Econ 3229 exam 1

suppose you are planning to take a vacation in two years. how much would you need to save money now in order to have 2000 in two years at interest rate of 4%. a. 1647 b. 1849 c. 1918 d. 2163

b. 1849

if the real interest rate is -1.4% and the nominal interest rate is .6% expected inflation equals a. .8% b. 2% c. -2% d. -.8%

b. 2%

what is the yield to maturity of 100 face value, one year 5% coupon bond with selling price of 102 a. 2.1% b. 2.9% c. 3.1% d. 3.9%

b. 2.9%

Suppose that your marginal federal income tax rate is 40%, your marginal state tax rate is 5%, and the yield on the 30-year municipal bond issued within your state (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield of a. 0% b. 3% c. 2% d. 10%

b. 3%

if a 1000 face value coupon bond has a coupon rate of 3.75%, then the coupon payment every year is a. 13.75 b. 37.50 c. 375 d. 3.75

b. 37.50

what is the yield on a consol bond with $5 coupon and selling price of 102. a. 27.5% b. 4.9% c. 3.6% d. 2.75%

b. 4.9%

if a perpetuity has a price of $5000 and an annual interest payments of $350, the interest rate is a. 1% b. 7% c. 7.5% d. 10%

b. 7%

what is the price of 100 face value, two year, 4% coupon bond with a yield of 10% a. 78.7 b. 89.6 c. 94.6 d. 95

b. 89.6

which of the following instruments are traded in a money market a. state and local government bonds b. US treasury bills c. stocks d. corporate bonds

b. US treasury bills

a liquid asset is a. share of an ocean resort b. an asset that can easily and quickly be sold to raise cash c. difficult to resell d. always sold in an over-the-counter market

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

which of the following financial intermediaries is not a depository institution a. a commercial bank b. an investment bank c. a savings and loan association d. a credit union

b. an investment bank

equity and debt instruments with maturities greater than one year are called ____ market instruments a. benchmark b. capital c. federal d. money

b. capital

a short-term debt instrument issued by well-known corporations is called a. municipal bond b. commercial paper c. corporate bond d. commercial mortgages

b. commercial paper

if the expected return on bond decreases, all else equal, the demand for bond decreases, the price of bonds _____ and the interest rate _____ a. increases; increases b. decreases; increases c. increases; increases d. decreases; decreases

b. decreases; increases

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. increase in the price of bonds c. shift to the left of the bond supply curve d. shift to the left of the bond demand curve

b. increase in the price of bonds

which of the following would not be considered a characteristic of money a. its is a store of value b. it must have intrinsic value c. it is a unit of account d. it is a means of payment

b. it must have intrinsic value

if a 2 year and 10 year treasury bond pays 1.5% and 3.1% respectively and 10 year corporate bond pays 3.4%, what's the risk spread on 10 year corporate bond a. 0.3% b. 1.6% c. 1.9% d. 6.5%

a. 0.3%

suppose you have a fixed-rate mortgage with an nominal 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? a. 2% b. 5% c. 6% d. 8%

a. 2%

an 8000 coupon bond with 400 coupon payment every year has a coupon rate of a. 5% b. 10% c. 8% d. 40%

a. 5%

if an individual moves money from a small- denomination time deposit to a checking account a. M1 increases and M2 stays the same b. M1 stays the same and M2 stays the same c. M1 stays the same and M2 increases d. M1 increases and M2 decreases

a. M1 increases and M2 stays the same

of the following, the largest is a. M2 b. checking deposits c. money market deposit accounts d. M1

a. M2

which of the following $1000 face-value securities has the highest yield to maturity a. a 5% coupon bond with a price of $600 b. a 5% coupon bond with a price of $1000 c. a 5% coupon bond with a price of $800 d. a 5% coupon bond with a price of $1200

a. a 5% coupon bond with a price of $600

a futures contract is an example of a. a derivative instrument b. a contract that is traded but is not a financial instrument c. a high-risk security that will only have value if certain events occue d. an instrument used solely by financial institutions

