Money, Banking & Financial Markets

If the U.S. government's borrowing needs decrease, all other factors constant: A. The supply of bonds will increase B. The demand for bonds will decrease C. The price of bonds will decrease D. The price of bonds will increase

Chapter 6 The price of bonds will increase

Identify which item is not one of the six parts of the financial system. A. Financial markets B. Central banks C. Credit cards D. Financial institutions

Chapter 1 Credit cards

Which of the following statements best describes financial instruments? A. All financial instruments are a means of payment B. Financial instruments can transfer resources between people but not risk C. Financial instruments can transfer resources and risk between people D. Financial instruments can transfer risk but not resources between people

Chapter 1 Financial instruments can transfer resources and risk between people

Investing in financial instruments in today's economy: A. Is an activity practiced only by the wealthy B. Involves costly transactions C. Requires a relatively large sum of money to invest (more than $100,000) D. Is made easier by the use of mutual funds

Chapter 1 Is made easier by the use of mutual funds

Identify which of the following is not one of the five core principles of money and banking? A. Risk requires compensation B. Time has value C. Information is the basis for decisions D. Stability creates risk

Chapter 1 Stability creates risk

When an individual obtains a car loan and makes all of the regular monthly payments, the sum of the payments made will exceed the purchase price of the car. This is due primarily to the core principle: A. Risk requires compensation B. Information is the basis for decisions C. Markets determine prices and allocate resources D. Time has value

Chapter 1 Time has value

The statement "risk requires compensation" implies that people: A. Do not take risk B. Only accept risk when they absolutely have to C. Will only accept risk when they are rewarded for doing so D. Avoid risk at all cost

Chapter 1 Will only accept risk when they are rewarded for doing so

Money as a means of payments refers only to: A. Actual currency B. Coins and currency C. Coins, currency and credit cards D. Anything that is generally accepted as payment for goods and services

Chapter 2 Anything that is generally accepted as payment for goods and services

When the price level increases, the purchasing power of money: A. Increases by a similar amount B. Stays the same since the purchasing power of money is not impacted by price levels C. Decreases D. First increases and then decreases as people get used to higher prices

Chapter 2 Decreases

Which of the following would not be considered a characteristic of money? A. It is a store of value B. It is a means of payment C. It must have intrinsic value D. It is a unit of account

Chapter 2 It must have intrinsic value

The money aggregate M2 includes: A. Large denomination time deposits B. Stock and bond mutual fund shares C. Savings deposits but not money market deposit accounts D. M1

Chapter 2 M1

In countries with low inflation: A. M2 growth is a very strong forecaster of inflation B. There tends to be a greater reliance on checks than electronic payments C. M2 growth is a poor forecaster of inflation D. Money stocks are a larger percentage of GDP

Chapter 2 M2 growth is a poor forecaster of inflation

The unit of account characteristic of money: A. Makes it difficult to compare the relative prices of goods and services B. Refers to how we use money to transfer purchasing power over time C. Means all prices are expressed in terms of money D. Means that money finalizes payments

Chapter 2 Means all prices are expressed in terms of money

The introduction of money market substitutes for basic checking accounts was fueled partially by: A. The relatively high rates of inflation that existed in the late 1970s and early 1980s B. The reluctance of many retailers to accept checks C. The high number of bank failures that were occurring in the 1970s D. The higher interest rates banks had to pay on checking accounts

Chapter 2 The relatively high rates of inflation that existed in the late 1970s and early 1980s

An individual who stores wealth in art rather than money will find that he/she: A. Suffers larger real losses during periods of high inflation B. Has far more liquidity than most savers C. Will incur higher transaction costs when he/she ultimately makes purchases D. Will have to resort to barter exchanging the art for desired goods

Chapter 2 Will incur higher transaction costs when he/she ultimately makes purchases

A society without any money: A. Could never exchange goods and/or services B. Would find people doing everything for themselves C. Would have to rely strictly on barter D. Would be more efficient since people would be more self-sufficient

