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AB1201-FINANCIAL MANAGEMENT 2019/2020 Semester 2 Main Content

Lecture 3 - Financial Markets and Institutions, Financial Statements, Cash Flow, and Taxes, and Interest Rates
Review Test Submission: Lecture 3: Online Assignment

Review Test Submission: Lecture 3: Online Assignment

User CoB (NBS) LOOMBA RISHABH

Course AB1201-FINANCIAL MANAGEMENT 2019/2020 Semester 2 Main
Test Lecture 3: Online Assignment
Started 2/9/20 8:37 PM
Submitted 2/9/20 8:41 PM
Due Date 2/17/20 11:59 PM
Status Completed
Attempt 100 out of 100 points  
Score
Time 4 minutes
Elapsed
Instructions Answer the questions below to check your understanding of the concepts we
have covered in Lecture 3.

Results All Answers, Submitted Answers, Correct Answers, Feedback, Incorrectly

Displayed Answered Questions

Question 1 10 out of 10 points

Which of the following statements is CORRECT?

Selected A.
Answer: The most likely explanation for an inverted yield curve is that
investors expect in ation to decrease.

Answers: A.
The most likely explanation for an inverted yield curve is that
investors expect in ation to decrease.

B.
Inverted yield curves can exist for Treasury bonds, but because of
default premiums, the corporate yield curve can never be inverted.

C.
The most likely explanation for an inverted yield curve is that
investors expect in ation to increase.

D.
 The higher the maturity risk premium, the higher the probability that
the yield curve will be inverted.

E.
If the yield curve is inverted, short-term bonds have lower yields than
long-term bonds.

Question 2 10 out of 10 points

In the foreseeable future, the real risk-free rate of interest, r*, is expected to
remain at 3%, in ation is expected to steadily increase, and the maturity risk
premium is expected to be 0.1(t − 1)%, where t is the number of years until the
bond matures.
Given this information, which of the following statements is CORRECT?

Selected E. The yield curve must be upward sloping.

Answer:

Answers: A.
The yield on 2-year Treasury securities must exceed the yield on 5-
year Treasury securities.

B.
The yield on 5-year Treasury securities must exceed the yield on
10-year corporate bonds.

C.
The yield on 5-year corporate bonds must exceed the yield on 8-
year Treasury bonds.

D. The yield curve must be “humped.”

E. The yield curve must be upward sloping.

Response Choice a is wrong since IP5 is greater than IP2. Yield on 10-year
Feedback: corporate bonds include DRP, LP and greater IP than yield on 5-year
Treasury bond. Therefore choice b is wrong. Choice c is also wrong
since DRP +LP of corporate bonds yield may not exceed the average
inflation during year 6-8 of Treasury bonds yield.

Given the information (a constant r*, an increasing inflation rate and

an increasing MRP), the yield must be upward sloping curve, not
humped.

Question 3 10 out of 10 points

Which of the following factors would be most likely to lead to an increase in

nominal interest rates?

Selected E.
Answer: A new technology like the Internet has just been introduced, and it
increases investment opportunities.
 Answers: A. The economy falls into a recession.

B. The Federal Reserve decides to try to stimulate the economy.

C. There is a decrease in expected in ation.

D.
Households reduce their consumption and increase their savings.

E.
A new technology like the Internet has just been introduced, and it
increases investment opportunities.

Response If the new technology were so e cient that it takes an

Feedback: underdeveloped economy from a subsistence level, where savings
are necessarily low and rates high, to a level where people can
a ord to save, this might cause interest rates to decline. However, it
would take time for this to occur.

An increase in the investment opportunity raises the demand for

money which will lead to an increase in the interest rate.

Question 4 10 out of 10 points

One of the four most fundamental factors that a ect the cost of money as
discussed in the text is the risk inherent in a given security.
The higher the risk, the higher the security's required return, other things held
constant.

Selected Answer: True

Answers: True
False

Question 5 10 out of 10 points

Futures markets are markets in which:

Selected A.
Answer: participants agree today to buy or sell an asset at some later
date.

Answers: A.
participants agree today to buy or sell an asset at some later
date.

B.
physical assets such as wheat, autos, etc. are directly traded.

C. transactions are negotiated directly between two parties.

D. short-term, highly liquid debt securities are traded.

E. corporations raise new capital.

Question 6 10 out of 10 points

Suppose in ation rate is 6% for the past year.

The in ation rate is expected to be 5% in the coming year and 4% per year
thereafter.
Assume that the real risk free rate r*, will remain at 2% over the next 10 years.
The yield on a 5-year Treasury bond is 6.3% and the yield on a 10-year corporate
bond is 8.4%.
A 5-year corporate bond has the same maturity risk premium as the 5-year
Treasury bond described.
The 5-year corporate bond also has the same default risk premium and liquidity
premium as the 10-year corporate bond described.
Given that the maturity risk premium for the 10-year corporate bond is 0.3%,
what is the yield on the 5-year corporate bond?

Selected Answer: C. 8.3%

Answers: A. 7.4%

B. 8.1%

C. 8.3%

D. 8.4%

E. Cannot tell from the data given

Question 7 10 out of 10 points

Which of the following statements concerning the term structure of interest rates
is CORRECT?
I. Expectations of lower in ation rates in the future tend to lower the slope of the
yield curve.
II. An upward-sloping yield curve must be due to investors expecting in ation to
increase in the future.
III. The real risk-free rate of interest has minimal, if any, e ect on the slope of the
yield curve.
IV. The term structure of interest rates shows the relationship between yields and
time.

Selected Answer: A. I and III only

Answers: A. I and III only

B. II and IV only

C. I, II, and III only

D. II, III, and IV only

E. I, II, and IV only

Question 8 10 out of 10 points

Which of the following items does not reduce a rm’s net income?

Selected Answer: E. Dividend

Answers: A. Cost of Goods Sold

B. Depreciation

C. Interest expense

D. Income taxes

E. Dividend

Question 9 10 out of 10 points

Which one of the following statements is most CORRECT?

Selected A.
Answer: If a rm is more pro table than most other rms, we would normally
expect to see its stock price exceed its book value per share.

Answers: A.
If a rm is more pro table than most other rms, we would normally
expect to see its stock price exceed its book value per share.

B.
Inventory is more liquid than accounts receivable because inventory
is tangible.

C.
Retained earnings, as reported on the balance sheet, represents the
amount of cash a company has available to pay out as dividends to
shareholders.

D.
Dividends paid reduce the net income that is reported on a
company’s income statement.

E.
Assets other than cash are expected to produce cash over time, and
the amounts of cash they eventually produce should be exactly the
same as the amounts at which the assets are carried on the books.

Question 10 10 out of 10 points

Suppose the U.S. Treasury issued $50 billion of short-term securities and sold
them to the public.
Other things held constant, what would be the most likely e ect on short-term
securities' prices and interest rates?

Selected E. Prices would decline and interest rates would rise.

 Answer:

Answers: A. Prices and interest rates would both rise.

B. Prices and interest rates would both decline.

C.
There is no reason to expect a change in either prices or interest
rates.

D. Prices would rise and interest rates would decline.

E. Prices would decline and interest rates would rise.

Sunday, February 9, 2020 8:41:44 PM SGT

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