
Suppose that the Federal Reserve is concerned about rising inflation, so they increase short-term interest rates. How will this affect long-term rates and the yield curve? What does the slope of the yield curve reveal about the effectiveness of the Fed's policy? Explain in the context of the Liquidity Premium Theory.
Q:
The paper-bill spread refers to the interest rate spread between commercial paper and Treasury bills with the same maturity. Is this a risk spread or a term spread? How do you expect the paper-bill spread is related to GDP growth? What is the intuition for this result? What does this imply about the yield curve?
Q:
We have heard the predictions regarding the large number of people that will be retiring over the next 25-50 years and the strain this is going to place on the federal budget. Assuming that federal borrowing will have to increase, what is the likely impact going to be on the risk and term structure (if any) of interest rates and why?
Q:
Under the Expectations Hypothesis of the term structure of interest rates, explain the impact of a U.S. Treasury decision to phase out the 30-year bond and to only focus on 3-month, 1-year, 5-year and 10-year bonds.
Q:
In 2002 and 2003, the financial markets were hit by many corporate accounting scandals. Discuss these scandals and the impact they would have not only in terms of a flight to quality, but also in terms of the faith that people place in bond rating agencies.
Q:
Please use the graphs to show what happens to the risk (yield) differential in each situation and why? Assume the corporate and Treasury bonds have the same maturity.a) If the corporate bonds are default-risk free, what could you tell about the price and yields of each?b) If the corporate bonds are now viewed as having the possibility of default, what happens in each market?c) If the corporate bonds are granted tax-exempt status, what happens in each market?d) If the corporate bonds have a longer maturity than the Treasury bonds what would happen?
Q:
At the beginning of 2006 the yield curve was usually flat, and sometimes downward sloping (inverted). This raised concerns that a recession might be on the way. But the slope of the yield curve is only part of the story. What else is important?
Q:
Explain why most retired individuals are not likely to be heavily invested in municipal bonds.
Q:
Does the Expectations Hypothesis allow for people to have a preference for longer-term investments? Explain.
Q:
Why might we expect to see a high correlation between increases in the risk structure of interest rates and the yield curve becoming inverted?
Q:
Explain why an inverted yield curve is a valuable forecasting tool.
Q:
Why do yield curves usually slope upward?
Q:
Describe the concept of flight to quality in terms of the Russian government default of August 1998.
Q:
When we compare the graphs of GDP growth over time to the corresponding risk spread on Baa bonds compared to 10-year U.S. Treasury bonds, what relationship can be inferred?
Q:
During economic slowdowns why would you expect the risk premium to increase the most between U.S. Treasury bonds and junk bonds?
Q:
What impact should an economic slowdown have on the risk structure of interest rates?
Q:
Why can't the Expectations Hypothesis stand alone as an adequate theory to explain yield curves?
Q:
The usually upward sloping yield curve indicates that long-term bonds have higher yields than short-term bonds. Why is this?
Q:
Any theory of the yield curve must be able to explain what three general conditions?
Q:
Assuming the Expectations Hypothesis is correct, and given the following information:The current four-year interest rate is 5.0%The current one-year interest rate is 4.0%The expected one-year rate for one year from now is 5.0%The expected one-year rate for two years from now is 5.5%What is the expected one-year rate for three years from now? Explain.
Q:
What is the equivalent tax-exempt bond yield for a taxable bond with an 8% yield and a bondholder in a 35% marginal tax rate? Explain.
Q:
Standardization of financial instruments has occurred as a result of: A. the rule of 70.B. the law of demand.C. economies of scale.D. the law of supply.
Q:
Which of the following statements is most correct? A. When a risk is difficult to predict, financial instruments are created to transfer these risks.B. Financial instruments are created to transfer risks that are relatively easy to predict.C. Financial instruments require certainty of an event to be able to transfer risk.D. Financial instruments eliminate the risk from uncertainty, they do not transfer it.
Q:
A bank is a financial intermediary. Which of the following statements is most accurate? A. The bank's depositors are the ultimate lenders and the bank is the ultimate borrower.B. People seeking loans from the bank are the ultimate spenders while the bank is the ultimate lender.C. The bank's depositors are the ultimate lenders, while those seeking loans from the bank are the ultimate spenders.D. Those seeking loans from the bank are the ultimate spenders; the bank's stockholders are the ultimate lenders.
Q:
Juan purchases automobile insurance; the insurance contract is a: A. financial instrument.B. form of money.C. transfer of risk from the insurance company to Juan.D. financial intermediary.
Q:
Financial instruments are different from money because they: A. can act as a store of value and money cannot.B. can't be a means of payment but money can.C. can allow for the transfer of risk.D. have greater liquidity.
Q:
Financial instruments and money share which of the following characteristics? A. Both can function as a means of payment and a store of value.B. Both can function as a store of value and allow for trading of risk.C. Both can function by acting as a means of payment and allow for trading of risk.D. Both can function as a store of value even though they do not allow for trading of risk.
