SIE: Exercise

Exercise

Choose the best answer

1. 1. Order the reported interest rates from highest to lowest:
2. A. Federal funds rate, discount rate, broker call rate, prime rate
3. B. Prime rate, broker call rate, discount rate, federal funds rate
4. C. Prime rate, broker call rate, federal funds rate, discount rate
5. D. Broker call rate, prime rate, federal funds rate, discount rate
6. 2. When interest rates rise, all of the following typically are true except:
7. A. The prices of outstanding bonds rise because investors can purchase new bonds at higher interest rates.
8. B. Stock prices fall as investors pull out of the stock market in favor of the bond market.
9. C. The economy may be in the latter stages of an expansion and inflation pressures are increasing.
10. D. The economy may slow down.
11. 3. Regarding bond yields, which of the following is not true?
12. A. A yield curve illustrates a liquidity spread.
13. B. Liquidity spread is the concept that bonds with longer maturities tend to pay higher yields than bonds with shorter maturities.
14. C. Spreads widen during expansionary periods of the business cycle and narrow during periods of contraction.
15. D. A bond’s credit spread increases relative to a benchmark, such as Treasury bills, when its credit rating declines.
16. 4. Which of the following statements are true regarding yield curves?
17. I. A steep yield curve means investors see the future as particularly uncertain or volatile.
18. II. An inverted yield curve means investors think interest rates are going to rise in the future.
19. III. When the yield curve is inverted, short-term bonds are paying a lower yield than medium- or long-term bonds.
20. IV. A flat or softened yield curve means investors perceive the future as stable.
21. A. I and II
22. B. II and III
23. C. III and IV
24. D. I and IV
25. 5. The four stages of the business cycle are: