Self Study Notes with Answers
Chapter 2 Self Study Questions
True/False Indicate whether the sentence or statement is true or false. ____ ____ ____ ____ 1. If an individual investor buys and sells existing stocks through a broker, these are primary market transactions. 2. If the Federal Reserve tightens the money supply, other things held constant, short-term interest rates will be pushed upward, and this increase probably will be greater than the increase in rates in the long-term market. 3. The fact that a percentage of the interest income received by one corporation is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing. 4. If the tax laws stated that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a taxdeductible expense, it would probably encourage companies to use more debt financing than they presently do, other things held constant. 5. Financial asset markets deal with stocks, bonds, mortgages, and other claims on real assets with respect to the distribution of future cash flows. 6. The yield curve is downward sloping, or inverted, if the long-term rates are higher than the short-term rates. 7. American depository receipts are foreign stocks that sell in American stock exchanges and are denominated in dollar prices. 8. If you have information that a recession is ending, and the economy is about to enter a boom, and your firm needs to borrow money, it should probably issue long-term rather than short-term debt. 9. The two reasons most experts give for the existence of a positive maturity risk premium are (1) because investors are assumed to be risk averse, and (2) because investors prefer to lend long while firms prefer to borrow short.
____ ____ ____ ____ ____
____ 10. An investor with a six-year investment horizon believes that interest rates are determined only by expectations about future interest rates, (i.e., this investor believes in the expectations theory). This investor should expect to earn
True/False Indicate whether the sentence or statement is true or false. ____ ____ ____ ____ 1. If an individual investor buys and sells existing stocks through a broker, these are primary market transactions. 2. If the Federal Reserve tightens the money supply, other things held constant, short-term interest rates will be pushed upward, and this increase probably will be greater than the increase in rates in the long-term market. 3. The fact that a percentage of the interest income received by one corporation is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing. 4. If the tax laws stated that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a taxdeductible expense, it would probably encourage companies to use more debt financing than they presently do, other things held constant. 5. Financial asset markets deal with stocks, bonds, mortgages, and other claims on real assets with respect to the distribution of future cash flows. 6. The yield curve is downward sloping, or inverted, if the long-term rates are higher than the short-term rates. 7. American depository receipts are foreign stocks that sell in American stock exchanges and are denominated in dollar prices. 8. If you have information that a recession is ending, and the economy is about to enter a boom, and your firm needs to borrow money, it should probably issue long-term rather than short-term debt. 9. The two reasons most experts give for the existence of a positive maturity risk premium are (1) because investors are assumed to be risk averse, and (2) because investors prefer to lend long while firms prefer to borrow short.
____ ____ ____ ____ ____
____ 10. An investor with a six-year investment horizon believes that interest rates are determined only by expectations about future interest rates, (i.e., this investor believes in the expectations theory). This investor should expect to earn