Econ 3229 Final

Bank borrowing from the Fed is referred to as..

discount loans

According to the liquidity premium theory, a steep upward sloping yield curve may be an indicator of...

expectations of a significant increase in inflation

The present value of an expected future payment ________ as the interest rate increases.

falls

When prices rise, the purchasing power of money...

falls

As wealth increases in the economy, savers are willing to...

fend more at any given interest rate

Banks deal with problems of adverse selection by...

gathering information about the default risk of borrowers

Underwriting involves...

guaranteeing a price for new capital to the issuing firm.

Money market mutual funds...

hold portfolios of short-term assets

A "primary market" is a market...

in which newly issued claims are sold to buyers by borrowers

Information costs...

include the costs that savers incur to determine the credit worthiness of borrowers.

Research has shown that nations with highly independent central banks tend to have low...

inflation

According to the liquidity premium theory...

investors prefer shorter to longer maturities.

The Glass-Steagall Act was designed to...

legally separate investment banking from commercial banking.

Increasing transactions costs of selling an asset make the asset...

less liquid

Lenders prefer to lend to firms with high net worth because...

the owners of such firms have more to lose if the firm defaults on a loan.

Default risk is...

the probability that a borrower will not pay in full the promised coupon or principal.

Economies of scale are...

the reduction in costs per unit that accompanies an increase in volume.

The risk structure of interest rates refers to...

the relationship among the interest rates on bonds with the same maturity.

The Federal Reserve issues a report indicating that future inflation will be higher than had previously seemed likely. As a result...

the supply curve for bonds shifts to the right.

During a period of economic expansion, when expected profitability is high...

the supply curve of bonds shifts to the right

On a bank's balance sheet, assets are...

the uses of acquired funds

Compared to an economy that uses a medium of exchange, in a barter economy...

transaction costs are higher

Suppose in 2013 you buy a console bond that makes $10 coupon payments for $1000. If in 2014 market interest rates increase to 2%, at what price can you sell your consol bond and what will be your rate of return?

$500 and -49%

If a bank has $200,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is...

(200,000-x)(0.20) = 80,000 - x 40,000 - 0.20x = 80,000 - x 0.80x = 40,000 x = 50,000

A one-year bond currently pays 5% interest. It's expected that it will pay 4.5% next year and 4% the following year. The two-year term premium is 0.2% while the three-year term premium is 0.35%. What is the interest rate on a two-year bond according to the liquidity premium theory?

(5+4.5)/2 + 0.2 9.5/2 + 0.2 4.95

If a one-year bond currently yields 6% and is expected to yield 8% next year, the liquidity premium theory predicts that the yield today on a two-year bond should be

(6+8)/2 + TP --> 7 + TP more than 7%

If a bank's ratio of assets to capital is 25 and it's return on assets is -5%, what is its return on equity?

-125%

Smaller firms tend to rely on financial intermediaries instead of financial markets for external financing due to...

-moral hazard -transaction costs -adverse selection ("all of the above" on test)

According to the quantity theory of money, if the long-run economic growth rate is 3.5%, by how much should the Fed increase the money supply if it wants inflation to be 1.5%?

5%

If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is...

5,000 x .13 = $650

Suppose that your marginal federal income tax rate is 30%, the sum of your marginal state and local tax rates is 5%, and the yield on thirty-year U.S. Treasury bonds is 10%. You would be indifferent between buying a thirty-year Treasury bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield of...

7.0%

If a $10,000 face-value discount bond maturing in one year is selling for $9,000, then its yield to maturity is...

9,000 = (10,000) / (1 + i) 9,000 + 9,000i = 10,000 11.1%

Which of the following is NOT a reason that firms in the shadow banking system were more vulnerable than commercial banks during the financial crisis of 2007-2009? A) They were more heavily regulated than commercial banks, making them less able to adjust to changing market conditions. B) They made investments that would lose value if housing prices decline. C) They could invest in riskier assets. D) Investors had no insurance against loss of principal.

A) They were more heavily regulated than commercial banks, making them less able to adjust to changing market conditions.

All of the following are differences between hedge funds and mutual funds EXCEPT A) hedge funds use money collected from savers to make investments. B) hedge funds make risky investments that mutual funds cannot make. C) hedge funds are largely unregulated. D) hedge funds consist of a relatively number of wealthy investors.

A) hedge funds use money collected from savers to make investments.

With debt financing A) moral hazard problems are reduced but not eliminated. B) firms reduce the risk that they will become bankrupt during a recession. C) adverse selection problems are eliminated. D) moral hazard problems are eliminated.

A) moral hazard problems are reduced but not eliminated.

If you deposit $300 in your bank and the required reserve ratio is 10%, your bank will have...

An increase in required reserves of $30 and an increase in excess reserves of $270

Investment banks are vulnerable because...

the maturity of their liabilities is less than the maturity of their assets

The default risk premium fluctuates mainly A) because taxes tend to rise over the long run. B) as new information about a borrower's creditworthiness becomes available. C) because bond rating agencies tend to be inconsistent in their ratings of bonds. D) because risk-neutral investors will often become risk-averse as time passes.

B) as new information about a borrower's creditworthiness becomes available.

