Fin Mkts Exam 1

True or False. Real instrest rates include anticpated inflation.

(False)Real intrets gets ride of inflation it doesnt anticipate it.

1) Which of the following is true for zero-coupon loans? a. They are also called "discount bonds." b. Money market instruments fall under this category. c. They make no coupon payments. d. All of the above. e. Only A and C above.

********e. Only A and C above. Zero-coupon loans, also known as "discount bonds," are bonds that make no coupon payments and are issued at a deep discount to face value. Instead of paying periodic interest payments, zero-coupon bonds are sold at a discount and the investor receives the full face value of the bond when it matures. Zero-coupon bonds are not considered to be money market instruments, although they are sometimes included in some money market funds. Money market instruments are short-term investments, typically with a maturity of one year or less, that are issued by governments, financial institutions, and corporations. In conclusion, zero-coupon loans, also known as "discount bonds," make no coupon payments and are issued at a deep discount to face value. They are called "discount bonds" and they make no coupon payments. They are not considered to be money market instruments.Zero-coupon bonds are not considered to be money market instruments because they are not short-term investments. Money market instruments are defined as investments with maturities of one year or less and are typically issued by governments, financial institutions, and corporations. Zero-coupon bonds, on the other hand, are typically issued with longer maturities, often several years or more. They do not make periodic interest payments like traditional bonds, and instead are sold at a deep discount to face value, with the investor receiving the full face value when the bond matures.

1) A bank collects deposits that average $800 per account. The bank makes loans that average $250,000 per loan. This is an example of: a. Secondary market transactions b. Indirect money transfers c. Denomination intermediation d. Delegated monitoring

******d. Delegated monitoring Delegated monitoring refers to the process by which banks collect deposits from individuals and then use those funds to make loans to other individuals or businesses. In this process, banks act as intermediaries, taking on the role of monitoring and assessing the creditworthiness of borrowers and making loans on their behalf. In the example you provided, the bank collects deposits from individual accounts that average $800 and uses those funds to make loans that average $250,000. This is a classic example of delegated monitoring, as the bank is taking on the role of monitoring and assessing the creditworthiness of the borrowers and making loans on their behalf, using the deposits collected from individuals as the source of funds. Delegated monitoring is an important function of the banking system, as it helps to allocate capital to the most productive uses and promotes economic growth. By collecting deposits and making loans, banks are able to intermediate between savers and borrowers, providing a critical link in the financial system that facilitates the flow of funds from savers to borrowers. Denomination intermediation, on the other hand, is the process whereby small investors are able to purchase pieces of assets that normally are sold only in large denominations

1. Draw a balance sheet for a central bank with the gold standard

A central bank's balance sheet under the gold standard would typically show two main items: assets and liabilities. Assets would include the central bank's gold reserves, as well as any other assets that it holds, such as government bonds or foreign currency. Liabilities would include the central bank's currency in circulation (i.e., the money supply), as well as any other liabilities it may have, such as deposits from commercial banks. Under the gold standard, the central bank would typically be required to hold a certain amount of gold relative to the money supply, in order to maintain confidence in the currency and to ensure that it could redeem its currency for gold. The balance sheet would reflect this requirement by showing a specified amount of gold assets relative to the money supply. It's important to note that this type of balance sheet is no longer in use today, as most countries have abandoned the gold standard and operate using fiat currency instead.

1) The safest municipal bond is a: a. General obligation bond b. Revenue bond c. Registered bond d. Fixed-rate bond

A.

1) You are an investor in fixed income securities. You have a strong belief that interest rates are going to rise sharply. Given this belief, which of the following trades makes the LEAST financial sense? a. Buy long-term bonds. b. Buy gold. c. Buy money market securities. d. Buy risky bonds (low credit quality).

A. If you believe that interest rates are going to rise sharply, buying long-term bonds makes the least financial sense. This is because as interest rates rise, the value of existing bonds with lower interest rates tends to fall. Long-term bonds have longer durations, which makes them more sensitive to changes in interest rates, compared to short-term bonds or money market securities. On the other hand, investing in money market securities, gold, or risky bonds may be a more appropriate investment strategy if you believe that interest rates will rise.

