2.3 Financial Markets Instruments, Econ Old Exam Midterm 1, M&B: Ch 3 TB, Econ Chapter 5,6, & 7, CH. 2: MONEY & PAYMENTS SYSTEM, Chapter 3, Econ 3229 practice test 1, Chapter 6, Exam 2 Chapter 7, Money and Banking chapter 6

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Whose demand does not obey the law of demand

Grover's Quantity Demanded

What is the total rate of return on a bond with a coupon of $55 that was purchased for $900 and sold one year later for $950? A) 5.56% B) 6.11% C) 11.67% D) 12.43%

What is the yield on a discount basis for a U.S. Treasury bill that has a face value of $10,000, has a price of $9500, and will mature in 180 days? A) 5.00% B) 5.25% C) 10.00% D) 10.67%

What is the yield to maturity of a consol with a coupon of $85 and a price of $944.44? A) 5.56% B) 8.50% C) 9.00% D) Not enough information has been provided to determine the answer

The yield to maturity equals $40/$800 = 5%.

What is the yield to maturity of a perpetuity with a coupon of $40 and a price of $800?

What is the yield to maturity on a simple loan that requires payment of $500 plus $30 in interest one year from now? A) 6% B) 6.38% C) 5.3% D) Not enough information has been provided to determine the answer.

Which group is hurt by inflation being less than expected? A) holders of TIPS B) lenders of fixed-rate mortgages C) borrowers with fixed-rate mortgages D) all of the above

In the Keynesian liquidity preference framework an increase in the interest rate causes the demand curve for money to __________

stay where it is

21. When the price of a bond is below the face value, the yield to maturity: A. is below the coupon rate. B. will be above the coupon rate. C. will equal the current yield. D. will equal the coupon rate.

will be above the coupon rate.

10. If the purchase price of a bond exceeds the face value, the yield to maturity

will be less than the coupon rate because the capital gain will be negative.

An inverted yield curve predicts that short-term interest rates

will fall in the future

Using the Gordon growth formula, if D1 is $1.00, ke is 10% or 0.10, and g is 5% or 0.05, then the current stock price is

$20

When the expected inflation rate increases, the demand for bonds ________ the supply of bonds ___________ and the interest rate ___________ everything else held constant

decreases: increases: rises

The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is

default risk

When the price level falls, the _________ curve for nominal money _______________ and interest rates ________________ everything else held constant

demand: decreases: fall

Pieces of property that serve as a store of value are called

Assets

According to the WSJ article, in the late 2016 amid inflationary concerns, many investors piled cash into TIPS, Treasury Inflation Protected Securities... Why do TIPS become attractive option for the investors when the inflation expectations are high?

TIPS pay higher amount with rising price level whereas nominal government bonds pay fixed amount

Why do economists claim the Consumer Price Index (CPI) tends to overstate the actual rate of inflation?

The CPI is measured using a fixed-expenditure-weight index. As a result, when the price of a good included in the index increases the assumption is people continue to purchase the same quantity of this item when in reality many consumers (to whatever degree possible) may stop purchasing this item and select a lower priced substitute. This substitution toward a lower-priced good is not reflected in the reported CPI.

Historically, some governments have relied on the revenue generated from printing currency to finance government spending. Give two examples of government's relying on paper currency to finance wartime expenditures. What do you expect happened to inflation rates during these historical episodes?

The Continental Congress issued continentals in 1775 to finance the Revolutionary War. The French Revolutionary Government issued assignats in 1793. The inflation rates during both historical episodes increased. The money supply is linked to the economy's inflation rate. As the money supply grows at a faster rate, the inflation rate rises.

Can a financial instrument be bought and sold in both a primary and secondary financial market? Explain.

The answer is yes and highly likely. Treasury bond- initially sold in a primary market. (perhaps Federal Reserve) Secondary market-Federal Reserve sells bond.

The primary concern of current critics of fiat money is that: A. fiat money is too costly to produce. B. governments issue too much money threatening its value. C. fiat money is too easy to counterfeit. D. government will issue too little threatening economic growth.

B. governments issue too much money threatening its value.

An advantage that money has over other assets is that it: A. increases in value over time. B. has lower transaction costs to use as a means of payment than other assets. C. provides a higher return to the owner. D. is a safer asset to hold during times of inflation.

B. has lower transaction costs to use as a means of payment than other assets.

The process of financial intermediation: A. creates a net cost to an economy. B. increases the economy's ability to produce. C. is always used when a borrower needs to obtain funds. D. is used primarily in underdeveloped countries.

B. increases the economy's ability to produce.

4. The most common form of zero-coupon bonds found in the United States is: A. AAA rated corporate bonds. B. U.S. Treasury bills. C. 30-year U.S. Treasury bonds. D. municipal bonds.

U.S. Treasury bills.

Which of the following instruments are traded in a money market? A) State and local government bonds. B) U.S. Treasury bills. C) Corporate bonds. D) U.S. government agency securities.

U.S. Treasury bills.

Everything else held constant, if the the expected return of RST stock declines from 12 to 9 percent and the expected return on XYZ stock declines from 8 to 7 percent, then the expected return of holding RST stock ________ relative to XYZ stock and demand for XYZ stock ______________.

Falls:rises

Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called ______ money.

Fiat

If the current price of a bond is equal to its face value, A) there is no capital gain or loss from holding the bond until maturity. B) the yield to maturity must be greater than the current yield. C) the current yield must be greater than the coupon rate. D) the coupon rate must be greater than the yield to maturity

If the current price of a bond is greater than its face value A) an investor will receive a capital gain by holding the bond until maturity. B) the yield to maturity must be less than the coupon rate. C) the coupon rate must be less than the current yield. D) the coupon rate must be equal to the current yield.

If the current price of a bond is less than its face value, A) an investor will receive a capital gain by holding the bond until maturity. B) the yield to maturity must be less than the current yield. C) the coupon rate must be greater than the current yield. D) the coupon rate must be equal to the current yield.

If, while you are holding a coupon bond, its market price falls, you can be sure that A) the coupon payment you are receiving must have been reduced. B) the interest rate on other similar bonds must have fallen. C) the interest rate on other similar bonds must have risen. D) the par value of the bond must have declined

If, while you are holding a coupon bond, the interest rates on other similar bonds fall, you can be sure that A) the coupon payments on your bond will fall. B) the market price of your bond will rise. C) the market price of your bond will fall. D) the par value of your bond will rise.

U.S. Treasury bonds A) carry no risk of default and are therefore not risky investments. B) have constant yields to maturity and are therefore not risky investments. C) have constant coupon rates and are therefore not risky investments. D) are subject to fluctuations in their market prices and are therefore risky investments

Which od the following bonds are considered to be default-risk free

US Treasury bonds

derivative instrument

Use to shift risk among investors. Value derived from payoffs specified in an underlying instrument (ex: futures, options, swaps)

underlying instrument

Used to transfer resources from lenders to borrowers (ex: mortgages, stocks, bonds)

Which of the following is NOT a discount bond? A) a U.S. savings bond B) a U.S. Treasury bill C) a U.S. Treasury note D) a zero-coupon bond

Which of the following is NOT a fixed payment loan? A) a home mortgage B) a car loan C) a U.S. Treasury note D) a student loan

Which of the following is NOT fixed on a coupon bond? A) coupon B) coupon rate C) market price D) par value

Which of the following is a coupon bond? A) a U.S. savings bond B) a U.S. Treasury bill C) a U.S. Treasury note D) a zero-coupon bond

Which of the following is the correct expression for the approximate expected real interest rate? A) r = i +p^e B) r = i - p^e C) r = i/p^e D) r = ip^e

Which of the following statements about the total rate of return is NOT correct? A) The total rate of return may be greater or less than the current yield. B) The total rate of return may be greater or less than the rate of capital gain. C) The total rate of return may never be negative. D) The total rate of return is greater than the coupon, holding everything else constant

2. A consol is: A. another name for a zero-coupon bond. B. a bond with a maturity date exceeding 10 years. C. a bond that makes periodic interest payments forever. D. a form of a bond that is issued quite often by the U.S. Treasury.

a bond that makes periodic interest payments forever.

If investors expect interest rates to fall significantly in the future, the yield curve will be inverted. This means that the yield curve has a ________ slope

downward

According to the theory of the term structure, bonds of different maturities are not substitutes for one another

segmented markets theory

If there is an excess demand for money, individuals _________ bonds, causing interest rates to _____________

sell : rise

If the maturity of a debt instrument is less than one year, the debt is called

short-term

The steeply upward sloping yield curve in the figure above indicates that

short-term interest rates are expected to rise in the future

An inverted yield curve

slopes down

overcome complexity costs of financial instruments through:

standardization (which reduces problem of asymmetric info)

23. If the U.S. government's borrowing needs increase, all other factors constant the

supply of bonds will increase.

53. If the U.S. government's borrowing needs increase, all other factors constant the: A. demand for bonds will decrease. B. price of bonds will increase. C. supply of bonds will increase. D. yields on bonds will decrease.

supply of bonds will increase.

55. If the U.S. government's borrowing needs increase, all other factors constant the: A. price of bonds will increase. B. supply of bonds will increase. C. demand for bonds will decrease. D. supply of bonds and the demand for bonds will both increase.

supply of bonds will increase.

When the interest rate is above the equilibrium interest rate, there is an excess ___________ money and the interest rate will _____

supply of: fall

36. In reading bond quotes: A. the bid price is usually above the asked price. B. the asked price is fixed over the life of the bond. C. the asked price is usually above the bid price. D. bid and asked prices must be equal as set forth by SEC regulations.

the asked price is usually above the bid price.

37. The bond dealer's spread is: A. the asking price less the bid price. B. the difference between the current yield and the yield to maturity. C. the bid price less the asking price. D. usually negative; the dealer makes a profit holding the bonds.

the asking price less the bid price.

Municipal bonds have default risk, yet their interest rates are lower than the rates on default-free Treasury bonds. This suggests that

the benefit from the tax-exempt status o municipal bonds exceeds their default risk

32. A decrease in the nation's wealth, all other factors constant, would cause

the bond demand curve to shift left.

71. A decrease in the nation's wealth, all other factors constant, would cause: A. the bond demand curve to shift left. B. bond prices to rise. C. interest rates to decrease. D. the bond supply curve to shift left.

the bond demand curve to shift left.

44. Default risk is the risk associated with

the bond issuer not being able to make the promised payments.

24. The current yield of a bond: A. is another term for the coupon rate. B. is another term for the yield to maturity. C. equals zero for a zero-coupon bond since these bonds have no coupon payments. D. is the difference between its future value and its present value.

equals zero for a zero-coupon bond since these bonds have no coupon payments.

At a price of $20, there would be a(n)

excess demand. The law of supply and demand predicts that the price will rise from $20 to a higher price.

In the figure above, a factor that could cause the supply of bonds to increase (shift to the right) is(Price of Bonds/ Quantity of Bonds)

expectations of more profitable investment opportunities

22. If the quantity of bonds supplied exceeds the quantity of bonds demanded, bond prices would

fall and yields would rise.

51. If the quantity of bonds supplied exceeds the quantity of bonds demanded, bond prices would: A. rise and yields would fall. B. fall and yields would rise. C. rise but yields will remain constant. D. fall and yields would fall.

fall and yields would rise.

The U-shaped yield curve in the figure above indicates that short-term interest rates are expected to

fall sharply in the near-term and rise later on

78. If interest rates are expected to rise, the bond prices will: A. not change until interest rates actually change. B. fall, due to the demand for bonds decreasing. C. rise, as people seek capital gains. D. move in the same direction as the expected change in interest rates.

fall, due to the demand for bonds decreasing.

14. Most home mortgages are good examples of: A. consols. B. zero-coupon bonds. C. coupon bonds. D. fixed-payment loans.

fixed-payment loans.

49. The bond supply curve slopes upward because: A. as bond prices rise people holding bonds are more tempted to hold them. B. as bond prices rise yields increase. C. for companies seeking financing, the higher the price of bonds the more attractive it is to sell bonds. D. as bond prices rise yields decrease.

for companies seeking financing, the higher the price of bonds the more attractive it is to sell bonds.

Typical yield curves are

gently upward sloping

Other things being equal a decrease in the default risk of corporate bonds shifts the demand curve for corporate bonds to the _________ and the demand curve for Treasury bonds to the ________

right; left

When the Treasury bond market becomes less liquid, other things equal, the demand curve for corporate bonds shifts to the _________ and the demand curve for Treasury bonds shits to the __________

right; left

According to the liquidity premium theory of the term structure, a steeply upward sloping yield curve indicates that short-tern interest rates are expected to

rise in the future

The mound shaped yield curve in the figure above indicates that short-term interest rates are expected to

rise in the near-term an fall later on

The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates ________ as the expected rate of inflation ________, everything else held constant.

rise, increases

It is possible that when the money supply rises, interest rates may ______ if the ________ effect is more than offset by changes in income, the price level, and expected inflation

rise: liquidity

The supply curve for bonds has the usual upward slope, indicating that as the price ceter is paribus the __________ increases

rises: quantity supplied

During business cycle expansions when income and wealth are rising, the demand for bonds _______ and the demand curve shifts to the _______ everything else held constant

rises: right

Everything else held constant, if the expected return on US Treasury bonds falls from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return of holding RST Stock __________ relative to XYZ stock and demand for XYZ stock ____________.

rises:rises

When real income __________ the demand curve for money shifts to the ___________________ and the interest rate __________ everything else held constant.

rises; right; rises

The spread between the interest rates on bonds with default risk and default-free bonds is called the

risk premium

asset price deflation

If many firms deleverage asset prices fall

Collateral is ______ the lender receives if the borrower does not pay back the loan

an asset

The risk structure of interest rates is

the relationship among interest rates of different bonds with the same maturity

equity=

your net worth

46. Consider a one-year corporate bond that has a 20% probability of default. The payoff on the bond is $2,000 if the corporation does not default. The interest rate is 10%. If buyers of this bond are risk-neutral, this bond will sell for

$1,454.54

93. Consider a one-year corporate bond that has a 20% probability of default. The payoff on the bond is $2,000 if the corporation does not default. The interest rate is 10%. If buyers of this bond are risk-neutral, this bond will sell for: A. $400 B. $909.09 C. $1,454.54 D. $1,600

$1,454.54

Using the Gordon growth formula, if D1 is $2.00, ke is 12% or 0.12, and g is 10% or 0.10, then the current stock price is

$100

Using the Gordon growth formula, if D1 is $2.00Ke is 12% and g is 10% or 0.10, then the current stock price is

$100

Using the one-period valuation model, assuming a year end dividend of $0.11 an expected sales price of $110 and a required rate of return on 10% the current price of the stock would be

$100.10

Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10% the current price of the stock would be

$100.10

3. Which of the following best expresses the formula for determining the price of a U.S. Treasury bill that matures n periods from now per $100 of face value when the interest rate is i?

$100/(1 + i)n

5. Which of the following best expresses the formula for determining the price of a U.S. Treasury bill that matures n periods from now per $100 of face value when the interest rate is i? A. $100/(1 + i)n B. $100(1 + i) C. $100/(1 + i) D. 1 + $100/(1 + i)n

$100/(1 + i)n

Using the Gordon growth model, if D1 is $.50 Ke is 7% and g is 5% then the present value of the stock is

$25

18. If a consol is offering an annual coupon of $50 and the annual interest rate is 6%, the price of the consol is: A. $47.17 B. $813.00 C. $833.33 D. $8333.33

$833.33

9. If the annual interest rate is 5%(.05), the price of a one-year Treasury bill per $100 of face value would be: A. $95.00 B. $97.50 C. $95.24 D. $96.10

$95.24

Using the one-period valuation model, assuming a year end dividend of $1.00 an expected sales price of $100 and a required rate of return of 5% the current price of the stock would be

$96.19

10. If the annual interest rate is 5%(.05), the price of a six-month Treasury bill would be: A. $97.50 B. $97.59 C. $95.25 D. $95.00

$97.59

5. If the annual interest rate is 5%(.05), the price of a six-month Treasury bill would be

$97.59

11. If the annual interest rate is 5%(.05), the price of a three-month Treasury bill would be: A. $98.79 B. $95.00 C. $98.75 D. $97.59

$98.79

What are the four fundamental characteristics that determine the value of a financial instrument?

(1) The size of the payment that is promised (2) When the promised payment is to be made (3) the likelihood that the payment will be made (4) The conditions under which the payment is to be made

15. A 30-year Treasury bond as a face value of $1,000, price of $1,200 with a $50 coupon payment. Assume the price of this bond decreases to $1,100 over the next year. The one-year holding period return is equal to

-4.17%.

34. A 30-year Treasury bond as a face value of $1,000, price of $1,200 with a $50 coupon payment. Assume the price of this bond decreases to $1,100 over the next year. The one-year holding period return is equal to: A. -9.17%. B. -8.33%. C. -4.17%. D. -3.79%.

