ECON 2630 - Chapter 11

Sydney purchases a newly issued, two-year government bond with a principal amount of $20,000 and a coupon rate of 3 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 4 percent coupon rate?

a. $20,800 b. $19,808 c. $21,424 d. $20,600 b. $19,808 $20,000 x 1.03 = $20,600 $20,600/1.04 = $19,807.69 (round up) = $19,808

Sydney purchases a newly issued, two-year government bond with a principal amount of $20,000 and a coupon rate of 5 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 4 percent coupon rate?

a. $20,800 b. $21,840 c. $20,192 d. $21,000 c. $20,192 $20,000 x 1.05 = $21,000 $21,000/1.04 = 20,192

Carlos purchases a bond, newly issued by the Big Time Corporation, for $10,000. The bond pays $400 to its holder at the end of the first, second, and third years and pays $10,400 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 _____.

a. $400; 40 percent; four years b. $10,000; 4 percent; four years c. $10,000; $400; 4 percent d. $10,400; 4 percent; four years b. $10,000; 4 percent; four years

If the principal amount of a bond is $1,000,000, the coupon rate is 4 percent, and the inflation rate is 2 percent, then the annual coupon payment made to the holder of the bond is

a. $60,000 b. $20,000 c. $40,000 d. $1,000,000 c. $40,000 1,000,000 x .04 = 40,000

Shares in Brothers Grimm, Inc., manufacturers of gingerbread houses, are expected to pay a dividend of $5.50 in one year and to sell for $99 per share at that time. How much should you be willing to pay today per share of Grimm under the following circumstances? a. Consider a safe rate of interest of 5.1 percent and assume that investing in Grimm carries no risk.Grimm's share value would be $ b. Consider a safe rate of interest of 10.1 percent and assume that investing in Grimm carries no risk.Grimm's share value would be $ c. Consider a safe rate of interest of 5.1 percent and a risk premium of 2 percent.Grimm's share value would be $ Now assume that Grimm is not expected to pay a dividend, but the expected price is unchanged. d. Consider a safe rate of interest of 5.1 percent and assume that investing in Grimm carries no risk.Grimm's share value would be $ e. Consider a safe rate of interest of 10.1 percent a

a. 99.43 b. 94.91 c. 97.57 d. 94.20 e. 89.92 f. 92.44 _____________________________ a. $99 + $5.50 = $104.5 $104.5/1.051 = $99.429 (round up) = $99.43 b. $104.5/1.101 = $94.91 c. 5.1 + 2 = 7.1 $104.5/1.071 = $97.57 d. $99/1.051 = $94.20 e. $99/1.101 = $89.92 f. $99/1.071 = $92.44

A financial intermediary that sells shares in itself to the public and then uses the funds to buy a wide variety of financial assets is called a

a. commercial bank b. credit union c. stock exchange d. mutual fund d. mutual fund

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

a. ensuring capital gains exceed dividend payments. b. eliminating the need for commercial banks or other financial intermediaries. c. matching net capital inflows to net capital outflows. d. providing information and risk-sharing services. d. providing information and risk-sharing services.

A legal promise to repay a debt is called

a. equity b. a stock c. a bond d. a dividend c. a bond

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

a. gathering information about and evaluating potential borrowers. b. obtaining preferential tax treatment for savers. c. securing government guarantees for loans. d. evaluating the riskiness of stocks. a. gathering information about and evaluating potential borrowers.

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

a. increase b. decrease c. remain unchanged d. increase only if the coupon rate is less than 6 percent b. 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 _____.

a. increase; increase b. decrease; decrease c. increase; not change d. decrease; not change b. decrease; decrease

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

a. increase; reduces b. increase; raises c. decrease; raises d. decrease; reduces a. increase; reduces

Shares of stock are

a. legal promises to repay a debt. b. claims to partial ownership of a firm. c. regular payments made to owners of a firm. d. legal promises to make regular payments to the stockholder. b. claims to partial ownership of a firm.

Privately owned firms that accept deposits from individuals and businesses and use those deposits to make loans are called

a. mortgage banks b. brokerage firms c. commercial banks d. investment firms c. commercial banks

Financial systems in market economies improve the allocation of saving in each of the following ways except by

a. providing information about which potential use of funds will be most productive. b. helping savers to share the risk of individual investment projects. c. evaluating the potential productivity of alternative capital investments. d. allowing potential favoritism to determine which projects are funded. d. allowing potential favoritism to determine which projects are funded.

Two reasons savers keep deposits at banks are to

a. secure mortgages and to purchase stocks. b. earn a return on their savings and to facilitate making c. payments. c. lower interest rates and to increase the money supply. d. equalize loan supply and demand and to earn interest. b. earn a return on their savings and to facilitate making c. payments.

In the United States saving is allocated to its most productive use by

a. the Federal Reserve. b. the federal, state, and local governments. c. regulations and laws designed to improve productivity. d. a decentralized, market-oriented financial system d. a decentralized, market-oriented financial system