Interest income from municipal bonds is exempt from state taxes but is subject to federal taxes. True False 8. Assume the yield curve is flat.

Interest income from municipal bonds is exempt from state taxes but is subject to federal taxes.True False 8. Assume the yield curve is flat. If investors flood the short-term market and avoid the long-term market, they may cause the yield curve toremain flat. become upward sloping become downward sloping. none of the above 9. Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-year security is 7 percent. If the liquidity premium on a two-year security is 0.4 percent, then the one-year forward rate is8.0 percent 7.6 percent 6 percent 7 percent 3 percent 10. Which of the following is an action that the Fed uses to increase or decrease the money supply? buying or selling Treasury securities in the secondary market adjusting the tax rate imposed on income earned on Treasury securities adjusting the coupon rate on Treasury bonds selling Treasury securities in the primary market 11. All ____ are required to be members of the Federal Reserve System. state banks national banks savings and loan associations finance companies A and B 12. The federal funds rate is the rate at which the Fed lends money directly to member banks. True False increase; loosening decrease; tightening decrease; loosening increase; tightening 14. A passive monetary policy adjusts money supply automatically in response to economic conditions True False 15. A high budget deficit tends to place ____ pressure on interest rates; the Fed’s tightening of the money supply tends to place ____ pressure on interest rates upward; upward upward; downward downward; downward downward; upward 16. If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield?about 13.4 percent about 12.5 percent about 11.5 percent about 10.5 percent None of the above 17. (Financial calculator required.) Lisa can purchase bonds with 15 years until maturity, a par value of $1,000, and a 9 percent annualized coupon rate for $1,100. Lisa’s yield to maturity is ____ percent.9.33 7.84 9.00 6.00 18. Devin is, a private investor, purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Devin will hold the bonds until maturity. Thus, he will earn a return of ____ percent.12 10 9 10.5 12.5 19. Inflation-indexed Treasury bonds are intended for investors who wish to ensure that the returns on their investments keep up with the increase in prices over time.True False 20. Zero-coupon bonds do not pay interest. Instead, they are issued at a discount from par value True False 21. If interest rates suddenly decline, those existing bonds that have a call feature are less likely to be called. True False 22. A firm’s stock price is affected not only by macroeconomic and market conditions but also by firm specific conditions True False

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