Financial Markets exam 2
Dodd-Frank Wall Street Reform and Consumer Protection Act
to reduce reliance on rating agencies
S&P 500
uses a value-weighted index where larger firms carry more weight
the two parties to a futures contract each make an agreement with
a clearing corporation
a well designed policy framework helps policy makers establish
credibility
interest rate risk arises from the fact that investors
dont know the holding period return of a long term bond
the top four categories are considered
investments grade bonds
it is impossible to use a single instrument to achieve a
long list of objections
successful monetary policy requires a
long time horizon
interest rates only compensate for risk during recessions
lower rated bonds will have higher yields
the primary objective of all central banks is:
maintenance of price stability
government involvement is justified by the presence of externalities or
public goods
the writer of the option is obligated to buy the shares
should the holder choose to exercise the option
king william of orange created the central bank to
finance wars
*suppose the tax rate is 21% and a table bond yield is 10%. What is the equivalent tax exempt bond yield?
(1-.21)x.10 =.079 7.9%
Government's bank
-1900 only 18 countries had central banks -us federal reserve began operation in 1914
nominal interest rate should equal
-3% real interest rate + 2% expected inflation + compensation for inflation risk
the ownership of common stock conveys rights:
-A stockholder is entitled to participate in the profits of the enterprise. -Stockholders are entitled to vote at the firm's annual meeting.
It is essential to understand what a central bank is NOT:
-DOES NOT CONTROL SECURITIES MARKETS, THOUGH IT MAY MONITOR AND PARTICIPATE IN BOND AND STOCK MARKET -IT DOES NOR CONTROL GOV BUDGET a. that is determined by congress and the president through FISCAL POLICY b. the fed only acts as the TREASURY'S BANK
expected returns and expected interest rates
-If the expected return on bonds rises relative to the return on alternative investments, bond demand will shift right. -When interest rates are expected to fall, prices are expected to rise, shifting the bond demand right.
liquidity relative to alternatives
-Investors like liquidity; the more liquid the bond, the higher the demand. -if bonds become less risky relative to alternative investments, demand for
What if bond prices are above equilibrium?
-Quantity supplied > quantity demanded. -With excess supply, supplier cannot sell bonds they want at current price. -Suppliers begin to cut the price. -Excess supply puts downward pressure on the price until supply equals demand.
What if bond prices are below equilibrium?
-Those who wish to buy bonds cannot get what they want at that price. -They start bidding up the price. -Excess demand puts upward pressure on the price until supply equals demand.
the distinction between investment grade and speculative, non-investment grade is very important.
-a number of regulated institutional ......
the wilshire 5000 is most broadly based index in use. it covers
-all publicly traded stocks in the US with readily available prices -it is value weighted and is the BEST measure of overall market wealth
the thriving market of stocks is possible because:
-an individual share is only a small faction of the companys value -a large number of shares are outstanding -prices of individual stocks are low -stockholders are residual claimants -stockholders have limited liability -shareholders can replace managers who are doing a bad job
the DIJA is the first...
-and best known stock market index -based on the stock prices of 30 of the largest companies in the US -it measures the value of purchasing a single share of each of the stocks in the index
the central bank can control the...
-availability of money and credit in a country's economy
S&P 500
-constructed from the prices of many more stocks than the DIJA -it tracks the total value of owning the entirety of those firms -it uses a value weighted index where larger firms carry more weight
Stock indexes tell us:
-how much the value of an average stock has changed, and how much total wealth has gone up or down -provides a benchmark for performance of money managers
2. although both shifts could give an ambiguous answer in terms of bond price, theory is not ambiguous
-in recessions, interest rates tend to fall meaning that bond prices should rise
commercial paper is:
-issued on a discount basis, as zero-coupon bond specifying a single future payment with no associated coupon payments -has maturity of less than 270 days -is usually issued at a discount from face value and reflects prevailing market interest rates -only issued by firms with high quality debt ratings
advantages of commercial paper
-it does not need to we registered with the SEC, as long as it matures before 9 months or 270 days, making it very cost effective -You save money not having to go through all the expensive steps the SEC makes you do -maturities avg about 30 days, rarely reaching that threshold -proceeds from this type of financing can only be used on current assets, or inventories and are not allowed to be used on fixed assets (new plants, a new car), you need SEC involvement
Why do bonds with the same default rate and tax status but different maturity dates have different yields?