Q:
Sue has a checking account at the First National Bank; her checking account is a(n): A. asset to the bank and a liability to Sue.B. asset to Sue and a liability to the bank.C. asset to Sue but actually a liability to the Federal Reserve.D. liability to Sue until she spends the funds.
Q:
Which of the following is not a financial instrument? A. A share of Microsoft stockB. A U.S. Treasury BondC. An electric billD. A life insurance policy
Q:
A financial instrument would include: A. only a written obligation and a transfer of value.B. only a written obligation and a specified date.C. a written obligation, a transfer of value, a future date, and certain conditions.D. a written obligation, a transfer of value, a specific date for payment, uncertain conditions.
Q:
Mary purchases a U.S. Treasury bond; the bond is a(n): A. asset of the U.S. government as well as an asset for Mary.B. liability of the U.S. government and an asset for Mary.C. asset for Mary but not a liability of the U.S. Government.D. asset for the government but a liability for Mary.
Q:
Which of the following is not a financial intermediary? A. A bankB. An insurance companyC. The New York Stock ExchangeD. A mutual fund
Q:
Options on futures contracts are referred to asA)stock options.B)futures options.C)American options.D)individual options.
Q:
Options on individual stocks are referred to asA)stock options.B)futures options.C)American options.D)individual options.
Q:
An option that can be exercised only at maturity is called a(n)A)swap.B)stock option.C)European option.D)American option.
Q:
An option that can be exercised at any time up to maturity is called a(n)A)swap.B)stock option.C)European option.D)American option.
Q:
The seller of an option has the _________ to buy or sell the underlying asset, while the purchaser of an option has the _________ to buy or sell the asset.A)obligation; rightB)right; obligationC)obligation; obligationD)right; right
Q:
The seller of an option has theA)right to buy or sell the underlying asset.B)the obligation to buy or sell the underlying asset.C)ability to reduce transaction risk.D)right to exchange one payment stream for another.
Q:
The price specified in an option contract at which the holder can buy or sell the underlying asset is called theA)premium.B)strike price.C)exercise price.D)both B and C are true.
Q:
The price specified in an option contract at which the holder can buy or sell the underlying asset is called theA)premium.B)call.C)strike price.D)put.
Q:
Options are contracts that give the purchasers theA)opportunity to buy or sell an underlying asset.B)the obligation to buy or sell an underlying asset.C)the right to hold an underlying asset.D)the right to switch payment streams.
Q:
If a firm must pay for goods it has ordered with foreign currency, it can hedge its foreign exchange rate risk byA)selling foreign exchange futures short.B)buying foreign exchange futures long.C)staying out of the exchange futures market.D)doing none of the above.
Q:
If a firm is due to be paid in euros in two months, to hedge against exchange rate risk the firm shouldA)sell foreign exchange futures short.B)buy foreign exchange futures long.C)stay out of the exchange futures market.D)do none of the above.
Q:
If a portfolio manager believes stock prices will fall and knows that a block of funds will be received in the future, then he shouldA)sell stock index futures short.B)buy stock index futures long.C)stay out of the futures market.D)borrow and buy securities now.
Q:
Which of the following is a likely reason for a portfolio manager to sell a stock index future short?A)He believes the market will rise.B)He wants to lock in current prices.C)He wants to reduce stock market risk.D)Both B and C are correct.
Q:
If you sell a futures contract on the S&P 500 Index at a price of 450 and the index rises to 500, you willA)lose $12,500.B)gain $12,500.C)lose $50.D)gain $50.
Q:
f you buy a futures contract on the S&P 500 Index at a price of 450 and the index rises to 500, you willA)lose $12,500.B)gain $12,500.C)lose $50.D)gain $50.
Q:
Who would be most likely to buy a long stock index future?A)A mutual fund manager who believes the market will riseB)A mutual fund manager who believes the market will fallC)A mutual fund manager who believes the market will be stableD)None of the above would be likely to purchase a futures contract
Q:
The most widely traded stock index future is on theA)Dow Jones 1000 index.B)S&P 500 index.C)NASDAQ index.D)Dow Jones 30 index.
Q:
The risk that occurs because stock prices fluctuate is calledA)stock market risk.B)reinvestment risk.C)interest-rate risk.D)default risk.
Q:
When a financial institution is hedging interest-rate risk on its overall portfolio, the hedge is aA)macro hedge.B)micro hedge.C)cross hedge.D)futures hedge.
Q:
When a financial institution hedges the interest-rate risk for a specific asset, the hedge is called aA)macro hedge.B)micro hedge.C)cross hedge.D)futures hedge.
Q:
Which of the following features of Treasury bond futures contracts were not designed to increase liquidity?A)Standardized contracts.B)Traded up until maturity.C)Not tied to one specific type of bond.D)Can be closed with offsetting trade.