Chapter 2 Would have to rely strictly on barter

Financial instruments used primarily as stores of value would not include: A. A car insurance policy B. A U.S. Treasury bond C. Shares of General Motors stock D. A home mortgage

Chapter 3 A car insurance policy

Kate buys a share of Google. Google uses the funds raised from selling its stock to expand its operations into Asia. This is an example of: A. Direct finance B. Indirect finance C. Use of a financial institution D. A loan

Chapter 3 Direct finance

. Roles served by financial markets include the following, except: A. Eliminating risk B. Providing liquidity C. Pooling and communicating information D. Sharing of risk

Chapter 3 Eliminating risk

A derivative instrument: A. Comes into existence after the underlying instrument is in default B. Is a low-risk financial instrument used by highly risk-averse savers C. Gets its value and payoff from the performance of the underlying instrument D. Should be purchased prior to purchasing the underlying security

Chapter 3 Gets its value and payoff from the performance of the underlying instrument

A borrower has information that it does not make available to a prospective lender; this is an example of: A. A wise borrower and an unwise lender B. A transfer of risk C. Information asymmetry D. Liquidity risk

Chapter 3 Information asymmetry

All of the following are depository institutions, except: A. Commercial banks B. Credit unions C. Insurance companies D. Savings bank

Chapter 3 Insurance companies

A financial intermediary: A. Is an agency that guarantees a loan B. Is involved in indirect finance C. Would be used in direct finance D. Must be a depository institution

Chapter 3 Is involved in indirect finance

Which of the following is not a financial intermediary? A. A bank B. An insurance company C. The New York Stock Exchange D. A mutual fund

Chapter 3 The New York Stock Exchange

Tom obtains a car loan from Old Town Bank. A. The car loan is Tom's asset and the bank's liability B. The car loan is Tom's asset, but the liability belongs to the bank's depositors C. The car loan is Tom's liability and an asset for Old Town Bank D. The car loan is Tom's liability and a liability of the bank until Tom pays it off

Chapter 3 The car loan is Tom's liability and an asset for Old Town Bank

Debt instruments that have maturities less than one year are traded in: A. The primary market exclusively B. The bond markets exclusively C. The bond market if they are already in existence D. The money market

Chapter 3 The money market

Considering the value of a financial instrument, the sooner the promised payment is made: A. The less valuable is the promise to make it since time is valuable B. The greater the risk, therefore the promise has greater value C. The more valuable is the promise to make it D. The less relevant is the likelihood that the payment will be made

Chapter 3 The more valuable is the promise to make it

Financial instruments are different from money because: A. They can act as a store of value and money cannot B. They can't be a means of payment but money can C. They can allow for the transfer of risk D. They have greater liquidity

Chapter 3 They can allow for the transfer of risk

A primary financial market is a market: A. Where only corporate bonds are sold B. Where only corporate and government bonds are sold C. Where newly issued securities are sold by savers to borrowers D. Where investment banks assist companies in raising cash

Chapter 3 Where investment banks assist companies in raising cash

What is the present value of $200 promised two years from now at 5% annual interest? A. $190.00 B. $220.00 C. $180.00 D. $181.41

Chapter 4 $181.41 200/(1+.05)^2 = 2000/1.05^2 = 181.41

If a bond has a face value of $1000 and a coupon rate of 4.25%, the bond owner will receive annual coupon payments of: A. $425.00 B. $4.25 C. $42.50 D. A value that cannot be determined from the information provided

Chapter 4 $42.50 1000x.0425

Suppose Tom receives one-year loan from ABC Bank for $5000.00. At the end of the year, Tom repays $5400.00 to ABC Bank. Assuming the simple calculation of interest, the interest rate on Tom's loan was: A. $400 B. 8.00% C. 7.41% D. 20%

Chapter 4 8.00% 5000(1+i)=5400 1+i=5400/5000=1.08

Farou invests $2,000 at 8% interest. About how long will it take for Farou to double his investment (e.g., to have $4,000)? A. 4 years B. 5 years C. 8 years D. 9 years

