Chapter 11 Practice: Macroeconomics

Sydney purchases a newly issued, two-year government bond with a principal amount of $10,000 and a coupon rate of 6 percent paid annually. One year before the bonds matures (and after receiving the coupon payment for the first year), Sydney sells the bond in the bond market. What price (rounded to the nearest dollar) will Sydney receive for his bond if newly issued one-year government bonds are paying a 5 percent coupon rate?

$10,095.

Carlos purchases a bond, newly issued by the Big Time Corporation, for $20,000. The bond pays $1,000 to its holder at the end of the first, second, and third years and pays $21,000 upon its maturity at the end of four years. The principal amount of this bond is _____, the coupon rate is _____, and the term of this bond is _____.

$20,000; 5 percent; four years.

If the principal amount of a bond is $5,000,000, the coupon rate is 7 percent, and the inflation rate is 4 percent, then the annual coupon payment made to the holder of the bond is:

$350,000.

You expect a share of EconNews.Com to sell for $65 a year from now and to pay a $2 dividend per share in one year. What should you pay (rounded to the nearest dollar) for the stock today if you require an 8 percent return?

$62.

A legal promise to repay a debt is called:

A bond.

Each of the following is an example of a financial intermediary except a:

Bond market.

When the coupon rate on newly issued bonds increases from 5 percent to 6 percent, the prices of existing bonds:

Decrease.

You own shares in a start-up Internet company. If large swings in the stock market increase financial investors' concerns about market risk, then the price of your shares will _____, holding other factors constant.

Decrease.

You own shares in a start-up Internet company. If the company announces that it will not pay dividends next year as it has in the past, then the price of your shares will _____, holding other factors constant.

Decrease.

Your financial investments consist of U.S. government bonds maturing in 20 years and shares in a start-up Internet company. If interest rates on newly issued government bonds increase, then the price of your bonds will _____ and the price of the shares you own will _____.

Decrease; decrease.

A regular payment received by stockholders for each share they own is called a:

Dividend.

Firms that extend credit to borrowers using funds raised from savers are called:

Financial intermediaries.

Banks help savers find productive uses for their funds because banks are specialized in:

Gathering information about and evaluating potential borrowers.

You originally required a risk premium of 6 percent in addition to the rate of return on safe assets before you would purchase shares of Techno Company stock. If you and other investors reduce the risk premium you require to 4 percent, the price of Techno Company stock will:

Increase.

An increase in interest rates results in a(n) ______ in the required rate of return to hold stocks and ______ current stock prices.

Increase; reduces.

The coupon rate is the:

Interest rate promised when a bond is issued.

The current price of a stock increases when:

Interest rates decrease.

The coupon rate on newly issued bonds is usually ______ for bonds with favorable tax treatment, such as municipal bonds, and ______ for bonds that are very risky, such as junk bonds.

Lower; higher.

The principal amount of a bond is the amount:

Originally lent.

Decentralized market-based financial systems improve the allocation of saving by:

Providing information and risk-sharing services.