1) In the context of the Federal Reserve, the discount rate a. Is the rate used in finance to calculate the NPV. b. The rate the Fed charges on direct loans it makes. c. The target interest rate. d. The rate banks charge securities dealers to finance their inventory.

B.

1) The Federal Reserve is charged with a. regulating securities exchanges. b. conducting monetary policy. c. initiating loans between banks on the fed funds market. d. setting bank prime rates. e. Both A and C are correct.

B.

1) A callable bond a. can be converted to stock by the investor at a preset rate. b. can be purchased for a pre-determined price by the issuing company. c. can be sold for a pre-determined price by the investor. d. is generally more expensive than the equivalent plain vanilla bond. e. is usually not backed by any kind of collateral.

B. (A is a convertable bond)

1. Draw a picture of bond duration for a coupon bond with long maturity

Bond duration for a coupon bond with a long maturity is typically represented by a line or curve that rises from left to right. This line represents the sensitivity of the bond's price to changes in interest rates. The longer the maturity of the bond, the higher its duration will be. This is because a bond with a long maturity has more cash flows that are further into the future, and therefore is more sensitive to changes in interest rates. As interest rates increase, the price of the bond with a long maturity will decline more significantly than a bond with a shorter maturity. On the other hand, if interest rates decline, the price of the bond with a long maturity will rise more significantly than a bond with a shorter maturity. The exact shape of the bond duration curve will depend on the specifics of the bond, including its coupon rate, yield, and maturity.

1) Standard revenue bonds are a. backed by the full taxing authority of the municipality. b. backed by mortgages. c. are collateralized by the earnings of a specific project. d. Backed by the U.S. Treasury. e. less risky than general obligation bonds.

C.

1) Which of the following is true for repurchase agreements? a. They are generally under-collateralized to make the more attractive b. Sellers of the security (who later buy them back) are referred to as engaging in a "reverse repo" c. They are agreements to sell, and then repurchase, a security d. The were made illegal by the financial reform passed in 2010 because of the risk they pose to the economy

C.

1) The benefits of financial institutions to users of funds include a. their making monitoring easier. b. an increase in transaction costs paid by fund users. c. their making funds available with a variety of terms. d. All of the above. e. None of the above.

C. Financial institutions can provide a variety of different financial products and services that allow users of funds to choose the type of financing that best meets their needs. These products may include loans with different interest rates and repayment terms, savings accounts with varying levels of interest, and investment products that allow for the growth of funds over time. By offering a range of different products and services, financial institutions make funds available to users with a variety of terms, which can be tailored to meet the specific needs of each individual customer.

1) Derivatives are primarily used by investors to a. hedge risk. b. help companies raise money for investments. c. speculate on price movements. d. Only A and C above. e. None of the above.

D.

1) Within the context of the Federal Reserve, the "discount rate" is: a. The rate at which banks charge each other for loans on excess reserves b. The rate that is used to discount cash flows in most finance applications c. The rates banks charge security dealers to finance their inventories d. The interest rate that the Fed charges on loans it makes to banks and other borrower

D.

1) The interest rate that relates the promised cash flow of a bond to its current price is most commonly called the a. real interest rate. b. discount rate. c. simple interest rate. d. yield-to-maturity. e. IRR.

D. The interest rate that relates the promised cash flow of a bond to its current price is most commonly called the yield-to-maturity (d). Yield-to-maturity takes into account not only the coupon rate (the interest payment received on the bond), but also any price appreciation or depreciation that occurs as the bond approaches its maturity date. This makes it a comprehensive measure of the bond's return to the investor, as it considers both the current income from the coupon payments and the return of the bond's face value at maturity. This is why yield-to-maturity is often considered the most relevant measure of a bond's interest rate.

The Federal Reserve requires banks to maintain a reserve to a. meet liquidity shocks. b. to control the money supply. c. to reduce the riskiness of bank loans. d. All of the above. e. Only A and B above.

