43) Which one of the following is used by Treasury dealers to indicate the price they are willing
to pay to purchase a Treasury bill?
A) par rate
B) bid discount
C) face rate
D) asked discount
E) bank discount
44) Which one of the following statements is correct concerning a Treasury bill?
A) The asked discount indicates the amount a bond dealer is willing to pay to purchase a
Treasury bill.
B) The asked yield on a Treasury bill is a bond equivalent yield.
C) The asked discount for a Treasury bill is greater than the bid discount.
D) The asked yield for a Treasury bill is computed based on a 360-day year.
E) The bid price on a Treasury bill is computed based on a 365, or 366-day year.
45) The bond equivalent yield adjusts for leap years by using 366 days starting with:
A) January 1 of the leap year and ending with December 31 of the leap year.
B) February 1 of the year prior to the leap year and ending with February 29 of the leap year.
C) March 1 of the year prior to the leap year and ending with February 29 of the leap year.
D) the second quarter of the year prior to the leap year and ending with the first quarter of the
leap year.
E) February 1 of the leap year and ending with February 29 of the leap year.
46) Which of the following will increase the price of a money market instrument computed using
a discount yield?
I. bank discount rate
II. bond equivalent rate
III. annual percentage rate
IV. effective annual rate
A) I and II only
B) I and III only
C) I and IV only
D) II and III only
E) II and IV only
47) Consider a money market instrument with 50 days to maturity and a quoted ask price of 98.
Which two of the following statements are correct as they relate to this instrument?
I. The bond equivalent yield is an effective annual rate.
II. The bank discount rate is lower than the bond equivalent yield.
III. The bank discount rate is an effective annual rate.
IV. The bond equivalent yield is lower than the effective annual rate.
A) I and II only
B) I and III only
C) I and IV only
D) II and III only
E) II and IV only
48) Which two of the following are the largest categories of fixed-income securities in the U.S.?
I. U.S. government debt
II. corporate debt
III. municipal government debt
IV. real estate mortgage debt
A) I and II only
B) I and III only
C) III and IV only
D) I and IV only
E) II and IV only
49) Which one of the following borrowers will pay the rates depicted on a Treasury yield curve?
A) large corporation
B) municipal government
C) bank’s best customers
D) high-risk borrower
E) default-free borrower
50) Which of the following statements are true as applied to U.S. agency debt?
I. It is equally as risky as Treasury debt.
II. It is frequently subject to state taxes.
III. It has the same credit guarantee as U.S. Treasury debt.
IV. It generally has a lower yield than U.S. Treasury debt with the same maturity.
A) II only
B) III only
C) I and III only
D) III and IV only
E) I, III, and IV only
51) Which one of the following applies to “Yankee bonds”?
A) U.S. corporate bonds that are sold internationally
B) U.S. corporate bonds denominated in a foreign currency
C) U.S. government bonds that are sold internationally
D) any bond that is denominated in U.S. dollars
E) foreign-issued bonds sold in the U.S.
52) Which one of the following statements is correct?
A) The yield curve relates time to maturity to interest rates on zero-coupon bonds.
B) The yield curve is based on Treasury bill yields.
C) The term structure of interest rates is based on default-free, pure discount securities.
D) The term structure of interest rates is based on default-free, coupon bonds.
E) The yield curve ignores default risk while the term structure includes a default risk premium.
53) Treasury STRIPS are:
A) zero-coupon bonds issued by the U.S. Treasury with maturities of one year or less.
B) currently quoted in 32nds of a dollar.
C) zero-coupon securities.
D) a type of mortgage bond.
E) coupon securities created from the interest and principal payments of Treasury bonds.
54) The approximate nominal interest rate is computed as the real rate:
A) minus the risk-free rate.
B) minus the inflation rate.
C) plus the risk-free rate.
D) plus the inflation rate.
E) divided by the inflation rate.
55) Which one of the following statements is correct?
A) All real interest rates will be positive as long as the inflation rate is positive.
B) Real rates must exceed inflation rates.
C) Short-term interest rates are affected by future inflation expectations.
D) Treasury bill returns tend to vary in direct relation to inflation rates.
E) The Fisher hypothesis advocates that real interest rates follow inflation rates.
56) Which one of the following debt instruments guarantees investors a positive real rate of
return?