-4.17%.

the financial system

-Facilitates the design and the trading of a broad set of financial instruments. -It facilitates the transfer of financial resources between lenders and borrowers.

options

-One party has the right to buy or sell some asset at a given price on specific date or during a specified period.

roles of financial intermediaries

-Reduce transaction costs by specializing in the issuance of standardized securities -reduce the information costs of screening and monitoring borrowers

paradox of leverage

-Reinforces the liquidity spiral -asset price deflation

characteristics of financial instruments

-They are complex -Contain info about borrower -Primary use is to reallocate funds

securities firms

-brokers and investment banks -mutual-funds -hedge funds -private equity & venture capital firms

decentralized markets

-over-the-counter markets (OTCs) -Electronic Communication Networks (ECNs)

leverage ratio

1 + debt/equity

two kinds of financial intermediaries:

1) Depository institutions (banks) 2) non-depository institutions (non-banks)

3 components of the financial system:

1) Financial instruments (securities, contracts) 2) Financial Markets 3) Financial institutions

2 roles of financial institutions:

1) Provide services to traders 2) Regulate, monitor, enforce financial transactions

reason to reallocate funds:

1) across time (store value) 2) to shift risk

3 functions of financial instruments:

1) means of payment 2) Store of value 3) Transfer of risk

elements affecting security's value:

1) payment amount 2) payment timing 3) payment risk 4) conditions under which payment is made

financial markets promote economic efficiency in 3 ways:

1) provide liquidity 2) Generate information 3) Facilitate risk sharing

financial markets categorized by:

1) task accomplished (initial security issuing vs. subsequent trading 2) by trading process (Centralized vs. decentralized trading) 3) by type of instrument traded (to store value vs. to transfer risk)

financial instrument contracts specify:

1) the party who promises to make the transfer, and the counterparty 2) Payment amount 3) Future date when payment is to be made 4) The conditions under which payment will be made

Over the next three years, the expected path of 1-year interest rates is 4,1, and 1 percent. The expectations theory of the term structure predicts that the current interest rate on 3-year bond is

2 percent

If the expected path of 1-year interest rates over the next four years is 5 percent, 4 percent, 2 percent, and 1 percent, then the expectations theory predicts that today's interest rate on the four-year bond is

3 percent

43. Fly-By-Night Inc. issues $100 face value, zero-coupon, one-year bonds. The current return on one-year, zero-coupon U.S. government bonds is 3.5%. If the Fly-By-Night bonds are selling for $92.00, what is the risk premium for these bonds?

5.2%

89. Fly-By-Night Inc. issues $100 face value, zero-coupon, one-year bonds. The current return on one-year, zero-coupon U.S. government bonds is 3.5%. If the Fly-By-Night bonds are selling for $92.00, what is the risk premium for these bonds? A. 8.7% B. 1.5% C. 5.2% D. 8.0%

5.2%

If the expected path of one-year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today' interest rate on the five year bond is

6 percent

If a perpetuity has a price of $5000 and an annual interest payment of $350, the interest rate is

7 percent

14. If a bond's rating improves, we would expect: a. the demand for this bond to increase, all other factors constant. b. the demand for and the yield of this bond to increase, all other factors constant. c. the demand for this bond to decrease, and its yield to increase, all other factors constant. d. both the demand for and the price of the bond to decrease, all other factors constant.

15. Consider a zero-coupon bond with a $1,100 payment in one year. Suppose the interest rate decreases from 10% to 8%. The price of this bond: A. increases from $1,000 to $1,018. B. increases from $1,000 to $1,375. C. decreases from $110 to $88. D. decreases from $1,210 to $1,188.

17. The risk spread: a. is also known as the default-risk premium. b. should have a direct relationship with the bond's price. c. should have an inverse relationship with the bond's yield. d. is always constant.

18. Considering the value of a financial instrument, the more likely it is the payment will be made: A. the more valuable the financial instrument. B. the less valuable is the instrument because risk is lower. C. the less valuable is the financial instrument because it is highly liquid. D. the greater the uncertainty; therefore the less valuable is the financial instrument.

20. The default-risk premium: a. should vary directly with the bond's yield and inversely with its price. b. is less than 0 (zero) for a U.S. Treasury bond. c. should be lower for a highly speculative bond than for an investment-grade bond. d. should vary directly with the bond's yield and the bond's price.

22. U.S. Treasury securities are considered to carry no risk spread because: a. they are the closest thing to default-risk free that an investor can obtain. b. the prices of U.S. Treasury bonds never change. c. the yields on U.S. Treasury bonds never change. d. the yields on U.S. Treasury bonds are always low.

26. Roles served by financial markets include the following, except: A. eliminating risk. B. providing liquidity. C. pooling and communicating information. D. sharing of risk.

27. Doubling the future value will cause the: A. present value to double. B. present value to decrease. C. present value to increase by less than 100%. D. interest rate, i, to decrease.

29. The yield on a tax-exempt bond: a. equals the taxable bond yield times one minus the tax rate. b. is equal to the yield on a U.S. 30-year bond. c. is called the risk-free yield. d. only applies to foreign bonds because they are exempt from U.S. income taxes.

3. Investors usually obtain bond ratings from: a. private bond-rating agencies. b. the annual tax returns of the issuer. c. the U.S. government from publicly available information. d. public Information made available by the bond issuers.

30. Holding liquidity and default risk constant, an investor earning 6% from a tax-exempt bond who is in a 25% tax bracket would be indifferent between that bond and a taxable bond with a(n): a. 8% yield. b. 4.5% yield. c. 6.25% yield. d. 7.5% yield.

35A proposed increase in the federal income tax rate should: a. have no impact on the slope of the yield curve since the tax laws impact all maturities the same. b. cause the slope of the yield curve to become negative. c. increase the slope of the yield curve since it increases the risk premium of longer maturities. d. flatten the yield curve.

38. According to the Expectations Theory of the term structure, if interest rates are expected to be 2%, 2%, 4%, and 5% over the next four years, which yield is the closest to the yield on a three-year bond today? a. 2.7% b. 4% c. 4.3% d. 8%

39. Suppose the economy has an inverted yield curve. According to the expectations hypothesis, which of the following interpretations could be used to explain this? a. Interest rates are expected to fall in the future b. Investors prefer bonds with less default risk. c. Investors prefer bonds with less interest-rate risk. d. The term spread is positive.

46. The U.S. Treasury yield curve: a. shows the relationship among bonds with the same risk characteristics but different maturities. b. assumes maturities are constant, and reflects the difference in risk. c. always has a positive slope. d. always has a negative slope.

55. When the yield curve is downward sloping: a. people are expecting an economic slowdown. b. short-term yields are lower than long term yields. c. people are expecting higher inflation in the future. d. people could be expecting a tightening in monetary policy.

62. Under the liquidity premium theory, if investors expect short-term interest rates to remain constant, the yield curve should: a. have a positive slope. b. have a negative slope. c. be flat. d. have an increasing slope.

7. The lowest rating for an investment grade bond assigned by Moody's is: a. Baa. b. A. c. BBB. d. Aa.

9. According to the Expectations Theory of the term structure, if interest rates are expected to be 2%, 2%, 4%, and 5% over the next four years, which yield is the closest to the yield on a three-year bond today? A. 2.7% B. 4% C. 4.3% D. 8%

9. Which of the following would be most likely to earn an AAA rating from Standard & Poor's? a. A 10-year bond issued by Canada b. A bond issue by a new vegetarian fast-food chain c. A 10-year bond issued by a state or municipality d. Shares of stock in Coca-Cola

A bond's price and its yield to maturity are inversely related because A) discounting future payments at a higher rate reduces the present value of the payments. B) discounting future payments at a higher rate increases the present value of the payments. C) an increase in the yield to maturity will lower a bond's coupon rate and hence its price. D) a fall in a bond's price will lower its par value and hence its yield to maturity

A borrower and a lender agree on a mortgage interest rate. If inflation turns out to be less than expected A) the actual real interest rate will exceed the expected real interest rate. B) the actual real interest rate will be less than the expected real interest rate. C) the actual nominal interest rate will be higher than expected. D) the actual nominal interest rate will be less than expected

In the figure above, a factor that could cause the supply of bonds to shift to the right is (Price of Bonds/ Quantity of Bonds)

A business cycle expansion

A capital gain occurs when the A) coupon rate increases. B) current yield increases. C) price of an asset increases. D) yield to maturity increases

financial instrument

A claim on the issuer's future income. -liability for issuer -asset for the buyer

91. Consider the bonds below. Which is subject to the greatest interest-rate risk? A. A 30-year fixed-rate mortgage (fixed payment loan) B. A consol C. A Treasury bill D. A 20-year corporate bond

A consol

Since the price of the bond equals its present value, the price is $50/1.04 + $50/(1.04)^2+ $1050/(1.04)^3 = $1029

A corporation issues a three year bond with a coupon of $50 and a face value of $1000. Immediately after being issued, market interest rates decline to 4%. What is the price of the bond? Report your answer to the nearest dollar

Since the price of the bond equals its present value, the price is $50/1.04 + $1050/(1.04)^2 = $1019.

A corporation issues a three-year bond with a coupon of $50 and a face value of $1000. A year later, market interest rates have declined to 4%. What is the price of the bond a year after it was issued? Report your answer to the nearest dollar.

A coupon bond has an annual coupon of $75, a par value of $1000, and a market price of $900. Its current yield equals A) 7.50%. B) 8.33%. C) its yield to maturity. D) Not enough information has been provided to calculate the current yield for this bond

Explain why credit cards are not considered money even though people seem to use them like money.

A credit card isn't money for a few reasons. One, it is not an asset. The use of a credit card actually creates a liability for the user. A credit card is a promise by a bank to lend the cardholder money with which to make purchases. The store supplying the goods being purchased receives money, but the money that is used does not belong to the buyer. The credit card provides the cardholder with access to someone else's money.

Explain the difference(s) between a debit card and a credit card.

A debit card works the same way as a check, in that it provides the bank with instructions to transfer funds from the cardholder's account to the merchant's account. The debit card-holder must have adequate funds in his/her checking account to cover the purchase. A credit card is a promise by a bank to lend the cardholder money with which to make purchases. The store supplying the goods being purchased receives money, but the money that is used does not belong to the buyer, the credit card provides the cardholder with access to someone else's money.

A discount bond resembles a simple loan in that A) the interest on neither is taxable. B) the borrower repays in a single payment. C) both represent assets to the borrowers who issue them. D) both have par values greater than their face values

indirect finance

A financial intermediary stands between lenders and borrowers.

50. Interest-rate risk would not matter to which of the following bondholders?

A holder of a U.S. government bond that plans on holding it until it matures.

99. Interest-rate risk would not matter to which of the following bondholders? A. A holder of a U.S. government bond. B. A holder of a U.S. government bond indexed for inflation. C. A holder of a U.S. government bond who plans on selling it in one year. D. A holder of a U.S. government bond that plans on holding it until it matures.

A holder of a U.S. government bond that plans on holding it until it matures.

The yield to maturity is ($1000-$880)/$880 = 13.64%

A one-year discount bond has a face value of $1000 and price of $880. What is the yield to maturity on the bond? Report using percentages with two decimal places

A one-year discount bond with a par value of $1000 sold today, at issuance, for $943 has a yield to maturity of A) 4.30%. B) 5.70%. C) 6.04%. D) 9.43%.

A one-year discount bond with a par value of $5000 sold today, at issuance, for $4750 has a yield to maturity of A) 5.00%. B) 5.26%. C) 2.50%. D) 9.75%.

Which of the following are short-term financial instruments? A) A repurchase agreement. B) A share of Walt Disney Corporation stock. C) A Treasury note with a maturity of four years. D) A residential mortgage.

A repurchase agreement.

A sustained decrease in the price level is known as A) inflation. B) disinflation. C) reflation. D) deflation.

How many prices would a trader of a particular good need to know in a barter economy with 20 goods? A. 190 B. 100 C. 20 D. 40

A. 190

The amount of currency in the hands of the public is approximately what percentage of M1? A. 45% B. 25% C. 30% D. 90%

A. 45%

During the Civil War, the North issued currency, known as "greenbacks". Which of the following is true of "greenbacks"? A. Greenbacks are still legal tender in the U.S. B. Greenbacks were tied to the value of gold and silver. C. The South used "greenbacks" to pay for salaries and supplies. D. Greenbacks are a historical example of commodity money.

A. Greenbacks are still legal tender in the U.S.

Which of the following statements is most correct? A. Money is wealth but not all wealth is money. B. Money is a means of payment but is not part of wealth. C. In order to be considered part of a person's wealth, an asset must have a positive return. D. Wealth is a store of value and a means of payment.

A. Money is wealth but not all wealth is money.

Which best describes money as a means of payment? A. Money provides an immediate double coincidence of wants. B. Money makes sure a double coincidence of wants never occurs. C. Money requires at least two transactions to obtain the double coincidence of wants. D. To obtain a double coincidence of wants without money is impossible.

A. Money provides an immediate double coincidence of wants.

Compare two economies: a barter economy versus an economy that uses money. In order to exchange goods and services: A. a double coincidence of wants is necessary in the barter economy. B. a double coincidence of wants is more likely to occur in the barter economy. C. transactions are likely to be smoother in the barter economy because goods and services are exchanged directly. D. the money economy requires that sellers have more information about buyers' wants.

A. a double coincidence of wants is necessary in the barter economy.

Money eliminates the need for: A. a search for a double coincidence of wants. B. government regulation. C. specialization of labor. D. financial Intermediaries.

A. a search for a double coincidence of wants.

21. The bond demand curve slopes downward because

A. at lower prices the reward for holding the bond increases.

Carlos pays his cable bill using his bank's internet banking web site to withdraw funds from his checking account. This transaction is a(n): A. automated clearinghouse transaction (ACH). B. digitized-check transaction. C. e-money transaction. D. fedwire transaction.

A. automated clearinghouse transaction (ACH).

As a result of "Check 21—The Check Clearing for the 21st Century Act": A. banks no longer have to ship paper checks to complete the process of check clearing. B. people can write checks and plan on having a couple of days to make a deposit to cover the check amount. C. canceled checks can no longer be used as proof of payment. D. the Federal Reserve is no longer involved in the check-clearing process.

A. banks no longer have to ship paper checks to complete the process of check clearing.

When the Continental Congress issued currency to finance the Revolutionary War, the Continental Congress: A. issued too many "continentals," eventually making the currency worthless. B. tied the value of the "continental" to gold. C. tied the value of the "continental" to gold to French "assignats." D. made "continentals" legal tender.

A. issued too many "continentals," eventually making the currency worthless.

As an economy produces more different types of goods: A. it is more difficult to quote prices if the economy does not use money. B. the number of relative prices decreases. C. money becomes less useful as a unit of account. D. money becomes less useful as a standard of value.

A. it is more difficult to quote prices if the economy does not use money.

M1 is: A. less than 25% of GDP. B. equal to GDP. C. about four times larger than GDP. D. about one fourth the amount of GDP.

A. less than 25% of GDP.

A cross-country analysis of money growth shows that the growth rate in the money supply was: A. lower in countries with lower inflation rates. B. higher in countries with lower inflation rates. C. lower in countries with higher inflation rates. D. the same whether the countries had high or low inflation rates.

A. lower in countries with lower inflation rates.

Money aggregates can best be defined as a set of measures of the amount of: A. money that exists at a particular point in time. B. money the Federal Reserve has on deposit as reserves. C. money available to the economy over a year. D. U.S. currency the Bureau of Printing and Engraving has produced.

A. money that exists at a particular point in time.

A policy is time consistent when: A. policymakers have incentives to adhere to a policy decision made today, in the future. B. policymakers have incentives to make policy decisions in a time-sensitive fashion. C. policymakers consider the future when making current policies. D. the timing of a policy is irrelevant.

A. policymakers have incentives to adhere to a policy decision made today, in the future.

The introduction of money market substitutes for basic checking accounts was fueled partially by the: A. relatively high rates of inflation that existed in the late 1970s and early 1980s. B. reluctance of many retailers to accept checks. C. high number of bank failures that were occurring in the 1970s. D. higher interest rates banks had to pay on checking accounts.

A. relatively high rates of inflation that existed in the late 1970s and early 1980s.

All of the following are true about electronic funds transfers except: A. sometimes involve the Federal Reserve sending electronic images of checks to banks. B. occur when banks or individuals deposit/withdraw from one bank account to another electronically. C. include automated clearinghouse transactions (ACH). D. include credit card payments made online.

A. sometimes involve the Federal Reserve sending electronic images of checks to banks.

An automobile is an asset, but it is not liquid because: A. the transactions costs for turning it into money are high. B. the owner may still be making payments on the loan. C. the automobile may not be in good repair. D. the automobile cannot be sold without a loss in value.

A. the transactions costs for turning it into money are high.

Economists study the link between money and inflation because: A. they want to understand how to keep inflation low and stable. B. economists believe that inflation in the 3-6% range is healthy for an economy. C. as prices increase money becomes more valuable. D. the Fed needs to increase the money supply as prices increase.

A. they want to understand how to keep inflation low and stable.

One major difference between a debit and credit card is: A. you can build a credit history with the credit card but not with the debit card. B. you have to pay interest on your purchases if you use a credit card. C. credit cards are money and the debit card is not. D. debit cards charge late fees.

A. you can build a credit history with the credit card but not with the debit card.

Briefly explain one function of financial instruments that can make them very different from money.

Ability to transfer risk between buyer and seller (ex: futures, insurance policy)

What does it mean to say that an asset is "liquid"?

An asset is liquid when it can be converted into a means of payment, quickly without suffering a loss in value.

30. Which of the following would lead to an increase in bond supply?

An improvement in general business conditions.

67. Which of the following would lead to an increase in bond supply? A. A decrease in government spending relative to revenue. B. An increase in corporate taxes. C. A decrease in expected inflation. D. An improvement in general business conditions.

An improvement in general business conditions.

31. Which of the following would lead to a decrease in bond demand?

An increase in expected inflation.

68. Which of the following would lead to a decrease in bond demand? A. An increase in expected inflation. B. An increase in wealth. C. A decrease in risk. D. A decrease in liquidity.

An increase in expected inflation.

