E305 - Money and Banking HW1

There is ________ for any bond whose time to maturity matches the holding period. A) no interest-rate risk B) yield-to-maturity risk C) rate-of-return risk D) a large interest-rate risk

A

Of the four effects on interest rates from an increase in the money supply, the initial effect is, generally, the A) price level effect. B) expected inflation effect. C) income effect. D) liquidity effect.

D

If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200? A) 9 percent B) 10 percent C) 11 percent D) 12 percent

B

A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a A) coupon bond. B) discount bond. C) simple loan. D) fixed-payment loan.

A

If Microsoft sells a bond in London and it is denominated in dollars, the bond is a A) Eurobond. B) British bond. C) currency bond. D) foreign bond.

A

In Keynesʹs liquidity preference framework, individuals are assumed to hold their wealth in two forms A) money and bonds. B) money and gold. C) real assets and financial assets. D) stocks and bonds.

A

Which of the following can be described as direct finance? A) You borrow $2,500 from a friend. B) You buy shares in a mutual fund. C) You buy shares of common stock in the secondary market. D) You take out a mortgage from your local bank.

A

The components of the U.S. M1 money supply are demand deposits and other checkable deposits plus A) currency plus travelerʹs checks. B) currency plus savings deposits. C) currency plus travelerʹs checks plus money market deposits. D) currency.

A) currency plus traveler's checks

A liquid asset is: A) a share of an ocean resort. B) an asset that can easily and quickly be sold to raise cash. C) always sold in an over-the-counter market. D) difficult to resell.

B

A plot of the interest rates on default-free government bonds with different terms to maturity is called A) an interest-rate curve. B) a yield curve. C) a default-free curve. D) a risk-structure curve.

B

Another way to state the efficient markets hypothesis is: in an efficient market A) unexploited profit opportunities will never exist. B) unexploited profit opportunities will be quickly eliminated. C) all prices can be accurately predicted. D) every financial market participant must be well informed about securities.

B

If a consol has a price of $500 and an annual interest payment of $25, the interest rate is A) 2.5 percent. B) 5 percent. C) 7.5 percent. D) 10 percent.

B

If a forecast is made using all available information, then economists say that the expectation formation is A) adaptive. B) rational. C) irrational. D) reasonable.

B

If a forecast made using all available information is NOT perfectly accurate, then it is A) an adaptive expectation. B) still a rational expectation. C) not a rational expectation. D) a second-best expectation.

B

If an individual moves money from a money market deposit account to currency A) M1 stays the same and M2 stays the same. B) M1 increases and M2 stays the same. C) M1 stays the same and M2 increases. D) M1 increases and M2 decreases.

B

If you have a very low tolerance for risk, which of the following bonds would you be least likely to hold in your portfolio? A) a corporate bond with a rating of Aaa B) a corporate bond with a rating of Baa C) a U.S. Treasury bond D) a municipal bond

B

In Keynesʹs liquidity preference framework, as the expected return on bonds increases (holding everything else unchanged), the expected return on money ________, causing the demand for ________ to fall. A) rises; money B) falls; money C) falls; bonds D) rises; bonds

B

In the figure above, a factor that could cause the supply of bonds to increase (shift to the right) is A) a decrease in expected inflation. B) expectations of more profitable investment opportunities. C) a decrease in government budget deficits. D) a business cycle recession.

B

In the generalized dividend model, a future sales price far in the future does not affect the current stock price because A) the stock may never be sold. B) the present value is almost zero. C) the present value cannot be computed. D) the sales price does not affect the current price.

B

In which of the following situations would you prefer to be the lender? A) The interest rate is 25 percent and the expected inflation rate is 50 percent. B) The interest rate is 4 percent and the expected inflation rate is 1 percent. C) The interest rate is 13 percent and the expected inflation rate is 15 percent. D) The interest rate is 9 percent and the expected inflation rate is 7 percent.

B

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. A) rise; risk B) rise; liquidity C) fall; liquidity D) fall; risk

B

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today. A) interest B) present value C) deflation D) future value

B

The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________. A) positively; rises; falls B) negatively; rises; falls C) negatively; falls; falls D) positively; rises; rises

B

The theory of rational expectations, when applied to financial markets, is known as A) monetarism. B) the efficient markets hypothesis. C) the theory of impossibility. D) the theory of strict liability.

B

Which of the following functions is NOT performed by any of the twelve regional Federal Reserve Banks? A) setting interest rates payable on time deposits B) issuing new currency C) conducting economic research D) check clearing

B

________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices. A) Procedural finance B) Behavioral finance C) Methodical finance D) Strategical finance

B

____ is the relative ease and speed with which an asset can be converted into a medium of exchange A) specialization B) liquidity C) deflation D) efficiency

B) liquidity

If peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts are: A) reserves B) money C) loanable funds D) bank deposits

B) money

Dennis notices that jackets are on sale for $99. In this case, money is functioning as a: A) medium of exchange B) unit of account C) payments-system ruler D) store of value

B) unit of account

A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________, everything else held constant. A) increases; required rate of return; future sales price B) reduces; current dividend; expected rate of return C) increases; required rate of return; dividend growth rate D) reduces; future sales price; expected rate of return

C

According to the liquidity premium theory of the term structure, a downward sloping yield curve indicates that short-term interest rates are expected to A) rise in the future. B) decline moderately in the future. C) decline sharply in the future. D) remain unchanged in the future.

C

Does the efficient markets hypothesis imply that the average investor will not earn anything by purchasing stock? A) Yes, the efficient markets hypothesis implies that the best that the average investor can do is break even. B) Yes, the efficient markets hypothesis implies that stock purchases are extremely risky and that the average investor has no hope of recovering any loss. C) No, the efficient market hypothesis implies that the average investor should not expect to receive abnormally high returns on a consistent basis. D) No, the efficient market hypothesis implies that the investor will consistently earn abnormally high returns by purchasing stock.

C

Every financial market has the following characteristic. A) It determines the level of interest rates. B) It allows common stock to be traded. C) It channels funds from lenders/savers to borrowers/spenders. D) It allows loans to be made.

C

In the figure above, a factor that could cause the demand for bonds to shift to the right is A) a decrease in wealth. B) an increase in the riskiness of bonds relative to other assets. C) expectations of lower interest rates in the future. D) an increase in the expected rate of inflation.

C

The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is A) -5 percent. B) 5 percent. C) 0 percent. D) -10 percent.

C

Using the Gordon growth model, if D1 is $.50, ke is 7%, and g is 5%, then the present value of the stock is A) $46.73. B) $50. C) $25. D) $2.50.

C

If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is A) 2 percent. B) 8 percent. C) 10 percent. D) 12 percent.

D

The interest rate that equates the present value of payments received from a debt instrument with its value today is the A) current yield. B) real interest rate. C) simple interest rate. D) yield to maturity.

D

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 A) $110.00. B) $101.00. C) $100.00. D) $96.19.

D

What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent? A) $550.00 B) $476.25 C) $500.00 D) $453.51

D