Test 1
The actual amount of money borrowed when a discount bond is issued is greater than the face value on the bond.
False
The interest rate on a simple loan is not necessarily equal to the loan's rate of return.
False
The main feature of a zero-coupon bond is that it only has a limited number of coupon payments.
False
The word "money" refers exclusively to "cash".
False
When the inflation rate is higher than the nominal interest rate, the real interest rate is positive.
False
As a lender, high interest rates are:
Good
Which of the following best explains the speculative motive for holding money?
Holding money for future opportunities.
Rank the following assets from the least to the most liquid: a house, a check, a car and currency.
House, car, check, currency
The face value of a coupon bond is:
The amount of money borrowed when the bond is issued in the primary market.
Which of the following is TRUE about the M1 and M2 measures of money supply?
The components of M1 have a higher velocity.
Which of the following best explains the main reason why a corporation issues a bond?
The corporation needs to borrow some money.
Which of the following best describes the term "wealth"?
The difference between the overall value of a person's assets and their debt.
Which of the following best describes the term "liquidity"?
The ease with which an asset can be turned into a medium exchange.
Which of the following is TRUE when the yield to maturity of a bond is equal to the coupon rate?
The price of the bond is equal to the bond's face value
"Cash" (i.e. coins and paper bills) is formally known as "currency".
True
By definition, fiat money does not have much intrinsic value.
True
Fixed-payment loan are such that the present value of all payments is generally higher than the actual price of the purchased item.
True
One of the main functions of money is that it is a "medium of exchange".
True
People generally prefer to hold money rather than other assets.
True
Risk-averse investors (i.e. they are not willing to take risks) prefer bonds with shorter maturity.
True
Risk-loving investors prefer bonds with longer maturity.
True
The buyer of a bond is the lender.
True
The interest rate is also known as the "yield to maturity".
True
The interest rate on a financial instrument is not necessarily equal to the instrument's rate of return.
True
There is an inverse relationship between the yield to maturity and the price of a bond.
True
Which of the following is a function of money?
Unit of account
The following values are in billions of dollars: Retail money funds (money market mutual funds) = $200 Savings deposits = $450 Other checkable deposits = $250 Currency = $1000 Small-denomination time deposits = $300 Demand deposits = $1200 The non-M1 M2 component in this economy is:
$0
Which of the following best explains the concept of the "time value of money"?
$1,000 today is worth more than $1,000 next year.
Taylor takes a simple loan of $1,700 at an interest rate of 7%. How much will Taylor back in 5 years (approximately)?
$2,384
The following values are in billions of dollars: Savings deposits = $450 Other checkable deposits = $250 Currency = $1000 Small-denominations time deposits = $300 Demand deposits = $1200 The measure of money supply in the economy is
$2,450
A 12%-coupon bond has a face value of $22,500 and a maturity of 5 years. **Two years after bond's purchase**, the yield to maturity decreases to 10%. What is the new bond price (approximately)?
$23, 619
The following values are in billions of dollars: Retail money funds (money market mutual funds) = $200 Savings deposits = $450 Other checkable deposits = $250 Currency = $1000 Small-denomination time deposits = $300 Demand deposits = $1200 The M2 measure of money supply in this economy is
$3,400
You expect to receive a $5,000 in two years. You expect the interest rate to be 7% in the first year and 5% in the second. What is the present value of the donation (approximately)?
$4,450
Bruce too a simple loan his local bank. The interest rate on the loan is 8% and he is required to pay back $7,420 in 3 years. How much did Bruce borrow (approximately)?
$5,890
A 12%-coupon bond has a face value of $22,500 and a maturity of 5 years. 1. What is the coupon payment on the bound 2. The buyer computes the bond price and finds out that it is $22,500. What is the yield to maturity on the bond? *Two years after the bond's purchase*, the yield to maturity decreases to 10% 3. What is the new bond price (approximately)? 4. What is the rate of capital gain (approximately)? 5. What is the rate of return (approximately)?
1. $2,700 2. 12% 3. $23,619 4. 4.97% 5. 16.97%
A 12%-coupon bond has a face value of $22,500 and a maturity of 5 years. The buyer computes the bond price and finds out that it is $22,500. What is the yield to maturity on the bond?
12%
Margaret takes a simple loan of $1,250 so she can buy all her books this quarter. She is required to pay back $1,400 in one year. What is the interest rate on the simple loan?
12%
A 12%-coupon bond has a face value of $22,500 and a maturity of 5 years. **Two years after bond's purchase**, the yield to maturity decreases to 10%. What is the rate of return on the bond (approximately)?
16.97%
A 12%-coupon bond has a face value of $22,500 and a maturity of 5 years. **Two years after bond's purchase**, the yield to maturity decreases to 10%. What is the rate of capital gain on the bond (approximately)?
4.97%
Let's assume that 10 identified goods are traded in an economy under the barter system. How many "prices do people need to remember in this economy?
45
Which of the following is not commodity money?
A $100 bill
As a borrower, high interest rates are:
Bad
Which of the following is TRUE about the "interest-rate risk"?
Bond prices with a longer maturity react less to changes in the yield to maturity than bond prices with a shorter maturity.
Which of the following is the best illustration of money as a "store of value"?
Carl buys a house.
Which of the following **NOT** one of the necessary features of good money?
Convertibility
Which of the following is the main problem with the barter trade system?
Double coincidence of wants
Money is the best store of value
False
Which of the following is TRUE when the yield to maturity rises over and above the coupon rate?
It is bad for bond holders.
Which of the following scenarios provides the highest rate of return on a simple loan?
Nominal interest rate = 4% and inflation rate = 1%
The correct answer to this question is (c). a b. c. d. e.
c