E.

1) A bankers-acceptance is a. a non-tradable insurance policy issued by a bank. b. tradable in secondary markets. c. used to facilitate international trade. d. Only A and C are true. e. Only B and C are true.

E. Yes, a bankers acceptance is sold on secondary markets and is used to facilitate international trade. A Bankers Acceptance (BA) is a short-term, interest-bearing debt instrument that is used to finance international trade transactions. The instrument is created when a bank accepts a draft, or bill of exchange, drawn by a borrower and guaranteed by the bank. The borrower then sells the BA to an investor in the secondary market to raise capital for the trade transaction. The secondary market provides liquidity for bankers acceptances, which makes them an attractive investment for investors looking for low-risk alternatives to other forms of short-term debt. Additionally, the fact that the bank is guaranteeing the draft makes the BA a relatively low-risk investment compared to other short-term debt instruments. These factors, combined with the fact that they are widely used in international trade, make bankers acceptances a valuable tool for financing trade transactions.

True or False. The higher a bond's coupon payment, the more exposed it is to to intrest rate?

False instrets rate risk is more prevlant to zero coupon bonds than high coupon bonds.

True or False. Money Market instruments are generally low-risk investments, largely because their duration is higher than other debt instruments.

False. Money market instruments are generally considered low-risk investments, but their low risk is not primarily due to their duration being higher than other debt instruments. Rather, their low risk is due to the fact that they are generally issued by creditworthy issuers, have a short-term maturity (usually less than one year), and are highly liquid. Money market instruments include short-term debt securities such as Treasury bills, commercial paper, certificates of deposit, and municipal notes, among others. These instruments are typically issued by governments, corporations, and financial institutions, and are generally considered to have a lower risk of default than longer-term debt instruments. The low risk of money market instruments is due to their short-term maturity, which means that investors are not exposed to the risk of default over a long period of time. In addition, the short-term nature of these instruments makes them highly liquid, which means that investors can easily buy and sell them in the market without having to worry about liquidity issues. Therefore, the statement "Money Market instruments are generally low-risk investments, largely because their duration is higher than other debt instruments" is false.

True or False. Secondary markets for municpal bonds are highly liquid.

False. Secondary markets for municipal bonds are generally less liquid than those for other types of bonds, such as U.S. Treasury bonds or corporate bonds. Municipal bonds are debt securities issued by state and local governments, as well as agencies and authorities, to finance public projects such as infrastructure, schools, and hospitals. The secondary market for municipal bonds can be less liquid for several reasons. One reason is that the market is highly fragmented, with many different types of municipal bonds issued by different issuers with varying degrees of creditworthiness. This can make it difficult for investors to find buyers or sellers for specific bonds. Another reason for the lower liquidity of municipal bond secondary markets is that they are subject to a range of tax and regulatory requirements that can make them less attractive to some investors. For example, municipal bond interest income is generally exempt from federal income taxes and may also be exempt from state and local taxes in some cases. This tax advantage can limit the pool of potential buyers and sellers in the secondary market. Finally, the credit risk of municipal bonds can also affect their liquidity. If there are concerns about the creditworthiness of a particular issuer or if there are broader concerns about the credit quality of the municipal bond market as a whole, investors may be hesitant to buy or sell municipal bonds, which can reduce liquidity. Therefore, the statement "Secondary markets for municipal bonds are highly liquid" is false.

True or false. Banks are required by law to borrow and lend to other banks at the intrest rate specified by the Federal Reserve.

False. Banks are not required by law to borrow and lend to other banks at the interest rate specified by the Federal Reserve. Banks can choose to borrow or lend funds at any rate they negotiate with each other, although they often reference the federal funds rate as a benchmark when making these transactions. The Federal Reserve can influence the federal funds rate through its monetary policy actions, but it cannot directly control the rate at which banks lend to each other.

True or False. Liquidity risk includes risk that intrest rates may suddenly fall.