An speculator who buys a fifty-year corporate bond A) must be expecting to still be alive in fifty years. B) is subject to substantial reinvestment risk. C) is probably expecting market interest rates to increase in the future. D) is probably expecting market interest rates to decrease in the future

In the chapter you read that it costs the U.S. Treasury's Bureau of Engraving and Printing around nine cents to print a note (currency), whether that bill is a one-dollar or one-hundred dollar bill. It seems the Treasury could generate a nice profit for the government by simply printing currency and using this currency to purchase the goods and services the government needs. In fact, this seems to be a way to eliminate the problem of budget deficits for the U.S. government. Comment on this idea.

At first it seems the Treasury could buy one hundred dollars worth of goods for an actual cost of less than six cents, the cost of printing the note. Plus the Treasury can avoid having to borrow to finance the difference between tax receipts and expenditures. But what may be profitable for the Treasury can be very harmful to the economy. The printing of this additional currency can have many serious consequences. The additional currency will increase the money supply, which can fuel higher prices, lowering the real purchasing power of money. If the problem becomes large enough it can actually make people reluctant to accept the currency as a means of payment and they would revert to increased use of barter which can make the economy less efficient.

1. The bond rating of a security reflects the: a. size of the coupon payment relative to the face value. b. likelihood the lender/borrower will be repaid by the borrower/issuer. c. return a holder is likely to receive. d. size of the coupon rate relative to other interest rates.

10. Once a bond rating is assigned, it: a. never changes over the life of the bond. b. can change as the financial position of the issuer changes. c. can only change if the rating change is approved by the securities and exchange commission. d. can change on the next bond from the issuer but is fixed for the current bond.

10. The store of value characteristic of money refers to the fact that: A. people save most of their money. B. money allows people to shift purchasing power into the future. C. money is not valuable unless it is stored. D. money is the only way people have to store value.

13. The risk structure of interest rates says: A. the interest rates on a variety of bonds will move independently of each other. B. lower rated bonds will have higher yields. C. U.S. Treasury bond yields always change by more than other bonds. D. interest rates only compensate for risk during recessions.

15. Bonds issued by the U.S. Treasury are referred to as benchmark bonds because: a. they are always purchased for a premium. b. they are highly liquid and virtually free of default risk. c. all bonds from national governments are labeled as benchmark bonds. d. all bonds from the U.S. government have the same rate of interest.

16. The risk spread is: a. the difference between a bond's purchase price and selling price. b. the difference between the bond's yield and the yield on a U.S. Treasury bond of the same maturity. c. less than 0 (zero) for a U.S. Treasury bond. d. assigned by a bond-rating agency.

19. The default-risk premium: a. is negative for a U.S. Treasury bond. b. is also known as the risk spread. c. must always be greater than 0 (zero). d. is assigned by a bond-rating agency.

21. The risk structure of interest rates says: a. the interest rates on a variety of bonds will move independently of each other. b. lower rated bonds will have higher yields. c. U.S. Treasury bond yields always change by more than other bonds. d. interest rates only compensate for risk during recessions.

21. The value of $100 left in a certificate of deposit for four years that earns 4.5% annually will be: A. $120.00 B. $119.25 C. $117.00 D. $145.00

23. Suppose the economy has an inverted yield curve. According to the Liquidity Premium Theory, which of the following interpretations could be used to explain this? A. Interest rates are expected to rise in the future. B. Investors expect an economic slowdown. C. Investors are indifferent between bonds with different time horizons. D. The term spread has increased.

23. The risk structure of interest rates refers to the: a. relationship among the interest rates of bonds with different maturities. b. relationship among the interest rates of bonds from different issuers with the same maturities. c. relationship among the interest rates of bonds from the same issuer but different maturities. d. additional interest required to compensate the buyer for the longer maturity of the bond.

24. A borrower who has to pay an interest rate of 8% rather than 6% due to risk spread will pay: a. $20 more in interest annually for every $100 borrowed. b. 33.3% higher interest in dollar terms. c. 2% in net interest. d. less interest in total over the life of the loan.

28. Many financial instruments are standardized because: A. it is believed that most parties to a contract do not read them anyway. B. complexity is costly, the more complex a contract, the more it costs to create. C. the standardization of contracts makes them harder to understand. D. it is required by the government.

29. If the U.S. government's borrowing needs increase, in the bond market this would be seen as the: A. bond demand curve shifting right. B. bond supply curve shifting right. C. bond demand curve shifting left. D. bond supply curve shifting left.

31. Assume the Expectation Hypothesis regarding the term structure of interest rates is correct. Then, if the current one-year interest rate is 4% and the two-year interest rate is 6%, then investors are expecting the future one-year rate to be: A. 4%. B. 8%. C. 6%. D. 5%.

33. An advantage that money has over other assets is that it: A. increases in value over time. B. has lower transaction costs to use as a means of payment than other assets. C. provides a higher return to the owner. D. is a safer asset to hold during times of inflation

34. Which of the following is not an example of bartering? A. Sue trading candles with Tom for his bread. B. Mary paying for her new shoes with her credit card. C. John cutting his neighbor's grass in return for his neighbor washing John's car. D. Mrs. Smith treating the neighbor children to pizza after they helped clean up her yard.

36. If a local government eliminates the tax exemption on municipal bonds, we'd expect to see: a. an increase in the yield on taxable bonds. b. a decrease in the gap in yields on taxable and tax-exempt bonds. c. a decrease in the yield on municipal bonds. d. municipal bonds will become more attractive to investors.

37. The risk spread is: A. the difference between a bond's purchase price and selling price. B. the difference between the bond's yield and the yield on a U.S. Treasury bond of the same maturity. C. less than 0 (zero) for a U.S. Treasury bond. D. assigned by a bond-rating agency.

38. A financial intermediary: A. is an agency that guarantees a loan. B. is a third-party that facilitates a transaction between a borrower and a lender. C. would be used in direct finance. D. must be a depository institution.

43. In the fall of 1998 we saw an increase in the risk spread because: a. the risk spread always increases as we approach the end of the year. b. the Russian government defaulted on some of its bonds. c. there was an extraordinarily large amount of corporate fraud being reported in 1998. d. there was a significant increase in U.S. income tax rates.

44. A company that continues to have strong profit performance during an economic downturn when many other companies are suffering losses or failing should see: a. an increase in the yield of their bonds and the price of the bond increases. b. their bond rating maintained or actually increase. c. the demand for their bonds decrease and their yields decrease. d. the demand and price for their bonds decrease.

45. Bonds with the same tax status and ratings: a. always have the same yield. b. can have different yields due to different maturities. c. should sell for the same price. d. will still have different yields depending on their face values.

47. During a recession you would expect the difference between the commercial paper rate and the yield on U.S. T-bills of the same maturity to: a. be the same since their maturities are the same. b. increase reflecting the possibility of higher default risk for commercial paper. c. decrease. d. fluctuate rarely.

48. Which of the following statements pertaining to the yield curve is not true? a. Yield curves usually slope upwards. b. The yield curve shows the difference in default risk between securities. c. The yield curve shows the relationship among bonds with the same risk characteristics but different maturities. d. The yield curve can be flat or downward sloping depending on market conditions.

5. A coupon bond is a bond that: A. always sells at a price that is less than the face value. B. provides the owner with regular payments. C. pays the owner the sum of the coupons at the bond's maturity. D. pays a variable coupon rate depending on the bond's price.

5. Suppose that interest rates are expected to remain unchanged over the next few years. However, there is a risk premium for longer-term bonds. According to the liquidity premium theory, the yield curve should be: a. upward sloping and very steep. b. upward sloping and relatively flat. c. inverted. d. vertical.

51. The term structure of interest rates: a. always results in an upward sloping yield curve. b. represents the variation in yields for securities differing in maturities. c. usually results in a flat yield curve. d. usually results in a downward sloping yield curve.

52. Which of the following statements is not true of the yield curve for U.S. Treasury securities? a. The yield curve usually slopes upward. b. The yield curve usually is inverted. c. The yield curve shows the relationship among securities of different maturities. d. The yield curve can shift over time.

57. The expectations hypothesis assumes: a. a high level of uncertainty regarding the future of long-term yields. b. investors know the yields on bonds today and form expectations of the yields on short-term bonds in future time periods. c. securities of different maturities are not perfect substitutes for each other. d. the risk premium increases with longer maturities.

6. In comparing money to a share of Microsoft stock held by an individual, we can say: A. the share of stock is an asset, but money is a liability. B. only the money is a means of payment, but both are stores of value. C. only the money is a means of payment, but both are units of account. D. both the Microsoft stock and the money are liabilities.

6. Suppose the economy has an inverted yield curve. According to the liquidity premium theory, which of the following interpretations could be used to explain this? a. Interest rates are expected to rise in the future. b. Investors expect an economic slowdown. c. Investors are indifferent between bonds with different time horizons. d. The term spread has increased.

60. Assume the Expectation Hypothesis regarding the term structure of interest rates is correct. Then, if the current one-year interest rate is 4% and the two-year interest rate is 6%, then investors are expecting the future one-year rate to be: a. 4%. b. 8%. c. 6%. d. 5%.

8. Bonds rated as "highly speculative" are: a. rated so because they guarantee high returns for the buyer. b. commonly referred to as junk bonds. c. ranked just above investment grade by Standard & Poor's. d. rated so because they do not have any default risk.

How many prices would a trader of a particular good need to know in a barter economy with 5 goods? A. 5 B. 10 C. 20 D. 50

B. 10

Which of the following assets is the most liquid? A. Art B. Demand deposits C. Houses D. Stocks

B. Demand deposits

U.S. currency is: A. A commodity money B. Fiat money C. Tied to the value of gold at a fixed rate D. The only store of value

B. Fiat money

48. Which of the following is true of interest-rate risk?

Individuals owning long-term bonds are exposed to greater interest-rate risk.

Which of the following is not an example of bartering? A. Sue trading candles with Tom for his bread. B. Mary paying for her new shoes with her credit card. C. John cutting his neighbor's grass in return for his neighbor washing John's car. D. Mrs. Smith treating the neighbor children to pizza after they helped clean up her yard.

B. Mary paying for her new shoes with her credit card.

Which of the following is incorrect? A. Money is wealth but not all wealth is money. B. Money is a means of payment but is not part of wealth. C. An asset doesn't have to be a means of payment to be a part of a person's wealth. D. All items considered wealth can eventually be converted to a means of payment.

B. Money is a means of payment but is not part of wealth.

The Consumer Price Index (CPI): A. is calculated using a basket of goods and services adjusted annually by government statisticians. B. answers the question, "How much more does it cost today to buy the same basket of goods and services that were purchased at some fixed time in the past?" C. does not suffer from substitution bias because the basket used to measure prices changes every year. D. understates the impact of price changes.

B. answers the question, "How much more does it cost today to buy the same basket of goods and services that were purchased at some fixed time in the past?"

Checks and currency function similarly, however: A. currency is a more effective means of payment. B. carrying currency entails greater risk, because it cannot be replaced if lost or stolen. C. currency is a better store of value than checking deposits. D. checks are not included in measures of money, whereas currency is.

B. carrying currency entails greater risk, because it cannot be replaced if lost or stolen.

Sue uses a credit card to purchase a new pair of jeans. Sue is: A. using money to buy her jeans since credit cards is money. B. creating a liability that she will ultimately have to pay with money. C. using an electronic payment form of money. D. using a form of money included in M2.

B. creating a liability that she will ultimately have to pay with money.

19. Suppose there is a decrease in the price at which a bondholder sells her bond. In this case, the holding period return will

B. decrease, since this lowers the capital gain.

The store of value characteristic of money refers to the fact that: A. people save most of their money. B. money allows people to shift purchasing power into the future. C. money is not valuable unless it is stored. D. money is the only way people have to store value.

B. money allows people to shift purchasing power into the future.

While money is an asset not all assets are money because: A. only money stores value. B. money works as a means of payment. C. only money is a good asset to hold during times of inflation. D. money must be legal tender.

B. money works as a means of payment.

Considering the roughly $1.2 trillion in U.S. currency held by the public: A. over 90% of the amount is held in the form of $1 bills. B. more than three-fourths is held in the form of $100 bills. C. over half of the currency held in the form of $20 bills. D. the Federal Reserve distributes the amount equally across all denominations of bills.

B. more than three-fourths is held in the form of $100 bills.

In comparing money to a share of Microsoft stock held by an individual, we can say: A. the share of stock is an asset, but money is a liability. B. only the money is a means of payment, but both are stores of value. C. only the money is a means of payment, but both are units of account. D. both the Microsoft stock and the money are liabilities.

B. only the money is a means of payment, but both are stores of value.

The use of money makes us more efficient because: A. we spend more time trading and more time producing. B. people can specialize in what they do well. C. with money we borrow less. D. money increases in value over time.

B. people can specialize in what they do well.

12. In calculating the current yield for a bond the

B. present value of the capital gain/loss is ignored.

The Consumer Price Index (CPI): A. tends to understate the impact of price changes. B. tends to overstate the impact of price changes due to substitution bias. C. is more accurate than the GDP deflator. D. assumes that consumers substitute away from cheaper goods.

B. tends to overstate the impact of price changes due to substitution bias.

M1 has decreased in its usefulness in understanding inflation due to: A. the increased use of checks in the economy. B. the introduction of money market mutual fund shares and similar checking substitutes. C. more reliance on the use of currency. D. the increased use of electronic payments.

B. the introduction of money market mutual fund shares and similar checking substitutes.

The primary use of derivative contracts is: A. for IRA and other pension plans since they only have value well into the future. B. to shift risk among investors. C. for investors seeking a greater return by taking greater risk. D. to add to the profits an investor obtains through information asymmetry.

B. to shift risk among investors.

To say an asset is liquid implies that: A. we are focusing on a category of assets that are in a physically liquid form, like oil. B. we are considering assets that may be readily converted into a means of payment. C. we are considering any asset that can be sold. D. we are only considering U.S. currency.

B. we are considering assets that may be readily converted into a means of payment.

the deleveraging cycle

Bank wishes to deleverage ->some assets are sold -> asset prices decline -> net worth declines and assets become riskier

Banks who held mortgage-backed securities "took a bath" during the financial crisis of 2007-2009 due to: A) rising yields in secondary markets which led to a decline in the price of mortgage-backed securities. B) falling yields in secondary markets which led to a decline in the price of mortgage-backed securities. C) their inability to issue new mortgages. D) more rapid pre-payment of mortgages.

Why are electronic transactions increasingly taking the place of paper transactions?

Because efficient payments systems continue to evolve and seek easier and cheaper ways to pay for things.

31. Which of the following is not a reason why the yield to maturity can differ from the current yield? A. Because the yield to maturity considers the capital gain/loss. B. Because the current yield focuses only on the coupon payment and the purchase price. C. Because most bonds are not purchased for face value. D. Because the current yield moves in the opposite direction from price.

Because the current yield moves in the opposite direction from price.

39. The market for bonds is initially described by the supply of bonds - S0, and the demand for bonds - D0, with the equilibrium price and quantity being P0 and Q0. An increase in the nation's wealth, all else constant, would cause the

Bond demand curve to shift to D1.

85. The market for bonds is initially described by the supply of bonds - S0, and the demand for bonds - D0, with the equilibrium price and quantity being P0 and Q0. An increase in the nation's wealth, all else constant, would cause the A. Bond supply curve to shift to S1. B. Bond demand curve to shift to D1. C. Bond supply curve to shift to S2. D. Bond demand curve to shift to D2.

Bond demand curve to shift to D1.

40. The market for bonds is initially described by the supply of bonds - S0, and the demand for bonds - D0, with the equilibrium price and quantity being P0 and Q0. Suppose that the expected return on bonds falls relative to other assets. In the bond market this will result in

Bond demand curve to shift to D2

86. The market for bonds is initially described by the supply of bonds - S0, and the demand for bonds - D0, with the equilibrium price and quantity being P0 and Q0. Suppose that the expected return on bonds falls relative to other assets. In the bond market this will result in: A. Bond supply curve to shift to S1 B. Bond demand curve to shift to D1 C. Bond supply curve to shift to S2 D. Bond demand curve to shift to D2

Bond demand curve to shift to D2

41. The market for bonds is initially described by the supply of bonds - S0, and the demand for bonds - D0, with the equilibrium price and quantity being P0 and Q0. If the federal government were to offer larger tax breaks on the purchase of new equipment for businesses, all other factors constant, we would expect to see

Bond supply curve to shift to S1

87. The market for bonds is initially described by the supply of bonds - S0, and the demand for bonds - D0, with the equilibrium price and quantity being P0 and Q0. If the federal government were to offer larger tax breaks on the purchase of new equipment for businesses, all other factors constant, we would expect to see: A. Bond supply curve to shift to S1 B. Bond demand curve to shift to D1 C. Bond supply curve to shift to S2 D. Bond demand curve to shift to D2

Bond supply curve to shift to S1

42. The market for bonds is initially described by the supply of bonds - S0, and the demand for bonds - D0, with the equilibrium price and quantity being P0 and Q0. If the U.S. government's borrowing needs decrease, all other factors constant

Bond supply curve to shift to S2

88. The market for bonds is initially described by the supply of bonds - S0, and the demand for bonds - D0, with the equilibrium price and quantity being P0 and Q0. If the U.S. government's borrowing needs decrease, all other factors constant: A. Bond supply curve to shift to S1 B. Bond demand curve to shift to D1 C. Bond supply curve to shift to S2 D. Bond demand curve to shift to D2

Bond supply curve to shift to S2

primary financial markets

Borrowers obtain funds from lenders by selling newly issued securities -Occurs privately -intermediated by an investment bank

direct finance

Borrowers sell securities directly to lenders in the financial market.

1. If the risk on foreign government bonds increases relative to U.S. government bonds, the price of U.S. government bonds should: A. not change since U.S. government bonds are free of default risk. B. decrease since people will bail out of all government bonds. C. increase as the demand for these bonds increases. D. not be affected because the two types of bonds are traded in different markets.

