Assignment

1. A bond with high default risk pays __ a bond with low default risk.

A. a lower interest than. B. a higher interest than C. the same rate as

2. A long term bond pays ___ a short term bond.

A. a lower interest than. B. a higher interest than
C. the same rate as D. a higher or lower interest than

3. A two-year bond rate increases if one-year bond rate __.

A.increases B. decreases. C. is expected to decrease. D. remains the same

4. The current 1-year rate is 6%, and the yield curve slopes down. The 1-year rate expected 1 year from now would be __ % (choose the best one, given the information available).

A.9 B. 8 C. 7 D. 6 E. 5

5. A downward-sloping yield curve suggests that financial market participants expect short-term interest rates will ____ in the future.

A. rise. B. fall. C. equal zero. D. not change.

6. Assume that the current one-year rate is 6% and the two-year rate is 10%. Given this information, the one-year rate expected one year from now is __%.

A. 4 B. 6 C. 8 D. 14 E. 16

7. The fundamental value of a share of stock equals the present value of

A. expected dividends. B. expected real interest rate.
C. coupon payments. D. expected nominal interest rate.

8. Which of the following does NOT represent a form of debt finance?

A. loans B. bonds C. stock

9. If the current one-year interest rate increases by 4% while the expected future one-year interest rate does not change, i2t will

A. decrease by 4%. B. increase by 2%.
C. decrease by 2%. D. increase by 4%.

10. Suppose the Fed (central bank), as expected, decreases the money supply. As a result of this expected reduction in the money supply, stock prices will

A. increase. B. decrease.
C. not change. D. have an ambiguous effect.

11. The government announces on 2/1/2017 that it will increase taxes on 5/1/2017 (that is, the tax-increase policy will be implemented on 5/1/2017), and this announcement is known to everyone in the economy. The tax-increase policy will __ stock prices on 5/1/2017. Assume that the Fed takes no action in response to the announcement.

A. increase. B. decrease.
C. not change. D. have an ambiguous effect.

12. The government announces on 2/1/2017 that it will increase taxes on 5/1/2017 (that is, the tax-increase policy will be implemented on 5/1/2017), and this announcement is known to everyone in the economy. This announcement would __ stock prices on 2/1/2017. Assume that the Fed takes no action in response to the announcement.

A. increase. B. decrease.
C. not change. D. have an ambiguous effect.

13. Suppose the current one-year interest rate is 4%. Also assume that financial markets expect the one-year interest rate in 2018 to be 5%, and expect the one-year interest in 2019 to be 6%. Given this information, the three-year interest rate will be

A. 2% B. 3% C. 4% D. 5%

14. When choosing between one-year bonds and two-year bonds, assume that investors care about the expected returns and about uncertainty. In particular, they prefer a higher expected return and prefer to have less uncertainty about the return. The current one-year rate is 6% and the one-year rate expected one year from now is 10%. Given this information, the two-year rate is __%.(choose the best one, given the information available).

A. 7 B. 8 C. 10 D. 14 E. 16
15. Lower income individuals are ___ likely to purchase high grade municipal bonds than high grade corporate bonds.

A.more B. less C. equally

16. As a business person, explain why you would prefer equity financing to debt financing.