False. Liquidity risk refers to the risk that an investment or asset may be difficult to sell or convert to cash at a fair price in a timely manner. It is not related to interest rate risk, which is the risk that the value of an investment will change due to a change in interest rates.

True or False. Off the run treasury bonds have higher prices than on the run treasury bonds.

False. Off-the-run Treasury bonds generally have lower prices than on-the-run Treasury bonds. Treasury bonds are debt securities issued by the US government to raise funds to finance its operations. They are issued in multiple maturities and pay a fixed rate of interest. "On-the-run" Treasury bonds refer to the most recently issued bonds in a particular maturity. They are considered to be more liquid than other Treasury bonds, as there is usually a larger number of buyers and sellers in the market for on-the-run bonds. As a result, on-the-run Treasury bonds typically have lower yields compared to off-the-run bonds, which are older and less liquid. On the other hand, "off-the-run" Treasury bonds refer to bonds that were issued in the past, but are still outstanding. Off-the-run bonds may trade at a premium or a discount to the current market price for on-the-run bonds, depending on the supply and demand for the specific bond. Because off-the-run bonds are less liquid and there is less demand for them, they may trade at a lower price compared to on-the-run bonds.

True or False. General obligation municipal bonds are risker than revenue bonds.

False. Revenue bonds are considered riskier than general obligation bonds since they are only obligated to make repayments to the extent that the project funded by the bond generates the necessary revenue to meet payment obligations.

True or false. Because the multiplier effect has a large impact on the money supply, it is more widely used tool for monetary policy that open market operations..

False. While the multiplier effect is an important concept in macroeconomics that helps to explain how changes in the money supply can impact the overall level of economic activity, open market operations are a more widely used tool for monetary policy. Open market operations refer to the buying and selling of government securities by the central bank in the open market, with the aim of controlling the money supply and achieving its monetary policy objectives. The Federal Reserve, as the central bank of the United States, conducts open market operations as its primary tool for implementing monetary policy. When the Fed buys government securities, it injects new money into the banking system, increasing the money supply and lowering interest rates. Conversely, when the Fed sells government securities, it removes money from the banking system, reducing the money supply and raising interest rates. The multiplier effect, on the other hand, refers to the expansion of the money supply that occurs as a result of changes in bank lending. When a bank makes a loan, the recipient of the loan can use the funds to make purchases, which can stimulate further economic activity. This, in turn, can result in additional lending and a further expansion of the money supply. In conclusion, while the multiplier effect is an important concept that helps to explain the impact of changes in the money supply on the overall level of economic activity, open market operations are the more widely used tool for monetary policy as they directly control the money supply and interest rates.

True or False. The government increases taxes which reduces the ability of individuals to save money. This will decrease intrest rates.

Flase. As the government increases a tax, so now people will borrow money for living and this will increase borrowing and thus increase the interest rate. Secondly, as savings are low, so the supply of fund to banks are low, thus the demand of fund will be more than supply, thus interest rate will increase.

True or False. Maturity intermediation refers to the ability of finacial institutions to connect suppliers of funds, who tend to lend out on a short-term basis, with users of funds who want long-term loans.

Maturity intermediation is the process by which financial institutions such as banks, investment funds, and other intermediaries connect suppliers of funds (those who have excess funds to lend) with users of funds (those who need funds for investment or consumption purposes). In this process, financial intermediaries typically take short-term deposits from suppliers of funds and use the funds to make long-term loans to users of funds. The intermediaries earn a profit by charging a higher interest rate on the long-term loans than they pay on the short-term deposits. This is why the statement "Maturity intermediation refers to the ability of financial institutions to connect suppliers of funds, who tend to lend out on a short-term basis, with users of funds who want long-term loans" is true.

1) A securitized short-term, unsecured loan issued by a corporation is a. a Bankers acceptance. b. commercial paper. c. a negotiable CD. d. a repurchase agreement. e. asset-backed commercial paper.

