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Chapter 3 -Structure of Interest Rates Test Bank

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1. In general, securities with ____ characteristics will offer ____ yields. a. favorable; higher b. favorable; lower c. unfavorable; lower d. none of the above ANS: B PTS: 1 2. Default risk is likely to be highest for a. short-term Treasury securities. b. AAA corporate securities. c. long-term Treasury securities. d. BBB corporate securities. ANS: D PTS: 1 3. Some financial institutions such as commercial banks are required by law to invest only in a. junk bonds. b. corporate stock. c. Treasury securities. d. investment-grade bonds. ANS: D PTS: 1 4. Credit ratings are most commonly used to indicate which financial institutions have available funds that they can lend to borrowers. a. True b. False ANS: T PTS: 1 5. If a security can easily be converted to cash without a loss in value, it a. is liquid. b. has a high after-tax yield. c. has high default risk. d. is illiquid. ANS: A PTS: 1 6. Securities that offer ____ liquidity will need to offer a ____ yield. a. lower; higher b. lower; lower c. higher; higher d. B and C ANS: A PTS: 1 7. If all other characteristics are similar, ____ would have to offer ____.a. taxable securities; a higher after-tax yield than tax-exempt securities b. taxable securities; a higher before-tax yield than tax-exempt securities c. tax-exempt securities; a higher after-tax yield than taxable securities d. tax-exempt securities; a higher before-tax yield than taxable securities ANS: B PTS: 1 8. Assume an investor's tax rate is 25 percent. The before-tax yield on a security is 12 percent. What is the after-tax yield? a. 16.00 percent b. 9.25 percent c. 9.00 percent d. 3.00 percent e. none of the above ANS: C PTS: 1 9. An investor's tax rate is 30 percent. What must the before-tax yield on a security be to have an after-tax yield of 11 percent? a. 7.7 percent b. 15.71 percent c. 130 percent d. 11.00 percent e. none of the above ANS: B PTS: 1 10. A firm in the 35 percent tax bracket is aware of tax-exempt security that is paying a yield of 7 percent. To match this yield, taxable securities must offer a before-tax yield of a. 7.0 percent. b. 10.8 percent. c. 20.0 percent. d. none of the above ANS: B PTS: 1 11. Holding other factors such as risk constant, the relationship between the maturity and annualized yield of securities is called the a. term structure of interest rates. b. default structure of interest rates. c. liquidity structure of interest rates. d. tax structure of interest rates. e. none of the above ANS: A PTS: 1 12. The term structure of interest rates defines the relationship a. between risk and return. b. between risk and maturity. c. between maturity and yield. d. between default risk ratings and maturity.ANS: C PTS: 1

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