11. The price of a coupon bond is determined by: A. taking the present value of the bond's final payment and subtracting the coupon payments. B. taking the present value of the coupon payments and adding this to the face value. C. taking the present value of all of the bond's payments. D. estimating its future value.

12. Most commercial paper is: a. issued with maturities exceeding one year. b. issued with maturities between 50 and 75 days. c. used exclusively for short-term financing needs. d. issued by foreign companies doing business in the United States.

13. If a bond's rating improves it should cause the bond's price: a. and yield to increase, all other factors constant. b. and yield to decrease, all other factors constant. c. to increase and its yield to decrease, all other factors constant. d. to decrease and its yield to increase, all other factors constant.

14. A share of Microsoft stock would best be described as which of the following? A. A derivative instrument B. A means of payment C. An underlying instrument D. A debt instrument

16. A $1,000 face value bond, with an annual coupon of $40, one year to maturity and a purchase price of $980 has a: A. current yield that equals 4.00%. B. coupon rate that equals 4.08%. C. current yield that equals 4.08% and a yield to maturity that equals 6.12%. D. current yield that equals 4.08% and a yield to maturity that equals 4.0%.

17. The value of fiat money: A. comes from its intrinsic value. B. is worth more as a commodity than its value as money. C. comes from government decree. D. means that it is more desirable than currency.

19. Holding liquidity and default risk constant, an investor earning 4% from a tax-exempt bond who is in a 20% tax bracket would be indifferent between that bond and a taxable bone with a(n): A. 7.5% yield. B. 8.0% yield. C. 5% yield. D. 6% yield.

2. Tom obtains a car loan from Old Town Bank. A. The car loan is Tom's asset and the bank's liability. B. The car loan is Tom's asset, but the liability belongs to the bank's depositors. C. The car loan is Tom's liability and an asset for Old Town Bank. D. The car loan is Tom's liability and a liability of the bank until Tom pays it off

20. Which of the following is not a financial intermediary? A. A bank B. An insurance company C. The New York Stock Exchange D. A mutual fund

24. What is the present value of $100 promised one year from now at 10% annual interest? A. $89.50 B. $90.00 C. $90.91 D. $91.25

25. Which of the following is true? a. Long-term bond yields move together but short-term yields do not. b. Short-term bond yields move together but long-term yields do not. c. U.S. Treasury Bill yields are lower than the yields on commercial paper. d. Long-term bond yields are usually the same as short-term yields.

26. Taxes play an important role in bond returns because: a. all interest from owning bonds is taxed. b. all governments (federal, state, municipal) tax bonds similarly. c. some bond interest is exempt from some government taxation, so after tax returns across bonds can vary considerably. d. only U.S. Treasury bonds are tax-exempt, so investors should always seek higher returns from other bonds.

28. An investor in a 30% marginal tax bracket, earning $10 in interest annually for a $100 U.S. Treasury bond: a. earns a 10% after-tax return because interest on U.S. Treasury bonds is tax exempt at the federal level. b. earns a 3% return after-tax. c. would be indifferent between this bond and a municipal bond offering $7 annually per $100 of face value, assuming the same default risk and liquidity characteristics. d. earns a 1% return after-tax.

30. The purchasing power of money: A. rises when inflation rises. B. decreases as the price level decreases. C. decreases with inflation. D. is not impacted by inflation, only by monetary policy.

31. Holding liquidity and default risk constant, an investor earning 4% from a tax-exempt bond who is in a 20% tax bracket would be indifferent between that bond and a taxable bone with a(n): a. 7.5% yield. b. 8.0% yield. c. 5% yield. d. 6% yield.

32. A 30-year Treasury bond as a face value of $1,000, price of $1,200 with a $50 coupon payment. Assume the price of this bond decreases to $1,100 over the next year. The one-year holding period return is equal to: A. -9.17%. B. -8.33%. C. -4.17%. D. -3.79%.

33. Suppose the tax rate is 25% and the taxable bond yield is 8%. What is the equivalent tax-exempt bond yield? a. 2% b. 2.3% c. 6% d. .9%

34When the growth rate of the economy slows we would expect: a. the risk to increase for U.S. Treasury securities. b. the risk spread to increase more between U.S. Treasury Securities and Aaa securities than between Aaa and Baa securities. c. the risk spread to increase more between Aaa and Baa securities than U.S. Treasuries and Aaa securities. d. investors to purchase more junk bonds in search of a higher yield.

35. The unit of account characteristic of money: A. makes it difficult to compare the relative prices of goods and services. B. refers to how we use money to transfer purchasing power over time. C. means prices are expressed in terms of money. D. means that money finalizes payments.

36. At any fixed interest rate, an increase in time, n, until a payment is made: A. increases the present value. B. has no impact on the present value since the interest rate is fixed. C. reduces the present value. D. affects only the future value.

37. Which of the following is not typically used for qualifying mortgages as prime or subprime? a. The borrower's income b. The borrower's credit score c. The borrower's ethnicity d. The loan to value ratio

39. The lower the interest rate, i, the: A. lower is the present value. B. greater must be n. C. higher is the present value. D. higher is the future value.

4. If a consol is offering an annual coupon of $50 and the annual interest rate is 6%, the price of the consol is: A. $47.17 B. $813.00 C. $833.33 D. $8333.33

40. Under the Liquidity Premium Theory a flat yield curve implies: A. there is no risk premium for longer-term maturities. B. short-term interest rates are expected to remain constant. C. short-term interest rates are expected to decrease. D. long-term interest rates are higher than short-term interest rates.

40. Which fact about the term structure is the expectations theory unable to explain? a. Why interest rates on bonds with different terms to maturity tend to move together over time. b. Why yields on short-term bonds are more volatile than yields on long-term bonds. c. Why longer-term yields tend to be higher than shorter-term yields. d. Why long-term bond yields are influenced by expected future short-term bond yields.

42. The risk spread on bonds fluctuates mainly because: a. taxes tend to increase over time. b. bond rating agencies are often inconsistent. c. new information about a borrower's financial condition becomes available. d. people do not change their attitudes towards risk quickly.

50. Interest on most bonds issued by states is usually exempt from: a. state income tax but not federal. b. from federal income tax but not state. c. both state and federal income taxes. d. from city income taxes.

53. The yield curve for U.S. Treasury securities allows us to draw the following conclusions, except that: a. long-term yields tend to higher than short term yields. b. interest rates of different maturities tend to move. c. long-term rates tend to equal short-term rates. d. yields on short-term securities are more volatile than yields on long-term bonds.

56. Any theory of the term structure of interest rates needs to explain each of the following, except why: a. short-term yields are more volatile than long-term yields. b. the yields of different maturities tend to move together. c. short-term yields are usually higher than long-term yields. d. long-term yields are usually higher than short-term yields.

59. The yield on a 30-year U.S. Treasury security is 6.5%; the yield on a 2-year U.S. Treasury bond is 4.0%. This data indicate: a. the yield curve is downward sloping. b. the yield curve is flat since the risk premium needs to be added for longer maturities. c. the yield curve is upward sloping. d. that people expect inflation to decrease in the future.

61. Under the liquidity premium theory a flat yield curve implies: a. there is no risk premium for longer-term maturities. b. short-term interest rates are expected to remain constant. c. short-term interest rates are expected to decrease. d. long-term interest rates are higher than short-term interest rates.

7. If a bond's purchase price equals the face value the: A. coupon rate equals the current yield, which is less than the yield to maturity. B. current yield equals the yield to maturity, which exceeds the coupon rate. C. coupon rate equals the yield to maturity, which equals the current yield. D. coupon rate does not equal the current yield, which does not equal the yield to maturity.

8. Which of the following assigns widely followed bond ratings? A. The Federal Reserve B. The Wall Street Journal C. Moody's Investor Service D. The Nasdaq

Which of the following statements is not true? A. For most of history gold has been the most common commodity money. B. The most common form of money in the U.S. is not a commodity money. C. Gold is an example of a fiat money. D. U.S. currency is legal tender.

C. Gold is an example of a fiat money.

Which of the following statements is correct? A. If you can buy the same goods this year as you bought last year with less money there must have been inflation. B. If purchasing the same goods today that were purchased one year ago requires more money, there must have been deflation. C. If purchasing the same goods today as one year ago requires less money, the money supply likely decreased. D. If purchasing the same goods today as one year ago requires less money, the money supply likely increased.

C. If purchasing the same goods today as one year ago requires less money, the money supply likely decreased.

Which of the following would not be considered a characteristic of money? A. It is a store of value. B. It is a means of payment. C. It must have intrinsic value. D. It is a unit of account.

C. It must have intrinsic value.

In countries with low inflation: A. M2 growth is a very strong forecaster of inflation. B. there tends to be a greater reliance on checks than electronic payments. C. M2 growth is a poor forecaster of inflation. D. money stocks are a larger percentage of GDP.

C. M2 growth is a poor forecaster of inflation.

Current critics of fiat money are urging governments to do what? A. Return to a system of legal tender. B. Move to a system of electronic transactions only. C. Return to a gold standard. D. Place limits on the creation.

C. Return to a gold standard.

Tom obtains a car loan from Old Town Bank. A. The car loan is Tom's asset and the bank's liability. B. The car loan is Tom's asset, but the liability belongs to the bank's depositors. C. The car loan is Tom's liability and an asset for Old Town Bank. D. The car loan is Tom's liability and a liability of the bank until Tom pays it off.

C. The car loan is Tom's liability and an asset for Old Town Bank.

Which of the following could not be commodity money? A. Gold coins B. Cigarettes C. U.S. Currency D. Silk

C. U.S. Currency

Comparing checks and currency, we can say: A. both are money but only currency is legal tender. B. only checks are both money and legal tender. C. a check isn't money but currency is. D. both are money and legal tender.

C. a check isn't money but currency is.

The Consumer Price Index (CPI) is: A. an example of an index that uses variable expenditure weights. B. a fixed-expenditure-weight index used to measure changes in the GDP Deflator. C. a fixed-expenditure-weight index used to measure changes in purchasing power for households. D. the least commonly used measure of inflation.

C. a fixed-expenditure-weight index used to measure changes in purchasing power for households.

Specialization usually increases the output of a country; however effective specialization requires: A. everyone in the country producing the same thing. B. that workers have very similar skills. C. an effective low-cost means to exchange goods and services. D. a large stock of capital.

C. an effective low-cost means to exchange goods and services.

In a barter system people: A. have to specialize in order to have goods to trade. B. cannot specialize because they never know what goods will be desired. C. are less likely to specialize as extensively as they would in a monetary economy. D. must be self sufficient.

C. are less likely to specialize as extensively as they would in a monetary economy.

The U.S. Treasury estimates that the fraction of U.S. currency held outside the United States is: A. about one-fourth. B. about half. C. between two-thirds and three-quarters. D. less than 10%.

C. between two-thirds and three-quarters.

In comparing money to a U.S. Treasury bond held by an individual, we can say: A. the treasury bond is an asset but money is not. B. money is an asset but the U.S. bond is a liability of the individual. C. both are stores of value. D. money is a store of value but the bond is not.

C. both are stores of value.

The value of fiat money: A. comes from its intrinsic value. B. is worth more as a commodity than its value as money. C. comes from government decree. D. means that it is more desirable than currency.

C. comes from government decree.

The money aggregate M1 includes each of the following, except: A. currency in the hands of the public. B. travelers checks that have been issued. C. currency in the vaults of commercial banks. D. demand deposits at commercial banks.

C. currency in the vaults of commercial banks.

The purchasing power of money: A. rises when inflation rises. B. decreases as the price level decreases. C. decreases with inflation. D. is not impacted by inflation, only by monetary policy.

C. decreases with inflation.

When the price level increases, the purchasing power of money: A. increases by a similar amount. B. stays the same since the purchasing power of money is not impacted by price levels. C. decreases. D. first increases and then decreases as people get used to higher prices.

C. decreases.

The value of money as a means of payment: A. is independent of changes in the amount of money in the economy. B. is fixed once relative prices are set. C. depends on the amount of money in the economy, among other things. D. depends on whether the majority of M1 is in currency or demand deposits.

C. depends on the amount of money in the economy, among other things.

20. The bond supply curve slopes upward because

C. for companies seeking financing, the higher the price of bonds the more attractive it is to sell bonds.

The high transaction costs associated with a barter system refers to the: A. fact that, often times, these exchanges are taxed by governments. B. risk associated with having to carry an inventory of goods to trade. C. high cost associated with finding someone with whom to exchange. D. cost of drawing up complete contracts.

C. high cost associated with finding someone with whom to exchange.

M1 is: A. a more useful measure of the relationship between the money supply and inflation because it includes the most liquid assets. B. the money supply the Federal Reserve pays the most attention to in conducting monetary policy. C. less useful than M2 for understanding inflation. D. the fastest growing of all of the money aggregates.

C. less useful than M2 for understanding inflation.

The unit of account characteristic of money: A. makes it difficult to compare the relative prices of goods and services. B. refers to how we use money to transfer purchasing power over time. C. means prices are expressed in terms of money. D. means that money finalizes payments.

C. means prices are expressed in terms of money.

In a barter economy with "n" number of goods there will always be: A. exactly "n" relative prices. B. fewer than "n" relative prices. C. more than "n" relative prices. D. "n/2" relative prices.

C. more than "n" relative prices.

The fact that U.S. currency is legal tender means: A. U.S. currency is good anywhere in the world. B. the only money the government will accept for settlement of debts is U.S. currency. C. private businesses in the U.S. and the U.S. government must accept currency for payment. D. it cannot be backed by gold or other metals.

C. private businesses in the U.S. and the U.S. government must accept currency for payment.

Without the use of money, workers in an economy would: A. become more specialized B. have to spend a lot less time trading C. probably specialize less D. be far more productive

C. probably specialize less

An individual who stores wealth in art rather than money will find that he/she: A. suffers larger real losses during periods of high inflation. B. has far more liquidity than most savers. C. will incur higher transaction costs when he/she ultimately makes purchases. D. will have to resort to barter exchanging the art for desired goods.

C. will incur higher transaction costs when he/she ultimately makes purchases.

A society without any money: A. could never exchange goods and/or services. B. would find people doing everything for themselves. C. would have to rely on barter. D. would be more efficient since people would be more self-sufficient.

C. would have to rely on barter.

17. The price (P) of a consol offering an annual coupon payment (C) is best expressed by: A. F/C B. C(1 + i) C. C/(1 + i) D. C/i

C/i

What distinguishes commodity money from fiat money?

Commodity money, such as gold or silver, has value even if it is not used as money. For example, gold coins could be melted down and converted to jewelry. Fiat money, such as U.S. paper currency really has no value other than its use as money. Its value derives from the fact that it is deemed to be legal tender by the U.S. government and along with people's willingness to accept it.

Explain why most financial instruments are fairly complex, while at the same time quite standardized.

Complex: Many possible contingencies because buyer/seller wants to account for unexpected events. --complete contract is time consuming and expensive Standardized: makes easier to compare contracts and makes the instruments more liquid

7. Which of the following makes fixed payments indefinitely? A. Amortized loan B. Consol C. Coupon bond D. Zero-coupon bond

Consol

17. Which of the following best expresses the equation for holding period return?

Current yield + capital gain

42. Which of the following best expresses the equation for holding period return? A. Current yield + coupon rate B. Yield to maturity - current yield C. Current yield + capital gain D. Coupon rate + capital gain

Current yield + capital gain

11. Commercial paper refers to: a. the financial publications read by the CEO's of public corporations. b. any debt security with a maturity exceeding one year. c. short-term collateralized securities issued only by corporations. d. unsecured short-term debt issued by corporations and governments.

12. The money aggregate M2 includes: A. large denomination time deposits. B. stock and bond mutual fund shares. C. savings deposits but not money market deposit accounts. D. M1

18. All of the following are true about the risk spread except it should: a. be higher for highly speculative bonds than investment grade bonds. b. have a direct relationship with the bond's yield. c. have an inverse relationship with the bond's price. d. have a direct relationship with the bond's price.

2. The two best known bond rating services are: a. the Federal Reserve and Moody's Investment Services. b. the Federal Reserve and the U.S. Treasury. c. Standard & Poor's and the Wall Street Journal. d. Standard & Poor's and Moody's Investment Services.

22. If interest rates are expected to fall, bond prices will: A. fall as the demand for bonds decreases. B. remain constant until interest rates actually change. C. fall as people fear capital losses in the future. D. increase due to the demand for bonds increasing.

25. Debt instruments that have maturities less than one year are traded in the: A. primary market exclusively. B. bond markets exclusively. C. bond market if they are already in existence. D. money market.

27. Municipal bonds are issued by: a. cities only. b. the U.S. Treasury, but the proceeds can only be used by cities. c. states and cities, but their interest is taxable only at the federal level. d. states and cities and their interest is exempt from U.S. government taxation.

3. A borrower who makes a $1000 loan for one year and earns interest in the amount of $75, earns what nominal interest rate and what real interest rate if inflation is two percent? A. A nominal rate of 5.5% and a real rate of 2.0%. B. A nominal rate of 7.5% and a real rate of 5.0%. C. A nominal rate of 7.5% and a real rate of 9.5%. D. A nominal rate of 7.5% and a real rate of 5.5%.

32. Municipal bonds are usually purchased by: a. retired investors who have no other taxable income. b. investors looking for securities to buy for their IRA accounts. c. investors who live in cities with high municipal tax rates. d. investors who are in high marginal tax brackets.

