Econ 3229 Exam 1
If a $1000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon payment every year is A) $37.50. B) $3.75. C) $375.00. D) $13.75
A) $37.50
What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent? A) $453.51 B) $500.00 C) $476.25 D) $550.00
A) $453.51
Suppose in 2014 you buy 4% coupon rate, $100 face value bond for $100 that has 2 years left till maturity. If in 2015 interest rates increase to 6%, what will be the price of your bond and what will be your rate of return if you decide to sell it? A) $98.1 and 2.1% B) $99.4 and 3.4% C) $101.6 and 7.6% D) $102 and 8%
A) $98.1 and 2.1%
If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding? A) a bond with one year to maturity B) a bond with five years to maturity C) a bond with ten years to maturity D) a bond with twenty years to maturity
A) a bond with one year to maturity
Which of the following long-term bonds has the highest interest rate? A) corporate Baa bonds B) U.S. Treasury bonds C) corporate Aaa bonds D) municipal bonds
A) corporate Baa bonds
Holding the expected return on bonds constant, an increase in the expected return on common stocks would ________ the demand for bonds, shifting the demand curve to the ________. A) decrease; left B) decrease; right C) increase; left D) increase; right
A) decrease; left
In the bond market, the bond demanders are the ________ and the bond suppliers are the ________. A) lenders; borrowers B) lenders; advancers C) borrowers; lenders D) borrowers; advancers
A) lenders; borrowers
The yield to maturity for a discount bond is ________ related to the current bond price. A) negatively B) positively C) not D) directly
A) negatively
A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium. A) positive; raise B) positive; lower C) negative; raise D) negative; lower
A) positive; raise
The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates ________ as the expected rate of inflation ________, everything else held constant. A) rise; increases B) rise; stabilizes C) fall; stabilizes D) fall; increases
A) rise; increases
Currently, a three-month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%. What is the risk premium of the typical A rated ten-year corporate bond with a yield of 5.5%? A) 0.5% B) 0.8% C) 5.5% D) 1.17%
B) 0.8%
In which of the following situations would you prefer to be the lender? A) The interest rate is 9 percent and the expected inflation rate is 7 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 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.
________ are the time and resources spent trying to exchange goods and services. A) Bargaining costs B) Transaction costs C) Contracting costs D) Barter costs
B) Transaction Costs
Which of the following can be described as involving direct finance? A) A corporation issues new shares of stock. B) People buy shares in a mutual fund. C) A pension fund manager buys a short-term corporate security in the secondary market. D) An insurance company buys shares of common stock in the over-the-counter markets.
A) A corporation issues new shares of stock.
When prices increase, interest rates fall When prices decrease, interest rates rise
:)
What is the price of $1000 face-value one year zero coupon discount bond that offers 1.5% yield? A) $992.3 B) $1001.5 C) $998.5 D) $985.2
D) $985.2
What yield does one year 4% coupon rate $1000 face value bond offer if it currently sells for $1050? A) 4% B) 2% C) 1% D) -1%
D) -1%
Of the following assets, the least liquid is A) stocks. B) traveler's checks. C) checking deposits. D) a house.
D) A house
According to the WSJ, which of the following are the ways that Tesla has been raising money since 2010? A) Issuing stock B) Directly borrowing and taking on loans C) Selling high-yield (junk bonds) D) All of the above
D) All of the above
An example of economies of scale in the provision of financial services is A) investing in a diversified collection of assets. B) providing depositors with a variety of savings certificates. C) hiring more support staff so that customers don't have to wait so long for assistance. D) spreading the cost of writing a standardized contract over many borrowers.
D) Spreading the cost of writing a standardized contract over many borrowers.
What is a future value of $50 five years from now at 2%? A) $48.5 B) $51.3 C) $55.2 D) $58.4
C) $55.2
According to the WSJ article, due to increased inflation concerns, investors are piling money into TIPS. The article also mentions other assets that become popular among investors in times of high inflation. A) Junk bonds B) Treasury bills C) Industrial and precious metals D) Bonds issued in the emerging economies such as India and Russia
C) Industrial and precious metals
Which of the following bonds are considered to be default risk-free? A) Municipal bonds B) Investment grade bonds C) U.S. Treasury bonds D) Junk bonds
C) U.S. Treasury bonds
The collapse of the subprime mortgage market increased the spread between Baa and default free U.S. Treasury bonds. This is due to A) a reduction in risk. B) a reduction in maturity. C) a flight to quality. D) a flight to liquidity.
