Final Exam

1. Yield spreads represents the difference in yield between issues of different terms to maturity but same risks. a. T b. F 2. The coupon rate is the interest rate that equates the current purchase price of the bond with the economic value of all anticipated future interest and principal payments. a. T b. F 3. Zero coupon bonds are sold at an original price that is a substantial premium from their face amount. a. T b. F 4. Municipal bonds are interest-bearing securities issued by local governments that are typically free of federal income taxes. a. T b. F 5. A bond bid-ask spread of 1/32 represents a difference of only 31.25 cents per thousand of dollars face amount. a. T b. F 6. An interesting characteristic of the corporate bond is its relatively low trading volume. a. T b. F 7. Treasury Inflation-Protected Securities (TIPS) have fixed coupon rates like traditional T-bonds. The difference is that the par value is adjusted semiannually for inflation as measured by the Consumer Price Index (CPI).
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b. F 8. The mortgage securitization process is the process by which mortgage-backed securities are pooled and resold in order to decrease lender risk.
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b. F 9. The Federal Reserve buys and sells bonds in the Treasury securities market in order to implement monetary policy. If the Fed wishes to increase the money supply, it sells Treasury securities, thereby injecting funds into the financial system and reducing interest rates. a. T b. F 10. The Federal Reserve buys and sells bonds in the Treasury securities market in order to implement monetary policy. If the Fed wishes to decrease the money supply, it sells Treasury securities, thereby withdrawing funds from the financial system and increasing interest rates. In this manner, the Fed tries to manage growth in the economy and tame the rate of inflation. a. T b. F 11. Prospect Theory explains how investors