Multiple Choice Questions
1. Over the past year you earned a nominal rate of interest of 10 percent on your money.
The inflation rate was 5 percent over the same period. The exact actual growth rate of
your purchasing power was
A) 15.5%.
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B) 10.0%.
C) 5.0%.
D) 4.8%.
E) 15.0%
Answer: D Difficulty: Moderate
Rationale: r = (1+R) / (1+I) - 1; 1.10% / 1.5% - 1 = 4.8%.
2. A year ago, you invested $1,000 in a savings account that pays an annual interest rate of
7%. What is your approximate annual real rate of return if the rate of inflation was 3%
over the year?
A) 4%.
B) 10%.
C) 7%.
D) 3%.
E) none of the above.
Answer: A Difficulty: Easy
Rationale: 7% - 3% = 4%.
3. If the annual real rate of interest is 5% and the expected inflation rate is 4%, the nominal
rate of interest would be approximately
A) 1%.
B) 9%.
C) 20%.
D) 15%.
E) none of the above.
Answer: B Difficulty: Easy
Rationale: 5% + 4% = 9%.
4. You purchad a share of stock for $20. One year later you received $1 as dividend and
sold the share for $29. What was your holding period return?
A) 45%
B) 50%
C) 5%
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E) none of the above
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Answer: B Difficulty: Moderatexop
Rationale: ($1 + $29 - $20)/$20 = 0.5000, or 50%.
5. Which of the following determine(s) the level of real interest rates?
I)the supply of savings by houholds and business firms
II)the demand for investment funds
III)the government's net supply and/or demand for funds
A) I only
B) II only
C) I and II only
梁上君子翻译D) I, II, and III
E) none of the above
Answer: D Difficulty: Moderate
Rationale: The value of savings by houholds is the major supply of funds; the demand for investment funds is a portion of the total demand for funds; the government's
position can be one of either net supplier, or net demander of funds. The above factors constitute the total supply and demand for funds, which determine real interest rates.
6. Which of the following statement(s) is (are) true?
I)The real rate of interest is determined by the supply and demand for funds.
II)The real rate of interest is determined by the expected rate of inflation.
III)The real rate of interest can be affected by actions of the Fed.
IV)The real rate of interest is equal to the nominal interest rate plus the expected rate of inflation.
A) I and II only.
B) I and III only.
impulC) III and IV only.
D) II and III only.
E) I, II, III, and IV only
Answer: B Difficulty: Moderate
Rationale: The expected rate of inflation is a determinant of nominal, not real, interest rates. Real rates are determined by the supply and demand for funds, which can be affected by the Fed.
7. Which of the following statements is true?
A) Inflation has no effect on the nominal rate of interest.
B) The realized nominal rate of interest is always greater than the real rate of interest.
C) Certificates of deposit offer a guaranteed real rate of interest.
D) None of the above is true.
E) A, B and C
Answer: D Difficulty: Moderate
Rationale: Expected inflation rates are a determinant of nominal interest rates. The realized nominal rate of interest would be negative if the difference between actual and anticipated inflation rates exceeded the real rate. The realized nominal rate of interest would be less than the real rate if the unexpected inflation were greater than the real rate of interest. Certificates of deposit contain a real rate bad on an estimate of inflation that is not guaranteed.
8. Other things equal, an increa in the government budget deficit
A) drives the interest rate down.
B) drives the interest rate up.
C) might not have any effect on interest rates.
D) increas business prospects.
E) none of the above.
Answer: B Difficulty: Moderate
Rationale: An increa in the government budget deficit, other things equal, caus the government to increa its borrowing, which increas the demand for funds and drives
interest rates up.
9. Ceteris paribus, a decrea in the demand for loanable funds
A) drives the interest rate down.
B) drives the interest rate up.
C) might not have any effect on interest rate.
D) results from an increa in business prospects and a decrea in the level of savings.
E) none of the above.
Answer: A Difficulty: Moderate
Rationale: A decrea in demand, ceteris paribus, always drives interest rates down. An increa in business prospects would increa the demand for funds. The savings level affects the supply of, not the demand for, funds.
10. The holding period return (HPR) on a share of stock is equal to
A) the capital gain yield during the period, plus the inflation rate.
B) the capital gain yield during the period, plus the dividend yield.
C) the current yield, plus the dividend yield.
D) the dividend yield, plus the risk premium.
E) the change in stock price.
Answer: B Difficulty: Moderate
Rationale: The HPR of any investment is the sum of the capital gain and the cash flow
over the period, which for common stock is B.
11. Historical records regarding return on stocks, Treasury bonds, and Treasury bills
between 1926 and 2005 show that
A) stocks offered investors greater rates of return than bonds and bills.
B) stock returns were less volatile than tho of bonds and bills.
C) bonds offered investors greater rates of return than stocks and bills.
D) bills outperformed stocks and bonds.