4. Which of the following assigns widely followed bond ratings? a. The Federal Reserve b. The U.S. Treasury c. The New York Stock Exchange d. Standard & Poor's

41. Which fact about the term structure is the expectations theory able to explain? a. Why interest rates on bonds with different terms to maturity tend to move together over time. b. Why yields on short-term bonds are more volatile than yields on long-term bonds. c. Why longer-term yields tend to be higher than shorter-term yields. d. Why long-term bonds usually are less liquid than short-term bonds with the same default risk.

49. If the federal government replaced the current income tax with a national sales tax, the price of: a. corporate bonds and municipal bonds would rise. b. municipal bonds would rise and corporate bonds would not change. c. corporate bonds would fall while the price of municipal bonds would rise. d. municipal bonds would fall while the price of corporate bonds would rise.

54. When the yield curve slope is more upward sloping than usual, people are expecting: a. an economic slowdown. b. the U.S. Treasury may default on its obligations. c. the Federal Reserve is going to ease monetary policy. d. a future rise in short-term interest rates.

58. The expectations hypothesis suggests the: a. yield curve should usually be downward sloping. b. yield curve should usually be upward sloping. c. slope of the yield curve reflects the risk premium associated with longer-term bonds. d. slope of the yield curve depends on the expectations for future short-term rates.

Money as a means of payment refers to: A. only actual currency. B. only coins and currency. C. only coins, currency and credit cards. D. anything that is generally accepted as payment for goods and services.

D. anything that is generally accepted as payment for goods and services.

14. Which of the following is not a reason why the yield to maturity can differ from the current yield?

D. Because the current yield moves in the opposite direction from price.

Which of the following statements is incorrect? A. If you can buy the same goods this year as you bought last year with less money there must have been deflation. B. If you can buy the same goods this year as you purchased one year ago with the same amount of money, prices are stable. C. If purchasing the same goods today that were purchased one year ago requires more money, there must have been inflation. D. If you can buy the same goods this year as you bought last year with the same money there must have been deflation.

D. If you can buy the same goods this year as you bought last year with the same money there must have been deflation.

The money aggregate M2 includes: A. large denomination time deposits. B. stock and bond mutual fund shares. C. savings deposits but not money market deposit accounts. D. M1.

D. M1.

The most commonly quoted monetary aggregate is: A. money-market mutual fund shares. B. M1 since it is the most liquid. C. public currency. D. M2 since its movement is most closely related to interest rates and economic growth.

D. M2 since its movement is most closely related to interest rates and economic growth.

Which of the following lists correctly orders assets from most liquid to least liquid? A. Stocks, house, paper currency, savings deposits B. Stocks, paper currency, house, savings deposits C. Savings deposits, paper currency, house, stocks D. Paper currency, savings deposits, stocks, house

D. Paper currency, savings deposits, stocks, house

Sophia receives a $400 gift card for her campus bookstore from her parents. Which of the following is true regarding the $400 gift card? A. It is counted only in M1. B. It is included in both M1 and M2. C. It is counted in only M2. D. Stored-value cards are not counted in either M1 or M2.

D. Stored-value cards are not counted in either M1 or M2.

Ava buys a $2,000 computer using a paper check. At which step does $2,000 get recorded in M1? A. When Ava hands the $2,000 check to the computer merchant. B. Once the $2000 is credited to the merchant bank's reserve account and is debited from Ava's bank account. C. Once the Federal Reserve sends the paper check (or an electronic image) to Ava's bank. D. The check is never M1. The $2000 is M1 both in Ava's bank account and, later, in the merchant's account. It is the deposit balance that is counted.

D. The check is never M1. The $2000 is M1 both in Ava's bank account and, later, in the merchant's account. It is the deposit balance that is counted.

Suppose that in a barter economy Tom bakes bread and Hans produces chocolates. Tom wants chocolates but Hans doesn't like bread, so Hans is unwilling to trade with Tom. Tom's problem is an example of which problem associated with a barter system? A. Too much specialization B. Not enough prices C. The law of diminishing returns D. The double coincidence of wants problem

D. The double coincidence of wants problem

Periodic payments of net earnings to shareholders are known as

dividends

In comparing money to a U.S. Treasury bond held by an individual, we can say: A. both are legal tender. B. both are units of account. C. only the bond is legal tender since it is an obligation of the U.S. government. D. both are stores of value.

D. both are stores of value.

27. When expected inflation increases, for any given nominal interest rate the

D. cost of borrowing decreases and the desire to borrow increases.

One major difference between a debit card and a credit card is: A. only the debit card helps you to build a credit history. B. the debit card has lower minimum monthly payments. C. you do not need to actually have the funds in your account when you use a debit card. D. debit cards have no late fees.

D. debit cards have no late fees.

Most of the non-cash retail payments made each year in the United States are made by: A. check. B. credit card. C. debit card. D. electronic funds transfers.

D. electronic funds transfers.

Gross Domestic Product in the U.S. is roughly: A. equal to M1. B. twice as large as M2. C. equal to M2. D. more than five times M1.

D. more than five times M1.

Inflation refers to growth in the economy's: A. Gross Domestic Product (GDP). B. interest rates. C. money. D. prices.

D. prices.

A cross-country analysis of money growth supports the conclusion that: A. there is no correlation between the growth rate of the quantity of money and the rate of inflation. B. the correlation between the money growth rate and inflation in most countries was positive but very small. C. the correlation between inflation and money growth in most industrialized countries was actually negative. D. the correlation between inflation and the money growth rate was positive and relatively strong.

D. the correlation between inflation and the money growth rate was positive and relatively strong.

One advantage of using checks over a debit card is: A. checks can be replaced if lost or stolen, a debit card cannot. B. the bank is responsible if someone steals your checks and uses them; this isn't the case with debit cards. C. a cancelled paper check is the only generally accepted proof of payment. D. the person has "float," meaning time between writing the check and depositing funds to cover it.

D. the person has "float," meaning time between writing the check and depositing funds to cover it.

35. Suppose that general business conditions improve, and at the same time, wealth increases. Based on this information, we know that

D. the quantity of bonds increases.

Gold would be a superior commodity money compared to wheat because: A. wheat has a high value relative to weight, which gold does not. B. it is easier to divide wheat into small units. C. wheat has more practical uses than gold. D. wheat is perishable.

D. wheat is perishable.

The Gordon Growth Model Formula

D0 = the most recent dividend paid g = the expected constant growth rate in dividends ke = the required return on an investment in equity

All else equal, an increase in the income of buyers who consider turkey to be an inferior good would cause a move from

DA to DB

Over-the-counter markets (OTCs)

Dealers stand ready to buy/sell securities electronically or on the phone.

Declining default risk in late 2009 and 2010 led to A) increase in the price of junk bonds. B) increase in the yield of junk bonds. C) increase in yield of Treasury bonds. D) increase in the price of Treasury bonds

Why are options referred to as derivative instruments?

Derivatives are instruments that derive their value and the payoff from the behavior of the underlying asset. Similarly, option contracts value will increase if the actual price of a stock rises above the specified price in the contract.

Electronic Communication Networks (ECNs)

Electronic system brings buyers & sellers together without the use of a broker or dealer. (ex: NASDAQ, NYSE)

How useful is M2 in tracking inflation? Explain.

Empirical research mentioned in the chapter shows that across many countries, high rates of growth in M2 were associated with high rates of inflation and relatively low growth rates in M2 in many countries also were associated with low rates of inflation. For this reason many economists believe that, at least for moderate inflation rates, controlling inflation means controlling the money growth.

What is the primary distinction between debt/equity markets and derivative markets?

Equity and debt markets-claims are purchased and sold for immediate cash payments. Derivative markets-parties make agreements that are settled at a later date.

In the figure above, a factor that could cause the demand for bonds to shift to the right is (Price of Bonds/ Quantity of Bonds)

Expectations of lower interest rates in the future

How do financial markets pool and communicate the information regarding issuers of financial instruments in a convenient way?

Financial markets pool and communicate information about the issuers of financial instruments and summarize this information in the form of a price. -Any information that says an issuer of a financial instrument is less likely to honor its payment would have the price of the instrument decrease or the required return increases.

For a specific change in the yield to maturity A) the shorter the time until a bond matures, the greater will be the change in its price. B) the longer the time until a bond matures, the greater will be the change in its price. C) the longer the time until a bond matures, the greater will be the change in its par value. D) the shorter the time until a bond matures, the greater will be the change in its coupon rate.

For bonds issued at the same point in time, which of the following is likely to have the highest coupon? A) Treasury bond B) high-grade corporate bond C) medium-grade corporate bond D) "junk" bond

For simple loans, the yield to maturity A) is always less than the specified simple interest rate. B) is always greater than the specified simple interest rate. C) is always equal to the specified simple interest rate. D) may be less than, greater than, or equal to the specified simple interest rate, depending on the maturity of the loan.

Has M2 always been a useful tool for forecasting inflation? Explain.

From 1960 to 1980 it seemed that growth of M2 was a good tool to forecast inflation, with a two-year lag; in fact the correlation was over 0.5. For the years 1990 to 2013 this does not seem to be the case, in fact the correlation was 0. There is no clear explanation for why the growth of M2 has ceased being a good forecast tool for inflation, but there are some ideas economists are researching.

Have the growth rates of the two measures of money moved together over time? Explain.

From 1960 to 1980 the growth rates of the two money measures did move together. After 1980 M1 behaved very differently than M2. The main reason for this seems to be the high rates of inflation that began in the late 1970s and fostered innovation into other types of accounts that people could hold to earn a higher return and yet were relatively liquid, such as money market accounts.

If i is the yield to maturity of a fixed-payment loan, A) the value of the loan today equals i times the sum of the values of all the loan payments. B) i equals the present value of the loan payments. C) the value of the loan today equals the sum of the values of the loan payments. D) the value of the loan today equals the present value of the loan payments discounted at rate i.

The income velocity of money is defined as nominal GDP divided by the money supply. In the first quarter of 2013 the U.S. nominal GDP was estimated to be around $16 trillion annually and M2 was $10460.3 billion. Would the income velocity of M2 be equal to 1; < 1; or > 1? Explain.

Greater than one. If you divide nominal GDP of $16 trillion (or $14,500 billion) by $10460.3 billion the result is 1.53.

After the Revolutionary War, the U.S. monetary system was based on gold. Historically, why did the U.S. adopt the use of gold as a currency? How does this compare with the currency used today?

Historically, the U.S. adopted the use of gold as a currency (or as a way to back paper notes) because people had grown suspicious of the use of fiat money. During the Revolutionary War, the Continental Congress issued continentals that became worthless with rising inflation. Using gold to back currency gave the public trust in the government's ability and desire to protect its value (e.g., to prevent rising inflation). Today, the currency printed by the U.S. Treasury Bureau of Engraving and Printing is fiat money. That is, it has little or no intrinsic value. The general public is willing to use this fiat money because it trusts the government's promise to protect its value. People have an expectation that they will be able to use the existing currency to pay for goods and services.

How are TIPS adjusted for inflation? A) the interest rate is adjusted for inflation during each period B) the principal is adjusted once the bond reaches maturity C) the principal is adjusted for inflation each period D) the interest rate is adjusted once the bond reaches maturity

If an investor is certain that market interest rates will decline in the future, which of the following will she be most likely to purchase? A) a six-month government bill B) a two-year government note C) a ten-year government bond D) a fifty-year government bond

Explain how money solves the problem of the "double coincidence of wants."

In an economy that does not rely on the use of money, if people are going to specialize at all they have to resort to barter, which is the exchange of one good or service for another. In the situation of barter, it may be likely that the individual who has what the other person wants will not want what the other person has. In this case multiple trades may be necessary to ultimately obtain what is desired. With the use of money, since everyone generally accepts it, one exchange will suffice. In reality you can say that money creates an immediate double coincidence of wants.

In comparing the yield to maturity on a Treasury bill with the yield on a discount basis on the same bill, we can say that the yield to maturity A) will always be greater than the yield on a discount basis. B) will always be less than the yield on a discount basis. C) will always be equal to the yield on a discount basis, provided the holding period is the same as the number of years to maturity. D) rises whenever the yield on a discount basis falls

95. Which of the following is true of interest-rate risk? A. It is the risk that the coupon rate for a bond will change, affecting current bondholders' coupon payments. B. It refers to the probability that a borrower will default on debt obligations. C. It is the risk that the face value of a bond will change before maturity. D. Individuals owning long-term bonds are exposed to greater interest-rate risk.

Individuals owning long-term bonds are exposed to greater interest-rate risk.

In the figure above, the price of bonds would fall from P1 to P2 when (Price of Bonds/ Quantity of Bonds)

Inflation is expected to increase in the future

Debt & equity markets

Instruments are traded for immediate cash payments (immediate settlement)

Interest-rate risk can best be characterized as the risk that A) you could have earned a higher interest rate if you waited to purchase a bond. B) fluctuations in the price of a financial asset in response to changes in market interest rates. C) you could have gotten a lower interest rate if you waited to lock in a mortgage. D) short-term interest rates may exceed long-term interest rates

What was the double liquidity shock that occurred in the U.S. financial system in the summer of 2007?

Investors began to doubt the value of a wide class of securities so market liquidity for those instruments disappeared and financial institutions that held them faced large losses. In turn, funding liquidity for these institutions dried up as the potential losses caused their lenders to be worried about their safety.

When the interest changes

It is because either the demand or the supply curve has shifted

In the bond market, the bond demanders are the ___________ and the bond suppliers are the _________________

Lenders : Borrowers

Of the following, the largest is

interbank loan

Marginal source of funds for banks. Their cost affects other lending rates.

Explain why the following statement is true, "money is an asset but not all assets are money."

Money is an asset because it represents something of value to the owner. But not all assets can be used as an immediate means of payment.

84. Which of the following statements about the result of a deterioration in business conditions that also causes a decrease in a nation's wealth is false? A. The impact on bond prices will be ambiguous since both the bond demand and supply curves shift left. B. The price of bonds will increase if bond supply decreases more than bond demand. C. Interest rates will increase if bond demand decreases more than bond supply. D. Neither bond demand nor bond supply will shift.

Neither bond demand nor bond supply will shift.

Consider the following: there are two countries, A and B. Each country has the same resources, and produces the same goods. The residents of country A use money; the residents of country B rely on bartering of goods. Will each country produce the same quantity of output? Explain.

No, the residents of Country B will definitely spend more of their time transacting, trying to create a double coincidence of wants, and may have to rely on multiple trades to do so. They will also likely specialize less, reducing the gains to the country from specialization. In country A the residents will be able to transact immediately using money, and will also be able to specialize in what they do well creating a more efficient economy.

Standard & Poor's sells information to investors; this is their primary business. Is this an example of a financial intermediary? Explain.

No. Financial intermediary is indirectly involved in matching lenders with ultimate spenders. It serves as a middleman which is not the case with S&P.

Is the characteristic that distinguishes money from other assets its ability to be a store of value?

No; there are many assets that fall into the category of financial assets that are good stores of value, these include bonds and stocks. What distinguishes money is that it is liquid, meaning it can immediately serve as a means of payment. This is not true of other assets, which must be converted to spendable form. Moreover, it can be costly to turn a bond or stock into a means of payment, especially if it must be done on short notice.

Nominal interest rates are higher than real interest rates as long as A) expected inflation is positive. B) the government taxes interest income. C) inflation is expected to decline in the future. D) long-term interest rates are higher than short-term interest rates

A famous American has been visiting the same tropical island for 15 years for vacations. When she goes she pays for everything by writing checks drawn on her U.S. bank. The currency the natives use are not U.S. dollars; they use a currency called a fungo. The natives never cash her checks. She is so well known on the island that the natives simply trade her checks among themselves. The question you need to answer, complete with an explanation, is: who is paying for her vacation? (You can assume her bank would honor the checks if presented for payment even after a considerable period of time has passed.)

Obviously neither the famous American nor her bank is paying for the vacation since the checks are never presented for payment. On the other hand, the famous American is providing the people on the island with additional money, which they seem very comfortable using. As a result, the money supply on the island has increased by the amount of these checks. One result of the added money will be inflation, so islanders will see the real purchasing power of their money decrease, thus their loss in real purchasing power has been used to pay for the famous American's vacations.

On a coupon bond, the yield to maturity A) always equals the coupon rate. B) equates the present value of all the bond's payments to its price today. C) increases when the market price of the bond increases. D) equals the coupon payment divided by the current price of the bond.

Which of the following movements would illustrate the effect in the market for swimming lessons of an increase in the incomes of parents with school-aged children

Point A to Point D

insurance contracts

Parties agree to exchange money under a given contingency.

futures contracts

Parties agree to exchange some commodity or asset at a given price on a given future date.

swaps

Parties agree to exchange two specific cash flows in the future.

Consider two barter economies: Duos and Varietas. Duos produces two different goods, whereas Varietas produces 80 different goods. Both countries have the same number of people. In which barter economy is it more likely that the means of payment and the units of account would be efficient? How many relative prices are there in Duos compared with Varietas? Which economy would benefit more from adopting money?

Payments would be far easier and efficient in Duos. With fewer goods to be traded, the likelihood of reaching a double coincidence of wants would be greater. Also, with fewer goods being produced, the need for specialization is not as great as it would be in Varietas. With 80 different goods, people in Varietas are likely to be specialized. Also, with many different goods, the need for information is much greater in Varietas. Duos would have one relative price, 1 = 2(2 - 1)/2. Varietas would have thousands of relative prices: 3160 = 80(80 - 1)/2. This suggests that quoting prices and recording debts would be easier in Duos. Varietas would benefit more from adopting money, for the reasons cited above.

financial markets

Places where financial instruments are traded so firms, governments & individuals can finance their activities.

Rank the following assets from most liquid to least liquid. a) Common stock b) Houses c) Currency d) Art e) Savings accounts f) Checking account deposits.