C) a flight to quality.
Which of the following benefits directly from any increase in the corporation's profitability? A) a bond holder B) a commercial paper holder C) a shareholder D) a T-bill holder
C) a shareholder
Equity instruments are traded in the ________ market. A) money B) bond C) capital D) commodities
C) capital
According to the WSJ article, how did sharp increase in bond yields, following Donald Trump's victory, affect bond holders? A) Bond funds based on Treasuries showed a negative return. B) High yields made investors happy, particularly the ones that held long-term bonds. C) High bond yields were offset by lower bond prices, thus leaving investors indifferent. D) There has been a massive sell-off of Treasuries and investors channeling funds to emerging market bonds.
A) Bond funds based on Treasuries showed a negative return.
In a(n) ________ market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices. A) exchange B) over-the-counter C) common D) barter
B) over-the-counter
Which of the following instruments are traded in a money market? A) bank commercial loans B) commercial paper C) state and local government bonds D) residential mortgages
B) commercial paper
Which of the following are NOT contractual savings institutions? A) life insurance companies B) credit unions C) pension funds D) state and local government retirement funds
B) credit unions
Bonds with relatively low risk of default are called ________ securities and have a rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and are called ________. A) investment grade; lower grade B) investment grade; junk bonds C) high quality; lower grade D) high quality; junk bonds
B) investment grade; junk bonds
Everything else held constant, when stock prices become ________volatile, the demand curve for bonds shifts to the ________ and the interest rate ________. A) more; right; rises B) more; right; falls C) less; left; falls D) less; left; does not change
B) more; right; falls
According to the WSJ article, after the surprise Donald Trump election victory, bond markets experienced a sudden increase in yields. Which of the following best explains such trend? A) There has been a sustained increase in demand for government bonds following the Brexit. B) Trump's promise of increased government spending on infrastructure spending led investors to believe that government would increase its borrowing. C) Increased stock market volatility following the election day. D) Weakened position of dollar versus other major currencies such as euro and Japanese yen.
B) Trump's promise of increased government spending on infrastructure spending led investors to believe that government would increase its borrowing.
The M1 measure of money includes A) small denomination time deposits. B) checking account deposits. C) money market deposit accounts. D) money market mutual fund shares.
B) checking account deposits.
According to the WSJ article, what are the two camps of sovereign (government) bonds found on the market today? A) Bonds from industrialized nations with super low-interest rates and bonds from developing countries with very high interest rates B) A-grade and B-grade bonds C) Junk bonds with low-interest rates and investment grade bonds with high interest rates D) Bonds denominated in dollars and bonds denominated in euros.
A) Bonds from industrialized nations with super low interest rates and bonds from developing countries with very high interest rates
According to the WSJ article, why are investors allocating more and more money to TIPS? A) Due to increased inflation expectations B) Due to increased federal budget deficits C) Due to pre-election instability known as "White House spiral" D) Due to dollar gaining ground against euro lately.
A) Due to increased inflation expectations
If an individual moves money from a small-denomination time deposit to a checking deposit account A) M1 increases and M2 stays the same. B) M1 stays the same and M2 increases. C) M1 stays the same and M2 stays the same. D) M1 increases and M2 decreases.
A) M1 increases and M2 stays the same.
Financial markets have the basic function of A) getting people with funds to lend together with people who want to borrow funds. B) assuring that the swings in the business cycle are less pronounced. C) assuring that governments need never resort to printing money. D) providing a risk-free repository of spending power.
A) getting people with funds to lend together with people who want to borrow funds.
The yield to maturity for a discount bond is ________ related to the current bond price. A) negatively B) positively C) not D) directly
A) negatively
An important source of short-term funds for commercial banks are ________ which can be resold on the secondary market. A) negotiable CDs B) commercial paper C) mortgage-backed securities D) municipal bonds
A) negotiable CDs
Currency includes A) paper money and coins. B) paper money, coins, and checks. C) paper money and checks. D) paper money, coins, checks, and savings deposits.
