TEST BANK
CAPITAL MARKETS: INSTITUTIONS AND INSTRUMENTS
FABOZZI/MODIGLIANI
Chapter 17
THE THEORY AND STRUCTURE OF INTEREST RATES
MULTIPLE CHOICE
1. The rate that would prevail in the economy if price levels remain constant is referred to as
the:
e. None of the above.
[E]
2. The marginal rate of substitution between current and future consumption is the slope of
the:
[M]
3. A large endowment of the current commodity relative to the future will make people:
[M]
4. The transformation curve or production function:
5. The consumer has several decisions to make regarding:
[E]
6. The optimum rate of investment for a firm is found at the point where:
[M]
7. A most important property resulting from the existence of a perfect loan market is that:
[M]
8. The market-clearing interest rate is found:
[M]
9. If it is not possible to reallocate inputs and outputs in such a way that some will be better
off while nobody will lose, this property is referred to by economists as:
10. According to Fisher’s Law, the nominal gross rate is equal to:
[M]
11. The minimum yield sought on an investment as measured by the yield on an on-the-run
Treasury security with comparable maturity is referred to as the:
[M]
12. The yield spread between a non-Treasury security and a Treasury security of comparable
maturity is called a:
[M]
13. The factors that affect the yield spread between a non-Treasury security and a
comparable Treasury security are:
[E]
14. Within the corporate market sector, issuers are classified as:
15. The risk that the issuer of a bond may not be able to make timely interest and principal
payments is called:
[E]
16. Investment-grade bonds are bond issues that are assigned a rating:
[M]
17. The spread between Treasury securities and non-Treasury securities that are identical in
all respects except for quality is referred to as:
[M]
18. The term structure of interest rates is the relationship between the yields on comparable
securities but different:
[M]
19. A provision in a bond issue that grants the issuer the right to retire the debt, fully or
partially, before the scheduled maturity date is called:
20. Which of the following statements is most correct?
[D]
TRUE/FALSE
1. A “basket” or ”bundle” consists of a certain quantity of currency consumption and a
certain quantity of future consumption.
[E]
2. In the market for loans, net borrowing is zero.
[M]
3. There is not just one interest rate in any economy, rather there is a structure of interest
rates.
[E]
4. A high-grade bond is a bond with a quality rating that indicates low credit risk.
[E]
5. Bonds trade with the same degrees of liquidity.
106
ESSAY QUESTIONS
1. Explain Fisher’s Law.
Key Issues:
2. What is meant by Pareto optimality.
Key Issues:
3. Discuss the factors that affect the yield spread between a non-Treasury security and a
Treasury security with the same maturity.
Key Issues: