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. Credit 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 is true regarding yield curves?
17. A. A yield curve is a graph that plots yield on the x-axis and maturity on the y-axis
18. B. In a normal yield curve, short term bonds have higher yields than long-term bonds
19. C. An inverted yield curve reflects the usual state of the relationship between yields and maturity
20. D. The normal yield curve reflects an expectation of inflation and growth, as maturities increase so do yields
21. 5. The four stages of the business cycle are:
22. A. Expansion, contraction, recession, trough
23. B. Expansion, peak, contraction, trough
24. C. Expansion, peak, contraction, depression
25. D. Expansion, con