A) paper money and coins
According to the WSJ article, Venezuela is experiencing very high inflation rates which was created by the government simply printing too much money. The flood of money has led the population of Venezuela pricing the goods, such as real estate, in US dollars. Based on this information, which o the functions did Venezuelan bolivar lose? A) Medium of exchange B)Unit of Account C)Store of Value D)Bartering device
B) Unit of Account
According to the WSJ article, Venezuela is experiencing very high inflation rates which was created by the government simply printing too much money. This flood of money has led the population of Venezuela pricing the goods, such as real estate, in US dollars. Based on this information, which of the functions did Venezuelan bolivar lose? A) Medium of exchange B) Unit of account C) Store of value D) Bartering device
B) Unit of account (TAs note: medium of exchange is not correct because the article pointed out that the transactions still happened in bolivars)
Economists also encountered an interesting phenomena where used cars had higher prices and were more valuable in Venezuela than new cars. Which of the following explains it? A) used cars are taxed at higher rate thus making them more expensive B) Used cars started to function as a store of value instead of bolivars, therefore people were valuing them more than just cars C) Used car prices were always tightly regulated in government D) This is due to clunker prada effect
B) Used cars started to function as a store of value instead of bolivars, therefore people were valuing them more than just cars
According to the WSJ article, Venezuela is experiencing very high inflation rates which was created by the government simply printing too much money. Economists also encountered an interesting phenomena where used cars had higher prices and were more valuable in Venezuela than new cars. Which of the following explains it? A) Used cars are taxed at higher rate thus making them more expensive. B) Used cars started to function as a store of value instead of bolivars, therefore people were valuing them more than just cars. C) Used cars prices were always tightly regulated by the Venezuelan government. D) This is due to "clunker Prada effect", where people tend to value inferior goods more.
B) Used cars started to function as a store of value instead of bolivars, therefore people were valuing them more than just cars.
A discount bond A) pays the bondholder a fixed amount every period and the face value at maturity. B) pays the bondholder the face value at maturity. C) pays all interest and the face value at maturity. D) pays the face value at maturity plus any capital gain.
B) pays the bondholder the face value at maturity.
The ________ interest rate more accurately reflects the true cost of borrowing. A) nominal B) real C) discount D) market
B) real
A financial market in which previously issued securities can be resold is called a ________ market. A) primary B) secondary C) tertiary D) used securities
B) secondary
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) store of value. D) payments-system ruler.
B) unit of account. - value (how much is it worth)
A consol paying $20 annually when the interest rate is 5 percent has a price of A) $100 B) $200 C) $400 D) $800
C) $400
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) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond.
C) coupon bond.
Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds to the ________. A) right; right B) right; left C) left; right D) left; left
C) left; right
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) increase; increase B) reduce; reduce C) reduce; increase D) increase; reduce
C) reduce; increase
During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________, everything else held constant. A) falls; right B) falls; left C) rises; right D) rises; left
C) rises; right
What is the price of $1000 face-value one year zero coupon discount bond that offers 1.5% yield? A) $992.3 B) $1001.5 C) $998.5 D) $985.2
D) $985.2
What yield does one year 4% coupon rate $1000 face value bond offer if it currently sells for $1050? A) 4% B) 2% C) 1% D) -1%
D) -1%
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) 12 percent.
What is the return on a 5 percent coupon $1000 face value bond that initially sells for $1,000 and sells for $1,200 next year? A) 5 percent B) 10 percent C) -5 percent D) 25 percent
D) 25 percent
A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of A) 3 percent. B) 20 percent. C) 25 percent. D) 33.3 percent.
D) 33.3 percent.
A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of A) 3 percent. B) 20 percent. C) 25 percent. D) 33.3 percent.
D) 33.3 percent.
