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1) Present value calculations: A) are appropriate for investments in the same time period B) are accurate only in a low-rate environment C) provide comparisons for investments when inflation is known D) provide a common reference for measuring investments at different maturities 2) Compounding refers to: A) the calculation of interest rates after allowing for the effect of taxes B) the process of earning interest on interest of an investment C) the repayment of both interest and principal at the same time during the life of a loan D) the increased value of an investment from the payment of coupons 3) Adverse selection and moral hazard are two examples of A) transaction costs B) symmetric information C) information cost D) financial market efficiency 4) Which of the following assign ratings for corporate bonds in the United States? A) The Securities and Exchange Commission B) The Office of Debt Management C) Private companies such as Moody's and Fitch D) The issuing companies 18) Which of the following best describes the segmented markets theory? A) It assumes that bonds with different maturities are near perfect substitutes. B) It provides a good explanation for why yield curves are always positive. C) It demonstrates that lenders always prefer to invest for only short periods of time, D) It assumes that investors have different investment objectives and horizons. 19) You purchased a one-year Treasury bill at a yield of 3.00% with a price of $97. If you held the investment to maturity, your rate of return will be: A) 3.09% B) 2.91% C) 3.00% D) unknown because not enough information is given 20) Suppose there is concern about the stability of the global financial system, causing a flight to safety of U.S. govemment bonds. Which of the following is NOT a likely result? A) Higher prices of U.S. goverment bonds B) Greater issuance of U.S. government bonds C) Lower interest rates on U.S. government bonds D) Increased demand for U.S. government bonds 21) A decrease in expected inflation: A) will lead to more borrowings B) leads to flatter yield curves C) will lower the interbank rate D) indicates an independent central bank 22) The rate charged on a repurchase agreement between 2 parties will be LEAST dependent on the: A) borrower of funds B) collateral provided C) maturity of the borrowing D) haircut on the collateral 23) For a coupon bond, its rate of return will NOT be dependent on the A) reinvestment opportunities B) frequency of coupon payments C) yield to maturity D) time period of investment 24) The yield curve for U.S. government notes and bonds: A) is always positive since inflation cannot be measured B) is not dependent on government deficits or surpluses C) indicates a rate of return required by investors D) shows the approximate coupon rate for any maturity 25) Investors value liquidity in an asset because: A) they tend to have high rates of return B) liquid assets have high information costs, but it has low risk C) transaction costs are usually lower D) it is taxed at lower rates

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