The correct answer is "b. commercial paper." Commercial paper is a short-term, unsecured loan issued by a corporation to raise capital for a variety of purposes. The loans are typically for periods ranging from overnight to 270 days and are generally issued at a discount to face value. Commercial paper is typically used by corporations to manage short-term liquidity and funding needs and is considered to be a low-risk investment. A Bankers Acceptance (BA) is a short-term, interest-bearing debt instrument issued by a corporation and guaranteed by a commercial bank. A Negotiable Certificate of Deposit (NCD) is a type of time deposit issued by a commercial bank and traded in the secondary market. A Repurchase Agreement (repo) is a form of short-term borrowing for dealers in government securities. Asset-backed Commercial Paper (ABCP) is a type of commercial paper backed by a pool of assets, such as consumer loans or mortgages.

1. When interest rates increase, what happens to the quantity supplied? Show this on the curve

The supply of funds curve shows the relationship between interest rates and the quantity of funds that savers are willing to supply. When interest rates increase, the quantity of funds that savers are willing to supply (i.e., the quantity supplied) typically increases. This relationship can be shown graphically by shifting the supply of funds curve to the right. The x-axis of the graph represents interest rates and the y-axis represents the quantity of funds supplied. An increase in interest rates results in a higher quantity supplied, which is reflected by a rightward shift of the supply curve.

1. Draw the supply of funds curve. Label the x-axis and y-axis

The x-axis in the supply of funds curve typically represents the real interest rate, and the y-axis represents the quantity of funds supplied. The curve slopes upward, meaning that as the real interest rate increases, the quantity of funds supplied also increases. This is because lenders are willing to supply more funds when they can earn a higher rate of return. The exact shape of the curve will depend on various factors, such as the level of economic growth, inflation expectations, and the availability of credit.

True or False. The federal reserve primarily regulates state banks.

True yes they do regulate state banks.

True or False. A bond that has no collateral is called a debenture.

True. A debenture is a type of bond that is not secured by any collateral or specific assets. This means that if the issuer defaults on the bond, the bondholders have no claim on any specific assets and must rely on the creditworthiness of the issuer to recover their investment. Debentures are typically issued by corporations, governments, and other organizations to raise capital for various purposes, such as funding operations, financing projects, or refinancing debt. Because debentures are unsecured, they typically offer a higher rate of return than secured bonds, such as mortgage bonds, which are backed by specific assets. Therefore, the statement "A bond that has no collateral is called a debenture" is true.

True or False. The federal funds market is very liquid and allows banks to get or make loans very quickly.

True. The federal funds market is a highly liquid market where banks and other depository institutions can lend or borrow reserves from each other overnight to meet their reserve requirements. The federal funds rate is the interest rate at which these loans are made, and it is set by the supply and demand for reserves in the market. Banks and other depository institutions can use the federal funds market to quickly borrow or lend money to meet their short-term funding needs. This market allows banks to quickly obtain funds to cover unexpected withdrawals or to make loans to customers. Conversely, banks with excess reserves can lend those funds to other banks in need of funding. The Federal Reserve conducts open market operations to influence the federal funds rate and keep it within its target range. By buying or selling government securities in the open market, the Fed can increase or decrease the supply of reserves in the banking system, which can in turn affect the federal funds rate. Therefore, the statement "The federal funds market is very liquid and allows banks to get or make loans very quickly" is true.

True or False. The liquidity offered on secondary markets can affect the price of a security offered in primary markets.

True. The liquidity offered on secondary markets can affect the price of a security offered in primary markets. The secondary market is where previously issued securities are bought and sold among investors, rather than being sold directly by the issuer as in the primary market. The price of a security in the secondary market is determined by supply and demand and can be influenced by a variety of factors, such as changes in interest rates, economic conditions, and market sentiment. If there is high demand for a security in the secondary market, its price may rise, and if there is low demand, its price may fall. The price of a security in the secondary market can, in turn, affect the price of similar securities in the primary market. If the price of a similar security in the secondary market is higher than the price at which the issuer plans to sell the security in the primary market, the issuer may raise the price of the security in the primary market to take advantage of the higher demand. Conversely, if the price of a similar security in the secondary market is lower than the price at which the issuer plans to sell the security in the primary market, the issuer may lower the price to attract more investors. Therefore, the statement "The liquidity offered on secondary markets can affect the price of a security offered in primary markets" is true.

