1. Considering the value of a financial instrument, the bigger the size of the promised payment?

A. The less valuable the financial instrument because risk must be greater

B. The longer an investor has to wait for the payment

C. The more valuable the financial instrument

D. The greater the risk

2. Rising inflation expectations lead to rising nominal rates because

A. rising inflation expectations lead to falling bond demand and supply

B. rising inflation expectations lead to rising bond demand and supply

C. rising inflation expectations lead to falling bond demand and rising bind supply

D. rising inflation expectations lead to rising bond demand and falling bond supply

3. If a mutual fund manager is earning above-average returns and markets are effcient, on epossible explanation for this is:

A. the manager is taking on more risk

B. the manager is using technical analysis

C. the manager is more experienced

D. all of the above

4. The risk structure of interest rate says:

A. interest rates on different bonds are not correlated

B. lower rated bonds will have lower yields

C. lower rate bonds will have higher yield

D. interest rates never compensate for risk

5. The yield curve plots:

A. yields on bonds for various bond ratings

B. yields on bonds for various tax treatments

C. treasury yields for various maturities at a given point in time

D. treasury yields over time

6. All of the following are true about risk spread EXCEPT:

A. It should be higher for highly speculative bonds than investment grade bonds

B. It should have a direct relationship with the bond's yield

C. It should have a direct relationship with the bond's price

D. It should have a inverse relationship with the bond's price

7. A pension fund manager who plans on selling bonds in the future:

A. wants to insure against the price of bonds falling

B. can offset the risk of bond prices rising by selling a futures contract

C. will the long position in a futures contract

D. will take the short position in a futures contract

8. Unlike futures contracts, a major risk for swaps is that:

A. interest rates will not change

B. one of the parties will default

C. they are highly liquid and the market price will change

D. high U.S. government deficits will limit the availability of swaps.

9. Consider the choice between $25,000 today or $1,000 per year for 30 years, with investors caring only about the time value of money. Which of the following is true?

A. at an interest rate of 0% an investor will odayprefer $25,000 t

B. an investor choosing $25,000 today has a higher discount rate than an investor choosing $1,000/yr.

C. an investor choosing $25,000 today has a lower discount rate than an investor choosing $1,000/yr.

D. Both A and C

10. In which of the following situations would you rather be LENDING?

A. the nominal interest rate is 20% and expected inflation rate is 15%

B. the nominal interest rate is 12% and expected inflation rate is 10%

C. the nominal interest rate is 11% and expected inflation rate is 5%

D. the nominal interest rate is 4% and expected inflation rate is 1%

11. Suppose purchasing power parity holds between Canada and the U.S., and the exchange rate is C$1.20/US $1. A Big Mac that costs $3.40 in the US should cost______ in Canada

A. C$ 2.20

B. C$ 2.83

C. C$ 4.08

D.C$ 4.60

12. Assuming risk adverse behaviour, which of the following is NOT true?

A. An investor will never prefer an investment with a lower expected return

B. An investor will always prefer an investment with a certain return to one with the same expected return but any amount of uncertainty

C. An investor will sometimes accept higher risk in exchange for a higher expected return

D. An investor will compare the risk and expected return and the tradeoff involved

13. The fact that a financial intermediary can hire a lawyer to write one contract that works for many customers is an example of:

A. Economies of scale

B. the law of diminishing marginal returns

C. the law of increasing opportunity cost

D. the law of demand

14. By pooling the funds of many smaller savers, financial intermediaries:

A. obtain the funds necessary to make loans to borrowers seeking large amounts

B. obtain substantial fee income from small savers

C. raise their transaction costs of obtaining funds

D. hedge their interest rate risk

15. Requiring an applicant to have a significant net worth is one way lenders deal with the problem of:

A. free-riders

B. adverse selection

C. moral hazard

D. the lemons market