a. a derivative instrument

money eliminates the need for a. a search for a double coincidence of wants b. specialization of labor c. government regulation d. financial intermediaries

a. a search for a double coincidence of wants

collateral is _____ the lender receives if the borrower does not pay back the loan a. an asset b. a liability c. an offering d. a present

a. an asset

which of the following assets is the most liquid a. checking deposits b. art c. houses d. stocks

a. checking deposits

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 government of Japan, Germany and the United States or bonds offering very high yields from the government of Russia, Ukraine and Greece. such stark difference is mainly attributed to a. countries in the first group having much lower default risk b. countries in the first group having much higher default risk c. countries in the first group having volatile currencies d. countries in the first group having much higher inflation rate

a. countries in the first group having much lower default risk

a 1000 face value bond purchased for 965000 with an annual coupon of 60 and 20 year to maturity has a a. current yield equal to 6.22% and a coupon rate below this b. current yield and coupon rate equal to 6.22% and a coupon rate above this c. coupon rate equal to 6% and a current yield below this d. a yield to maturity and current yield equal to 6%

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

if stock prices are expected to climb next year, everything else held constant, the ___ curve for bonds shifts ___ and the interest rate ____ a. demand; left; rises b. demand; right; rises c. demand; left; falls d. supply; left; rises

a. demand; left; rises

credit union is an example of a. depository institution b. insurance company c. pension fund d. securities firm

a. depository institution

a bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a a. discount bond b. simple loan c. coupon bond d. fixed-payment loan

a. discount bond

the ___ is the final amount that will be paid to the holder of a coupon bond a. face value b. present value c. discount value d. coupon value

a. face value

paper currency that has been declared legal tender but is not convertible into coins of precious metals is called _____ money a. fiat b. electronic c. funny d. commodity

a. fiat

financial instruments used primarily as stores of value include each of the following except a. futures contracts b. stocks c. home mortgages d. bonds

a. futures contracts

if interest rates are expected to fall, bond prices will a. increase due to the demand for bonds increasing b. remain constant until interest rates actually change c. fall as the demand for bonds decreases d. fall as people fear capital losses in the future

a. increase due to the demand for bonds increasing

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 US government bonds a. increasing; decreasing b. increasing; increasing c. decreasing; decreasing d. decreasing; increasing

a. increasing; decreasing

which of the following is a common characteristic of mutual funds and hedge funds a. investor's money typically is not insured in these institutions b. they both make very safe investments c. they both have relatively few restrictions on opening a new account d. they both have relatively few restrictions on withdrawing money

a. investor's money typically is not insured in these institutions

suppose investors anticipate that long-term bond yields will increase in the future, possibly due to the Fed increasing interest rates. then the current demand for long-term bonds shifts. a. left and the equilibrium interest rate rises b. left and the equilibrium interest rate falls c. right and the equilibrium interest rate rises d. right and the equilibrium interest rate falls

a. left and the equilibrium interest rate rises

which of the following is not an example of bartering a. mary paying for her new shoes with her credit card b. Mrs. Smith treating the neighbor children to pizza after they helped clean up her yard c. John cutting his neighbor's grass in return for his neighbor washing John's car d. Sue trading candles with tom for his bread

a. mary paying for her new shoes with her credit card

when the current yield and the coupon rate are equal, the bond is a. purchased at a price that equals the face value b. a zero-coupon bond c. purchased at a price that exceeds its face value d. purchased at a discount

a. purchased at a price that equals the face value

an increase in the riskiness of corporate bonds will ___ the price of corporate bonds and ____ the price of Treasury bonds, everything else held constant a. reduce; increase b. increase; reduce c. increase; increase d. reduce; reduce

a. reduce; increase

the bond rating of security reflects the a. size of the coupon rate relative to other interest rates 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 payment relative to the face value.

