# Question Details

### FINC510 Final Exam A+ Complete Solution JUNE 100% Solution

Question Details:
FINC510 Final Exam A+ Complete Solution JUNE 100% Solution

1. Which of the following statements is CORRECT?

a. Time lines are useful for visualizing complex problems prior to doing actual calculations.

b. Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods

c. A time line is not meaningful unless all cash flows occur annually.

d. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.

e. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

2. Which of the following statements is CORRECT?

a. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

b. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.

c. A time line is not meaningful unless all cash flows occur annually.

d. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

e. Time lines are not useful for visualizing complex problems prior to doing actual calculations.

3. Which of the following statements is CORRECT?

a. Time lines are not useful for visualizing complex problems prior to doing actual calculations.

b. Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.

c. Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.

d. A time line is not meaningful unless all cash flows occur annually.

e. Time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

4. Which of the following statements is CORRECT?

a. Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

b. Time lines are not useful for visualizing complex problems prior to doing actual calculations.

c. Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.

d. Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.

e. A time line is not meaningful unless all cash flows occur annually.

5. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment?

a. The discount rate decreases.

b. The discount rate increases.

c. The riskiness of the investment's cash flows increases.

d. The cash flows are in the form of a deferred annuity, and they total to \$100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for \$10,000 rather than for \$20,000.

e. The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.

6. Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is CORRECT, other things held constant?

a. If there is a positive maturity risk premium, the Treasury yield curve must be upward sloping.

b. If inflation is expected to decline, there can be no maturity risk premium.

c. If the pure expectations theory holds, the corporate yield curve must be downward sloping.

d. If the pure expectations theory holds, the Treasury yield curve must be downward sloping.

e. The expectations theory cannot hold if inflation is decreasing.

7. Which of the following statements is CORRECT, other things held constant?

a. If companies have fewer good investment opportunities, interest rates are likely to increase.

b. If expected inflation increases, interest rates are likely to increase.

c. Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.

d. Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.

e. If individuals increase their savings rate, interest rates are likely to increase.

8. Which of the following would be most likely to lead to a higher level of interest rates in the economy?

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

b. The economy moves from a boom to a recession.

c. The level of inflation begins to decline.

d. Households start saving a larger percentage of their income.

e. Corporations step up their expansion plans and thus increase their demand for capital.

9. If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?

a. The yields on the two securities would be equal.

b. It is impossible to tell without knowing the coupon rates of the bonds.

c. The yield on a 10-year bond would be less than that on a 1-year bill.

d. The yield on a 10-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium.

e. It is impossible to tell without knowing the relative risks of the two securities.

10. Which of the following statements is CORRECT?

a. If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping.

b. If the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping.

c. If the expectations theory holds, the Treasury bond yield curve will never be downward sloping.

d. Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds.

e. If the maturity risk premium (MRP) equals zero, the Treasury bond yield curve must be flat.

11. Which of the following statements is CORRECT?

a. You hold two bonds, a 10-year, zero coupon, issue and a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline.

b. You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.

c. The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates, other things held constant.

d. The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.

e. The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.

12. Which of the following events would make it more likely that a company would call its outstanding callable bonds?

a. The company's financial situation deteriorates significantly.

b. Market interest rates decline sharply.

c. The company's bonds are downgraded.

d. Market interest rates rise sharply.

e. Inflation increases significantly.

13. Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?

c. Making the bond a first mortgage bond rather than a debenture.

d. The rating agencies change the bond's rating from Baa to Aaa.

14. Which of the following statements is CORRECT?

a. Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued.

b. If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price.

c. Most sinking funds require the issuer to provide funds to a trustee, who holds the money so that it will be available to pay off bondholders when the bonds mature.

d. Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time.

e. A sinking fund provision makes a bond more risky to investors at the time of issuance.

15. Amram Inc. can issue a 20-year bond with a 6% annual coupon at par. This bond is not convertible, not callable, and has no sinking fund. Alternatively, Amram could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund. Which of the following most accurately describes the coupon rate that Amram would have to pay on the second bond, theconvertible, callable bond with the sinking fund, to have it sell initially at par?

a. The rate should be over 7%.

b. The coupon rate could be less than, equal to, or greater than 6%, depending on the specific terms set, but in the real world the convertible feature would probably cause the coupon rate to be less than 6%.

c. The rate should be over 8%.

d. The rate should be slightly greater than 6%.

e. The coupon rate should be exactly equal to 6%.