True or False. The markets in which users of funds raise cash by selling securities are called primary markets.

True. The primary market is the financial market where securities, such as stocks, bonds, and other financial instruments, are issued and sold for the first time. It is the market where the users of funds, such as corporations and governments, raise cash by selling new securities to investors. In the primary market, issuers work with underwriters to price and sell their securities to investors, who may include individuals, institutional investors, or other financial intermediaries. Once the securities are sold in the primary market, they can be traded in the secondary market by investors who wish to buy or sell them. Therefore, the statement "The markets in which users of funds raise cash by selling securities are called primary markets" is true.

True or False. Certificates of deposit can be sold on secondary markets.

True. Certificates of deposit (CDs) can be sold on secondary markets, although it is relatively uncommon. CDs are financial instruments that pay a fixed rate of interest over a specified term, usually ranging from a few months to several years. They are issued by banks and other financial institutions, and they are typically insured by the Federal Deposit Insurance Corporation (FDIC) or another government-backed agency. In some cases, investors may need to sell their CDs before they mature. For example, they may need to raise cash for unexpected expenses or to take advantage of a better investment opportunity. In such cases, the investor can sell their CD on a secondary market, such as a brokerage or a trading platform, to another investor who is willing to buy it. The secondary market for CDs is relatively small and illiquid, and the price at which a CD can be sold may be lower than its face value, depending on market conditions and the remaining term of the CD.

True or False. All else being equal, investors would prefer a putable bond to a callable bond.

True. Putable bonds, on the other hand, allow the investor to sell the bond back to the issuer at a predetermined price, which could be advantageous if interest rates have risen since the bond was issued. However, if interest rates have declined, the investor may not be able to sell the bond at a favorable price, which could be disadvantageous. Putable bond gives the investor more power.

True or False. The Federal Reserve facilitates check cashing across the 50 states.

True. The Federal Reserve plays a key role in facilitating check clearing and settlement across the United States. When a check is written, it is sent to the bank where the recipient holds an account, known as the "depository bank." The depository bank then sends the check to the bank where the writer holds an account, known as the "remitting bank." The Federal Reserve acts as an intermediary between these two banks, facilitating the clearing and settlement of the check. The Federal Reserve also operates a nationwide check-processing network, which enables banks to exchange checks with each other in a timely and efficient manner, regardless of where the banks are located. Through its check-processing operations, the Federal Reserve helps to ensure that checks are credited to the appropriate account in a timely and accurate manner, which helps to promote the stability and efficiency of the payment system. The Federal Reserve's role in facilitating check clearing and settlement is just one of the many ways in which the Fed contributes to the stability and efficiency of the financial system in the United States.

True or False. The equilibirum intrest rate is where the demand and supply curves meet.

True. The equilibrium interest rate is where the demand and supply curves for borrowing and lending meet, and it is the rate at which the quantity of loans demanded is equal to the quantity of loans supplied. This rate takes into account various market forces, such as economic growth, inflation expectations, and the actions of central banks, and it represents the point at which the market is in balance. At this rate, borrowers are willing to pay the interest rate demanded by lenders, and lenders are willing to provide the funds requested by borrowers.

True or False. Because their intrest payments are excempt from taxation, interest rates on municipal bonds can be lower than US Treasury Rates.

True. The interest payments on municipal bonds are generally exempt from federal income tax and, in some cases, state and local taxes as well. This tax-exempt status makes municipal bonds attractive to investors who are in high tax brackets, as the after-tax yield on a tax-exempt bond can be higher than the yield on a taxable bond, even if the nominal interest rate is lower. As a result of the tax-exempt status, municipal bonds can offer lower interest rates compared to US Treasury bonds, which are taxable at the federal level. This allows issuers of municipal bonds, such as state and local governments, to borrow money at a lower cost, which can be used to finance various public projects, such as infrastructure development, schools, and hospitals. It is worth noting that the relative attractiveness of municipal bonds compared to Treasury bonds depends on the investor's tax bracket and the prevailing tax laws. In general, municipal bonds can be an attractive investment for investors in higher tax brackets, as the tax savings can offset the lower nominal interest rate.