-long term bonds are like a composite of a series of short-term bonds -their yield depends on what people expect to happen in the future
Two events provide the foundation from fed independence
-political appointees were removed from the federal reserve boars, and the FOMC was created -President trump supported the fed's refusal to purchase treasury securities that the security of the treasury requested they buy
in cases of hyperinflation
-prices contain virtually no info -people use all their energy just coping with the crisis so growth plummets
1. A business cycle downturn
-reduces business investment opportunities shifting bond supply to the left -reduces wealth, shifting bond demand to the left also
OTC (over the counter)
-tailor-made derivatives -these consist of investment banks with traders who make markets in these derivatives, and clients such as hedge funds, commercial banks, government-sponsored enterprises, etc
differences in tax status and municipal bonds
-taxes are also an important factor affecting the yield of a bond -bondholders must pay income tax on the interest income they receive from owning privately issues bonds (taxable bonds) -the coupon payments on bonds issued by state and local governments, municipal or tax exempt bonds, are specifically exempt from taxation
the real exchange rate
-the competitiveness of US exports depends on the RER -appreciation of the real exchange rate makes US exports more expensive to foreigners, reducing competitiveness -depreciation of the RER makes US exports seem cheaper to foreigners, improving their competitiveness
the higher the price of a bond
-the larger the quantity supplied -The bond supply curve slopes upward
a clearing corporation guarantees the obligations embodied in the option-those of the option writer
-the option writer is required to post margin -the option holder incurs no obligation, so no margin is needed
stocks tell us
-the real value of money -and they allocate scarce resources
no payments are made when the contract is agreed to
-the seller/short position benefits from declines in the price of the underlying asset -the buyer/long position benefits from increases in the price of the underlying asset
investment grade bonds
-these bonds have a very low risk of default -reserved for most government issuers and corporations that are among the most financially strong
we need to be able to measure the level of fluctuation in all stock values
-this concept is the value of the stock market -we will refer to its measures as stock market indexes
inflation risk
-with few exceptions, bonds promise to make fixed-dollar payments -remember that we care about the purchasing power of our money, not the number of dollars
factors that shift bond supply
1. Changes in Government Borrowing 2. Change in General Business Conditions 3. Changes in Expected Inflation
factors that shift bond demand
1. Wealth 2. Expected Inflation 3. Expected Returns and Expected Interest Rates 4. Risk Relative to Alternatives 5. Liquidity Relative to Alternatives
WHY BONDS ARE RISKY (on test)
1. default risk 2. inflation risk 3. interest rate risk
the market can be divided into two
1. exchange traded derivatives 2. over the counter derivatives
securitization uses the efficiency of markets to lower the cost of borrowing by:
1. facilitating diversification of risks 2. making assets liquid (you can sell a mortgage very easily) 3. allowing greater specialization in the business of finance 4. broadening markets 5. promoting innovation
we can easily see examples of failure
1. great depression of the 1930's when the banking system collapsed (economic historians state that the fed failed to provide adequate money and credit) 2. the crisis of 2007-2009 (fed was largely passive as intermediaries took on increasing risk amid the housing bubble)
Comparing 3-month and 10-year Treasury yields we can see:
1. interest rates of different maturities tend to move together 2. yields on short term bonds are more volatile than yields on long term bonds 3. long term yields tend to be higher than short term yields
central bankers work to reduce the volatility of the economic and financial systems by pursuing 5 specific objectives
1. low AND stable inflation 2. high and stable real growth, together with high employment 3. stable financial market and institutions 4. stable interest rates 5. a stable exchange rate (instability in any of these 5 objectives poses a systematic or economy-wide risk) (it is probably impossible to achieve all 5 of their objectives simultaneously, trade offs must be made)
the need for accountability and transparency
1. politicians would establish a set of goals 2. the policymakers would publicly report their progress in pursuing those goals -explicit goals foster accountability and disclosure requirements creates transparency -legislatures usually grant central banks instrument independence not goal independence -the institutional means for assuring accountability transparency differ from one country to the next
think of the interest rate having three components
1. the real interest rate 2. expected inflation 3. compensation for inflation rate
if the US dollar British pound exchange rate is $1.25 per pound, and the US dollar-euro rate is $1.19 per euro, what is the pound per euro rate?
1.19/1.25= .95
the terms of governors are ____years. Chairs term is____ years. and reserve bank presidents serve for _____years.