E) treasury bills always offered a rate of return greater than inflation.
Answer: A Difficulty: Moderate
Rationale: The historical data show that, as expected, stocks offer a greater return and
greater volatility than the other investment alternatives. Inflation sometimes exceeded
the T-bill return.
12. If the interest rate paid by borrowers and the interest rate received by savers accurately
reflects the realized rate of inflation:
A) borrowers gain and savers lo.
B) savers gain and borrowers lo.
C) both borrowers and savers lo.
D) neither borrowers nor savers gain or lo.
E) both borrowers and savers gain.
Answer: D Difficulty: Moderate
Rationale: If the described interest rate accurately reflects the rate of inflation, both
borrowers and lenders are paying and receiving, respectively, the real rate of interest;
thus, neither group gains.
U the following to answer questions 13-15:
You have been given this probability distribution for the holding period return for KMP stock:
13. What is the expected holding period return for KMP stock?
A) 10.40%
B) 9.32%
C) 11.63%
D) 11.54%
E) 10.88%
Answer: A Difficulty: Moderate
Rationale: HPR = .30 (18%) + .50 (12%) + .20 (-5%) = 10.4%
14. What is the expected standard deviation for KMP stock?
A) 6.91%
B) 8.13%
C) 7.79%
D) 7.25%
E) 8.85%
Answer: B Difficulty: Difficult
Rationale: s = [.30 (18 - 10.4)2 + .50 (12 - 10.4)2 + .20 (-5 - 10.4)2]1/2 = 8.13%
15. What is the expected variance for KMP stock?
A) 66.04%
B) 69.96%
C) 77.04%
D) 63.72%
E) 78.45%
Answer: A Difficulty: Difficult
Rationale: s = [.30 (18 - 10.4)2 + .50 (12 - 10.4)2 + .20 (-5 - 10.4)2] = 66.04%
16. If the nominal return is constant, the after-tax real rate of return
A) declines as the inflation rate increas.
B) increas as the inflation rate increas.
C) declines as the inflation rate declines.
vulD) increas as the inflation rate decreas.
E) A and D.
Answer: E Difficulty: Moderate
Rationale: Inflation rates have an inver effect on after-tax real rates of return.
17. The risk premium for common stocks
A) cannot be zero, for investors would be unwilling to invest in common stocks.
B) must always be positive, in theory.
C) is negative, as common stocks are risky.
D) A and B.
E) A and C.
Answer: D Difficulty: Moderate
Rationale: If the risk premium for common stocks were zero or negative, investors
would be unwilling to accept the lower returns for the incread risk.
18. A risk-free intermediate or long-term investment
A) is free of all types of risk.
B) does not guarantee the future purchasing power of its cash flows.
C) does guarantee the future purchasing power of its cash flows as it is insured by the U.
S. Treasury.
D) A and B.
there is no planE) B and C.
Answer: B Difficulty: Moderate
Rationale: A risk-free U. S. Treasury bond is a fixed income instrument, and thus does not guarantee the future purchasing power of its cash flows. As a result, purchasing power risk is prent.
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19. You purcha a share of Boeing stock for $90. One year later, after receiving a dividend
of $3, you ll the stock for $92. What was your holding period return?
A) 4.44%
B) 2.22%
C) 3.33%万人迷英文
D) 5.56%
E) none of the above
Answer: D Difficulty: Moderate
Rationale: HPR = (92 - 90 + 3) / 90 = 5.56%
20. Toyota stock has the following probability distribution of expected prices one year from
now:
If you buy Toyota today for $55 and it will pay a dividend during the year of $4 per
share, what is your expected holding period return on Toyota?
A) 17.72%
B) 18.89%
C) 17.91%
D) 18.18%
E) None of the above
Answer: D Difficulty: Difficult
Rationale: E(P1) = .25 (54/55 - 1) + .40 (64/55 - 1) + .35 (74/55 - 1) = 18.18%.
21. Which of the following factors would not be expected to affect the nominal interest
rate?
A) the supply of loanable funds
B) the demand for loanable funds
C) the coupon rate on previously issued government bonds
D) the expected rate of inflation
E) government spending and borrowing
Answer: C Difficulty: Easy
Rationale: The nominal interest rate is affected by supply, demand, government actions and inflation. Coupon rates on previously issued government bonds reflect historical interest rates but should not affect the current level of interest rates.
22. Your Certificate of Deposit will mature in one week and you are considering how to
invest the proceeds. If you invest in a 30-day CD the bank will pay you 4%. If you
invest in a 2-year CD the bank will pay you 6% interest. Which option would you
choo?
A) the 30-day CD, no matter what you expect interest rates to do in the future
B) the 2-year CD, no matter what you expect interest rates to do in the future
C) the 30-day CD if you expect that interest rates will fall in the future
D) the 2-year CD if you expect that interest rates will fall in the future
