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  111. Explain why many mayors of cities facing the need to borrow for infrastructure improvements, may not look favorably on a large federal income tax rate reduction?          112. What is the effective after-tax yield to an investor from a bond paying $70 per $1,000 annually, if the investor is in a 25% marginal.
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  104. Could the holding period return ever be less than the yield to maturity? Explain.          105. Use the example of a consol to show how bond prices and yields are inversely related.          106. Suppose a Treasury bill has a purchase price of $9,865.50; a face value of $10,000 and 90 days to maturity. Calculate the.
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  129. The text identified the various sources of risk for bonds. Are U.S. Treasury TIPS bonds free from risk? Explain.          130. In the chapter you read about David Bowie, a rock and roll artist from Great Britain, who has issued bonds. Would this be a likely avenue of financing for a new rock.
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    71. If the federal government were to offer larger tax breaks on the purchase of new equipment for businesses, all other factors constant, we would expect to see: A. The bond demand curve shift rightB. The bond supply curve shift leftC. The bond supply curve shift rightD. The bond demand curve shift left   72. Which of the following.
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    61. Assume the Expectations Hypothesis regarding the term structure of interest rates is correct. Then, if the current two-year interest rate is 5% and the current one-year rate is 6%, then investors expect: A. The future one-year rate to be 4%B. The future one-year rate to be 5%C. The future one-year rate to be 6%D. The.
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  Essay Questions  132. You win your state lottery. The lottery officials offer you the option of taking your winnings in one lump-sum payment, or fixed annual payments for the next 20 years. The sum of the 20 annual payments is larger than the lump-sum payment. Before deciding, what are the key factors.
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    41. Which fact about the term structure is the Expectations Theory able to explain? A. Why interest rates on bonds with different terms to maturity tend to move together over timeB. Why yields on short-term bonds are more volatile than yields on long-term bondsC. Why longer-term yields tend to be higher than shorter-term yieldsD. Why interest.
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    11. If the annual interest rate is 5% (.05), the price of a three-month Treasury bill would be: A. $98.79B. $95.00C. $98.75D. $97.59   12. The relationship between the price and the interest rate for a zero coupon bond is best described as: A. VolatileB. FluctuatingC. InverseD. Non-existent   13. When a loan is amortized, it means: A. The borrower is in defaultB. The principal and interest are paid off.
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  108. Calculate the price of a zero coupon bond that has an interest rate of 6.65% (.0665), a face value of $100.00 and six-months to maturity.          109. Calculate the monthly payment for a 30-year mortgage, where the amount borrowed is $100,000 and the annual interest rate is 6.0%.          110. Calculate the price of a $1,000.
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  119. Why can't the Expectations Hypothesis stand alone as an adequate theory to explain yield curves?          120. Consider the yield curve below. Using the Expectations Hypothesis, what conclusion can we draw from the data? Now, using the Liquidity Premium Theory, cite two possible conclusions we can draw from the data.                        121. What impact should.
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Multiple Choice Questions  1. A zero-coupon bond refers to a bond which: A. Does not pay any coupon payments because the issuer is in defaultB. Promises a single future paymentC. Pays coupons only once a yearD. Pays coupons only if the bond price is above face value   2. A consol is: A. Another name for a zero-coupon bondB. A bond with a.
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Multiple Choice Questions  1. The bond rating of a security reflects: A. The size of the coupon payment relative to the face valueB. The likelihood the lender/borrower will be repaid by the borrower/issuerC. The return a holder is likely to receiveD. The size of the coupon rate relative to other interest rates   2. The two best known bond rating.
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    71. The economy enters a period of robust economic growth that is expected to last for several years. How would this be reflected in the risk and term structures of interest rates? A. An inverted yield curveB. A decrease in the term spreadC. A decrease in the interest rate spreadD. An increase in yields on tax-exempt.
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    61. If the U.S. government's borrowing needs increase, in the bond market this would be seen as: A. The bond demand curve shifting rightB. The bond supply curve shifting rightC. The bond demand curve shifting leftD. The bond supply curve shifting left   62. If the U.S. government's borrowing needs increase, in the bond market this would be seen.