Ranked from most liquid to least liquid: #1) Currency; #2) Checking account deposits; #3) Savings accounts; #4) Common Stock; #5) Houses; #6) Art.

deleverage

Sell assets to raise their net worth.

insurance companies

Shift risk. Accept premiums, which they invest, in return for promising compensation to policy holders under certain events.

hedge funds

Shift risk. Designed for wealthy investors who want to shed risk.

government-sponsored enterprises (GSEs)

Shift risk. Federal credit agencies that provide loans directly for farmers, home owners, students -Provide retirement income and medical care through SS and Medicare

mutual-funds

Shift risk/store value. Pool the resources of individuals & companies, invest them in portfolios.

private equity & venture capital firms

Shift risk/store value. Serve wealthy investors by acquiring controlling stakes in a few firms and manage them actively.

What is included in M2 that is not included in M1?

Small denomination time deposits, plus Savings Deposits and Money Market Deposit Accounts and Retail Money Market Mutual Fund Shares.

pension funds

Store value. Invest individual & company contributions in stocks, bonds, and real estate in order to provide payments to retirees.

brokers and investment banks

Store value. Issue stocks & bonds to corporate customers, trade them, and advise customers.

finance companies

Store value. Raise funds directly on financial markets to make specialized loans to individuals and firms (car loans, mortgages)

How has the Bureau of Labor Statistics (BLS) changed the calculation of the CPI in order to take substitution bias into account?

Substitution bias is an overstatement of inflation by the CPI that comes from the fact that the calculation of the index is based on the assumption of an unchanging market basket of goods and services. Since prices do not all rise at the same rate (and some may not rise or may even fall), people can avoid some inflation by changing their spending pattern, that is, substituting lower-priced goods in place of those whose prices have risen. In order to take this into account, the BLS now changes the weights used in the CPI every two years, and today's CPI is a much more accurate measure of inflation than the one published a decade ago.

Suppose you have a fixed-rate mortgage with a nominal interest rate of 6% and the expected annual inflation rate over the life of the mortgage is 2%. What is the expected real interest rate? A) 3% B) 4% C) 8% D) 12%

The rate of return is $30/$1025 + ($1050 - $1025)/$1025 = 5.37%.

Suppose you purchase a bond with a coupon of $30 for $1025. You sell it one year later for $1050. What rate of return did you earn? Report a percentage with two decimal places.

The rate of return is $50/$1010 + ($900 - $1010)/$1010 = -5.94%.

Suppose you purchase a bond with a coupon of $50 for $1010. You sell it one year later for $900. What rate of return did you earn? Report a percentage with two decimal places.

Many college campuses use student ID cards as a way for students to pay for on-campus expenses, such as books, photocopies, and food. For convenience, some students will maintain a balance on their ID cards. Are these balances a means of payment? Are they a store of value? Explain why or why not.

The balances on the cards serve as both a means of payment and a store of value. Using the student ID card in this way is an example of a stored-value card, similar to a gift card for a store, or a card used to pay for public transportation. While these stored value cards are not included in the money supply, they are used as a means of payment and a store of value.

The bid price for a bond is A) the minimum price that you are allowed to bid for a bond that is being auctioned by the government. B) the maximum price that you are allowed to bid for a bond that is being auctioned by the government. C) the price that you will receive from a securities dealer if you sell the bond. D) the price that you must pay a securities dealer to purchase a bond

You purchase a good by writing a check for $1,000. Considering the financial payments system this check follows, when is the check money? Explain.

The check itself is never money; rather it is the balances on deposit that represent money. Therefore the $1,000 was money when it was in your checking account and that $1,000 will be money again when the Federal Reserve credits the reserve account of the bank receiving the check (and debits your bank's reserve account).

The expected real interest rate approximately equals A) the nominal interest rate minus the tax rate. B) the nominal interest rate minus the expected rate of inflation. C) the nominal interest rate plus the expected rate of inflation. D) the yield to maturity on a coupon bond held to maturity.

Which of the following statements are true

The expected return on corporate bonds decreases as default risk increases

Suppose there is an economy that has 100 people each of whom makes a different good, and that they use a barter system for exchange. How many relative prices will there be?

The general formula for the number of prices is n(n - 1)/2; where n = the number of goods. Since we have 100 people each producing one good, we have 100 goods, so n = 100. Plugging this into our formula, we obtain: 100(99)/2 = 4950; so there will be 4,950 relative prices.

Is the obtaining of a car loan a primary or secondary market transaction?

The obtaining of a car loan is a primary market transaction since the loan represents a newly-issued instrument by the bank.

During what period was money a better store of value: 1960-1980 or 1990-2009? Explain.

The period 1990-2009. During the period 1960-1980, inflation often rose to more than 5 percent; during the period 1990-2000, it rarely did.

47. A student receives a five-year loan to pay for a $2,000 used car. The lender and the student agree to an 8% interest rate on a fixed-rate loan. Expected inflation was estimated to equal 2.5%, but unexpectedly decreases to 2%. Which of the following is true?

The student is made worse off because her real cost of borrowing is higher.

94. A student receives a five-year loan to pay for a $2,000 used car. The lender and the student agree to an 8% interest rate on a fixed-rate loan. Expected inflation was estimated to equal 2.5%, but unexpectedly decreases to 2%. Which of the following is true? A. The real interest rate decreased. B. The student is made worse off because her real cost of borrowing is higher. C. The lender is made worst off because his real return on the car loan is lower. D. Both the student and the lender benefit.

The student is made worse off because her real cost of borrowing is higher.

The total rate of return is equal to A) the coupon rate plus the rate of capital gains. B) the coupon rate plus the current yield. C) the current yield plus the rate of capital gains. D) the coupon rate multiplied by the rate of capital gains

The total rate of return is equal to the A) sum of the coupon rate and the current yield. B) yield to maturity. C) sum of the current yield and the actual rate of capital gain or loss. D) sum of the current yield and the expected rate of capital gain

The yield to maturity on a new one-year discount bond equals A) (F V- P)/P. B) (D - FV)/P. C) (FV - P)/FV. D) (P - FV)/FV.

Derivative markets

Trade instruments like futures, options, and swaps.

Debt markets

Trade loans, mortgages, bonds. Categorized by maturity: -money market --loan repaid in no more than 1 yr -Bond (capital) market--loan repaid in >1 yr

secondary financial markets

Traders buy & sell existing securities.

money markets

Typically less risky.

Of the four factors that influence asset demand, which factor will cause the demand for all assets to increase when it increase everything else held constant?

Wealth

What is the price of a coupon bond that has annual coupon payments of $75, a par value of $1000, a yield to maturity of 5%, and a maturity of two years? A) $1043.08 B) $1046.49 C) $1000.00 D) $1150.00

What is the price of a coupon bond that has annual coupon payments of $85, a par value of $1000, a yield to maturity of 10%, and a maturity of three years? A) $211.38 B) $898.84 C) $962.70 D) $1255.0

What is the total rate of return on a bond with a coupon of $38 payable in one year that was purchased for $950 and sold one year later for $931? A) 2% B) 4% C) 6% D) 19%

Consider an island where people use sand dollars (shells) as currency. For simplicity, assume that people consume only one good: fish. Currently, there are 400 sand dollars in circulation and there are 200 fish purchased each year. Based on this information, what is the price of fish? Now, suppose that a change in climate leads to new sand dollars washing ashore, leaving a total of 500 sand dollars. If there are still 200 fish purchased each year, what is the new price of fish? In order to prevent inflation, what would have to happen to the amount of fish purchased each year?

When there are 400 sand dollars and 200 fish purchased in a year, this implies that each fish costs 2 sand dollars (= 400/200). When the number of sand dollars increases to 500, the price of fish will increase to 2.5 sand dollars per fish (= 500/200). In order to prevent this inflation in fish prices, the number of fish would have to be increased to 250. That is, if there are 500 sand dollars and 250 fish, the price of fish would go back to 2 sand dollars per fish (= 500/250).

Which type of bond would you purchase if you expected higher rates of inflation during the life of the bond? A) Treasury bond B) TIPS C) corporate bond D) municipal bond

During the U.S. Civil War the Confederate government had to resort to printing currency to obtain the goods they needed. Comment on what you think happened to both prices and the value of this currency at the end of the war.

While the Confederate government was printing this currency in increasing amounts the prices in the South undoubtedly were rising. Any time currency is made increasingly available the eventual result will be higher prices. In addition, when the war ended and the Confederate states lost, the currency was basically worthless since there was no government that could guarantee its value. It was probably the case that as it was becoming clearer to people living in Confederate states that the outcome of the war was not going to be in their favor, it would not have been surprising if the people relied less on the currency and more on barter.

Why may investors buy a Treasury bill with a negative real interest rate? A) fear of rising inflation B) concern about high yields on other bonds C) fear of default by the US government D) concern about the high default risk of alternative investments

With respect to U.S. Treasury bills, A) the bid price is always greater than the asked price. B) the asked price is always greater than the bid price. C) the bid price is only greater than the asked price if investors expect interest rates to decline in the future. D) the asked price is only greater than the bid price if investors expect interest rates to decline in the future.

There are three goods produced in an economy by three individuals: Oranges --- Orchard Owner Bread --- Baker Chocolate --- Candy Maker If the orchard owner likes only bread, the baker likes only chocolate, and the candy maker likes only oranges, will any trade between these three persons take place in a barter economy? Explain.

Yes, but this is a good example of the high transaction costs that can occur in a barter economy due to the double coincidence of wants problem. Any one of the individuals will have to make two trades to get what he/she wants; for example, the baker will have to trade bread with the orchard owner to get oranges, to then be able to trade with the candy maker to obtain the chocolate that he/she really wants.

6. Once you buy a coupon bond, which of the following can change? A. Coupon rate B. Coupon payment C. Face value D. Yield to maturity

Yield to maturity

19. Which of the following statements is most accurate? A. Yield to maturity is equal to the coupon rate if the bond is held to maturity. B. Yield to maturity is the same as the coupon rate. C. Yield to maturity will exceed the coupon rate if the bond is purchased for face value. D. Yield to maturity is the same as the coupon rate if the bond is purchased for face value and held to maturity.

Yield to maturity is the same as the coupon rate if the bond is purchased for face value and held to maturity.

8. Which of the following statements is most accurate?

Yield to maturity is the same as the coupon rate if the bond is purchased for face value and held to maturity.

One of the assumptions of the Gordon Growth Model is that dividends will continue growing at ________rate

a constant

If the yield curve is flat for short maturities and then slopes downward for longer maturities, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting

a decline in short-term interest rates in the near future and an even steeper decline further out in the future

In the figure above, the decrease in the interest rate from I1 to I2 can be explained by (interest Rate/Quantity of Money)

a decline in the expected price level

In the figure above, a factor that could cause the demand for bonds to decrease (shift to the left) is (Price of Bonds/ Quantity of Bonds)

a decrease in the expected return on bonds relative to other assets

49. Interest-rate risk results from

a mismatch between an individual's investment horizon and a bond's maturity.

98. Interest-rate risk results from: A. bond prices being fixed over the life of the bond. B. a mismatch between an individual's investment horizon and a bond's maturity. C. the fact that most people hold bonds until they mature. D. inflation being uncertain.

a mismatch between an individual's investment horizon and a bond's maturity.

33. Suppose that the expected return on bonds falls relative to other assets. In the bond market this will result in

a shift to the left of the bond demand curve.

75. Suppose that the expected return on bonds falls relative to other assets. In the bond market this will result in: A. the bond supply curve shifting left. B. a movement down the bond demand curve. C. a shift to the left of the bond demand curve. D. an increase in the price of bonds.

a shift to the left of the bond demand curve.

If both members and non-members are allowed to purchase tickets to this year's celebrity golf tournament and the country club sets the ticket price at $30, then there will be

a surplus of 300 tickets

A plot of the interest rates on default-free government bonds with different terms to maturity is called

a yield curve

Keynes assumed that money has _______ rate of return

a zero

When the interest rate on a bond is _____________ the equilibrium interest rate, in the bond market there is excess _________ and the interest rate will ________

above; demand; fall

41. One characteristic that distinguishes holding period return from the coupon rate, the current yield, and the yield to maturity is: A. all of the other returns can be calculated at the time the bond is purchased, but holding period return cannot. B. holding period return will always be the highest return. C. holding period return will usually be less than the other returns. D. only the holding period return includes the capital gain/loss.

all of the other returns can be calculated at the time the bond is purchased, but holding period return cannot.

A liquid asset

an asset that can easily and quickly be sold to raise cash

In Keynes's liquidity preference framework, it there is excess demand for money, there is

an excess supply of bond

77. The return on bonds rises relative to other assets, in the bond market this will result in: A. the price of bonds falling and the yields increasing. B. a rightward shift in the bond supply curve. C. a shift to the left of the bond demand curve. D. an increase in bond prices.

an increase in bond prices.

Panel (a) shows which of the following

an increase in demand and an increase in quantity supplied

In the figure above, one factor not responsible for the decline in the demand for money is (interest Rate/Quantity of Money)

an increase in income

Refer to the above diagram, in which S1 and D1 represent the original supply and demand curves and S2 and D2 the new curves. In this market the indicated shift in demand may have been caused

an increase in income if the product is a normal good

In the figure above, the decrease in the interest rate from I1 to I2 can be explained by (interest Rate/Quantity of Money)

an increase in money growth

In the figure above, the factor responsible for the decline in the interest rate is (interest Rate/Quantity of Money)

an increase in the money supply

A stock's price will fall if there is

an increase in the required rate of return

___________ in the money supply creates excess demand for ___________ causing interest rates to ___________ everything else held constant

an increase; bonds; fall

50. The bond demand curve slopes downward because: A. at lower prices the reward for holding the bond increases. B. as bond prices fall so do yields. C. as bond prices fall bonds are less attractive. D. as bond prices rise yields increase.

at lower prices the reward for holding the bond increases.

underwriting

bank will purchase securities at a determined price over what the stock will resell for so as to make a profit.

69. An increase in the nation's wealth, all other factors constant, would cause the: A. bond supply curve to shift left. B. bond demand curve to shift left. C. bond supply curve to shift right. D. bond demand curve to shift right.

bond demand curve to shift right.

25. As general business conditions improve, we would witness the following in the bond market

bond prices decreasing.

58. As general business conditions improve, we would witness the following in the bond market: A. the bond demand curve shifting left. B. the bond supply curve shifting left. C. bond prices decreasing. D. bond prices increasing.

bond prices decreasing.

73. A decrease in expected inflation for any given nominal interest rate will cause: A. bond prices to increase and interest rates to decrease. B. bond prices to decrease and interest rates to increase. C. the bond demand curve to shift to the left. D. the bond supply curve to shift to the left.

bond prices to increase and interest rates to decrease.

70. An increase in the nation's wealth, all other factors constant, would cause: A. bond prices to fall and yields to increase. B. bond prices and yields to increase. C. bond prices to rise and yields to decrease. D. the bond supply curve to shift right.

bond prices to rise and yields to decrease.

According to the liquidity premium theory, a yield curve that is flat means that

bond purchasers expect interest rates to fall in the future

29. If the federal government were to offer larger tax breaks on the purchase of new equipment for businesses, all other factors constant, we would expect to see the

bond supply curve shift right.

66. If the federal government were to offer larger tax breaks on the purchase of new equipment for businesses, all other factors constant, we would expect to see the: A. bond demand curve shift right. B. bond supply curve shift left. C. bond supply curve shift right. D. bond demand curve shift left.

bond supply curve shift right.

24. If the U.S. government's borrowing needs increase, in the bond market this would be seen as the

bond supply curve shifting right.

56. If the U.S. government's borrowing needs increase, in the bond market this would be seen as the: A. bond demand curve shifting right. B. bond supply curve shifting right. C. bond demand curve shifting left. D. bond supply curve shifting left.

bond supply curve shifting right.

64. When expected inflation increases, for any given nominal interest rate the: A. bond demand curve shifts right. B. bond supply curve shifts right. C. price of bonds increases. D. yield on bonds will increase.

bond supply curve shifts right.

44. The holding period return has relevance because: A. most bonds are held by the original purchaser until maturity. B. most bonds are held by the original purchaser until they mature. C. bonds are frequently traded. D. current yields are not that important to bondholders.

bonds are frequently traded.

centralized exchanges

buyers and sellers meet in a central, physical location

62. When expected inflation increases, for any given nominal interest rate the: A. cost of borrowing increases and the desire to borrow decreases. B. real interest rate increases. C. bond supply curve shifts to the left. D. cost of borrowing decreases and the desire to borrow increases.

cost of borrowing decreases and the desire to borrow increases.

63. When expected inflation decreases for any given nominal interest rate, all of the following occur except the: A. real interest rate decreases. B. bond supply curve shifts to the left. C. cost of borrowing increases and the desire to borrow decreases. D. price of bonds increases.

cost of borrowing increases and the desire to borrow decreases.

28. In calculating the current yield for a bond the: A. coupon payment and purchase price is all that is needed. B. present value of the capital gain/loss is ignored. C. present value of the final payment is the only important consideration. D. present value of the coupon payments is the only important consideration.

coupon payment and purchase price is all that is needed.

4. A 10-year Treasury note as a face value of $1,000, price of $1,200, and a 7.5% coupon rate. Based on this information, we know the

coupon payment on this bond is equal to $75.

8. A 10-year Treasury note as a face value of $1,000, price of $1,200, and a 7.5% coupon rate. Based on this information, we know the: A. present value is greater than its price. B. current yield is equal to 8.33%. C. coupon payment on this bond is equal to $75. D. coupon payment on this bond is equal to $90.

coupon payment on this bond is equal to $75.

