Financial Markets and Institutions, 8e (Mishkin)
1) Compared to money market securities, capital market securities have
A) more liquidity.
B) longer maturities.
C) lower yields.
D) less risk.
2) (I) Securities that have an original maturity greater than one year are traded in capital markets.
(II) The best known capital market securities are stocks and bonds.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
3) (I) Securities that have an original maturity greater than one year are traded in money markets.
(II) The best known money market securities are stocks and bonds.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
4) (I) Firms and individuals use the capital markets for long-term investments.
(II) Capital markets provide an alternative to investment in assets such as real estate and gold.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
5) The primary reason that individuals and firms choose to borrow long-term is to reduce the risk
that interest rates will ________ before they pay off their debt.
A) rise
B) fall
C) become more volatile
D) become more stable
6) The primary reason that individuals and firms choose to borrow long-term is to
A) reduce the risk that interest rates will fall before they pay off their debt.
B) reduce the risk that interest rates will rise before they pay off their debt.
C) reduce monthly interest payments, as interest rates tend to be higher on short-term than long–
term debt instruments.
D) reduce total interest payments over the life of the debt.
7) A firm will borrow long-term
A) if the extra interest cost of borrowing long-term is less than the expected cost of rising interest
rates before it retires its debt.
B) if the extra interest cost of borrowing short-term due to rising interest rates does not exceed
the expected premium that is paid for borrowing long-term.
C) if short-term interest rates are expected to decline during the term of the debt.
D) if long-term interest rates are expected to decline during the term of the debt.
8) The primary issuers of capital market securities include
A) the federal and local governments.
B) the federal and local governments, and corporations.
C) the federal and local governments, corporations, and financial institutions.
D) local governments and corporations.
9) Governments never issue stock because
A) they cannot sell ownership claims.
B) the Constitution expressly forbids it.
C) both A and B of the above.
D) neither A nor B of the above.
10) (I) The primary issuers of capital market securities are federal and local governments, and
corporations. (II) Governments never issue stock because they cannot sell ownership claims.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
11) (I) The primary issuers of capital market securities are financial institutions.
(II) The largest purchasers of capital market securities are corporations.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
12) The distribution of a firm’s capital between debt and equity is its
A) current ratio.
B) liability structure.
C) acid ratio.
D) capital structure.
13) The largest purchasers of capital market securities are
A) households.
B) corporations.
C) governments.
D) central banks.
14) Individuals and households frequently purchase capital market securities through financial
institutions such as
A) mutual funds.
B) pension funds.
C) money market mutual funds.
D) all of the above.
E) only A and B of the above.
15) (I) There are two types of exchanges in the secondary market for capital securities: organized
exchanges and over-the-counter exchanges. (II) When firms sell securities for the very first time,
the issue is an initial public offering.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
16) (I) Capital market securities fall into two categories: bonds and stocks. (II) Long-term bonds
include government bonds and long-term notes, municipal bonds, and corporate bonds.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
17) The ________ value of a bond is the amount that the issuer must pay at maturity.
A) market
B) present
C) discounted
D) face
18) The ________ rate is the rate of interest that the issuer must pay.
A) market
B) coupon
C) discount
D) funds
19) (I) The coupon rate is the rate of interest that the issuer of the bond must pay.
(II) The coupon rate is usually fixed for the duration of the bond and does not fluctuate with
market interest rates.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
20) (I) The coupon rate is the rate of interest that the issuer of the bond must pay.
(II) The coupon rate on old bonds fluctuates with market interest rates so they will remain
attractive to investors.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
21) Treasury bonds are subject to ________ risk but are free of ________ risk.
A) default; interest-rate
B) default; underwriting
C) interest-rate; default
D) interest-rate; underwriting
22) The prices of Treasury notes, bonds, and bills are quoted
A) as a percentage of the coupon rate.
B) as a percentage of the previous day’s closing value.
C) as a percentage of $100 face value.
D) as a multiple of the annual interest paid.
23) The security with the longest maturity is a Treasury
A) note.
B) bond.
C) acceptance.
D) bill.
24) (I) To sell an old bond when interest rates have risen, the holder will have to discount the
bond until the yield to the buyer is the same as the market rate. (II) The risk that the value of a
bond will fall when market interest rates rise is called interest-rate risk.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
25) To sell an old bond when interest rates have ________, the holder will have to ________ the
price of the bond until the yield to the buyer is the same as the market rate.
A) risen; lower
B) risen; raise
C) fallen; lower
D) risen; inflate
26) Most of the time, the interest rate on Treasury notes and bonds is ________ that on money
market securities because of ________ risk.
A) above; interest-rate
B) above; default
C) below; interest-rate
D) below; default
27) (I) In most years, the rate of return on short-term Treasury bills is below that on the 20-year
Treasury bond.
(II) Interest rates on Treasury bills are more volatile than rates on long-term Treasury securities.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
28) (I) Because interest rates on Treasury bills are more volatile than rates on long-term
securities, the return on short-term Treasury securities is usually above that on longer-term
Treasury securities.
(II) A Treasury STRIP separates the periodic interest payments from the final principal
repayment.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
29) Which of the following statements about Treasury inflation-indexed bonds is not true?
A) The principal amount used to compute the interest payment varies with the consumer price
index.
B) The interest payment rises when inflation occurs.
C) The interest rate rises when inflation occurs.
D) At maturity, the securities pay the greater of face value or inflation-adjusted principal.
30) (I) Municipal bonds that are issued to pay for essential public projects are exempt from
federal taxation. (II) General obligation bonds do not have specific assets pledged as security or a
specific source of revenue allocated for their repayment.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
31) (I) Most corporate bonds have a face value of $1,000, pay interest semiannually, and can be
redeemed anytime the issuer wishes. (II) Registered bonds have now been largely replaced by
bearer bonds, which do not have coupons.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
32) The bond contract that states the lender’s rights and privileges and the borrower’s obligations
is called the
A) bond syndicate.
B) restrictive covenant.
C) bond covenant.
D) bond indenture.
33) Policies that limit the discretion of managers as a way of protecting bondholders’ interests are
called
A) restrictive covenants.
B) debentures.
C) sinking funds.
D) bond indentures.
34) Typically, the interest rate on corporate bonds will be ________ the more restrictions are
placed on management through restrictive covenants, because ________.
A) higher; corporate earnings will be limited by the restrictions
B) higher; the bonds will be considered safer by bondholders
C) lower; the bonds will be considered safer by buyers
D) lower; corporate earnings will be higher with more restrictions in place
35) Restrictive covenants can
A) limit the amount of dividends the firm can pay.
B) limit the ability of the firm to issue additional debt.
C) restrict the ability of the firm to enter into a merger agreement.
D) do all of the above.
E) do only A and B of the above.
36) (I) Restrictive covenants often limit the amount of dividends that firms can pay the
stockholders.
(II) Most corporate indentures include a call provision, which states that the issuer has the right
to force the holder to sell the bond back.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
37) Call provisions will be exercised when interest rates ________ and bond values ________.
A) rise; rise
B) fall; rise
C) rise; fall
D) fall; fall