Chapter 4 9 years 72/8=9

A borrower who makes a $1000 loan for one year and earns interest in the amount of $75, earns what nominal interest rate and what real interest rate if inflation is two percent? A. A nominal rate of 5.5% and a real rate of 2.0% B. A nominal rate of 7.5% and a real rate of 5.0% C. A nominal rate of 7.5% and a real rate of 9.5% D. A nominal rate of 7.5% and a real rate of 5.5%

Chapter 4 A nominal rate of 7.5% and a real rate of 5.5% i=75/1000=7.5% <-- Nominal Interest Rate 7.5-2% = 5.5% <-- Real Interest Rate (NiR-iR)

As inflation increases, for any fixed nominal interest rate, the real interest rate: A. Also increases B. Remains the same, that's why it is real C. Decreases D. Decreases by less than the increase in inflation

Chapter 4 Decreases

If the interest rate is zero, a promise to receive a $100 payment one year from now is: A. More valuable than receiving $100 today B. Less valuable than receiving $100 today C. Equal in value to receiving $100 today D. Equal in value to receiving $101 today

Chapter 4 Equal in value to receiving $100 today

The coupon rate for a coupon bond is equal to: A. The annual coupon payment divided by the face value of the bond B. The annual coupon payment divided by the purchase price of the bond C. The purchase price of the bond divided by the coupon payment D. The annual coupon payment divided by the selling price of the bond

Chapter 4 The annual coupon payment divided by the face value of the bond

The lower the interest rate, i: A. The lower is the present value B. The greater must be n C. The higher is the present value D. The higher is the future value

Chapter 4 The higher is the present value

The higher the future value of the payment: A. The lower the present value B. The higher the present value C. The future value doesn't impact the present value, only the interest rate really matters D. The lower the present value because the interest rate must fall

Chapter 4 The higher the present value

The price of a coupon bond will increase as: A. The face value decreases B. The yield increases C. The coupon payments decrease D. The term to maturity is shorter

Chapter 4 The term to maturity is shorter

If a consol is offering an annual coupon of $50 and the annual interest rate is 6%, the price of the consol is: A. $47.17 B. $813.00 C. $833.33 D. $8333.33

Chapter 6 $833.33 Pconsul=Yearly Coupon Payment/i Pconsul=50/.06

If the annual interest rate is 5% (.05), the price of a one-year Treasury bill per $100 of face value would be: A. $95.00 B. $97.50 C. $95.24 D. $96.10

Chapter 6 $95.24 100/(1+.05)=95.24

Suppose you buy a 30-year, $50 coupon payment Treasury bond with a face value of $1,000 for a price of $1,200. Assume the price of this bond decreases to $1,100 over the next year and you decide to sell it. The one-year holding period return is equal to: A. -9.17% B. -8.33% C. -4.17% D. -3.79%

Chapter 6 -4.17% HPR = Current Yield + Capital Change CY = (50/1200) + (1100-1200)/1200 = .0417

What is yield to maturity of one year zero-coupon $100 face value bond that's selling for $98.25? A. 10% B. 2.25% C. 1.78% D. 1.25%

Chapter 6 1.78% 98.25=100/(1+i) 1+i = 100/98.25 i=.0178 = 1.78%

Which of the following $1,000 face- value securities with the same maturity has the lowest yield to maturity? A. A 10 percent coupon bond selling for $1,000 B. A 10 percent coupon bond selling for $1,100 C. A 12 percent coupon bond selling for $1,000 D. A 12 percent coupon bond selling for $ 900

Chapter 6 A 10 percent coupon bond selling for $1,100 A) BP = FV -> CR = CY = YTM = .1 B) BP > FV -> CR > CY > YTM -> YTM < .1 C) BP = FV -> CR = YTM = .12 > .1 D) BP < FV -> CR < YTM -> YTM > .12

A $1000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has: A. A current yield equal to 6.22% B. A current yield equal to 6.00% C. A coupon rate equal to 6.22% D. A yield to maturity and current yield equal to 6.22%