Q:
Which of the following features of Treasury bond futures contracts were not designed to increase liquidity?A)Standardized contracts.B)Traded up until maturity.C)Not tied to one specific type of bond.D)Marked to market daily.
Q:
If interest rates rise by 5 percentage points, then bank profits (measured using gap analysis) will increase regardless of the income gap.
Q:
Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals by the change in the interest rate is called duration analysis.
Q:
Developing and maintaining long-term customer relationships help to reduce banks' costs of screening and monitoring borrowers.
Q:
Credit rationing occurs when lenders charge higher interest rates on the loans they make to riskier borrowers.
Q:
Credit rationing reduces adverse selection problems.
Q:
A correspondent account is sometimes required of a borrower as a condition for a loan.
Q:
Due-on-sale clauses in loan contracts reduce moral hazard.
Q:
Banks face the problem of adverse selection in loan markets because bad credit risks are the ones most likely to seek bank loans.
Q:
If a bank has a negative gap, then a decrease in interest rates will increase income.
Q:
The difference between rate-sensitive liabilities and rate-sensitive assets is known as the duration gap.
Q:
If a bank has more rate-sensitive liabilities than assets, then an increase in interest rates will reduce bank profits.
Q:
A bank manager concerned about interest income who expects interest rates to fall and who knows the bank currently has a positive gap should _________ rate-sensitive assets and _________ rate-sensitive liabilities.A)increase; increaseB)decrease; increaseC)decrease; decreaseD)increase; decrease
Q:
A bank manager concerned about interest income who expects interest rates to rise and who knows the bank currently has a positive gap should _________ rate-sensitive assets and _________ rate-sensitive liabilities.A)increase; increaseB)decrease; increaseC)decrease; decreaseD)increase; decrease
Q:
One problem with basic gap analysis is that itA)is calculated assuming interest rates on all maturities are equal.B)is calculated assuming interest rates on all maturities change by equal amounts.C)measures the sensitivity of net worth to interest rate changes.D)does not measure the sensitivity of income to interest rate changes.E)applies only to financial institutions.
Q:
One problem with duration gap analysis is that itA)is calculated assuming that the yield curve is flat.B)is calculated assuming that the yield curve does not change.C)does not measure the sensitivity of net worth to interest rate changes.D)does not measure the sensitivity of income to interest rate changes.E)applies only to financial institutions.
Q:
If a rise in interest rates causes the market value of a bank's net worth to rise, then the bank must have aA)negative duration gap.B)positive duration gap.C)negative gap.D)positive gap.
Q:
If a decline in interest rates causes the market value of a bank's net worth to rise, then the bank must have aA)negative duration gap.B)positive duration gap.C)negative gap.D)positive gap.
Q:
If a bank has a duration gap of 2 years, then a fall in interest rates from 6 percent to 3 percent will lead toA)a rise in the market value of its net worth of 5.66 percent.B)a fall in the market value of its net worth of 5.66 percent.C)a rise in net interest income of 5.66 percent.D)a fall in net interest income of 5.66 percent.E)an unknown change.
Q:
If a bank has a duration gap of 2 years, then a rise in interest rates from 6 percent to 9 percent will lead toA)a rise in the market value of its net worth of 5.66 percent.B)a rise in net interest income of 5.66 percent.C)a fall in the market value of its net worth of 5.66 percent.D)a fall in net interest income of 5.66 percent.E)an unknown change.
Q:
To use the concept of duration to analyze the effect of changes in interest rates on the market value of an asset, a bank manager would multiplyA)the negative of the duration of the asset by the change in the interest rate, Δi.B)the negative of the duration of the asset by Δi /(1 + i).C)the duration of the asset by the change in the interest rate, Δi.D)the duration of the asset by Δi /(1 + i).
Q:
Duration analysis involves comparing the average duration of the bank's _________ to the average duration of its _________A)securities portfolio; non-deposit liabilities.B)loan portfolio; non-deposit liabilities.C)loan portfolio; rate-sensitive liabilities.D)rate-sensitive assets; rate-sensitive liabilities.E)assets; liabilities.
Q:
Duration gap analysisA)is a refinement of basic gap analysis that accounts for interest-rate changes over a multiyear period.B)is a refinement of basic gap analysis that accounts for how long a gap will last.C)is a complement to basic gap analysis that accounts for the effect of interest rate changes on market value.D)is a complement to basic gap analysis that accounts for the influence of partially rate-sensitive assets.
Q:
Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals by the change in the interest rate is calledA)basic gap analysis.B)the segmented maturity approach to gap analysis.C)the maturity bucket approach to gap analysis.D)the segmented maturity approach to interest-exposure analysis.E)none of the above.
Q:
Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is calledA)basic duration analysis.B)basic gap analysis.C)interest-exposure analysis.D)gap-exposure analysis.