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  116. The U.S. Treasury offers several ways to purchase U.S. government bonds. There are the traditional coupon bonds, plus Treasury Inflation-Indexed Securities and STRIPS. How do these bonds differ from their traditional counterparts?          117. In the late 1990s, the U.S. government ran a surplus for the first time in decades. It instituted a.
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  134. Consider the factors that affect bond demand and bond supply. Describe how the following are likely to change during a period of robust economic growth: wealth, default risk, and general business conditions. For each, state how the factor is likely to change, and discuss the implications for bond demand/supply, bond.
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  Short Answer Questions  102. What is the main purpose (function) of bond rating services?          103. What role did rating agencies play in the financial crisis of 2007-2009?          104. What is meant by a subprime mortgage?          105. If an investor wants to compare commercial paper to a corresponding risk-free investment, which security would he/she use and why?              .
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  100. Calculate the expected value of an investment that has the following payoff frequency: a quarter of the time it will pay $2,000, half of the time it will pay $1,000, and the remaining time it will pay $0.          101. Consider the following two investments. One is a risk-free investment with a $100.
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  Short Answer Questions  87. An individual faces two alternatives for an investment: Asset A has the following probability return schedule:  Asset B has a certain return of 8.0%. If the individual selects asset A does she violate the principle of risk aversion? Explain.          88. An individual faces two alternatives for an investment. Asset ‘A' has.
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    81. In investment matters, generally young workers compared to older workers will: A. Minimize expected return and focus more on variabilityB. Maximize expected return and focus less on variabilityC. Have equal concern for expected return and variabilityD. Be more risk-averse   82. The variance of a portfolio containing n assets: A. Increases as n increasesB. Decreases as n increasesC. Is constant for any.
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    41. The yield on a discount basis: A. Will overstate the return on a Treasury bill versus using yield to maturity since they are sold at discountsB. Will understate the return on Treasury bills versus yield to maturity since they are sold at premiumsC. Will understate the return on Treasury bills versus yield to maturity.
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    91. Default risk is the risk associated with: A. The bond issuer not being able to make the promised paymentsB. The illiquidity associated with small issuesC. The effect on bond prices caused by changes in market rates of interestD. Changes in the expected inflation rate   92. Consider the bonds below. Which is subject to the greatest interest-rate risk? A. A.
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    31. Which of the following is not a reason why the yield to maturity can differ from the current yield? A. Because the yield to maturity considers the capital gain/lossB. Because the current yield focuses only on the coupon payment and the purchase priceC. Because most bonds are not purchased for face valueD. Because the current.
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  115. What is the equivalent tax-exempt bond yield for a taxable bond with an 8% yield and a bondholder in a 35% marginal tax rate? Explain.          116. Assuming the Expectations Hypothesis is correct, and given the following information: The current four-year interest rate is 5.0%The current one-year interest rate is 4.0%The expected one-year.
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    51. When looking at Treasury note quotes in the Wall Street Journal, you notice that a Treasury note has an "i" following the maturity date. This indicates that this financial instrument: A. Is subject to risk associated with changes in the inflation rateB. Has an interest rate that is adjusted for inflationC. Has a fixed.
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    91. The terrorist attack on the World Trade Center on September 11, 2001: A. Triggered a flight to quality in the bond marketB. Caused the demand for U.S. Treasury securities to fall and the demand for corporate bonds to riseC. Caused the price of U.S. Treasury securities to fall and the yields on corporate bonds.
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    51. The term structure of interest rates: A. Always results in an upward sloping yield curveB. Represents the variation in yields for securities differing in maturitiesC. Usually results in a flat yield curveD. Usually results in a downward sloping yield curve   52. Which of the following statements in not true of the yield curve for U.S. Treasury securities? A. The.