Chapter 6 A current yield equal to 6.22% CY=60/965 BP<FV YTM>CY = 6.22%

A pure discount bond is also known as: A. A consol B. A fixed payment loan C. A coupon bond D. A zero-coupon bond

Chapter 6 A zero-coupon bond

Which of the following would lead to a decrease in bond demand? A. An increase in expected inflation B. An increase in wealth C. A decrease in risk D. A decrease in liquidity

Chapter 6 An increase in expected inflation

The bond demand curve slopes downward because: A. At lower prices the reward for holding the bond increases B. As bond prices fall so do yields C. As bond prices fall bonds are less attractive D. As bond prices rise yields increase

Chapter 6 At lower prices the reward for holding the bond increases

If interest rates are expected to rise, the bond prices will: A. Not change until interest rates actually change B. Fall, due to the demand for bonds decreasing C. Rise, as people seek capital gains D. Move in the same direction as the expected change in interest rates

Chapter 6 Fall, due to the demand for bonds decreasing

In considering the holding period return, the longer the term of the bond the: A. Less important is the capital gain and the more important in the current yield B. Less important is the coupon rate and the more important is the current yield C. Less important is the capital gain D. More important is the capital gain

Chapter 6 More important is the capital gain

Bond prices and yields: A. Move together in the same direction B. Do not change if the coupon is fixed C. Move together inversely D. Are independent of each other

Chapter 6 Move together inversely

A 10-year Treasury note has a face value of $1,000, price of $1,200, and a 7.5% coupon rate. Based on this information, we know: A. The present value is greater than its price B. The current yield is equal to 8.33% C. The coupon payment on this bond is equal to $75 D. The coupon payment on this bond is equal to $90

Chapter 6 The coupon payment on this bond is equal to $75 Current Yield = Yearly Coupon Payment/ Price Paid Cy = 75/1200 = 6.25% Coupon Payment = 1000x7.5% = $75

When expected inflation decreases for any given nominal interest rate, all of the following occur except: A. The demand for bonds decreases. B. The bond supply curve shifts to the left C. The cost of borrowing increases and the desire to borrow decreases D. The price of bonds increases

Chapter 6 The demand for bonds decreases.

Which of the following statements is most accurate? A. Yield to maturity is equal to the coupon rate if the bond is held to maturity B. Yield to maturity is the same as the coupon rate C. Yield to maturity will exceed the coupon rate if the bond is purchased for face value D. Yield to maturity is the same as the coupon rate if the bond is purchased for face value and held to maturity

Chapter 6 Yield to maturity is the same as the coupon rate if the bond is purchased for face value and held to maturity

During the debt crises of 1998, gap between US Treasury bonds and Brazilian government bond yields ______, because demand for US Treasury bonds ______ and demand for Brazilian government bonds ________. A. narrowed; increased; decreased. B. widened; increased; decreased. C. narrowed; decreased; increased. D. widened; increased; increased.

Chapter 6 widened; increased; decreased.

Suppose the tax rate is 30% and Treasury bond yield is 9%. What is the risk spread on tax-exempt municipal bond with an yield of 8%? A. 1% B. 1.7% C. 6% D. 6.3%

Chapter 7 1.7%

Using the information provided and the Expectations Hypothesis, compute the yields for: Time Expected 1-yr T Bond Today 2.5% 1 yr from T 3.5% 2 yr from T 4% 3 yr from T 4.5% a two-year, three-year and four-year bonds.

Chapter 7 3 3.3 3.625

Which of the following would be most likely to earn an AAA rating from Standard & Poor's? A. A 30-year bond issued by the U.S. Treasury B. A bond issue by a new vegetarian fast-food chain C. A 10-year bond issued by a state or municipality D. Shares of stock in Coca-Cola

Chapter 7 A 30-year bond issued by the U.S. Treasury

If a local government eliminates the tax exemption on municipal bonds, we'd expect to see: A. An increase in the yield on taxable bonds B. An increase in the yield on municipal bonds. C. A decrease in the yield on municipal bonds D. Municipal bonds will become more attractive to investors

Chapter 7 An increase in the yield on municipal bonds. People would get less money back.

