Fundamentals of Investments, 8e (Jordan)
Chapter 9 Interest Rates
1) Which one of the following is the interest rate that the largest commercial banks charge their
most creditworthy corporate customers for short-term loans?
A) discount
B) Federal funds
C) prime
D) bid
E) call money
2) Which one of the following terms applies to a rate that serves as an indicator of future trends?
A) bellwether
B) prime
C) call
D) discount
E) nominal
3) Which one of the following rates is the rate that banks charge each other for overnight loans of
$1 million or more?
A) institutional
B) financial overnight
C) Federal funds
D) monetary
E) daily
4) Which one of the following rates is the rate a commercial bank must pay the Federal Reserve
to borrow reserves overnight?
A) discount
B) Fed funds
C) financial overnight
D) daily
E) institutional
5) Which one of the following rates is used by brokerage firms as the basis for determining
margin loan rates?
A) discount
B) Fed funds
C) prime
D) brokerage
E) call money
6) Which one of the following is unsecured debt issued by corporations on a short-term basis?
A) commercial paper
B) interbank offered loan
C) equipment bond
D) collateralized debt
E) banker’s acceptance
7) A $100,000 or more term deposit at a bank is called which one of the following?
A) interbank deposit
B) bankers’ acceptance
C) collateralized deposit
D) call bond
E) certificate of deposit
8) Which one of the following describes a banker’s acceptance?
A) agreement to loan money in exchange for an agreement by the borrower to offer an asset as
collateral
B) written agreement to loan funds in the future once the loan terms have been accepted
C) postdated check with payment guaranteed by a bank
D) agreement by a bank to provide short-term funds for the construction phase of a project
E) the sale of a security by a bank accompanied by an agreement to repurchase the security the
following day
9) Which one of the following is defined as U.S. dollar-denominated deposits held in a foreign
bank?
A) Eurodollars
B) foreign funds
C) certificates of deposits
D) banker’s acceptances
E) T-bills
10) Which one of the following abbreviations is the interest rate that international banks charge
one another for overnight Eurodollar loans?
A) EIOEL
B) EUDOR
C) LEDOR
D) EDBOR
E) LIBOR
11) Which one of the following is a short-term debt instrument issued by the U.S. Treasury?
A) Freddie Mac
B) Ginnie Mae
C) T-note
D) T-bill
E) T-bond
12) A pure discount security is an interest-bearing asset that pays:
A) interest on a semi-annual basis.
B) interest on an annual basis.
C) a single payment at maturity.
D) no interest.
E) a variable-rate interest.
13) Which one of the following is a basis point?
A) 1 percent
B) 0.1 percent
C) 0.01 percent
D) 0.001 percent
E) 0.0001 percent
14) Which one of the following is the method used to quote interest rates on money market
instruments?
A) short basis
B) floating-rate basis
C) call rate method
D) bank discount basis
E) prime rate method
15) The Treasury yield curve is a graph which plots Treasury yields against which one of the
following?
A) corporate bond yields
B) Fed funds rate
C) maturities
D) inflation rates
E) S&P 500 yield
16) Which one of the following is defined as the relationship between the interest rate on default-
free, pure discount bonds and the time to maturity?
A) discount rate curve
B) Treasury yield curve
C) risk premium structure
D) term structure of interest rates
E) market interest rate curve
17) Pure discount bonds which are created by separating the interest and principal payments
from U.S. Treasury bonds are called U.S. Treasury:
A) notes.
B) bills.
C) STRIPS.
D) SWAPS.
E) tax-exempts.
18) Which one of the following rates is the normally quoted rate?
A) nominal
B) deflated
C) inflated
D) real
E) indexed
19) Which one of the following best describes a real interest rate?
A) current rate on a U.S. Treasury bill
B) nominal rate minus the risk-premium on an individual security
C) market return minus the risk-free rate
D) nominal rate minus inflation
E) historical rate rather than a projected rate
20) Which one of the following best describes the Fisher hypothesis?
A) Long-term interest rates are based on current inflation rates.
B) Nominal interest rates are inversely related to real rates.
C) Interest rates tend to be higher than inflation rates.
D) Nominal interest rates tend to be relatively constant over time.
E) Future interest rates must be higher than current interest rates.
21) Which one of the following theories states that the term structure of interest rates reveals the
financial market’s projections of future interest rates?
A) market rate theory
B) market yield theory
C) Fisher hypothesis
D) expectations theory
E) rational rate hypothesis
22) Which one of the following is defined as a forward rate?