14, 4, 5
On November 16, _________, the 12 cities chosen as sites for regional Federal Reserve Banks were open for business (Numeric only, 4 digits, no words or decimal places For example: if you think the year was 1932, simply enter 1932)
1914
the FOMC committee is comprised of all Federal Reserve Board of Governors, the president of the New York Federal Reserve Bank, and _____ presidents of district federal reserve banks
4
most commercial paper is issued with a maturity of
5 to 45 days and is used exclusively for short term financing
Nasdaq is a value weighted index of over ______ companies traded on the over the counter market
5000
The Federal District that includes the state of Minnesota (our district) is the
9th district
The best--known bond rating services are: (two answers are correct)
?
which of these bond ratings assigned by Standard and Poor's would be considered investment grade bonds?
AA AAA BBB
which of the following is not true regarding the federal reserve board of governors
ALL OF THE ABOVE -their term is not to exceed 14 yrs -they are responsible for setting reserve requirements -they are all appointed by the president of the US -they are required to come from different districts
A Coupon bond has which of the following attributes / characteristics:
Both periodic interest payments and principal payment at maturity
exchange traded
CME group (made up of the 2007 merger of the Chicago Mercantile Exchange and the Chicago board of trade and the 2008 acquisition of the new york mercantile exchange)
The interest rate has three components. Which of the following isn't one of them?
CPI index
Chapter 15:
Central banks
Which of the following are attributes of the The board of Governors of the Federal Reserve System? (more than one answer)
Chairperson serves a 4 year term that is renewable Appointed by the President Serve a 14 year term, non-renewable
commercial paper is not usually back by any form of _____ making it an unsecured debt
Collateral
expected inflation
Declining inflation means promised payments have higher value- bond demands shifts right
Chapter 9:
Derivatives
the price weighted average
Gives greater weight to shares with higher prices
the fed has the sole legal authority to
ISSUE US DOLLAR BILLS
risk relative to alternatives
If bonds become less risky relative to alternative investments, demand shifts right
the relationship among bonds with the same risk characteristics but different maturities is called the term structure of interest rates. which of the following are characteristics associated with this relationship?
Interest rates of different maturities tend to move together long term yields tend to be higher than short term yields
There are three criteria for judging a central bank's independence. Select from the following each of the three criteria (multiple choices)
Irreversible decisions Budgetary independence Long terms in Office
the writer of the call option ________ sell the share if and when the holder chooses to use the call option
MUST
The Federal Reserve works to reduce the volatility of the economic and financial systems by pursuing five specific objectives. Which of the following are among the five: (two selections)
Promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole Promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring in the U.S. and abroad
*we can think of the required returns as the sum of risk-free return and the risk premium (equally risk premium). Calculate the value of a share of stock of the 3M company using the following financial metrics and the dividend discount model. growth rate= 4% risk premium 6% risk free rate 2% dividend $50
Ptoday= Dtoday(1+g)/i-g 1,299 to 1301 Ptoday=50(1+4%)/(8%-4%)
real exchange rate equation
RER = $ price of domestic goods/$ price of foreign goods
Exam 1
Review
The distinction between moving along a curve (change in quantity supplied or demanded) versus a ___________ in the curve (change in supply or demand) is important to the pricing of a bond.
Shift
Within the structure of the Federal Reserve System, which of the following statements are true?
State banks that receive their charters from individual state banking authorities have the option of joining All national banks are required to belong to the Federal Reserve System
Wilshire 5000
The most broadly based value-weighted stock index in use. It covers all publicly traded stocks in the United States with readily available prices
Market Capitalization
The total value of a company's issued shares EX: if a firm is priced at $100 and has 10 million shares outstanding, its total market value or MC is worth $1billion
A business cycle downturn reduces business investment opportunities shifting bond supply to the left.
True
Interest-rate risk arises from the fact that investors don't know the holding period return of a long-term bond.