1. The central bank increases the supply of money. Draw the new equilibrium interest rate

When the central bank increases the supply of money, it leads to an increase in the supply of funds. This results in a rightward shift in the supply of funds curve. The new equilibrium interest rate is determined at the intersection of the supply of funds curve and the demand for funds curve, where the quantity of funds supplied is equal to the quantity of funds demanded. The increase in the supply of money may cause a decrease in the interest rate, as there is now more money available to lend, making it easier for borrowers to access funds. The interest rate will adjust to balance the supply and demand for funds, and the new equilibrium interest rate will be lower than the previous rate.

1) A par bond: a. Is one whose price is equal to its face. b. Is one whose coupon is different from its yield-to-maturity. c. Is a recently issued bond. d. Only A and B.

a. Is one whose price is equal to its face value. A par bond is a bond whose price is equal to its face value. In other words, a par bond is a bond that is trading at its nominal or face value, which is typically $1,000 per bond. A bond trading at par means that the interest rate that the bond pays is equal to the prevailing market interest rate for bonds with similar credit quality and maturity. If the interest rate on a bond is higher than the prevailing market interest rate, the bond will trade at a discount to its face value, meaning that its price will be lower than its face value. Conversely, if the interest rate on a bond is lower than the prevailing market interest rate, the bond will trade at a premium to its face value, meaning that its price will be higher than its face value. In conclusion, a par bond is a bond whose price is equal to its face value, meaning that the interest rate that the bond pays is equal to the prevailing market interest rate for bonds with similar credit quality and maturity.

1) Primary markets are a. where securities are issued for the first time. b. where securities trade after they are initially issued. c. any market that serves as a primary source of funds for a given entity. d. safer than secondary markets.

a. where securities are issued for the first time. The primary market is where securities are issued and sold for the first time to investors. This is typically done through an initial public offering (IPO) for stocks or the issuance of new bonds. In the primary market, the issuer raises capital by selling securities directly to investors, usually through an investment bank or underwriter. The primary market is different from the secondary market, where securities are traded after they have been initially issued. In the secondary market, investors buy and sell securities that have already been issued, usually through a stock exchange or over-the-counter (OTC) market. The prices in the secondary market are determined by supply and demand, and are not directly influenced by the issuer. In conclusion, the primary market is where securities are issued and sold for the first time, while the secondary market is where securities are traded after they have been initially issued.

1) Which of the following is false about money market securities? a. They are debt securities with an original maturity of a year or less b. They are often issued by low credit quality companies c. They generally don't pay coupons d. They have low default risk

b. They are often issued by low credit quality companies is false. Money market securities are usually issued by high credit quality entities such as the government, corporations with high credit ratings, and financial institutions. They are considered to be low-risk investments and are often used by investors looking to park their money in short-term, highly liquid investments.

2) Relative to investment-grade bonds, which of the following is false for so-called junk bonds? a. They have higher yields-to-maturity. b. They are often purchased by pension funds. c. They have higher probabilities of default. d. They have higher coupon rates.

b. They are often purchased by pension funds is false. Junk bonds, also known as high-yield bonds, are issued by companies with lower credit ratings and are considered to be higher risk investments. Due to the higher risk of default, they generally offer higher yields than investment-grade bonds. However, due to the higher risk, pension funds and other conservative investors typically avoid investing in junk bonds and instead opt for safer, investment-grade bonds.