b. likelihood the lender/borrower will be repaid by the borrower/issuer

federal funds are a. funds raised by the federal government in the bond market b. loans made by banks to each other c. loans made by banks to the federal reserve system d. loans made by the Federal Reserve System to banks

b. loans made by banks to each other

kevin purchasing concert tickets with his debit card is an example of the ____ function of money a. unit of account b. medium of exchange c. store of value d. specialization

b. medium of exchange

NASDAW is an example of a. centralized exchange b. over the counter market (OTC) c. primary market d. money market

b. over the counter market (OTC)

investors usually obtain bond ratings from a. public information made available by bond issuers b. private bond-rating agencies c. the US government from publicly available information d. the annual tax returns of the issuer.

b. private bond-rating agencies

___ are short term loans in which treasury bills serve as collateral a. federal funds b. repurchase agreements c. US government agency securities d. negotiable certificates of deposit

b. repurchase agreements

increased volatility in the stock market will cause bond demand to shift ___ and bond yields to ____ a. right; increase b. right; decrease c. left; increase d. left; decrease

b. right; decrease

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 a. medium of exchange b. store of value c. unit of specialization d. unit of account

b. store of value

everything else held constant, when the government has higher budget deficits a. the demand curve for bonds shifts to the left and the interest rates rises b. the supply curve for bonds shifts to the right and interest rate rises c. the supply curve for bonds shifts to the right and the interest rate falls d. the demand curve for bonds shifts to the left and the interest rate falls

b. the supply curve for bonds shifts to the right and interest rate rises

the spread between interest rates on low quality corporate bonds and US government bonds a. did not change during the great depression b. widened significantly during the great depression c. narrowed moderately during the great depression d. narrowed significantly during the great depression

b. widened significantly during the great depression

suppose you buy a 10-year bond, 2.5% coupon rate treasury bond with face value of 100 for a price of 108. assume the price of this bond decreases to 102 over the next year and you decide to sell it. the one-year holding period return is equal to a. 8% b. -2.5% c. -3.2% d. -3.5%

c. -3.2%

a 30 year treasury bond has a face value of 1000 price of 1200 with a 50 coupon payment. assume the price of this bond decreases to 1100 over the next year. the one year holding period return is equal a. -3.79% b. -9.17% c. -4.17% d. -8.33%

c. -4.17%

suppose in 2019 you lend 100 to a friend who promises to repay 120 in 2020. you expect 5% inflation rate during that year. however when your friend repays debt, you discover that actual inflation was 10% that year. given this information, your expected real interest rate was ___, but actual real interest rate turned out to be ___ a. 20%; 5% b. 10%; 6% c. 15%; 10% d. 6%; 0%

c. 15%; 10%

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 on the typical A rated 5-year corporate bond with a yield of 4.8% a. 1% b. 1.8% c. 2% d. 3%

c. 2%

suppose you are in 40% income tax bracket. you would be indifferent between buying treasury bond with 6% yield and municipal bond with yield of a. 2% b. 2.4% c. 3.6% d. 6.6%

c. 3.6%

what is price of 100 face value, one year discount bond with a yield of 6% a. 92 b. 92.6 c. 94.3 d. 96.8

c. 94.3

suppose in 2017 you buy two year 1000 face value 4% coupon bond for 1000. in 2018, interest rates increase to 10%. if you decide to sell your bond in 2018, what will be the selling price and one-year rate of return for you? a. 1000; 2% b. 927.3; -5.3% c. 945.5; -1.45% d. 1020; 7%

c. 945.5; -1.45%

which of the following 1000 face value securities has the highest yield to maturity a. a 5% coupon bond selling for 1000 b. a 10% coupon bond selling for 1000 c. a 12% coupon bond selling for 1000 d. a 12% coupon bond selling for 1100

c. a 12% coupon bond selling for 1000

if an investor is certain that market interest rates will decline in the future which of the following will she be more likely to purchase today a. a 10-year government bond b. a 2 year government note c. a 50 year government bond d. a 6 month government bill

c. a 50 year government bond

financial instruments used primarily as stores of value do not include: a. asset backed securities b. US treasury bonds c. a car insurance policy d. a bank loan

c. a car insurance policy

a lender 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 real interest rate of 2% b. a nominal rate of 7.5% and real rate of 9.5% c. a nominal rate of 7.5% and a real rate of 5.5% d. a nominal rate of 7.5% and real rate of 5%

