Money and Banking
In which of the following situations would you prefer to be the lender? 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 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.
A. The interest rate is 4 percent and the expected inflation rate is 1 percent.
What is the opportunity cost of holding $ in cash if the relevant interest rate is percent? The opportunity cost is $ . (Round your response to the nearest dollar.) If interest rates rise, this opportunity cost will , and individuals will hold cash balances.
The opportunity cost is $200. (Round your response to the nearest dollar.) If interest rates rise, this opportunity cost will increase, and individuals will hold smaller cash balances.
Calculate the present value of $800 discount bond with 5 years to maturity if the yield to maturity is 6%.
The present value is $597.81. (Round your response to two decimal places.)
What is the price of a perpetuity that has a coupon of $70 per year and a yield to maturity of 1.5%?
The price of the perpetuity is $4667. If the yield to maturity doubles, what will happen to its price? The new price is $2333. (Enter your response rounded to the nearest whole number.)
How much is $225 to be received in exactly one year worth to you today if the interest rate is 10%?
The value today is $204.54. (Round your response to the nearest penny.) This same $225 received in one year would be worth less to you today if the interest rate rose to 15%.
What is the yield to maturity(YTM) on a $10,000-face-value discount bond maturing in one year that sells for $8,928.57?
The yield to maturity is 12%
A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid. A. discount bond; discount B. coupon bond; face C. discount bond; face D. coupon bond; discount
B. coupon bond; face
A discount bond A. pays all interest and the face value at maturity. B. pays the bondholder the face value at maturity. C. pays the face value at maturity plus any capital gain. D. pays the bondholder a fixed amount every period and the face value at maturity.
B. pays the bondholder the face value at maturity.
The concept of ________ is based on the commonsense notion that a dollar paid to you in the future is less valuable to you than a dollar today. A. deflation B. present value C. future value D. interest
B. present value
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; right B. decrease; left C. increase; left D. increase; right
B. decrease; left
In the Keynesian liquidity preference framework, a rise in the price level causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant. A. decrease; right B. increase; right C. decrease; left D. increase; left
B. increase; right
Everything else held constant, if interest rates are expected to fall in the future, the demand for longterm bonds today ________ and the demand curve shifts to the ________. A. falls; right B. rises; right C. rises; left D. falls; left
B. rises; right
If there is an excess demand for money, individuals ________ bonds, causing interest rates to ________. A. buy; fall B. sell; rise C. sell; fall D. buy; rise
B. sell; rise
The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is A. 5 percent. B. 5 percent. C. 0 percent. D. 10 percent.
C. 0 percent.
If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A. 3 percent. B. 2 percent. C. 3 percent. D. 7 percent.
C. 3 percent.
A movement along the bond demand or supply curve occurs when ________ changes. A. expected return B. wealth C. income D. bond price
D. bond price
In the market for money, an interest rate below equilibrium results in an excess ________ money and the interest rate will ________. A. demand for; fall B. supply of; rise C. supply of; fall D. demand for; rise
D. demand for; rise
What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent? A. $550.00 B. $476.25 C. $500.00 D. $453.51
D. $453.51
If interest rates decline, which would you rather be holding, long-term bonds or short-term bonds? A. Short-term bonds because their price is less sensitive to interest-rate volatility B. Short-term bonds because their price would increase more than the price of long-term bonds C. Long-term bonds because their price is likely to fall D. Long-term bonds because their price would increase more than the price of short-term bonds
D. Long-term bonds because their price would increase more than the price of short-term bonds
In Keynes's liquidity preference framework, as the expected return on bonds increases (holding everything else unchanged), the expected return on money ________, causing the demand for ________ to fall. A. falls; bonds B. rises; money C. rises; bonds D. falls; money
D. falls; money
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; left B. rises; left C. falls; right D. rises; right
D. rises; right
In a business cycle expansion, the ________ of bonds increases and the ________ curve shifts to the ________ as business investments are expected to be more profitable. A. demand; demand; right B. supply; supply; left C. demand; demand; left D. supply; supply; right
D. supply; supply; right
M1 money growth in the U.S. was about 16% in 2008, 7% in 2009, and 9% in 2010. Over the same time period, the yield on 3-month Treasury bills fell from almost 3% to close to 0%. Given these high rates of money growth, why did interest rates fall, rather than increase? A. The income, price-level, and expected-inflation effects were small relative to the liquidity effect. B. The liquidity effect did not dominate the other effects as the liquidity preference framework would suggest. C. The liquidity effect was working in the same direction as the income, price-level, and expected inflation effects. D. The income, price-level, and expected-inflation effects were large relative to the liquidity effect.
A. The income, price-level, and expected-inflation effects were small relative to the liquidity effect.
Factors that can cause the supply curve for bonds to shift to the right include A. an expansion in overall economic activity. B. a business cycle recession. C. a decrease in expected inflation. D. a decrease in government deficits.
A. an expansion in overall economic activity.
The interest rate that equates the present value of payments received from a debt instrument with its value today is the A. yield to maturity. B. real interest rate. C. current yield. D. simple interest rate.
A. yield to maturity.
True or False: With a discount bond, the return on a bond is equal to the rate of capital gain. A. True: A discount bond has no coupon payments so the return on the bond is equal to the rate of capital gain. B. True: A discount bond pays fixed interest payments every year so the return is equal to the rate of capital gain. C. False: Bond returns can never equal the rate of capital gain; there must be a capital loss or gain indicated. D. There is no way to determine this without the knowing the coupon amount and interest rate.