Which of the following is true about ten-year $1,000 face-value 6% coupon bond that's selling for $1,050? A) It's yield to maturity and coupon rate equal to 5.7%. B) Its current yield and coupon rate equal to 6%. C) Its yield to maturity is 8%. D) Its current yield is 5.7%
D) Its current yield is 5.7%
According to the WSJ article, Tesla is offering traditional bonds at 5.25% yield which according to the analysts, is higher than what Ford pays on its bonds. Which of the following explains the high yield Tesla pays on its bonds? A) Differences in taxes or tax credit. B) Lack of other high-yield offerings on the market. C) Tesla's stock has been falling over the past year. D) Lack of profits means that investors are demanding a high yield from Tesla.
D) Lack of profits means that investors are demanding a high yield from Tesla.
________ is used to make purchases while ________ is the total collection of assets that serve to store value. A) Money; income B) Wealth; income C) Income; money D) Money; wealth
D) Money; wealth
According to the WSJ article, why is it puzzling that government bonds from industrialized nations offer such low interest rates? A) Interest rates in general are quite high presently B) Stock market volatility should have pushed interest rates up C) Low oil prices generally translate into high interest rates D) Promised interest rates on those government bonds are lower than expected inflation, implying that investors would eventually lose money by buying these bonds.
D) Promised interest rates on those government bonds are lower than expected inflation, implying that investors would eventually lose money by buying these bonds.
Other than savings deposits, small CDs and money market mutual fund shares (MMMFs), broader money supply M2 also includes money market deposit accounts (MMDAs). Which of the following about MMDAs is correct? A) They are just as liquid as checking or savings account deposits B) They pay lower interest rate than savings deposits C) They focus exclusively on stocks and long-term bonds D) They are very similar to MMMFs, except the fact that MMDAs are federally insured
D) They are very similar to MMMFs, except the fact that MMDAs are federally insured
According to the WSJ article, the Congress is considering removing tax-exempt status from municipal bonds. Which of the following is likely to happen on the bonds market? A) Yields of Treasuries and municipal bonds both increase B) Yields of Treasuries and municipal bonds both decrease C) Treasury yields increase and municipal bond yields decrease D) Treasury yields decrease and municipal bond yields increase
D) Treasury yields decrease and municipal bond yields increase
6. Which of the following $1,000 face-value securities has the lowest yield to maturity? A) a 5 percent coupon bond selling for $1,000 B) a 5 percent coupon bond selling for $900 C) a 12 percent coupon bond selling for $900 D) a 5 percent coupon bond selling for $1,200
D) a 5 percent coupon bond selling for $1,200
Factors that decrease the demand for bonds include A) an increase in the volatility of stock prices. B) a decrease in the expected returns on stocks. C) a decrease in the inflation rate. D) a decrease in the riskiness of stocks.
D) a decrease in the riskiness of stocks.
When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises
D) decreases; increases; rises
The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is A) interest rate risk. B) inflation risk. C) liquidity risk. D) default risk.
D) default risk.
The riskiness of an asset's returns due to changes in interest rates is A) exchange-rate risk. B) price risk. C) asset risk. D) interest-rate risk.
D) interest-rate risk.
Federal funds are A) funds raised by the federal government in the bond market. B) loans made by the Federal Reserve System to banks. C) loans made by banks to the Federal Reserve System. D) loans made by banks to each other.
D) loans made by banks to each other.
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; rises B) negatively; falls; falls C) positively; rises; falls D) negatively; rises; falls
D) negatively; rises; falls
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; rises B) negatively; falls; falls C) positively; rises; falls D) negatively; rises; falls
D) negatively; rises; falls
An example of economies of scale in the provision of financial services is A) investing in a diversified collection of assets. B) providing depositors with a variety of savings certificates. C) hiring more support staff so that customers don't have to wait so long for assistance. D) spreading the cost of writing a standardized contract over many borrowers.
D) spreading the cost of writing a standardized contract over many borrowers.
Everything else held constant, when the government has higher budget deficits A) the demand curve for bonds shifts to the left and the interest rate rises. B) the demand curve for bonds shifts to the left and the interest rate falls. C) the supply curve for bonds shifts to the right and the interest rate falls. D) the supply curve for bonds shifts to the right and the interest rate rises.
D) the supply curve for bonds shifts to the right and the interest rate rises.