13. If a bond's purchase price equals the face value the

coupon rate equals the yield to maturity, which equals the current yield.

30. If a bond's purchase price equals the face value the: A. coupon rate equals the current yield, which is less than the yield to maturity. B. current yield equals the yield to maturity, which exceeds the coupon rate. C. coupon rate equals the yield to maturity, which equals the current yield. D. coupon rate does not equal the current yield, which does not equal the yield to maturity.

coupon rate equals the yield to maturity, which equals the current yield.

11. A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has a

current yield equal to 6.22% and a coupon rate below this.

26. A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has a: A. current yield and coupon rate equal to 6.22% and a coupon rate above this. B. current yield equal to 6.22% and a coupon rate below this. C. coupon rate equal to 6.00% and a current yield below this. D. yield to maturity and current yield equal to 6.00%.

current yield equal to 6.22% and a coupon rate below this.

25. A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has a: A. current yield equal to 6.22%. B. current yield equal to 6.00%. C. coupon rate equal to 6.22%. D. yield to maturity and current yield equal to 6.00%.

current yield equal to 6.22%.

22. When the price of a bond equals the face value the: A. yield to maturity will be above the coupon rate. B. yield to maturity will be below the coupon rate. C. current yield is equal to the coupon rate. D. yield to maturity is greater than the current yield.

current yield is equal to the coupon rate.

32. A $1000 face value bond, with one year to maturity that sells for $950 and has a $40 annual coupon has a: A. current yield and yield to maturity of 4.00%. B. yield to maturity that equals the current yield. C. coupon rate of 4.00% and a current yield that is below this. D. current yield of 4.21%.

current yield of 4.21%.

33. A $1,000 face value bond, with an annual coupon of $40, one year to maturity and a purchase price of $980 has a: A. current yield that equals 4.00%. B. coupon rate that equals 4.08%. C. current yield that equals 4.08% and a yield to maturity that equals 6.12%. D. current yield that equals 4.08% and a yield to maturity that equals 4.0%.

current yield that equals 4.08% and a yield to maturity that equals 6.12%.

According to the liquidity premium theory of the term structure, a flat yield curve indicates that short-term interest rates are expected to

decline moderately in the future

45. Suppose there is a decrease in the price at which a bondholder sells her bond. In this case, the holding period return will: A. increase, since yields and prices are inversely related. B. decrease, since this lowers the capital gain. C. be negative. D. equal the coupon rate.

decrease, since this lowers the capital gain.

If the price of gold becomes less volatile, then other things equal, the demand for stocks will ______ and the demand for antiques will _________.

decrease: decrease

A decrease in the liquidity of corporate bonds will _____ the price of corporate bonds and ________ the yield of Treasury bonds, everything else held constant

decrease; decrease

Everything else held constant, if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future, the interest rate on corporate bonds will ______ and the interest rte on Treasury securities will ________

decrease; increase

Risk premiums on corporate bonds tend to _____ during business cycle expansions and _____ during recessions, everything else held constant

decrease; increase

As default risk increases, the expected return on corporate bonds ___________, and the return becomes ______ uncertain, everything else held constant

decreases; more

If the interest rate on a bond is above the equilibrium interest rate, there is an excess ___________ for bonds and the bond price will _________

demand : rise

97. The U.S. Treasury issues bonds where the return is indexed to the consumer price index. We should expect that these bonds, relative to other U.S. Treasury bonds, will have: A. lower price and lower return due to the decreased risk. B. lower price and a lower fixed return since the demand for them should be higher. C. higher price and higher fixed return since we always seem to have some inflation. D. higher price and lower return due to the decreased risk from inflation in holding these bonds.

higher price and lower return due to the decreased risk from inflation in holding these bonds.

If a corporation begins to suffer large losses, then the default risk on the corporate bond will

increase and the bond's return will become more uncertain, meaning the expected return on the corporate bonds will fall

36. If the risk on foreign government bonds increases relative to U.S. government bonds, the price of U.S. government bonds should

increase as the demand for these bonds increases.

81. If the risk on foreign government bonds increases relative to U.S. government bonds, the price of U.S. government bonds should: A. not change since U.S. government bonds are free of default risk. B. decrease since people will bail out of all government bonds. C. increase as the demand for these bonds increases. D. not be affected because the two types of bonds are traded in different markets.

increase as the demand for these bonds increases.

79. If interest rates are expected to fall, bond prices will: A. fall as the demand for bonds decreases. B. remain constant until interest rates actually change. C. fall as people fear capital losses in the future. D. increase due to the demand for bonds increasing.

increase due to the demand for bonds increasing.

34. Suppose that the return on assets other than bonds falls. In the bond market this will result in a(n)

increase in the price of bonds.

76. Suppose that the return on assets other than bonds falls. In the bond market this will result in a(n): A. movement down the bond demand curve. B. shift to the left of the bond demand curve. C. increase in the price of bonds. D. shift to the left of the bond supply curve.

increase in the price of bonds.

In a one-period valuation model, a decrease in the required return on investments in equity causes a _____ in the _______ price of a stock

increase; current

In a one-period valuation model, a decrease in the required return on investments in equity causes a(n)_________ in the ____________ price of a stock

increase; current

If the probability of a bond default increases because corporations begin to suffer large losses, then the default risk on corporate bonds will _______ and the expected return on these bonds will _______ everything else held constant

increase; decrease

A(n) ________ in the liquidity of corporate bonds will ____ the price of corporate bonds and _________ the yield on corporate bonds, all else equal

increase; increase; decrease

If the possibility of a default increases because corporation begin to suffer losses, then the default risk on corporate bonds will _____ and the bonds' return will become _____ uncertain, meaning that the expected return on these bonds will decrease, everything else held constant

increase; more

A decrease in the riskiness of corporate bonds will ______ the price of corporate bonds and _____ the price of Treasury bonds, everything else held constant

increase; reduce

An increase in an asset's expected return relative to that of an alternative asset, holding everything else constant, _____________ the quantity demand of the asset

increases

45. Consider a zero-coupon bond with a $1,100 payment in one year. Suppose the interest rate decreases from 10% to 8%. The price of this bond

increases from $1,000 to $1,018.

92. Consider a zero-coupon bond with a $1,100 payment in one year. Suppose the interest rate decreases from 10% to 8%. The price of this bond: A. increases from $1,000 to $1,018. B. increases from $1,000 to $1,375. C. decreases from $110 to $88. D. decreases from $1,210 to $1,188.

increases from $1,000 to $1,018.

In the Gordon growth model, a decrease in the required rate of return on equity

increases the current stock price

If wealth increase, the demand for stocks _________and that of long-term bonds ___________ everything else held constatnt

increases, increases

When the Fed ___________ the money stock, the money supply curve shifts to the ___________ and the interest rate ________ everything else held constant

increases: right: falls

A monetary expansion ______ stock prices due to a decrease in the __________ and an increase in the ___________ everything else held constant

increases; required rate of return; dividend growth rate

A monetary expansion _______stock prices due to a decrease in the _______ and an increase in the _______everything else held constant.

increases; required rate of return; dividend growth rate

If there is an excess supply of money

individuals buy bonds causing interest rates to fall

96. U.S. government bonds that provide for bondholders to receive a fixed rate of interest plus the change in the consumer price index were designed to remove: A. default risk. B. liquidity risk. C. inflation risk. D. interest-rate risk.

inflation risk.

12. The relationship between the price and the interest rate for a zero coupon bond is best described as: A. volatile. B. fluctuating. C. inverse. D. non-existent.

inverse.

20. When the price of a bond is above face value the yield to maturity: A. is below the coupon rate. B. will be above the coupon rate. C. will equal the current yield. D. will equal the coupon rate.

is below the coupon rate.

9. When the price of a bond is above face value the yield to maturity

is below the coupon rate.

In the generalized dividend model, if he expected sales price is in he distant future

it does not affect the current stock price

In the generalized dividend model, if the expected sales price is in the distant future

it does not affect the current stock price

When the Treasury bond market becomes more liquid, other things equal, the demand curve for corporate bonds shifts to the _____ and the demand curve for Treasury bonds shifts to the _________

left; right

39. The larger the bond dealer's spread the: A. less liquid is the market for that bond. B. greater is the coupon rate for that bond. C. more liquid is the market for that bond. D. less risk there is for the dealer to hold that bond.

less liquid is the market for that bond.

In the Gordon Growth Model, the growth rate is assumed to be ________ the required return on equity

less than

In the Gordon Growth Model, the growth rate is assumed to be _________ the required return on equity

less than

38. The size of the bond dealer's spread is mainly a function of the: A. purchase price of the bond. B. current yield. C. liquidity of the bond market. D. face value of the bond.

liquidity of the bond market.

the expectations theory and the segmented markets theory do not explain the facts very well, but they provide the groundwork for the most widely accepted theory of the term structure of interest rates

liquidity premium theroy

Three factors explain the risk structure of interest rates

liquidity, default risk, and the income tax treatment of a security

Federal funds are

loans made by banks to each other

When yield curves are steeply upward sloping

long-term interest rates are above short-term interest rates

When a surplus exists in a market, sellers

lower price, which increases quantity demanded and decreases quantity supplied, until the surplus is eliminated.

37. The demand for U.S. government bonds is high relative to other bond issues because

market for U.S. government bonds is more liquid than most if not all other bond markets.

82. The demand for U.S. government bonds is high relative to other bond issues because: A. liquidity of other bond issues is high relative to U.S. government bonds. B. U.S. bond market has low transaction spreads due to high illiquidity. C. market for U.S. government bonds is more liquid than most if not all other bond markets. D. U.S. government bonds have higher default.

market for U.S. government bonds is more liquid than most if not all other bond markets.

In Keyne's liquidity preference framework, individuals are assumed to hold their wealth in two forms

money and bonds

more leverage means:

more bankruptcy risk

18. In considering the holding period return, the longer the term of the bond the

more important is the capital gain.

43. In considering the holding period return, the longer the term of the bond the: A. less important is the capital gain and the more important in the current yield. B. less important is the coupon rate and the more important is the current yield. C. less important is the capital gain. D. more important is the capital gain.

more important is the capital gain.

2. Bond prices and yields

move together inversely.

47. Bond prices and yields: A. move together in the same direction. B. do not change if the coupon is fixed. C. move together inversely. D. are independent of each other.

move together inversely.

futures vs. options

option-right, but not obligation, to buy or sell; option is exercised only when it is profitable -must be purchased -premium=price of option itself futures-obliged to make or take delivery -long position: must buy -short position: must sell -entered into without cost

a bond with default risk will always have a ________ risk premium and an increase in its default risk will _____ the risk premium

positive; raise

Holding all other factors constant, the quantity demanded of an asset is

positively related to wealth

The value of any investment is found by computing the

present value of all future cash flows

27. In calculating the current yield for a bond the: A. coupon payment is ignored. B. present value of the capital gain/loss is ignored. C. present value of the final payment is the only important consideration. D. present value of the coupon payments is the only important consideration.

present value of the capital gain/loss is ignored.

15. The price of a coupon bond can best be described as the: A. present value of the face value. B. future value of the coupon payments. C. future value of the coupon payments and the face value. D. present value of the face value plus the present value of the coupon payments.

present value of the face value plus the present value of the coupon payments.

7. The price of a coupon bond can best be described as the

present value of the face value plus the present value of the coupon payments.

72. An increase in expected inflation for any given nominal interest rate will cause the: A. bond supply curve to shift to the left. B. bond demand curve to shift to the right. C. price of bonds to decrease. D. price of bonds to increase.

price of bonds to decrease.

54. If the U.S. government's borrowing needs decrease, all other factors constant the: A. supply of bonds will increase. B. demand for bonds will decrease. C. price of bonds will decrease. D. price of bonds will increase.

price of bonds will increase.

13. When a loan is amortized, it means the: A. borrower is in default. B. principal and interest are paid off by the borrower over the life of the loan. C. interest is due entirely at the maturity date. D. principal in never repaid, only interest.

principal and interest are paid off by the borrower over the life of the loan.

6. When a loan is amortized, it means the

principal and interest are paid off by the borrower over the life of the loan.

1. A zero-coupon bond refers to a bond which

promises a single future payment.

1. A zero-coupon bond refers to a bond which: A. does not pay any coupon payments because the issuer is in default. B. promises a single future payment. C. pays coupons only once a year. D. pays coupons only if the bond price is above face value.

promises a single future payment.

lenders wish to --------- financial instruments, borrowers want to ----- them

purchase; issue

29. When the current yield and the coupon rate are equal, the bond is: A. purchased at a discount. B. purchased at a price that equals the face value. C. a zero-coupon bond. D. purchased at a price that exceeds its face value.

purchased at a price that equals the face value.

Increased uncertainty resulting from the global financial crisis ______ the required return on investment in equity

raised

28. When expected inflation increases, for any given nominal interest rate the

real cost of repayment for bond issuers decreases.

65. When expected inflation increases, for any given nominal interest rate the: A. real cost of repayment for bond issuers increases. B. real return for bondholders increases. C. real cost of repayment for bond issuers decreases. D. bond demand curve shifts right.

real cost of repayment for bond issuers decreases.

Stockholders are residual claimants, meaning that they

receive the remaining cash flow after all other claims are paid

In the one-period valuation model, an increase in the required return on investments in equity

reduces the current price of a stock

In the one-period valuation model, an increases in the required return on investments in equity

reduces the current price of a stock

90. Default risk is the risk associated with: A. the bond issuer not being able to make the promised payments. B. the illiquidity associated with small issues. C. the effect on bond prices caused by changes in market rates of interest. D. changes in the expected inflation rate.

the bond issuer not being able to make the promised payments.

57. If the U.S. government's borrowing needs increase, in the bond market this would be seen as: A. the bond demand curve shifting right. B. a movement up the bond supply curve. C. the bond demand curve shifting left. D. the bond supply curve shifting right.

the bond supply curve shifting right.

61. As general business conditions deteriorate, all other factors constant: A. the bond supply curve will shift left. B. there will be a movement down the existing bond supply curve. C. the bond demand curve shifts left. D. the price of bonds will decrease.

the bond supply curve will shift left.

59. As general business conditions deteriorate, all other factors constant: A. the demand for bonds will decrease. B. the supply of bonds will increase. C. bond prices will decrease. D. bond yields will increase.

the demand for bonds will decrease.

Using he Gordon growth model, a stock's price will increase if

the dividend growth rate increases

In the one-period valuation model, the current stock price increases if

the expected sales price increase

In the one-period valuation model, the current stock price increases if

the expected sales price increases

The opportunity cost of holding money is

the interest rate

According to the segmented markets theory of he term structure

the interest rate for each maturity bond is determined by supply and demand for that maturity bond

According to the liquidity premium theory of the term structure

the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium

Everything else held constant, if the tax-exempt status of municipal bonds were eliminated then

the interest rate on municipal bonds would exceed the rate on Treasury bonds

Holding everything else constant,

the more liquid is asset A relative to alternative assets, the greater will be the demand for asset A

In the generalized dividend model, a future sales price far in he future does not affect he current stock price because

the present value is almost zero

In the generalized dividend model, a future sales price far in the future does not affect the current stock price because

the present value is almost zero

16. The difference in the prices of a zero-coupon bond and a coupon bond with the same face value and maturity date is simply: A. zero, since they are the same. B. the present value of the final payment. C. the present value of the coupon payments. D. the future value of the coupon payments.

the present value of the coupon payments.

In the generalized dividend model, the current stock price is the sum of

the present value of the future dividend stream

35. The bid price for a bond quote is: A. the price at which the bond dealer is willing to sell the bond. B. the price at which the bond dealer is willing to purchase the bond. C. fixed over the life of a bond. D. determined solely by the time left to maturity.

the price at which the bond dealer is willing to purchase the bond.

80. Suppose that general business conditions improve, and at the same time, wealth increases. Based on this information, we know that: A. bond prices increase. B. yield to maturity decreases. C. the real interest rate increases. D. the quantity of bonds increases.

the quantity of bonds increases.

48. As bond prices increase: A. the quantity of bonds supplied increases. B. the quantity of bonds supplied decreases. C. the quantity of bonds demanded increases. D. yields increases.

the quantity of bonds supplied increases.

74. An increase in expected inflation for any given nominal interest rate will cause: A. the real return to bondholders to decrease. B. a movement down the bond demand curve, but no change in the bond demand curve. C. the bond demand curve to shift right. D. the price of bonds to increase.

the real return to bondholders to decrease.

The term structure of interest rates is

the relationship among interest rates on bonds with different maturities

A change in perceived risk of a stock changes

the required rate of return

Information plays and important role in asset pricing because it allows the buyer to more accurately judge

the risk

In the figure above, the price of bonds would fall from P2 to P1 if (Price of Bonds/ Quantity of Bonds)

there is a business cycle expansion

Equity markets

trade stocks

Consider a typical individual who owns the following financial instruments: A life insurance policy for $250,000; a certificate of deposit for $10,000; homeowner's and auto insurance policies; $50,000 in a mutual fund, and $150,000 in her pension fund at work. Which of these are instruments used primarily as stores of value and which are being used to transfer risk?

transfer risk: life insurance policy, homeowner's and auto insurance policies store of value: certificate of deposit, pension fund, mutual fund

A stockholder's ownership of a company's stock gives her the right to

vote and be the residual claimant of all cash flows

In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return thus

when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall

The segmented markets theory can explain

why yield curves usually tend to slope upward

23. If the purchase price of a bond exceeds the face value, the yield to maturity: A. is greater than the coupon rate because the capital gain is positive. B. will equal the current yield. C. will be less than the coupon rate because the capital gain will be negative. D. will be greater than the current yield.

will be less than the coupon rate because the capital gain will be negative.