c. a nominal rate of 7.5% and a real rate of 5.5%

which of the following is not a financial instrument a. a life insurance policy b. a share of microsoft stock c. an electric bill d. a US treasury Bond

c. an electric bill

a 1000 face value bond, with an annual coupon of 40, one year maturity and a purchase price of 980 has a a. current yield of 4% b. a current yield that equals 4.08% and a yield to maturity of 4% c. current yield that equals 4.08% and a yield to maturity that equals 6.12% d. coupon rate that equals 4.08%

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

according to the 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 a. elimination of tax-free status would result in higher prices for municipal bonds hurting investors b. elimination of tax-free status would imply higher borrowing costs of the federal government c. elimination of tax-free status would result in higher yields of municipal bonds, raising borrowing costs of the cities and states d. elimination of tax-free status would result the cities and states to increase state income tax to compensate for loss revenue

c. elimination of tax-free status would result in higher yields of municipal bonds, raising borrowing costs of the cities and states

the bush tax cut reform 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 a. higher; higher b. lower; higher c. higher; lower d. lower; lower

c. higher; lower

when the price of a bond is above face value the yield to maturity a. will equal the coupon rate b. will be above the coupon rate c. is below the coupon rate d. will equal the current yield

c. is below the coupon rate

suppose john deposits 100 bill into his savings account a. both m1 and m2 increase b. m1 decreases and m2 increases c. m1 decreases and m2 stays changed d. m1 and m2 stays unchanged

c. m1 decreases and m2 stays changed

president obama increase income tax rates. everything else being the same, how should this affect municipal and treasury bond yields a. both increased b. both decreased c. municipal bond yields decreased and treasury bond yields increased d. municipal bond yields increased and treasury bond yields decreased.

c. municipal bond yields decreased and treasury bond yields increased

if the federal government increase its spending and doesn't change taxes, the bond supply shifts to the a. left and the equilibrium interest rate rises b. left and the equilibrium interest rate falls c. right and the equilibrium interest rate rises d. right and the equilibrium interest rate falls

c. right and the equilibrium interest rate rises

the economist Irving Fisher, after whom the fisher effect is named, explained why interest rates ______ as the expected inflation ____, everything else held constant a. fall; stabilizes b. fall; increases c. rise; increases d. rise; stabilized

c. rise; increases

if the maturity of a debt instrument is less than one year, the debt is called a. intermediate term b. long term c. short-term d. prima-term

c. short-term

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

c. to shift risk among investors

when would you be indifferent between receiving 100 now and 100 next year a. when interest rate =1% b. when interest rate = 100% c. when interest rate = 0% d. none of the above

c. when interest rate = 0%

what is the risk spread on 2-year bond issued by Apple with a yield of 3.1% if 1-year and a 2-year treasury bonds pay 3.5% and 2.8% respectively a. -0.4% b. 0.7% c. 0.4% d. 0.3%

d. 0.3%

suppose in 2017 you buy two year $1000 face-value 5% coupon bond for $1000. 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? a. 1020; 7% b. 1000; 2% c. 971; -2.1% d. 1029; 7.9%

d. 1029; 7.9%

suppose in 2019 you buy 6% coupon rate, 100 face value bond for 100 that has 2 years left till maturity. if in 2020 interest rates decrease to 1%, what will be the price of your bond and what will be your rate of return if you decide to sell it then a. 101 and 7.2% b. 98.09 and 1.09% c. 106 and 12.1% d. 104.9 and 10.9%

d. 104.9 and 10.9%

what is the price of a coupon bond that has annual coupon payments of 75, a face value of 1000, interest rate of 5% and a maturity of 2 years a. 1150 b. 1000 c. 1043.08 d. 1046.49

d. 1046.49

what is the price of a coupon bond that has annual coupon payments of $8, a face value of $100, a yield to maturity of 4% and a maturity of 2 years a. 98.84 b. 96.70 c. 102.92 d. 107.70