The yield on a 30-year U.S. Treasury security is 6.5%; the yield on a 2-year U.S. Treasury bond is 4.0%. This data: A. Indicate the yield curve is downward sloping B. Indicate the yield curve is flat C. Indicate the yield curve is upward sloping D. Indicate that people expect inflation to decrease in the future

Chapter 7 Indicate the yield curve is upward sloping

Under the Expectations Hypothesis, a downward-sloping yield curve suggests: A. Investors expect future short-term interest rates to fall B. Investors expect future short-term interest rates to rise C. This is a trick question, the yield curve always slopes upward D. Investors expect future short-term interest rates to remain constant

Chapter 7 Investors expect future short-term interest rates to fall

The risk spread: A. Is also known as the default-risk premium B. Should have a direct relationship with the bond's price C. Should have an inverse relationship with the bond's yield D. Is always constant

Chapter 7 Is also known as the default-risk premium

The risk structure of interest rates says: A. The interest rates on a variety of bonds will move independently of each other B. Lower rated bonds will have higher yields C. U.S. Treasury bond yields always change by more than other bonds D. Interest rates only compensate for risk in structured amounts

Chapter 7 Lower rated bonds will have higher yields

According to the Expectations Hypothesis: A. When short-term interest rates are expected to rise in the future, the long-term interest rates are equal to current short-term interest rates B. When short-term rates are expected to remain constant in the future, the long-term interest rates are higher than current short-term interest rates C. Short-term bonds are perfect substitutes for long-term bonds D. Expectations of future short-term rates equal estimates of current short-term rates

Chapter 7 Short-term bonds are perfect substitutes for long-term bonds

If a bond's rating improves, we would expect: A. The demand for this bond to increase, all other factors constant B. The demand for and the yield of this bond to increase, all other factors constant C. The demand for this bond to decrease, and its yield to increase, all other factors constant D. Both the demand for and the price of the bond to decrease, all other factors constant

Chapter 7 The demand for this bond to increase, all other factors constant

Assume the Expectation Hypothesis regarding the term structure of interest rates is correct. Then, if the current one-year interest rate is 4% and the two-year interest rate is 6%, then investors are expecting: A. The future one-year rate to be 4% B. The future one-year rate to be 8% C. The future one-year rate to be 6% D. The future one-year rate to be 5%

Chapter 7 The future one-year rate to be 8% (4+6)/2

The bond rating of a security reflects: A. The size of the coupon payment relative to the face value B. The likelihood the lender/borrower will be repaid by the borrower/issuer C. The return a holder is likely to receive D. The size of the coupon rate relative to other interest rates

Chapter 7 The likelihood the lender/borrower will be repaid by the borrower/issuer

The Expectations Hypothesis suggests: A. The yield curve should usually be downward sloping B. The yield curve should usually be upward sloping C. The slope of the yield curve reflects the risk premium associated with longer-term bonds D. The slope of the yield curve depends on the expectations for future short-term rates

Chapter 7 The slope of the yield curve depends on the expectations for future short-term rates

Which of the following statements pertaining to the yield curve is not true? A. Yield curves usually slope upwards B. The yield curve shows the difference in default risk between securities C. The yield curve shows the relationship among bonds with the same risk characteristics but different maturities D. The yield curve can be flat or downward sloping depending on market conditions

Chapter 7 The yield curve shows the difference in default risk between securities

An investor in a 30% marginal tax bracket, earning $10 in interest annually for a $100 U.S. Treasury bond: A. Earns a 10% after-tax return because interest on U.S. Treasury bonds is tax exempt at the federal level B. Earns a 3% return after-tax C. Would be indifferent between this bond and a municipal bond offering $7 annually per $100 of face value, assuming the same default risk D. Earns a 1% return after-tax

Chapter 7 Would be indifferent between this bond and a municipal (tax exempt) bond offering $7 annually per $100 of face value, assuming the same default risk