Chapter 5

The demand curve and supply curve for one-year discount bonds with a face value of $1030 are represented by the following equations: B(d): Price = -0.7Q + 1160 B(s): Price = Q+680 Expected equilibrium quantity of bonds is ___. Expected equilibrium price of bonds is ___. Expected interest rate in this market is ___.

282 962 7.07%

"No one who is risk-adverse will ever buy a security that has a lower expected return, more risk, and less liquidity than another security." Is this statement true, false, or uncertain? False, because by diversifying or hedging your portfolio, it is possible to avoid risks and increase your expected return. True, because for a risk-averse person, those characteristics make a security less desirable. Uncertain because there may be other crucial characteristics to consider when purchasing a security.

True, because for a risk-averse person, those characteristics make a security less desirable.

Will there be an effect on interest rates if brokerage commisssions on stocks fall? Yes, interest rates would fall because stocks would have a relatively higher rate of return than bonds, which would reduce the demand for bonds. Yes, interest rates would rise because people would want to hold more stocks and fewer bonds, which would increase the demand for bonds. No, interest rates would remain the same because the brokerage commissions would only affect the stock market. Yes, interest rates would rise because stocks become more liquid than before, which would reduce the demand for bonds.

Yes, interest rates would rise because stocks become more liquid than before, which would reduce the demand for bonds.

When the interest rate on a bond is _____, the equilibrium interest rate, in the bond market there is excess _____ and the interest rate will _____. above; demand; fall above; supply; rise above; demand; rise below; supply; fall

above; demand; fall

Factors taht can cause the supply curve for bonds to shift to the right include: a business cycle recession a decrease in expected inflation a decrease in government deficits an expansion in overal economic activity

an expansion in overall economic activity

During a recession, the supply of bonds _____ and the supply curive shifts to the _____, everything else held constant. increase; right increase; left decrease; right decrease; left

decrease; left

Holding the expected return on bonds constant, an increase in the expected return on common stocks would _____ the demand for bonds, shifting demand curve to the _____. increase; right decrease; right increase; left decrease; left

decrease; left

When the economy slips into a recession, normally the demand for bonds _____, the supply of bonds _____, and the interest rate _____, everything else held constant. decreases; increases; rises decreases; decreases; falls increases; decreases; falls increrases; increases; rises

decreases; decreases; falls

When the expected inflation rate increases, the real cost of borrowing _____ and bond supply _____, everything else held constant. decreases; decreases increases; increases decreases; increases increases; decreases

decreases; increases

The bond demand curve is _____ sloping, indicating a(n) _____ relationship between the price and quantity demanded of bonds. upward; direct downward; direct upward; inverse downward; inverse

downward; inverse

Everything else held constant, if the expected return on ABC stock rises from 5% to 10% and the expected return on CBS stock is unchanged, then the expected return of holding CBS stock _____ relative to ABC stock and the demand for CBS stock _____. rises; falls falls; falls rises; rises falls; rises

falls; falls

Higher government deficits _____ the supply of bonds and shift the supply curve to the _____, everything else held constant. decrease; right increase; right increase; left decrease; left

increase; right

If wealth increases, the demand for stocks _____ and that of long-term bonds _____, everything else held constant. increases; decreases decreases; increases increases; increases decreases; decreases

increases; increases

Everything else held constant, when bonds become less widely traded, and as a consequence the market becomes less liquid, the demand curve for bonds shifts to the _____ and the interest rate _____. left; falls right; falls left; rises right; rises

left; rises

Everything else held constant, when stock prices become less volatile, the demand curve for bonds shift to the _____ and the interest rate _____. left; falls fight; falls left; rises right; rises

left; rises

In the bond market, the bond demanders are the _____ and the bond suppliers are the _____. lenders; borrowers borrowers; lenders borrowers; advancers lenders; advancers

lenders; borrowers

Everything else held constant, during a business cycle expansion, the supply of bonds shift to the _____ as businesses perceive more profitable investment opportunities, while the demand shifts to the _____ as a result of the increase in wealth generated by the economic expansion. right; right left; left right; left left; right

right; right

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. rises; left falls; right falls; left rises; right

rises; right

Everything else held constant, if interest rates are expected to fall in the future, the demand for long-term bonds today _____ and the demand curve shifts to the _____. rises; right rises; left falls; left falls; right

rises; right

Everything else held constant, if the expected return on U.S. Treasury bonds falls from 10% to 5% and the expected return on GE stock rises from 7% to 8%, then the expected return of holding GE stock _____ relative to U.S. Treasury bonds and the demand for GE stock _____. falls; falls falls; rises rises; rises rises; falls

rises; rises

When the government has a surplus, as occured in the late 1990s, the _____ curve of bonds shifts to the _____, everything else held constant. demand; right supply; right supply; left demand; left

supply; left

In a business cycle expansion, the _____ of bonds increases and the _____ curve shifts to the _____ as business investments are expected to be more profitable. demand; demand; left supply; supply; right demand; demand; right supply; supply; left

supply; supply; right

Holding everything else constant: the more liquid is asset A, relative to alternative assets, the greater will be the demand for asset A. if wealth increases, demand for asset A increases and demand for alternative assets decreases. if asset A's risk rises relative to that of alternative assets, the demand will increase for asset A. the lower the expectated return to asset A relative to alternative assets, the greater will be the demand for asset A.

the more liquid is asset A, relative to alternative assets, the greater will be the demand for asset A.

The bond supply curve is _____ sloping, indicating a(n) _____ relationship between the price and quantity supplied of bonds. downard; inverse downward; indirect upward; inverse upward; direct

upward; direct

Of the four factors that influence asset demand, which factor will cause the demand for all assets to increase when it increase? (everything else held constant) expected returns wealth risk liquidity

wealth