True
T or F: because they are customized, forward contracts are very difficult to resell
True
today the federal reserve has the sole legal authority to issue
US dollar bills
The U.S. Government's Bank refers to which of the following:
US treasury department
the required return is calculated as the sum of the risk free return and the risk premium. The risk premium is:
a measure of risk associated with the specific attributes of an investment
maintaining stable financial markets and institutions is one of the five objectives of the Federal Reserve System. Which of the following is another one of the five?
a stable exchange rate
when the price of the stock is ______ the strike price of the call option, exercising the option is profitable and the option is said to be in the money
above
asymmetric information poses two important obstacles to the smooth flow of funds from savers to investors. They are:
adverse selection, which arises before the transaction occurs, and moral hazard, which occurs after the transaction
investors base their decisions on the
after tax yield
the central bank can control the availability of money and credit in a country's economy by.......?
all of the above -buying or selling bonds in the open market -by adjusting short term interest rates -reducing the reserve requirement
Commercial paper rating
almost all carry Moody's P-1 or P-2 rating -p= prime grade comm paper -speculative grade doesn't exist
inflation risk
an investor can't be sure of what the real value of the payments will be, even if they are made ex: his wife was promised 10k if she stayed in the company for 1 and a half years. She may want to argue to have it earlier because in a year and a half it wont be worth 10k
changes in government borrowing
any increase in the government's borrowing needs increases the quantity of bonds outstanding, shifting the bond supply curve to the right
the rise in the value of one currency relative to another is called __________ of the currency that is rising in value
appreciation
economic and financial systems, when left on their own...
are prone to episodes of extreme volatility
the Nasdaq Composite index and the Wilshire 5000
are the next largest indexes in the US
interest rate risk
arises from a bondholders investment horizon, which may be shorter than the maturity of the bond
changes in general business conditions
as business conditions improve, the bond supply curve shifts to the right
*an investor deposits $10,000 into a brokerage account and borrows an additional $10,000 from the the broker. the investor has $20,000 to invest. the brokerage firm requires that a maintenance margin of $5000 must be maintained between cash and the value of the stocks. Which one of the following statements best describes the circumstances in which the broker will not need to make a margin call
as long as the account maintains a value of more than $5000, the investor will not get a margin call
*company: beg share $: end $: # of Share google 2026. 2108 400 amazon. 3037 3101 450 IBM 136 142 1050
assuming you have designed a value weighted index comprised of the stocks listed in the tables above. What is the annual growth in this index 2.90 to 2.98 beg total 5199 end total 5351 (5351-5199)/5199=2.92%
match each stock index with its unique attribute
below...
as the governments bank and the banker's banks, central banks are the _______ and ____________ ______________ players in a country's financial and economic system
biggest, most powerful
Supply and Demand determine
bond prices and bond yield
changes in bond prices and the associated changes in interest rates,
can have a pronounced effect on borrowing costs corporations face
chapter 15
central banks
moving along the curve
change in quantity supplied or demanded
shift in the curve
change in supply or demand
if the economy is to run efficiently, we need to be able to tell the reason why prices are
changing -we can't just sit back when things are looking good, they need to find out why they're doing so good
People differ on the method by which stock should be valued. for example, Some people are chartists, others behavioralists. The basic difference between these groups is:
chartists study charts of stock prices; behaviorists focus on investor psychology and behavior
futures contracts are popular tools for speculation because they're
cheap
_______________________ paper is a short-term version of a bond
commercial
*because _________is issued by large institutions, the denominations of the investment offerings are substantial, usually $100,000 or more. Other cooperations, financial institutions, wealthy individuals, and money market funds are usually buyers of this investment
commercial paper
stocks also known as:
common stock or equity, are shares in a firms ownership
commerical banks and nonbank financial instritutions have to be monitored so that savers and investors can be
confident that these institutions are sound
the ______ of the US sets the federal reserve objections
congress
volatile inflation degrades the information
content of prices
a 10-year treasury note as a face value of $1,000 price of $1,200 and a 7.5% coupon rate. Based on the information we know the:
coupon payment on the bond equals $75 $1000 x .075 = $75
the central bank
creates money
the central bank...
creates money
what is one of the most important risks a bondholder faces
default
a decline in the value of one currency relative to another is called a _________ of the currency that is falling in value
depreciation
the ______ market is the financial market for financial instruments like futures contracts or options, which are derived from other forms of assets
derivatives
Central banks strive to
eliminate inflation
if the price of the stock exactly ________ the strike price, the option is said to be at the money
equals
In the above chart, the point E represents the _____________________ price and quantity of bonds in the market. (one word)
equilibrium
Chapter 8
equity markets
if the strike price _________ the market price of the stock, it is termed out of the money
exceeds
although option can be customized, most are standardized and traded on
exchanges
the financial press tends to become excited when the Dow Jones industrial average rises or falls sharply. After a particularly steep rise or fall, newspapers may publish tables ranking the day's results with other large advances or declines. If you were asked to construct a table of the best and worst days in the stock market history, how would you do it and why?
expressing market performance as a percent change is best because this method incorporates the actual level of the index in the calc.
the law of one price
fails almost all of the time
sellers of futures are betting that prices will
fall
The general rule in the U.S. is that the interest from bonds issued by one government is taxed by another government.
false
There is a strong need for accountability and transparency in the Federal Reserve. That is why the FOMC immediately issues on the same day they adjourn from their monetary policy meetings a letter and a transcript of the meeting.
false
To be successful, the Federal Reserve must be dependent
false
the european central bank is a subset of the European Central Bank System
false
the federal reserve central bank is a physical structure in which bank customers can deposit funds, borrow money and exchange foreign currency for US$
false
the job of the central bank is to improve general economic welfare by managing and increasing systematic risk
false
as the governments bank and the bankers bank, central banks are the biggest most powerful players in a country's
financial and economic system
stocks are the central link between the
financial works and the real economy
companies use stocks as a way to obtain
financing
put option
gives the holder the right but not the obligation to sell the underlying asset at a predetermined price on or before a fixed date
high inflation is bad for
growth
the job of the central bank is to
improve general economic welfare by managing and reducing systematic risk
The same terminology that is used to describe calls, is also used to describe puts:
in the money- profitable at the money- same price out of the money- not profitable
wealth
increases in wealth shift the demand for bonds to the right
central bankers must be
independent, accountable, and good communicators -these qualities make up the monetary policy framework
in 1998 we saw the simultaneous increase in some interest rates and decline in other- a rise in what are called ...
interest rate spreads
if the federal reserve is focused on interest rate stability, then why is unstable interest rates a problem?
interest rate volatility makes output unstable
The DIJA
is a price weighted average, which gives greater weight to shares with higher prices -the behavior of higher priced stocks dominates the movement of price weighted index
asset backed commercial paper (ABCP)
is a short term liability with a maturity of up to 270 days -it is COLLATERALIZED by assets that financial institutions place in a special portfolio -played a special role in the housing boom that preceded the financial crisis of 2007-2009
Commercial paper
is a short term version of a bond. -EXCEPT the borrower offers no collateral so the debt is unsecured -Short term makes it more like cash in your wallet
a forward or forward contract
is an agreement between a buyer and a seller to exchange commodity or financial instrument for a specified amount of cash on a prearranged future date
the law of one price
is based on the concept of arbitrage- the identical products should sell for the same price
Nasdaq composite index
is mainly composed of smaller newer firms and has recently been dominated by technology and internet companies
general rule in the US
is that the interest from bonds issued by one government is not taxed by another government, although the issuing government may tax it
default risk
is the change that the issuer may not make the promised payment
Derivative Market
is the financial market derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets
Securitization
is the process by which financial institutions pool various assets that generate a stream of payments and transform them into a bond that gives the bondholder a claim to those payments ex: a mortgage, you are going to take care of your house and the payments so it's pretty safe.
nominal exchange rate
is the rate at which one can exchange the currency of one country for the currency of another country
the bond supply curve
is the relationship between the price and the quantity of bonds people are willing to sell, all else equal
bond demand curve
is the relationship between the price and the quantity of bonds that investors demand, all else equal
call option
is the right to buy, "call away" a given quantity of an underlying asset at a predetermined price, called the strike price, on or before a specific date
as the gov bank, the central bank has a privileged position:
it has the monopoly on the issuance of currency
the central bank has a privileged position
it has the monopoly on the issuance of currency
line S shifts to the left along E line
it means there is less need for the good
however stockholders have _____ _______ in the firm
limited liability (even if a company fails completely, the max amount a shareholder can lose is their initial investment)
factors that shift bond demand includes all the following except:
liquidity relative to alternatives
an investor needs only a small amount to invest- the margin - to purchase a future contract
margin requirements of 10% or less are common
most central banks go about this by adjusting short-term interest rates:
monetary policy (use it to stabilize economic growth and info)
the idea of central bank independence, that central bank should be independent of political pressure, is a new one. independence has two operational opponents. The banks policies must not be reversible by people outside the central bank and ________
monetary policymakers must be free to control their own budgets
Only the ___________ Federal Reserve Branch can auction Federal Treasury Securities. (alpha only, no numeric. If more than one word, enter space between words)
new york
do the market yields affect the company who issued the bond?