A) rate agreed upon today for a long-term loan
B) interest rate quoted today which will apply to all loans made this week
C) interest rate on a loan made today that will vary as the market rate varies
D) interest rate adjusted for the anticipated rate of inflation
E) expected future interest rate implied by current interest rates
23) Which one of the following proposes that lenders must be financially rewarded for loaning
funds on a long-term versus a short-term basis?
A) expectations theory
B) forward rate theory
C) market hypothesis
D) maturity preference theory
E) Fisher hypothesis
24) The market segmentation theory states that interest rates on debt vary dependent upon market
segments which are segmented based upon which one of the following?
A) time to maturity
B) principal amount
C) use of funds
D) type of lender
E) type of borrower
25) U.S. Treasury bill rates were the highest during which one of the following time periods?
A) 1930–1933
B) 1943–1945
C) 1979–1981
D) 1997–1999
E) 2002–2007
26) Which one of the following statements is correct concerning U.S. Treasury bill rates for the
period 1800–2010?
A) T-bill rates never exceeded 10 percent.
B) T-bill rates never exceeded T-bond rates.
C) T-bill rates were lower than 1 percent for a period of time.
D) T-bill rates were less volatile than T-bond rates.
E) T-bill rates were the highest during the World War II years of the 1940’s.
27) Banks are most apt to quote short-term loan rates as:
A) prime plus a spread.
B) prime plus inflation.
C) prime minus inflation.
D) Federal funds plus prime.
E) prime minus the discount.
28) Which one of the following rates is generally considered the bellwether rate for bank loans to
business firms?
A) money market
B) Fed funds
C) discount
D) prime
E) call money
29) Capital Bank needs a one-day reserve loan of $3.6 million from Countryside Bank. Which
one of the following interest rates will be charged on this loan?
A) money market
B) Federal funds
C) discount
D) prime
E) Treasury bill
30) Southern Bank needs to borrow money overnight from the Federal Reserve in order to meet
its reserve requirements. Which one of the following interest rates will be charged on this loan?
A) money market
B) Federal funds
C) discount
D) prime
E) Treasury
31) Which one of the following actions is the Federal Reserve most likely to take if it is
concerned about a slowing economy?
A) lower the tax rate
B) lower the discount rate
C) increase the call rate
D) increase the tax rate
E) increase the discount rate
32) The rate which an investor pays a brokerage firm for a margin loan is based on a negotiated
premium which is added to which one of the following rates?
A) prime
B) call
C) discount
D) T-bill
E) Federal funds
33) Assume that a large corporation, such as General Electric, needs money in the short-term.
Which one of the following securities is that corporation most likely to issue to meet this need?
A) commercial paper
B) prime rate loan
C) corporate bond
D) secured bill
E) banker’s acceptance
34) Which one of the following statements is correct concerning large-denomination certificates
of deposit?
A) The security can be sold to another investor.
B) The face amount is equal to $10,000 or more.
C) The security is a bank time deposit.
D) The security is a form of a commercial check.
E) The security is issued by the U.S. Treasury.
35) Which one of the following facilitates international trade?
A) secured bond
B) Treasury security
C) banker’s acceptance
D) commercial paper
E) Eurodollar loan
36) You notice that the interest rate on your credit card is set at LIBOR plus 8.9 percent. Given
this, the rate you will pay is primarily influenced by the money market rates in which one of the
following?
A) Lisbon, Portugal
B) New York, USA
C) Frankfort, Germany
D) London, England
E) Chicago, USA
37) Which one of the following is the largest market in the world for new debt securities with
maturities of one year or less?
A) commercial paper
B) U.S. Treasury bill
C) banker’s acceptance
D) Eurodollar money market
E) certificates of deposit
38) The overnight repurchase rate is the rate charged on overnight loans which are collateralized
by which one of the following securities?
A) Treasury securities
B) municipal bonds
C) commercial paper
D) banker’s acceptances
E) Eurodollar deposits
39) Which one of the following features applies to a U.S. Treasury bill?
A) U.S. agency debt
B) pure discount security
C) taxable at the state level
D) semi-annual interest payments
E) annual interest payments
40) The market rate on a bond fell from 5.76 percent to 5.73 percent. This is a decline of how
many basis points?
A) 0.003
B) 0.0003
C) 0.03
D) 0.3
E) 3
41) Which one of the following is correct when computing the price of a debt security when
using a discount yield?
A) The price will exceed the face value.
B) An increase in the discount yield will increase the current price.
C) The current price will decrease as the days to maturity decrease.
D) The computation will be based on a 360-day year.
E) The computation will consider leap years.
42) Which of the following will increase the price of a money market instrument computed using
a discount yield?
I. increase in discount yield
II. decrease in discount yield
III. increase in days to maturity
IV. decrease in days to maturity
A) I only
B) I and III only
C) I and IV only
D) II and III only
E) II and IV only