1. Among their many functions, financial institutions 2. Auto insurance premiums
ID: 1094639 • Letter: 1
Question
1.
Among their many functions, financial institutions
2.
Auto insurance premiums are higher for younger drivers. This illustrates
3.
Which of the following statements is true?
4.
The yield on commercial paper is always higher than the yield on a Treasury bill with the same maturity. This is because
5.
In an interest rate swap, the size of payments swapped is determined by
6.
Unlike futures contracts, a major risk for swaps is that:
7.
For a credit default swaps:
1.
Among their many functions, financial institutions
A) Transform illiquid assets into liquid assets.B) Reduce transactions costs through things like standard lending contracts.
C) Pool the funds of many small savers to make large loans.
D) All of the above.
2.
Auto insurance premiums are higher for younger drivers. This illustrates
A) The importance of stability in financial markets.B) That the risk premium is sometimes negative.
C) That risk requires compensation.
D) The time value of money.
3.
Which of the following statements is true?
A) Money is a better means of payment than other financial assets.B) Money is a better store of value than other financial assets.
C) Money is a better way to transfer risk than other financial assets.
4.
The yield on commercial paper is always higher than the yield on a Treasury bill with the same maturity. This is because
A) cash flows are less valuable further into the future.B) risk requires compensation and the commercial paper carries MORE risk than the Treasury bill.
C) risk requires compensation and the commercial paper carries LESS risk than the Treasury bill.
D) there is no secondary market for commercial paper.
5.
In an interest rate swap, the size of payments swapped is determined by
A) a notional principle amount that is never transferred between counterparties.B) a notional principle held by a clearinghouse to guarantee payment.
C) a notional principle borrowed from a third party.
D) a notional principle amount that is transferred between counterparties when the swap is complete.
6.
Unlike futures contracts, a major risk for swaps is that:
A) Interest rates will not change.B) One of the parties will default.
C) They are highly liquid and the market price will change.
D) High U.S. government deficits will limit the availability of swaps.
7.
For a credit default swaps:
A) The buyer assumes the risk of a debt default.B) The sellers are protecting themselves from the risk of a debt default.
C) The buyer
Explanation / Answer
1)D-All of the above
2)C-That risk requires compensation.
3)A-Money is a better means of payment than other financial assets.
4)B-risk requires compensation and the commercial paper carries MORE risk than the Treasury bill.
5)C-a notional principle borrowed from a third party
6)B-One of the parties will default.
7)A-The buyer assumes the risk of a debt default
8)B-The prices of all financial instruments reflect all available information.
9)D-all of the above.
10)D-They lead to a shortfall of investment capital
11)D-my discount rate is greater than 4.35%
12)A-7.5%; 5.5%
13)C-6.4%
14)A-They are the closest thing to a risk-free bond
15)C-a taxable bond with a 4.9% yield
16)D-Has a current yield of 4.21%.
17)B-taking the present value of the coupon payments and adding this to the face value.
18)A-It is the risk that the coupon rate for a bond will change, affecting current bondholders' coupon payments
19)A-Investors will pay to avoid certain risks
20)D-All of the above
21))A-Indicate the yield curve is downward sloping
22)A-interest rates are expected to rise slightly
23)D-Both a and c
24)C-increased demand for U.S. Treasury bonds.
25)C-The demand for dollars increases and the dollar appreciates
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