BUS-G 345 Midterm

Using the one-period valuation model, assuming a year-end dividend of $0.24, an expected sales price of $120, and a required rate of return of 20%, the current price of the stock would be:

$100.20

If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is:

$25,000

If during the past decade the average rate of monetary growth has been 2% and the average inflation rate has been 2%, everything else held constant, when the Federal Reserve announces that the new rate of monetary growth will be 4%, the adaptive expectation forecast of the inflation rate is:

2%

Assuming the same coupon rate and maturity length, when the interest rate on a Treasury Inflation Protected Security is 3 percent, and the yield on a non indexed Treasury bond is 8 percent, the expected rate of inflation is:

5 percent

In order to reduce the ______ problem in loan markets, bankers collect information from prospective borrowers to screen out the bad credit risks from the good ones

Adverse selection

The problem created by asymmetric information before the transaction occurs is called:

Adverse selection

Which is a disadvantage of securitization?

All of the risk is passed onto the purchaser of the security. If the mortgages go into default, the bank is no longer liable for the mortgages

When the price of a bond is ______ the equilibrium price, there is an excess demand for bonds and interest rate will ______

Below; fall

During President Reagan's administration, his supporters argued that higher real interest rates were the result of policies increasing the profitability of investment. Reagan's critics argued that the high interest rates were the result of high budget deficits. In theory:

Both increasing profitability and higher budget deficits increase the supply of bonds. Both arguments are valid

A bank with insufficient reserves can increase its reserves by:

Calling in loans

When a lender refuses to make a loan, although borrowers are willing to pay the stated interest rate or even a higher rate, the bank is said to engage in:

Credit rationing

If expected deflation is rising, the interest rate ______ and the quality of loans provided ______

Decrease; cannot be determined

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 rate on Treasury securities will ______

Decrease; increase

If fluctuations in interest rates become smaller then, other things equal, the demand for stocks ______ and the demand for long-term bonds ______

Decreases; increases

When the expected inflation rate increases, the real cost of borrowing ______ and bond supply ______, everything else held constant

Decreases; increases

If people expect real estate prices to increase significantly, the ______ curve for bonds will shift to the ______

Demand; left

Which of the following are generally true of all bonds?

Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise

The reduction of brokerage commissions for trading common stocks that occurred in 1975 caused the demand for bonds to ______ and the bond demand curve to shift to the ______

Fall; left

If the price level doubles, the value of money:

Falls by 50 percent

All else equal, the ______ the coupon rate on a bond, the ______ the bond's duration

Higher; shorter

Off-balance sheet activities involving guarantees of securities and back-up credit lines:

Increase the risk a bank faces

An increase in the riskiness of corporate bonds will ______ the yield on corporate bonds and ______ the yield on Treasury securities, everything else held constant

Increase; reduce

Federal funds are:

Loans made by banks to each other

If an individual redeems a U.S. savings bond for currency:

M1 increases and M2 increases

The primary assets of money market mutual funds are:

Money market instruments

The problem created by asymmetric information after the transaction occurs is called:

Moral hazard

If the expected path of 1-year interest rates over the next five years is 2 percent, 4 percent, 1 percent, 4 percent, and 3 percent, the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of:

One year

Countries that experience very high rates of inflation may also have:

Rapidly growing money supplies

Bank capital has both benefits and costs for the bank owners. Higher bank capital ________ the likelihood of bankruptcy, but higher bank capital ________ the return on equity for a given return on assets

Reduces; reduces

Which of the following are bank assets?

The building owned by the bank

For a given return on assets, the lower the bank capital:

The higher is the return for the owners of the bank

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

Adverse selection is a problem associated with equity and debt contracts arising from:

The lender's relative lack of information about the borrower's potential returns and risks of his investment activities

The originate-to-distribute model:

Transfers default risks from the bank to the market