d. 107.70

if a $5000 face value discount bond maturing in one year is selling for $4000 then it's yield to maturity is a. 0% b. 5% c. 20% d. 25%

d. 25%

a discount bond selling for 15000 with a face value of 20,000 in one year has a yield to maturity of a. 3% b. 20% c. 25% d. 33.3%

d. 33.3%

what is the yield to maturity of 100 face value one year discount bond selling for 94 a. 2% b. 2.04% c. 5% d. 6.4%

d. 6.4%

if a consol is offering an annual coupon of 50 and the annual interest rate is 6%, the price of the consol is a. 813 b. 8333.33 c. 47.17 d. 833.33

d. 833.33

The money aggregate M2 includes a. savings deposits but not money market deposit accounts b. large denomination time deposits c. stock and bond mutual fund shares d. M1

d. M1

if an individual moves money from a savings deposit account to a money market deposit account a. M1 increases and M2 decreases b. M1 decreases and M2 stays the same c. M1 stays the same and M2 increases d. M1 and M2 stays the same

d. M1 and M2 stays the same

consider the bonds below. which is subject to the greatest interest-rate risk a. a 30 year treasury bond b. a 20 year corporate bond c. a treasury bill d. a consol

d. a consol

a decrease in expected inflation for any given interest rate will cause a. bond prices to decrease and interest rates to increase b. the bond supply curve to shift to the left c. the bond demand curve to shift to the left d. bond prices to increase and interest rates to decrease

d. bond prices to increase and interest rates to decrease

how do the financial crises affect corporate bond and treasury bond markets a. corporate bond and treasury bonds yields both increase b. corporate bond and treasury bond yields both decrease c. corporate bond prices increase and treasury bond prices decrease d. corporate bond prices decrease and treasury bond prices increase

d. corporate bond prices decrease and treasury bond prices increase

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; decrease b. decrease; decrease c. increase; increase d. decrease; increase

d. decrease; increase

a factor that could cause the demand for bonds to shift to the right is a. an increase in the riskiness of bonds relative to other assets b. an increase in the expected rate of inflation c. a decrease in wealth d. expectation of lower interest rates in the future

d. expectation of lower interest rates in the future

a factor that could cause the demand for both bonds to shift to the right is a. an increase in the riskiness of bonds relative to other assets b. an increase in the expected rate of inflation c. a decrease in wealth d. expectations of lower interest rates in the future

d. expectations of lower interest rates in the future

US currency is a. the only store of value b. large denomination c. stock and bond mutual fund shares d. fiat money

d. fiat money

a derivative instrument a. is a low-risk financial instrument used by highly risk averse savers b. should be purchased prior to purchasing the underlying security c. comes into existence after the underlying instrument is in default d. gets its value and payoff from the performance of the underlying instrument

d. gets its value and payoff from the performance of the underlying instrument

deflation causes the demand for bonds to ____, the supply of bonds to _______, and bond prices to ______ everything else held constant. a. decrease; increase; increase b. decrease; decrease; increase c. increase; increase; increase d. increase; decrease; increase

d. increase; decrease; increase

funds flow from lenders to borrowers a. directly through financial intermediaries b. primarily through government agencies c. indirectly through financial markets d. indirectly through financial intermediaries

d. indirectly through financial intermediaries

if prices in the bond market become more volatile, everything else held constant, the demand for bonds shifts ____ and interest rates ___ a. right; rise b. right; fall c. left; fall d. left; rise

d. left; rise

which of the following is a part of the indirect finance a. stock market b. bond market c. foreign exchange market d. mutual fund

d. mutual fund

GEICO is an example of a. depository institution b. investment bank c. securities firm d. non-depository institution

d. non-depository institution

an investment bank purchases securities from a corporation at a predetermined price and then resells them in the market. this process is called a. underhanded b. undertaking c. understanding d. underwriting

d. underwriting

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 left as the bond supply curve shifts right b. will shift right as will the bond supply curve c. supply curve will shift left d. will shift right but the bond supply curve shift left

d. will shift right but the bond supply curve shift left