16. You have the following data on three stocks:

Stock

Standard Deviation

Beta

A

20%

0.59

B

10%

0.61

C

12%

1.29

If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

a. C; B.

b. A; A.

c. C; A.

d. A; B.

e. B; A.

17. Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

a. Variance; correlation coefficient.

b. Coefficient of variation; beta.

c. Beta; beta.

d. Beta; variance.

e. Standard deviation; correlation coefficient.

18. A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A's standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter?

a. Either A or B, i.e., the investor should be indifferent between the two.

b. Stock B.

c. Stock A.

d. Neither A nor B, as neither has a return sufficient to compensate for risk.

e. Add A, since its beta must be lower.

19. Which of the following statements is CORRECT?

a. The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.

b. The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time.

c. If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.

d. The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.

e. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

20. An increase in a firm's expected growth rate would cause its required rate of return to

a. increase.

b. possibly increase, possibly decrease, or possibly remain constant.

c. fluctuate more than before.

d. decrease.

e. fluctuate less than before.

21. If in the opinion of a given investor a stock's expected return exceeds its required return, this suggests that the investor thinks

a. the stock is experiencing supernormal growth.

b. the stock is a good buy.

c. dividends are not likely to be declared.

d. the stock should be sold.

e. management is probably not trying to maximize the price per share.

22. Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

a. All common stocks, regardless of class, must have the same voting rights.

b. Some class or classes of common stock are entitled to more votes per share than other classes.

c. All firms have several classes of common stock.

d. All common stocks fall into one of three classes: A, B, and C.

e. All common stock, regardless of class, must pay the same dividend.

23. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

A

B

Price

\$25

\$40

Expected growth

7%

9%

Expected return

10%

12%

a. The two stocks should have the same expected dividend.

b. The two stocks could not be in equilibrium with the numbers given in the question.

c. B's expected dividend is \$0.75.

d. A's expected dividend is \$0.50.

e. A's expected dividend is \$0.75 and B's expected dividend is \$1.20.

24. Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?

a. Increase the dividend payout ratio for the upcoming year.

b. Increase the percentage of debt in the target capital structure.

c. Increase the proposed capital budget.

d. Reduce the amount of short-term bank debt in order to increase the current ratio.

e. Reduce the percentage of debt in the target capital structure.

25. Schalheim Sisters Inc. has always paid out all of its earnings as dividends, hence the firm has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC?

a. The flotation costs associated with issuing new common stock increase.

b. The flotation costs associated with issuing preferred stock increase.

c. Expected inflation increases.

d. The market risk premium declines.

e. The company's beta increases.

26. For a typical firm, which of the following sequences is CORRECT? All rates are after taxes, and assume that the firm operates at its target capital structure.

a. rs > re > rd > WACC.

b. re > rs > WACC > rd.

c. rd > re > rs > WACC.

d. WACC > rd > rs > re.

e. WACC > re > rs > rd.

27. Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division A's cost of capital is 10.0%, Division B's cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division A's projects are equally risky, as are all of Division B's projects. However, the projects of Division A are less risky than those of Division B. Which of the following projects should the firm accept?

a. A Division B project with a 13% return.

b. A Division B project with a 12% return.

c. A Division A project with an 11% return.

d. A Division A project with a 9% return.

e. A Division B project with an 11% return.

28. Which of the following statements is CORRECT?

a. One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future.

b. One defect of the IRR method is that it does not take account of the cost of capital.

c. One defect of the IRR method is that it does not take account of the time value of money.

d. One defect of the IRR method is that it does not take account of cash flows over a project's full life.

e. One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.

29. Which of the following statements is CORRECT?

a. One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability.

b. One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person, one vote."

c. Corporations of all types are subject to the corporate income tax.

d. It is easier to transfer one's ownership interest in a partnership than in a corporation.

e. One of the advantages of the corporate form of organization is that it avoids double taxation.

30. Which of the following statements is CORRECT?

a. If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.

b. Corporations face fewer regulations than proprietorships.

c. It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.

d. One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership.

e. One disadvantage of operating a business as a proprietor is that the firm is subject to double taxation, because taxes are levied at both the firm level and the owner level.

31. Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT?

a. The firm will find it more difficult to raise additional capital to support its growth.

b. Relaxant's shareholders (the ex-partners) will now be exposed to less liability.

c. Assuming the firm is profitable, none of its income will be subject to federal income taxes.

d. The company will probably be subject to fewer regulations and required disclosures.

e. The firm's investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.

32. The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to

a. Maximize the stock price per share over the long run, which is the stock's intrinsic value.

b. Minimize the chances of losses.

c. Maximize the stock price on a specific target date.

d. Maximize its expected total corporate income.

e. Maximize its expected EPS.

33. Which of the following statements is CORRECT?

a. The CFO is responsible for raising capital and for making sure that capital expenditures are desirable, but he or she is not responsible for the validity of the financial statements, as the controller and the auditors have that responsibility.

b. The CFO generally reports to the firm's chief accounting officer, who is normally the controller.

c. By law in most states, the chairman of the board must also be the CEO.

d. In most corporations, the CFO ranks above the CEO.

e. The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.

34. Money markets are markets for

a. Short-term debt securities such as Treasury bills and commercial paper.

b. Foreign currencies.

c. Long-term bonds.

d. Consumer automobile loans.

e. Common stocks.

35. Which of the following statements is CORRECT?

a. If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction.

b. If you purchase 100 shares of Disney stock from your brother-in-law, this is an example of a primary market transaction.

c. Only institutions, and not individuals, can engage in derivative market transactions.

d. As they are generally defined, money market transactions involve debt securities with maturities of less than one year.

e. The NYSE is an example of an over-the-counter market.

36. You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of:

a. A money market transaction.

b. An over-the-counter market transaction.

c. A futures market transaction.

d. A secondary market transaction.

e. A primary market transaction

37. Which of the following statements is CORRECT?

a. A liquid security is a security whose value is derived from the price of some other "underlying" asset.

b. Money markets are markets for long-term debt and common stocks.

c. While the distinctions are becoming blurred, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

d. Money market mutual funds usually invest their money in a well-diversified portfolio of liquid common stocks.

e. The NYSE operates as an auction market, whereas Nasdaq is an example of a dealer market.

38. Which of the following statements is CORRECT?

a. Home mortgage loans are traded in the money market.

b. The New York Stock Exchange is an auction market, and it has a physical location.

c. While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

d. If an investor sells shares of stock through a broker, then it would be a primary market transaction.

e. Capital markets deal only with common stocks and other equity securities.

39. Which of the following statements is CORRECT?

a. If a company's statements were prepared in accordance with generally accepted accounting principles (GAAP), the market value of the stock equals the book value of the stock as reported on the balance sheet.

b. The difference between the total assets reported on the balance sheet and the liabilities reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP).

c. The balance sheet for a given year, say 2012, tells us how much money the company earned during that year.

d. The balance sheet for a given year, say 2012, is designed to give us an idea of what happened to the firm during that year.

e. The assets section of a typical industrial company's balance sheet begins with cash, then lists the assets in the order in which they will probably be converted to cash, with the longest lived assets listed last.

40. Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

a. The company pays a dividend.

b. The company purchases a new piece of equipment.

c. The company gives customers more time to pay their bills.

d. The company issues new common stock.

e. The company repurchases common stock.

41. Which of the following items is NOT normally considered to be a current asset?

a. Bonds.

b. Short-term, highly-liquid, marketable securities.

c. Accounts receivable.

d. Inventory.

e. Cash.

42. Which of the following items cannot be found on a firm's balance sheet under current liabilities?

a. Accrued wages.

b. Cost of goods sold.

c. Short-term notes payable to the bank.

d. Accrued payroll taxes.

e. Accounts payable.

43. Which of the following statements is CORRECT?

a. The focal point of the income statement is the cash account, because that account cannot be manipulated by "accounting tricks."

b. If a firm follows generally accepted accounting principles (GAAP), then its reported net income will be identical to its reported cash flow.

c. The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow generally accepted accounting principles (GAAP).

d. The reported income of two otherwise identical firms must be identical if the firms are publicly owned, provided they follow procedures that are permitted by the Securities and Exchange Commission (SEC).

e. The income statement for a given year, say 2012, is designed to give us an idea of how much the firm earned during that year.

44. Considered alone, which of the following would increase a company's current ratio?

a. An increase in net fixed assets.

b. An increase in accounts receivable.

c. An increase in notes payable.

d. An increase in accrued liabilities.

e. An increase in accounts payable.

45. Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?

a. The total assets turnover decreases.

b. The TIE declines.

c. The DSO increases.

d. The quick ratio increases.

e. The current ratio declines.

46. A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?

a. Use cash to increase inventory holdings.

b. Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.

c. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.

d. Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.

e. Use cash to repurchase some of the company's own stock.

47. Which of the following statements is CORRECT?

a. An increase in inventories would have no effect on the current ratio.

b. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.

c. A reduction in inventories would have no effect on the current ratio.

d. A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.

e. If a firm increases its sales while holding its inventories constant, then, other things held constant, its fixed assets turnover ratio will decline.

48. Companies E and P each reported the same earnings per share (EPS), but Company E's stock trades at a higher price. Which of the following statements is CORRECT?

a. Company E must pay a lower dividend.

b. Company E trades at a higher P/E ratio.

c. Company E probably has fewer growth opportunities.

d. Company E must have a higher market-to-book ratio.

e. Company E is probably judged by investors to be riskier.

49. Which of the following statements is CORRECT?

a. Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of "window dressing." Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of "window dressing."

b. Using some of the firm's cash to reduce long-term debt is an example of "window dressing."

c. "Window dressing" is any action that does not improve a firm's fundamental long-run position and thus increases its intrinsic value.

d. Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase fixed assets is an example of "window dressing."

e. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing."

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Solution Details:
FINC510 Final Exam A+ Complete Solution JUNE (100% Solution)

1. Which of the following statements is CORRECT? a. Time lines are useful for visualizing complex problems prior to doing actual calculations. b. Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods c. A time line is not meaningful unless all cash flows occur annually. d. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. e. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. 2. Which of the following statements is CORRECT? a. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. b. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. c. A time line is not meaningful unless all cash flows occur annually. d. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods. e. Time lines are not useful for visualizing complex problems prior to doing actual calculations. 3. Which of the following statements is CORRECT? a. Time lines are not useful for visualizing complex problems prior to doing actual calculations. b. Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. c. Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. d. A time line is not meaningful unless all cash flows occur annually. e. Time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity. 4. Which of the following statements is CORRECT? a. Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity. b. Time lines are not useful for visualizing complex problems prior to doing actual calculations. c. Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. d. Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. e. A time line is not meaningful unless all cash flows occur annually. 5. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment? a. The discount rate decreases. b. The discount rate increases. c. The riskiness of the investment's cash flows increases. d. The cash flows are in the form of a deferred annuity, and they total to \$100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for \$10,000 rather than for \$20,000. e. The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years. 6. Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is CORRECT, other things held constant? a. If there is a positive maturity risk premium, the Treasury yield curve must be upward sloping. b. If inflation is expected to decline, there can be no maturity risk premium. c. If the pure expectations theory holds, the corporate yield curve must be downward sloping. d. If the pure expectations theory holds, the Treasury yield curve must be downward sloping. e. The expectations theory cannot hold if inflation is decreasing. 7. Which of the following statements is CORRECT, other things held constant? a. If companies have fewer good investment opportunities, interest rates are likely to increase. b. If expected inflation increases, interest rates are likely to increase. c. Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills. d. Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities. e. If individuals increase their savings rate, interest rates are likely to increase. 8. Which of the following would be most likely to lead to a higher level of interest rates in the economy? a. The Federal Reserve decides to try to stimulate the economy. b. The economy moves from a boom to a recession. c. The level of inflation begins to decline. d. Households start saving a larger percentage of their income. e. Corporations step up their expansion plans and thus increase their demand for capital. 9. If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill? a. The yields on the two securities would be equal. b. It is impossible to tell without knowing the coupon rates of the bonds. c. The yield on a 10-year bond would be less than that on a 1-year bill. d. The yield on a 10-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium. e. It is impossible to tell without knowing the relative risks of the two securities. 10. Which of the following statements is CORRECT? a. If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping. b. If the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping. c. If the expectations theory holds, the Treasury bond yield curve will never be downward sloping. d. Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds. e. If the maturity risk premium (MRP) equals zero, the Treasury bond yield curve must be flat. 11. Which of the following statements is CORRECT? a. You hold two bonds, a 10-year, zero coupon, issue and a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline. b. You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline. c. The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates, other things held constant. d. The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates. e. The longer ...