no, because they're fixed payments
the holder of the call is ________ required to buy the shares, they have the option if its beneficial
not
margin call
occurs when the investments in the account cash decrease in value and fall below minimum maintenance margin amount
at its most basic level, printing money is a very profitable business...
only costs a couple cents to make a dollar bill
government examiners and supervisors are the
only ones....
independent companies (rating agencies) have arisen to evaluate the creditworthiness of
potential borrowers
the idea that there is some long run normal level of production called
potential output
the higher the inflation is, the less
predicable it is and the more systematic risk it creates
a shift in either supply or demand changes the
price of bonds, so it changes yields as well
most people agree that low inflation should be the
primary objective of monetary policy
real exchange rate
rate at which one can exchange the goods and services from one country for the goods and services from another country -the cost of a basket of goods in one country relative to the cost of the same basket of goods in another country
this means bondholders care about the _____ interest rate
real
although stockholders are entitled to participate in the profits of the firms, they are merely a
residual claimant (they are paid last, only after all other creditors have been paid)
For investors with holding periods shorter than the maturity of the bond, the potential for a change in interest rates creates ________.
risk
buyers of futures are betting that prices will
risk
the purpose of derivatives is to transfer ______ from one firm to another
risk
identical goods and services should be
sell for the same price regardless of where they are sold
nasdaq is mainly composed of
smaller newer firms and has recently been dominated by technology and internet companies
in an effort to make their bonds more attractive to investors
state and local governments usually choose not to tax the interest on their own bonds
which of the following are attributed of a share of common stock
stockholders are entitled to vote at the firm's annual meeting a stock holder is entitled to participate in the profits of the enterprise
*stocks are risky because
stockholders get part of the profits, but only after everyone else is paid, including bondholders
which of the following is NOT a feature of common stock a. stockholders receive regular fixed payments on their shares b. stockholders have voting rights c.stock holders are residual claimants d. stockholders have limited liability
stockholders receive regular fixed payments on their shares
in an exchange for investing,
stockholders received a share of the company's profits
by giving individuals a way to tranfer risk...
stocks supply a type of insurance enhancing our ability to take risk
growth in these inputs leads to growth in potential output=
sustainable growth
*if a manufacturer of widgets needed peanuts in 6 months to manufacture their product using a patented protection formula, they may be incented to:
take out forward contract on the price and amount of peanuts
the yield on a tax-exempt bond equals the taxable bond yield times one minus the tax rate
tax exempt bond yield= (taxable bond yield)x(1-tax rate)
the central bank can control
the availability of money and credit in a country's economy -adjusting short term interest rates: monetary policy
dow jones industrial
the behavior of higher priced stocks dominates the movement of a price weighted index
when the inflation rises too high or falls too low for an extended period of time...
the central bank is at fault
the greater the inflation risk
the larger the compensation for it
the longer the term of the bond,
the larger the price change for a given change in the interest rate
the more likely the interest rates are to change during the bondholder's investment horizon,
the larger the risk of holding a bond
*the more debt
the more leverage and the greater the owners risk
for investors with holding periods shorter than the maturity of the bond,
the potential for a change in interest rates creates risk
options are agreements between 2 parties
the seller is an option writer the buyer is an option holder
the relationship among bonds with the same risk characteristics, but different maturities is called:
the term structure of interest rates
the higher the tax rate
the wider the gap between the yields on taxable and tax exempt bonds
speculator are trying to make a profit
they bet on price movements
the clearing corporation operates like a large insurance company and is the counter party to both sides of the transaction
they guarantee that the parties will meet their obligations -lowers the risk buyers and sellers face
explicit goals foster accountability and disclose requirements create
transparency
firms or governments with an exceptionally strong financial position carry the highest ratings and are able to issue the highest bond rated bonds called?
triple A
T OR F: maintaining price stability enhances money's usefulness both as a unit of account and as store of value
true
T OR F: the goal of keeping inflation low and stable, then can be inconsistent with the goal of avoiding a recession
true
T or F: because of its liquidity, the US dollar is one side of roughly 88% of the currency transactions
true
T or F: the purchasing power of one dollar, one yen, or one euro should remain stable over long periods of time
true
the theory of purchasing power parity PPP, which means that one unit of US domestic currency will buy the same basket of good and services anywhere in the world
true
*stock prices should be high
when dividends are high
changes in expected inflation
when expected inflation rises, the cost of borrowing falls, shifting the bond supply curve to the right
