1. Money markets are markets for (Points: 4)
Foreign currencies.
Consumer automobile loans.
Corporate stocks.
Long-term bonds.
Short-term debt securities such a Treasury bills.
2. Which of the following statements is CORRECT? (Points: 6)
1. The most important difference between spot markets versus futures markets is the maturity of the instruments that are traded. Spot market transactions involve securities that have maturities of less than one year whereas futures markets transactions involve securities with maturities greater than one year.
2. Capital market transactions involve only preferred stock or common stock.
3. If General Electric were to issue new stock this year, it would be considered a secondary market transaction since the company already has stock outstanding.
4. Both Nasdaq dealers and “specialists” on the NYSE hold inventories of stocks.
5. Money market transactions do not involve securities denominated in currencies other than the U.S. dollar.
3. If the stock market is semistrong-form efficient, which of the following statements would be CORRECT?(Points: 6)
1. The required returns on all stocks are the same, and the required returns on stocks are higher than the required returns on bonds.
2. The required returns on stocks equal the required returns on bonds.
3. A trading strategy in which you buy stocks that have recently fallen in price is likely to provide you with a return that exceeds the return on the overall stock market.
4. If you have insider information about a particular stock, you cannot expect to earn an above average return on this information because it is already incorporated into the current stock price.
5. Even if a market is semistrong-form efficient, an investor could still earn a better return than the market return if he or she had inside information.
4.Suppose 1-year T-bills currently yield 5.00% and the future inflation rate is expected to be constant at 3.10% per year. What is the real risk-free rate of return, r*? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. (Points: 6)
1. 1.90%
2. 2.00%
3. 2.10%
4. 2.20%
5. 2.30%
5. Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.25%, and a maturity premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the years to maturity. What rate of return would you expect on a 5-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.(Points: 6)
1. 5.95%
2. 6.05%
3. 6.15%
4. 6.25%
5. 6.35%
6. Which of the following would be most likely to lead to a higher level of interest rates in the economy?(Points: 6)
1. Households start saving a larger percentage of their income.
2. Corporations step up their expansion plans and thus increase their demand for capital.
3. The level of inflation begins to decline.
4. The economy moves from a boom to a recession.
5. The Federal Reserve decides to try to stimulate the economy.
7. Assume that interest rates on 20-year Treasury and corporate bonds are as follows:
1. T-bond = 7.72% A = 9.64%
2. AAA = 8.72% BBB = 10.18%
The differences in rates among these issues were caused primarily by (Points: 6)
1. Tax effects.
2. Default risk differences.
3. Maturity risk differences.
4. Inflation differences.
5. Real risk-free rate differences
8. What does it mean when it is said the U.S. is running a trade deficit? What impact do you think a trade deficit could have on interest rates? Scroll down to respond.
9. Consider the following scenario: John buys a house for $150,000 and takes out a five year adjustable rate mortgage with a beginning rate of 6%. He makes annual payments rather than monthly payments.
Unfortunately for John, interest rates go up by 1% for each of the five years of his loan (Year 1 is 6%, Year 2 is 7%, Year 3 is 8%, Year 4 is 9%, Year 5 is 10%).
Calculate the amount of John's payment over the life of his loan. Compare these findings if he would have taken out a fix rate loan for the same period at 7.5%. Which do you think is the better deal?
