Principles of Finance, 6e
Besley/Brigham
Chapter 05
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Page 15
29. Which of the following is not one of the fundamental factors that affect the cost of money?
a.
Production opportunities
b.
Time preferences for consumption
c.
Exchange rates
d.
Risk
e.
Inflation
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-04 – International Financial Management
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Cost of Money
30. Most experts think that in the United States the real risk-free rate fluctuates between
a.
one to two percent.
b.
two to four percent.
c.
four to seven percent
d.
eight to twelve percent
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-3 – Comprehension
Business Program-6 – Reflective Thinking
DISC-FIN-04 – International Financial Management
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Cost of Money
31. Which of the following assets is the most liquid?
a.
b.
c.
d.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-3 – Comprehension
Business Program-6 – Reflective Thinking
DISC-FIN-04 – International Financial Management
DISC-FIN-09 – Investments
Principles of Finance, 6e
Besley/Brigham
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Page 16
Time Estimate-a – 5 min.
TOPICS:
Liquidity Premium
32. Assume that the expectations theory of term structure holds. If the rate on a two-year Treasury bond is 8% and the rate
on a three-year Treasury bond is 7%, what is the expected rate on a one-year Treasury bond in year three?
a.
8%
b.
7%
c.
6%
d.
5%
e.
4%
ANSWER:
d
RATIONALE:
1.082*(1 + x) = 1.073 x = (1.073/1.082) −1 = .05 = 5%
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-04 – International Financial Management
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Expectations Theory
33. The fundamental factors that affect the cost of money include
a.
production opportunities
b.
inflation
c.
risk
d.
time preference for consumption
e.
all of the above
ANSWER:
e
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-3 – Comprehension
Business Program-6 – Reflective Thinking
DISC-FIN-04 – International Financial Management
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Cost of Money
34. During recessions the demand for funds typically ____.
a.
increases
b.
stays the same
c.
decreases
d.
doubles
ANSWER:
c
Principles of Finance, 6e
Besley/Brigham
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Page 18
c.
liquidity risk
d.
default risk
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-3 – Comprehension
Business Program-6 – Reflective Thinking
DISC-FIN-04 – International Financial Management
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Default Risk Premium
38. If the Federal Reserve tightens the money supply, other things held constant, short-term interest rates will be pushed
upward, and this increase probably will be greater than the increase in rates in the long-term market.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-3 – Comprehension
Business Program-6 – Reflective Thinking
DISC-FIN-04 – International Financial Management
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Interest Rate
39. In the textbook, the nominal interest rate is defined as being equal to the real risk-free rate, plus an inflation premium,
plus a default risk premium, plus a liquidity premium, plus a maturity risk premium.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-3 – Comprehension
Business Program-6 – Reflective Thinking
DISC-FIN-04 – International Financial Management
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Interest Rate
40. Long-term interest rates reflect expectations about future inflation. Inflation has varied significantly from year to year
in the past, and as a result, long-term rates can be expected to fluctuate more than short-term rates.
a.
True
b.
False
Principles of Finance, 6e
Besley/Brigham
Chapter 05
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Page 19
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-3 – Comprehension
Business Program-6 – Reflective Thinking
DISC-FIN-04 – International Financial Management
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Interest Rate
41. The term structure is defined as the relationship between interest rates and maturities of similar securities.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-04 – International Financial Management
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Term Structure
42. The nominal rate of interest is defined as the sum of the nominal risk-free rate of return and the expected inflation rate.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-04 – International Financial Management
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Interest Rate
43. If the United States is running a deficit trade balance with Great Britain, we would expect the value of the British
pound to depreciate against the U.S. dollar.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Principles of Finance, 6e
Besley/Brigham
Chapter 05
Cengage Learning Testing, Powered by Cognero
Page 25
59. A downward sloping yield curve is considered normal.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-3 – Comprehension
Business Program-6 – Reflective Thinking
DISC-FIN-04 – International Financial Management
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Yield Curve
60. Inflationary pressures are usually strongest during business booms.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-3 – Comprehension
Business Program-6 – Reflective Thinking
DISC-FIN-04 – International Financial Management
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Inflation
61. Expectations of high inflation lead to low interest rates and vice versa.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-04 – International Financial Management
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Inflation
62. The return realized by investors comes only from the change in value of an asset over time
a.
True
b.
False
ANSWER:
True
POINTS:
1
Cengage Learning Testing, Powered by Cognero
Page 27
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