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    31. Holding risk constant, an investor earning 4% from a tax-exempt bond who is in a 20% tax bracket would be indifferent between that bond and: A. A taxable bond with a 7.5% yieldB. A taxable bond with a 8.0% yieldC. A taxable bond with a 5% yieldD. A taxable bond with a 6% yield   32. Municipal bonds.
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  110. Explain the rapid rise in popularity of mutual funds.          111. Considering leverage, can you explain why a mortgage lender would want borrowers to have larger down payments, and when the borrower doesn't the mortgage lender may require mortgage insurance?          112. You study horse racing avidly and discover for this year's Kentucky Derby you think.
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  112. Compute the change in the price of a five-year (until maturity) $1,000 face value zero-coupon bond that currently yields 7% when expected inflation increases from 3% to 4%.          113. Suppose that the interest rate on a conventional 30-year mortgage is currently 8%. You receive a call from a mortgage broker who offers.
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  106. What would be the impact of leverage on the expected return and standard deviation of purchasing an asset with 10% of the owner's funds and 90% borrowed funds?          107. Why isn't it correct to say that people who are risk averse avoid risk?          108. Briefly explain the difference between idiosyncratic risk and systematic risk..
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  118. Explain why insurance companies may find themselves at times having to refuse business.          119. Suppose a saver is looking for the opportunity to make a very large return in a very short period of time. Would you recommend diversification for this individual?      .
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    61. A risk-neutral investor: A. Highly values diversificationB. Is the only type of investor who benefits from diversificationC. Gains nothing from diversificationD. Does not believe that diversification can reduce risk   62. An investor practicing hedging would be most likely to: A. Avoid the stock market and focus on bondsB. Purchase shares in General Motors and buy U.S. Treasury BondsC. Purchase shares in.
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    11. Commercial paper refers to: A. The financial publications read by the CEOs of public corporationsB. Any debt security with a maturity exceeding one yearC. Short-term collateralized securities issued only by corporationsD. Unsecured short-term debt issued by corporations and governments   12. Most commercial paper is: A. Issued with maturities exceeding one yearB. Issued with maturities between 50 and 75 daysC. Used exclusively.
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    51. Which of the following statements is most correct? A. Usually higher expected returns are associated with higher risk premiumsB. Usually higher risk premiums are associated with lower expected returnsC. Usually lower expected returns are associated with higher risk premiumsD. Usually expected returns are not associated with risk premiums   52. The fact that over the long run the.
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  Essay Questions  115. Apply the definition of risk provided in the textbook to an individual's decision to purchase a car insurance policy. Suppose that the individual has two possibilities: no accident ($0 gain/loss) and accident (-$30,000 loss). If the probability of an accident is lower than the probability of an accident occurring.
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    21. The risk structure of interest rates says: A. The interest rates on a variety of bonds will move independently of each otherB. Lower rated bonds will have higher yieldsC. U.S. Treasury bond yields always change by more than other bondsD. Interest rates only compensate for risk in structured amounts   22. U.S. Treasury securities are considered to carry.
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    81. When the growth rate of the economy slows we would expect: A. The risk to increase for U.S. Treasury securitiesB. The risk spread to increase more between U.S. Treasury Securities and Aaa securities than between Aaa and Baa securitiesC. The risk spread to increase more between Aaa and Baa securities than U.S. Treasuries and.
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  106. How did asset backed commercial paper (ABCP) rollover risk contribute to the financial crisis of 2007-2009?          107. An investor sees the current twelve-month rate at 4% and expects the following future twelve-month rate for each of the subsequent years; 4.5%, 5.5% and 6.0%. If this investor views a four-year maturity at 5.65%.
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  92. Explain why casinos will find professional gamblers participating in the various games of chance even though these professionals know the odds are in favor of the house and against them.          93. What is the expected value of a $100 bet on a flip of a fair coin, where heads pays double and.
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    Short Answer Questions  101. Suppose a family member approaches you to borrow $2,000 for the down payment on an automobile. You have the cash available in a savings account that currently earns 5% annual interest. You and the family member consider the following repayment options: (i) Borrower repays you $100 each year.
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