A. True: A discount bond has no coupon payments so the return on the bond is equal to the rate of capital gain.
When the price of a bond is ________ the equilibrium price, there is an excess demand for bonds and price will ________. A. below; rise B. above; rise C. below; fall D. above; fall
A. below; rise
A lower level of income causes the demand for money to ________ and the interest rate to ________, everything else held constant. A. decrease; decrease B. increase; increase C. decrease; increase D. increase; decrease
A. decrease; decrease
A decline in the expected inflation rate causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant. A. decrease; left B. decrease; right C. increase; right D. increase; left
A. decrease; left
Everything else held constant, when stock prices become less volatile, the demand curve for bonds shifts to the ________ and the interest rate ________. A. left; rises B. left; falls C. right; rises D. right; falls
A. left; rises
The supply curve for bonds has the usual upward slope, indicating that as the price ________, ceteris paribus, the ________ increases. A. rises; quantity supplied B. falls; supply C. falls; quantity supplied D. rises; supply
A. rises; quantity supplied
What will happen to interest rates if the public suddenly expects a large increase in stock prices? A. Interest rates will fall because the expected increase in stock prices raises the expected return on stocks relative to bonds and so the demand for bonds decreases B. Interest rates will fall because the expected increase in stock prices raises the liquidity of stocks relative to bonds and so the demand for bonds decreases C. Interest rates will rise because the expected increase in stock prices raises the expected return on stocks relative to bonds and so the demand for bonds decreases D. Interest rates will rise because the expected increase in stock prices raises the liquidity of stocks relative to bonds and so the demand for bonds decreases
C. Interest rates will rise because the expected increase in stock prices raises the expected return on stocks relative to bonds and so the demand for bonds decreases
Which of the following are true for a coupon bond? A. The yield to maturity is greater than the coupon rate when the bond price is above the par value. B. The price of a coupon bond and the yield to maturity are positively related. C. When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. D. The yield is less than the coupon rate when the bond price is below the par value.
C. When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.
The present value of an expected future payment ________ as the interest rate increases. A. is unaffected B. rises C. falls D. is constant
C. falls
In Keynes's liquidity preference framework, individuals are assumed to hold their wealth in two forms: A. stocks and bonds. B. real assets and financial assets. C. money and bonds. D. money and gold.
C. money and bonds.
Everything else held constant, when households save less, wealth and the demand for bonds ________ and the bond demand curve shifts ________. A. increase; right B. increase; left C. decrease; left D. decrease; right
C. decrease; left
Explain why you would be more or less willing to buy a house under the following circumstances: You would be willing to buy a house if you just inherited $100,000 because You would be willing to buy a house if it meant selling your substantial holdings of Microsoft stock, which you expect will double in value next year because You would be willing to buy a house if prices in the stock market become more volatile because You would be willing to buy a house if you expect housing prices to fall because
Explain why you would be more or less willing to buy a house under the following circumstances: You would be more willing to buy a house if you just inherited $100,000 because you now have more wealth to spend on all assets. You would be less willing to buy a house if it meant selling your substantial holdings of Microsoft stock, which you expect will double in value next year because the stock will earn you a very large return. You would be more willing to buy a house if prices in the stock market become more volatile because stocks have become relatively more risky. You would be less willing to buy a house if you expect housing prices to fall because the return on your house will actually be negative.
You have just won $20,000 in the state lottery, which promises to pay you $1,000 (tax free) every year for the next twenty years. The interest rate is 5%. Note: all payments made at the beginning of each year.
In reality, you receive the first payment of $1,000 today, which is worth $1000 today. (Round your response to the nearest penny.) The value of the second $1,000 payment is worth $952.38 today. Your total lottery winnings are actually worth less than $20,000 to you today.
A bond has a face value of $1,000 and 5% coupon rate, its current price is $940, and it is expected to increase to $980 next year. The current yield is (Enter your response rounded to one decimal place.) The expected rate of capital gain is (Enter your response rounded to one decimal place.) The expected rate of return is (Enter your response rounded to one decimal place.)
The current yield is 5.31%. (Enter your response rounded to one decimal place.) The expected rate of capital gain is 4.25%. (Enter your response rounded to one decimal place.) The expected rate of return is 9.5%. (Enter your response rounded to one decimal place.)
The figure to the right depicts the bond market. Suppose there is a downward revision of inflation expectations. Show the effect on the bond market. 1. Using the line drawing tool, show the effect on bond demand. Properly label your line. 2. Using the line drawing tool, show the effect on bond supply. Properly label your line. 3. Using the point drawing tool, indicate the new equilibrium bond price and quantity. Label the point '2'. Carefully follow the instructions above, and only draw the required objects. The effect of this shock will likely cause bond yields to ?
The effect of this shock will likely cause bond yields to decrease.
Would you be more or less willing to buy long-term AT&T bonds under the following circumstances: Trading in these bonds increases, making them easier to sell. You expect a bear market in stocks (stock prices are expected to decline). Brokerage commissions on stocks fall. You expect interest rates to rise. Brokerage commissions on bonds fall.
Would you be more or less willing to buy long-term AT&T bonds under the following circumstances: Trading in these bonds increases, making them easier to sell. More willing You expect a bear market in stocks (stock prices are expected to decline). More willing Brokerage commissions on stocks fall. Less willing You expect interest rates to rise. Less willing Brokerage commissions on bonds fall. More willing