1) When entities borrow money (either by issuing a bond or via a bank loan) they often post collateral. Why would a borrower be willing to do this? a. To help lower market volatility b. To receive a lower interest rate c. It reduces interest rate risk d. To reduce recovery rates

b. To receive a lower interest rate Posting collateral is a common practice when entities borrow money either by issuing a bond or via a bank loan. The purpose of posting collateral is to provide the lender with a source of repayment in the event that the borrower defaults on the loan. By posting collateral, the lender can assess the risk associated with the loan and reduce the risk of default. This, in turn, enables the lender to offer a lower interest rate to the borrower compared to a loan without collateral. For the borrower, posting collateral provides the opportunity to receive a lower interest rate, which can be an important consideration for borrowers who want to minimize their borrowing costs. In addition, by posting collateral, the borrower can demonstrate to the lender that they are committed to repaying the loan, which can increase the likelihood that the loan will be approved. In conclusion, entities are willing to post collateral when borrowing money because it provides the opportunity to receive a lower interest rate, which can help minimize their borrowing costs. By posting collateral, the borrower can demonstrate their commitment to repaying the loan and reduce the risk of default for the lender.

1) If the federal reserve were to sell its assets, the results would likely include a. a decrease in interest rates. b. an increase in interest rates. c. a general increase in non-debt asset prices. d. increased inflation.

b. an increase in interest rates. When the Federal Reserve sells assets, it is effectively removing liquidity from the market, which typically results in a rise in interest rates. The increase in interest rates can lead to a decrease in borrowing and spending, which can help to control inflation.

1) Which of the following categories of financial institutions collectively own the largest amount of assets? a. Insurance companies b. Pension funds c. Depository institutions d. Hedge funds

c. Depository institutions Depository institutions, which include commercial banks, savings and loan associations, and credit unions, collectively own the largest amount of assets among the financial institutions mentioned. These institutions are primarily engaged in accepting deposits from individuals and businesses and making loans, and they play a crucial role in intermediating between savers and borrowers. As of 2021, depository institutions in the United States hold over $17 trillion in assets, making them the largest category of financial institutions in terms of total assets. This is due in large part to the fact that they have a large and stable deposit base, which provides them with a significant source of funding for their lending activities. Insurance companies, pension funds, and hedge funds are also important financial institutions, but they collectively own smaller amounts of assets compared to depository institutions. Insurance companies, for example, primarily provide insurance coverage for various types of risks, such as life, health, and property, and they typically hold assets to support their insurance liabilities. In conclusion, depository institutions, which include commercial banks, savings and loan associations, and credit unions, collectively own the largest amount of assets among the financial institutions listed.

1) A risk that is more pronounced for the finance industry than it is for other industries is: a. Operational risk b. Market risk c. Commodities risk d. Credit risk

d. Credit risk Credit risk is a risk that is more pronounced for the finance industry, particularly for banks and other financial intermediaries, than it is for other industries. Credit risk refers to the risk that a borrower will default on a loan or other financial obligation. This risk is particularly pronounced in the finance industry because banks and other financial intermediaries make loans to individuals and businesses, and there is always a risk that the borrower may not be able to repay the loan. In the finance industry, credit risk is managed through various means, such as thorough credit analysis, loan diversification, and the use of collateral. However, credit risk can never be completely eliminated, and it remains a key concern for the finance industry. In comparison, other industries, such as manufacturing or retail, generally have different types of risks that are more pronounced for them. For example, operational risk, which refers to the risk of loss from inadequate or failed internal processes, systems, or human error, is a more pronounced risk for many businesses in those industries. In conclusion, credit risk is a risk that is more pronounced for the finance industry than it is for other industries, and it remains a key concern for banks and other financial intermediaries.

1) A decrease in the reserve requirements could lead to a. a decrease in bank lending. b. an increase in the Fed's discount rate. c. a decrease in the money supply. d. an increase in the money supply. e. deflation.

d. an increase in the money supply. When the Federal Reserve decreases the reserve requirements, it means that banks are required to hold less reserves. This in turn allows banks to lend out more money, which results in an increase in the money supply. An increase in the money supply can lead to a decrease in interest rates and an increase in borrowing, spending, and economic activity.