40. The holding period return on a bond: A. can never be more than the yield to maturity. B. will equal the yield to maturity if the bond is purchased for face value and sold at a lower price. C. will be less than the yield to maturity if the bond is sold for more than face value. D. will be less than the yield to maturity if the bond is sold for less than face value.

will be less than the yield to maturity if the bond is sold for less than face value.

38. The impact of a decrease in expected inflation in the bond market will have a relatively large effect on the prices of bonds prices because the bond demand curve

will shift right but the bond supply curve shifts left.

83. The impact of a decrease in expected inflation in the bond market will have a relatively large effect on the prices of bonds prices because the bond demand curve: A. will shift right as will the bond supply curve. B. will shift right but the bond supply curve shifts left. C. and supply curves will shift left. D. will shift left as the bond supply curve shifts right.

will shift right but the bond supply curve shifts left.

52. If the quantity of bonds demanded exceeds the quantity of bonds supplied, bond prices: A. would rise and yields would fall. B. would fall and yields would increase. C. will rise and yields will remain constant. D. will rise and yields would increase.

would rise and yields would fall.

The diagram below pertains to the demand for turkey in the United States. All else equal, the premature deaths of thousands of turkeys would cause a move from

x to y

According to the expectations theory of the term structure

yield curves should be equally likely to slope downward as slope upward

26. As general business conditions improve, all other factors constant the

yield on bonds will increase.

60. As general business conditions improve, all other factors constant the: A. price of bonds will increase. B. yield on bonds will increase. C. bond demand curve shifts right. D. bond supply curve shifts left.

yield on bonds will increase.

46. If a one-year zero-coupon bond has a face value of $100, is purchased for $94, and is held to maturity the: A. holding period return will exceed the yield to maturity. B. yield to maturity will exceed the holding period return. C. yield to maturity will be 6.38%. D. holding period return is 6.0%.

yield to maturity will be 6.38%.

3. A pure discount bond is also known as a: A. consol. B. fixed payment loan. C. coupon bond. D. zero-coupon bond.

zero-coupon bond.

If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will ________ and that of Treasury bills will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

decrease; increase

If the expected return on bonds decreases, all else equal, the demand for bonds decreases, the price of bonds _______, and the interest rate ________.

decreases;increases

U.S. Treasury bills are considered the safest of all money market instruments because there is no risk of ________. A) defeat B) default C) desertion D) demarcation

default

$1 received n years from now has a value today of A) ($1 + i)/i. B) $1/(1 + i). C) ($1 + i)n/i. D) $1/(1 + i)n.

In the figure above, a factor that could cause the demand for bonds to shift to the right is...

expectations of lower interest rates in the future

The Bush tax cut reduced the top income tax bracket from 39% to 35% over a ten-year period. Supply and demand analysis predicts the impact of this change was a _____ interest rate on municipal bonds and a ______ interest rate on Treasury bonds.

higher; lower

Everything else held constant, an increase in marginal tax rates would likely have the effect of ______ the demand for municipal bonds, and ________ the demand for U.S. government bonds.

increasing, decreasing

Funds flow from lenders to borrowers

indirectly through financial intermediaries

Which of the following are not traded in a capital market? A) U.S. government agency securities. B) State and local government bonds. C) Repurchase agreements. D) Corporate bonds.

Repurchase agreements.

Which of the following instruments is not traded in a money market? A) Residential mortgages. B) U.S. Treasury Bills. C) Negotiable bank certificates of deposit. D) Commercial paper.

Residential mortgages.

Simple loans and discount bonds differ from coupon bonds and fixed-payment loans in that A) interest on simple loans and discount bonds is taxable, while interest on coupon bonds and fixed-payment loans is not. B) interest on coupon bonds and fixed-payment loans is taxable, while interest on simple loans and discount bonds is not. C) interest rates on simple loans and discount bonds are generally higher than interest rates on comparable coupon bonds and fixed-payment loans. D) interest on simple loans and discount bonds is paid in a single payment, while issuers of coupon bonds and fixed-payment loans make multiple payments of interest and principal.

Suppose First National Bank makes a one-year simple loan of $1,000 at 7% interest to Harry's Restaurant. At the end of one year Harry's Restaurant will pay First National A) $934.58. B) $1007. C) $1700. D) $1070.

Suppose Matt's New Cars issues a discount bond with a face value of $10,000 payable in one year with an interest rate of 4%. How much will they receive for the bond? A) $9,600 B) $9,615 C) $10,000 D) $10,400

Suppose Matt's New Cars issues and sells a one-year discount bond for $9,259 and repays $10,000 at maturity. The interest rate on this bond would be A) 2.6%. B) 7.41%. C) 8%. D) 10%

The coupon rate is $75/$1000 = 7.50%. The current yield is $75/$1100 = 6.82%.

Suppose a bond has a coupon of $75, face value of $1000, and current price of $1100. What is the coupon rate? What is its current yield? Report a percentage with two decimal places.

The amount of interest is $1000 - $975 or $25. the interest rate is $25/$975 which equals 2.56%

Suppose a firm receives $975 for a discount bond with a face value of $1000 to be repaid in one year. What is the amount of interest on the bond? What is the interest rate on the bond? Report a percentage with two decimal places.

A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and at maturity pays back the original purchase price is called A) commercial paper. B) a negotiable certificate of deposit. C) a municipal bond. D) federal funds.

a negotiable certificate of deposit.

U.S. Treasury bills pay no interest but are sold at a ________. That is, you will pay a lower purchase price than the amount you receive at maturity. A) premium B) collateral C) default D) discount

collateral

A short-term debt instrument issued by well-known corporations is called A) commercial paper. B) corporate bonds. C) municipal bonds. D) commercial mortgages.

commercial paper.

According to the WSJ article, in 2015 investors seeking to invest in government bonds were presented with only two choices: bonds offering super low yields from the governments of Japan, Germany and the United States; or bonds offering very high yields from the governments of Russia, Ukraine, and Greece. Such stark difference is mainly attributed to

countries in the first group having much lower default risk

Treasury STRIPS are A) tax-exempt bonds. B) simple loans. C) discount bonds. D) fixed payment loans

Suppose in 2017 you buy two year $1,000 face value 5% coupon bond for $1,000. in 2018, interest rates decrease to 2%. If you decide to sell your bond in 2018, what will be the selling price of your bond and one-year rate of return for you?

$1,029.4; 7.9%

What is the price of a coupon bond that has annual coupon payments of $8, a face value of $100, a YTM of 4% and a maturity of two years?

$107.70

Suppose you ave a fixed-rate mortgage with a nominal interest rate of 4% and the expected interest rate of 4% and the expected annual inflation rate over the life of the mortgage is 2%. What is the expected real interest rate?

Currently, a 2-year treasury bond has a yield of 1.8% while the yield on a 5 year treasury bond is 2.8%. What is the risk premium of the typical A rated 5 year corporate bond with a yield of 4.8%?

2.0%

Suppose that your marginal federal income tax rate is 40%, your marginal state tax rate is 5%, and the yield on thirty-year U.S. Treasury bonds is 5%. You would be indifferent between buying a thirty-year Treasury bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield of

3.0%

Which of the following is a long-term financial instrument? A) A negotiable certificate of deposit. B) A repurchase agreement. C) A U.S. Treasury bond. D) A U.S. Treasury bill.

A U.S. Treasury bond.

A coupon bond involves A) interest payments from the borrower to the lender periodically during the life of the loan and payment by the borrower to the lender of the face value of the loan at maturity. B) interest and principal payments from the borrower to the lender periodically during the life of the loan. C) periodic payments by the borrower to the lender that include both principal and interest. D) periodic payments by the borrower to the lender that include principal, but not interest

A debt instrument represents A) an ownership claim by the purchaser on the issuer. B) a promise by a borrower to repay principal plus interest to a lender. C) an attempt by a borrower in default to restore his or her credit. D) a nontaxable asset, owned primarily by large corporations.

A discount bond involves A) interest payments from the borrower to the lender periodically during the life of the loan. B) payment by the borrower to the lender of the face value of the loan at maturity. C) no payment of principal by the borrower to the lender. D) payment of interest by the borrower to the lender every six months during the life of the loan

A simple loan involves A) interest payments from the borrower to the lender periodically during the life of the loan. B) no payment of interest by the borrower to the lender. C) payment of interest by the borrower to the lender only at the time the loan matures. D) payment only of principal. by the borrower to the lender at maturity.

At an interest rate of 3%, what is the present value of $1000 to be received five years from now? A) $863 B) $1,667 C) $1,159 D) $850

At an interest rate of 6%, how much will need to be invested today to have $10,000 in 5 years? A) $5,000 B) $7,473 C) $10,000 D) $13,382

Which of the following instruments are traded in a money market? A) Bank commercial loans. B) Commercial paper. C) State and local government bonds. D) Residential mortgages.

Commercial paper.

Compounding refers to A) the calculation of interest rates after the compounding effect of taxes has been allowed for. B) the paying back of both interest and principal during the life of a fixed payment loan. C) the process of earning interest on both the interest and the principal of an investment. D) the increased value of an investment that arises from the payment of periodic interest.

Which of the following instruments are traded in a capital market? A) Corporate bonds. B) U.S. Treasury bills. C) Negotiable bank CDs. D) Repurchase agreements.

Corporate bonds.

If a $5,000 face-value discount bond maturing in one year is selling for $4,000, then its yield to maturity isA. 0 percent B. 5 percent C. 20 percent D. 25 percent

D. 25 percent

Deflation causes the demand for bonds to ________, the supply of bonds to ________, and bond prices to ________, everything else held constant. A) increase; increase; increase B) increase; decrease; increase C) decrease; increase; increase D) decrease; decrease; increase

D. increase, decrease, increase

Debt instruments are also called A) equities. B) credit market instruments. C) prospectuses. D) units of account

According to WSJ article, in 2016 many anticipated a tax overhaul by the Congress that would eliminate special tax status of municipal bonds. Some 600 state and local officials urged Congress to maintain the tax-free protection municipal bonds have enjoyed for decades. Which of the following the best explains such calls?

Elimination of tax free status would result in higher yields of municipal bonds, raising borrowing costs of the cities and states

Borrowers that use a coupon bond make interest payments at regular intervals and repay the face value when the bond reaches maturity. Those that borrow using a fixed-payment loan makes periodic payments that are equal and include both interest and principal.

How do payments on a fixed-payment loan differ from a coupon bond

If the annual interest rate is 8%, what would you expect to pay for a discount bond paying $10,000 in ten years? A) $4,632 B) $9,259 C) $10,000 D) $21,589

If the annual interest rate is 9%, what would you expect to pay for a discount bond paying $10,000 in two years? A) $8,417 B) $8,200 C) $10,000 D) $11,881

If you deposit $10,000 in a savings account at an annual interest rate of 6%, how much will you have in the account at the end of three years? A) $8,396 B) $11,800 C) $11,910 D) $10,600

If you deposit $500 in a savings account at an annual interest rate of 5%, how much will you have in the account at the end of five years? A) $625 B) $392 C) $638 D) $550

According to the WSJ article, after the surprise victory in the US elections by Donald Trump, the bond market saw a sharp increase in yields. Which of the following the best explains such increase in yields?

Investors decreased demand for government bonds anticipating future rise in interest rates

Issuers of coupon bonds A) make a single payment of principal when the bonds matures, but multiple payments of interest over the life of the bond. B) make a single payment of interest and principal. C) make multiple payments of principal, but a single payment of interest. D) make a single payment of principal at the time the bond is issued and multiple payments of interest over the life of the bond

The British Bankers Association average of interbank rates for dollar deposits in the London market is called the A) Libor rate. B) federal funds rate. C) prime rate. D) Treasury Bill rate.

Libor rate.

If an individual moves money from a small-denomination time deposit to a checking account

M1 increases and M2 stays the same

If an individual moves money from a savings deposit account to a money market deposit account

M1 stays the same and M2 stays the same

________ are short-term loans in which Treasury bills serve as collateral

Repurchase agreements

________ are short-term loans in which Treasury bills serve as collateral. A) Repurchase agreements B) Negotiable certificates of deposit C) Federal funds D) U.S. government agency securities

Repurchase agreements

The first investment which earned 5% a year for two years would result in $1,102.50 after two years. The second investment would result in $1,101.60. Thus, the first investment provides the higher return

Suppose you had $1000 and were deciding between two investments. One pays 5% a year for two years while the other pays 8% the first year and 2% the second year. Which investment would provide a higher return?

The present value of the first contract is $86,777 and the second one is $85,537

Suppose you have two clients who need your services for two years. One agreed to pay you $50,000 one year from now and another $50,000 in two years while the other paid $35,000 after one year, but $65,000 after two years. Assuming an interest rate of 10%, which one has a higher present value? Round off to the nearest dollar.

$540.80

Suppose you put $500 in your savings account and earn 4% interest per year. How much will you have in your account after two years? Be sure to round off to the nearest cent

The amount of funds the borrower receives from the lender with a simple loan is called the A) principal. B) equity. C) claim. D) collateral

The concept of present value A) reveals that discount bonds have higher interest rates than coupon bonds. B) reveals that fixed payment loans have higher interest rates than discount bonds. C) is useful in comparing interest rates for different financial instruments. D) limits the comparability of returns on different types of bonds.

The coupon rate is the A) annual coupon payment divided by the face value of the bond. B) annual coupon payment divided by the market value of the bond. C) difference between the face value of the bond and its par value. D) coupon paid every 6 months divided by par value

The current yield is equal to A) the coupon divided by the market price of the bond. B) the yield to maturity, if the bond is a coupon bond. C) the coupon divided by the par value of the bond. D) the market price of the bond divided by its par value

The key difficulty in answering the question: "Would you be better off financing your new home with a 15-year mortgage at 5% or by borrowing for five years at 4% and refinancing thereafter?" is that A) housing prices are very erratic. B) the tax deductibility of mortgage interest payments has changed over time. C) dollars paid in different periods do not have the same value. D) 15-year mortgages are fixed-payment loans while 5-year mortgages are simple loans

The key to present value calculations is that they A) are appropriate only for funds in the same time period. B) provide a common unit for measuring funds at different times. C) provide accurate answers only in a low-inflation environment. D) provide accurate answers only in a high-inflation environmen

The most common type of simple loan is a(an) A) automobile loan from a bank. B) mortgage loan from a bank. C) commercial loan from a bank. D) corporate bond

The total payment to a lender for a one-period simple loan is A) (P + i)n. B) P + i. C) i(1 + i). D) P(1 + i).

The yield to maturity is equal to A) the interest rate at which the present value of an asset's returns is equal to its price today. B) the face value or par value of a coupon bond. C) any payments received from an asset at the date the asset matures. D) interest rate on the asset minus any taxes owed on the interest received

Treasury STRIPS came into existence because A) investors demanded a tax-free long-term bond. B) the Treasury wished to shift from long-term borrowing to short-term borrowing. C) high inflation rates led to an increased demand for high-yield bonds. D) investors demanded long-term discount bonds

Which of the following instruments are traded in a capital market? A) U.S. Government agency securities. B) Negotiable bank CDs. C) Repurchase agreements. D) U.S. Treasury bills.

U.S. Government agency securities.

It can be merged with a financially healthier bank, voluntarily closed, or closed by federal regulators.

What are the three possible actions that could be taken when a bank becomes insolvent?

Banks charge interest on loans to compensate for inflation, to compensate for default risk, and to compensate for the opportunity cost of waiting to spend your money.

What are three reasons that banks charge interest on loans?

Which of the following is NOT true of a fixed payment loan? A) The borrower is required to make regular periodic payments to the lender. B) The payments made by the borrower include both interest and principal. C) The borrower is left with a substantial unpaid principal at the maturity of the loan. D) A home mortgage is an example of fixed payment loan.

Which of the following is a fixed payment loan? A) a home mortgage B) a U.S. Treasury bill C) a U.S. Treasury note D) a zero-coupon bond

Which of the following is fixed on a coupon bond? A) coupon rate B) current yield C) market price D) yield to maturity

Which of the following $1,000 face value securities has the highest yield to maturity?

a 5 percent coupon bond with a price of $600

If an investor is certain that market interest rates will decline in the future, which of the following will she be most likely to purchase today?

a fifty-year government bond

Collateral is ________ the lender receives if the borrower does not pay back the loan. A) a liability B) an asset C) a present D) an offering

an asset

Equity and debt instruments with maturities greater than one year are called ________ market instruments. A) capital B) money C) federal D) benchmark

capital

Federal funds are A) funds raised by the federal government in the bond market. B) loans made by the Federal Reserve System to banks. C) loans made by banks to the Federal Reserve System. D) loans made by banks to each other.

loans made by banks to each other.

Kevin purchasing concert tickets with his debit card is an example of the ________ function of money.

medium of exchange

Bonds issued by state and local governments are called ________ bonds. A) corporate B) Treasury C) municipal D) commercial

municipal

An increase in the riskiness of corporate bonds will _____ the price of corporate bonds and _______ the price of treasury bonds, everything else held constant.

reduce; increase

Patrick places his pocket change into his savings bank on his desk each evening. By his actions, Patrick indicates that he believes that money is a

store of value

Prices of money market instruments undergo the least price fluctuations because of A) the short terms to maturity for the securities. B) the heavy regulations in the industry. C) the price ceiling imposed by government regulators. D) the lack of competition in the market.

the short terms to maturity for the securities.

Everything else held constant, when the government has higher budget deficits

the supply curve for bonds shifts to the right and the interest rate rises

The spread between interest rates on low quality corporate bonds and U.S. government bonds

widened significantly during the Great Depression

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