Which of the following is NOT a liability in the shadow banking system? A) repurchase agreements B) bank deposits C) commercial paper D) money market mutual fund shares

B) bank deposits

What is the lowest rating given to an investment-grade bond by Moody's?

Baa

Which of the following $1,000 face-value securities has the highest yield to maturity? A) A 10 percent coupon bond selling for $1,000 B) A 12 percent coupon bond selling for $1,100 C) A 12 percent coupon bond selling for $1,000 D) A 5 percent coupon bond selling for $1,000

C) A 12 percent coupon bond selling for $1,000

Which of the following is NOT true of moral hazard? A) It describes a lender's problem in verifying borrowers are using their funds as intended. B) It would not exist in a world of perfect information. C) It describes a lender's problem of distinguishing the good-risk applicants from the bad-risk applicants. D) It arises because borrowers typically know more than lenders.

C) It describes a lender's problem of distinguishing the good-risk applicants from the bad-risk applicants.

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

C) The interest rate is 25 percent and the expected inflation rate is 50 percent.

Which of the following is a bank liability? A) consumer loans B) reserves C) nontransaction deposits D) securities

C) nontransaction deposits

Which of the following is NOT a key financial service provided by the financial system? A) liquidity B) information C) profitability D) risk sharing

C) profitability

The term structure of interest rates A) usually results in a downward-sloping yield curve. B) reflects differing tax treatment received by different instruments. C) represents the relationship among the interest rates on bonds that are otherwise similar but that have different maturities. D) always results in an upward-sloping yield curve.

C) represents the relationship among the interest rates on bonds that are otherwise similar but that have different maturities.

Which of the following is NOT an example of off-balance-sheet lending? A) a loan commitment B) a loan sale C) a standby letter of credit D) a swap

D) a swap

Financial markets A) act as go-betweens by holding a portfolio of assets and issuing claims based on that portfolio to savers. B) generally provide lenders with lower returns than do financial intermediaries. C) channel funds indirectly between borrowers and lenders. D) channel funds directly from lenders to borrowers.

D) channel funds directly from lenders to borrowers.

Which of the following is included in both M1 and M2? A) money market deposit accounts B) Small denomination time deposits C) Savings deposits D) Currency

D) currency

Which of the following activities is NOT a primary area of service of investment banks? A) providing advice and financing for mergers and acquisitions B) providing advice on new security issues C) underwriting new security issues D) taking in deposits and making loans

D) taking in deposits and making loans

The ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation.

Fisher equation

If an individual moves money from a small-denomination time deposit to a checkable deposit account, what happens to M1 and M2?

M1 increases and M2 stays the same.

Which of the following is NOT a financial intermediary? A) Allstate Insurance Company B) Vanguard Total Stock Market Index Fund C) Bank of America D) NASDAQ

NASDAQ

Financial securities that represent partial ownership of a corporation are known as

Stocks

Why is adverse selection more likely in financial markets when interest rates rise?

The remaining borrowers are more likely to be risky.

U.S. treasury securities...

are considered default-risk-free instruments

According to the expectations theory of the term structure, the interest rate on a long-term bond will equal the ________ of the short-term interest rates that people expect to occur over the life of the long-term bond.

average

The main role of financial intermediaries is to...

borrow funds from savers and lend them to borrowers

An equal increase in all bond interest rates...

decreases long-term bond returns more than short-term bond returns.

If you buy a bond issued by GB, the bond is a ______ to GB and a _______ to you

liability; asset

What is in M1?

look up

What is in M2?

look up

A flight to quality refers to a shift by savers from...

low-quality bonds and into high-quality bonds.

Monetary policy refers to the government's...

management of the money supply and interest rates to achieve macroeconomic objectives

The shadow banking system refers to...

nonbank financial institutions such as investment banks and hedge funds.

If the expected path of interest rates on one-year bonds over the next five years is 2%, 4%, 3%, 2%, and 1%, the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of...

one year

The McFadden Act of 1927...

prohibited national banks from operating branches outside their home states.

What was the primary reason that Congress initiated deposit insurance in the 1930s?

protect the deposits of individual savers

restrictive covenants...

put restrictions on the use of borrowed funds.

The ratio of a bank's after-tax profit to bank capital is known as...

return on equity

Everything else held constant, an increase in the liquidity of bonds results in a ________ in demand for bonds and the demand curve shifts to the ________.

rise; right

If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can ...

sell $3 million of securities

Hyperinflations are usually caused by large budget deficits financed by...

selling bonds to the central bank.

When the yield curve is downward-sloping...

short-term yields are higher than long-term yields

An inverted yield curve...

slopes down

According to the liquidity premium theory, the yield curve normally has a positive slope because...

term premiums rise as the time to maturity increases

The idea that nominal interest rates rise or fall one-for-one with expected inflation is known as...

the Fisher effect

The default risk premium is...

the additional yield a saver requires by very small companies

In the bond market, the seller is usually considered to be...

the borrower

The bond supply curve slopes up because...

the borrower is willing and able to offer more bonds when the price of the bond is high

The "lemons problem" in the used car market arises from...

the difficulty buyers have in distinguishing good cars from lemons.

If the expected gains on stocks rise, while the expected returns on bonds do not change, then...

the equilibrium interest rate will rise