A) zero-coupon bond
B) default-free, pure-discount bond
C) T-bill
D) TIPS
E) T-bond
57) Inflation-indexed Treasury securities:
I. adjust the principal amount on an annual basis.
II. are default-free.
III. offer a positive real rate of return.
IV. have a variable coupon rate.
A) II and III only
B) III and IV only
C) I, II, and III only
D) I, II, and IV only
E) I, II, III, and IV
58) Based on expectations theory, the term structure of interest rates will be _____ anytime
investors believe that interest rates will be higher in the future than they are today.
A) volatile
B) flat
C) downward sloping
D) upward sloping
E) vertical
59) The variable f1,1 as used in the expectations theory is interpreted as the forward rate for one
year:
A) based on the prior one-year rate.
B) at 1 percent.
C) based on a 1 percent increase from the current rate.
D) commencing in one year.
E) based on a 1 percent probability of occurrence.
60) According to the expectations theory and the Fisher hypothesis, a downward-sloping term
structure is indicative of which of the following based on market expectations?
I. nominal interest rates are expected to increase
II. nominal interest rates are expected to decline
III. inflation rates are expected to increase
IV. inflation rates are expected to decrease
A) I only
B) II only
C) IV only
D) I and III only
E) II and IV only
61) Which of the following statements are true?
I. Lenders have a preference for shorter maturities.
II. Lenders have a preference for longer maturities.
III. Borrowers have a preference for shorter maturities.
IV. Borrowers have a preference for longer maturities.
A) I only
B) I and III only
C) I and IV only
D) II and III only
E) II and IV only
62) Based solely on the maturity preference theory, long-term interest rates:
A) should equal short-term rates.
B) are unrelated to short-term rates.
C) may be higher than or lower than short-term rates.
D) should be lower than short-term rates.
E) should be higher than short-term rates.
63) Which one of the following statements concerning the modern fixed-income market is
correct?
A) Pension funds generally have a preference for short maturities.
B) Current maturity preference theory states that both borrowers and lenders prefer short
maturities.
C) Market segmentation theory does little to explain the modern fixed-income market.
D) The major borrower in the modern market borrows primarily on a long-term basis.
E) Institutional investors tend to invest in only one maturity range.
64) Which of the following comprise the nominal interest rate on default-free securities
according to the modern view of the term structure of interest rates?
I. liquidity premium
II. real rate
III. interest rate risk premium
IV. inflation premium
A) I and II only
B) II and III only
C) III and IV only
D) II, III, and IV only
E) I, II, III, and IV
65) Modern term structure theory supports the contention that the term structure of interest rates
will:
A) be upward sloping.
B) be downward sloping.
C) be upward sloping in the short-term and relatively flat in the long-term.
D) be constant over time.
E) change over time.
66) You want to purchase a security that will pay you $1,000 six years from now. If you want to
earn an annual nominal rate of 5.35 percent, how much should you pay for this investment
today?
A) $727.41
B) $731.46
C) $741.41
D) $743.51
E) $762.01
67) You invest $3,600 today at a nominal annual rate of 5.5 percent. This investment will pay
one payment five years from now. What will be the amount of that payment?
A) $2,754.48
B) $2,906.16
C) $4,705.06
D) $4,818.09
E) $5,018.62
68) An investment will make one payment of $22,500 nine years from now. What is the current
value of this investment if the nominal rate of return is 4.8 percent?
A) $11,980.86
B) $12,124.29
C) $12,390.08
D) $13,515.46
E) $14,754.72
69) A $1,000 face value, 240-day bond is quoted at a bank discount yield of 3.3 percent. What is
the current bond price?
A) $957.60
B) $960.09
C) $978.00
D) $982.02
E) $988.73
70) A bond has a face value of $30,000 and matures in 62 days. What is the bank discount yield
if the bond is currently selling for $29,750?
A) 4.67 percent
B) 4.84 percent
C) 5.48 percent
D) 5.78 percent
E) 6.03 percent
71) A $5,000 face value bond is quoted at a bank discount yield of 2.8 percent. What is the
current value of the bond if it matures in 36 days?
A) $4,972
B) $4,978
C) $4,982
D) $4,986
E) $4,991
72) A $40,000 face value bond matures in 100 days and has a bank discount yield of 3.86
percent. What is the current value of the bond?
A) $39,392.19
B) $39,473.14
C) $39,486.47
D) $39,571.11
E) $39,680.00
73) A Treasury bill has 21 days to maturity and a bank discount yield of 1.89 percent. What is
the bond equivalent yield?
A) 1.89 percent
B) 1.90 percent
C) 1.92 percent
D) 1.94 percent
E) 1.96 percent