Econ 3229 Final

Following relationships are true for any type of coupon bonds

If P<FV, then YTM>CY>CR If P>FV, then YTM<CY<CR If P=FV, then YTM=CY=CR

Under what conditions would the previous Treasury bill ($5000 face value maturing in one year) have a negative yield? A) If coupon payments were less than 4% B) If the selling price was less than $4800 C) If coupon payments were greater than 4% D) If selling price was more than $5000

If selling price was more than $5000

The riskiness of an asset's returns due to changes in interest is A) exchange-rate risk B) price risk C) asset risk D) interest-rate risk

Interest-rate risk

Consider $1000 face value, 8% coupon rate, 10 year bond that's selling for $1040. Which of the following must be true? A) Its yield to maturity is 8.4% B) its current yield is 8% C) Its yield to maturity is 7.9% D) Its current yield is 7.7%

Its current yield is 7.7%

Amortized loans

Loans with payments that include both interest and principal

The money aggregate of M2 includes: A) savings deposits but not money market deposit accounts B) stock and bond mutual fund shares C) M1 D) large denomination time deposits

M1

Suppose John deposits $100 bill to his savings account. A) Both M1 and M2 increase B) M1 decrease and M2 increases C)M1 decreases and M2 stays unchanged D) M1 and M2 stays unchanged

M1 decreases and M2 stays unchanged

If an individual moves money from a small-denomination time deposit to a checking deposit account A) M1 increases and M2 stays the same B) M1 stays the same and M2 increases C) M1 stays the same and M2 stays the same D) M1 increases and M2 decreases

M1 increases and M2 stays the same

Consol Bond

Makes fixed coupon payments forever. Has no face value. P=C/i OR i=C/P

Which of the following is not of an example of bartering? A) Mrs. Smith treating the neighbor children to pizza after they helped clean up her yard B) John cutting his neighbor's grass in return for his neighbor washing John's car C) Sue trading candles with Tom for his bread D) Mary paying for her new shoes with her new credit card

Mary paying for her new shoes with her new credit card

Three functions of money

Medium of exchange, Unit of account, Store Value

______ is used to make purchases while_______ is the total collection of assets that serve to store value A) Money; income B) Wealth; income C) Income; money D) Money; wealth

Money; wealth

Present value of any future cash flows is:

PV=CF/(1+i)^n

A discount bond A) pays the bondholder a fixed amount every period and the face value at maturity B) pays the bondholder the face value at maturity C) pays all interest and the face value at maturity D) pays the face value at maturity plus any capital gain

Pays the bondholder the face value at maturity

A collection of assets is known as a(n): A) asset-backed security B) derivative C) futures contract D) portfolio

Portfolio

Financial system provides what three services?

Risk sharing, Liquidity, and Information

In which of the following situations would you prefer to be the lender? A) The interest rate is 9 percent and the expected inflation is 7 percent B) The interest rate is 4 percent and the expected inflation rate is 1 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

The interest rate is 4 percent and the expected inflation rate is 1 percent

Financial arbitrage

The process of buying and selling securities to profit from prices changes over a brief period of time

Other than savings deposits, small CD's and money market mutual funds shares (MMMFs), broader money supply M2 also includes money market deposit accounts (MMDAs). Which of the following about MMDAs is correct? A) They are just as liquid as checking or savings account deposits B) They pay lower interest rate than savings deposits C) They focus exclusively on stocks and long-term bonds D) They are very similar to MMMFs, expect the fact that MMDAs are federally insured

They are very similar to MMMFs, expect the fact that MMDAs are federally insured

Store of value

ability to accumulate wealth over time

Unit of account

ability to compare value of things; a measuring stick

Medium exchange

ability to obtain goods and services

Financial intermediaries handle a larger flow of funds than do primary markets primarily because financial intermediaries: A) have a government-provided monopoly B) have government-regulated prices, so there is little competition C) can lower transaction costs and increase liquidity for savers D) do not have to worry about information asymmetry

can lower transaction costs and increase liquidity for savers

An important source of short-term funds for commercial banks are _____ which can be resold on the secondary market A) negotiable CD's B) commercial paper C) mortgage-backed securities D) municipal bonds

commercial paper

Which of the following instruments are traded in a money market? A) bank commercial loans B) commercial paper C) state and local government bonds D) residential mortgages

commercial paper

Non-depository institutions would include all of the following except: A) finance companies B) pension funds C) insurance companies D) credit unions

credit unions

Financial markets have the basic function of A) getting people with funds to lend together with people who want to borrow funds B) assuring that the swings in the business cycle are less pronounced C) assuring that governments need never resort to printing money D) providing a risk-free repository of spending power

getting people with funds to lend together with people who want to borrow funds

M2

includes M1 and savings deposits, small denomination time deposits, money market mutual funds shares

M1

includes currency at non-bank public, checking account deposits

Money

is anything that's accepted for payment for good and debts

Price of a coupon bond

is the sum of present values of all the future payments

Rank the following assets from most liquid to least liquid: A) money, stocks, US government bonds, real estate, gold B) money, US government bonds, stocks, gold, real estate C) US government bonds, money, stocks, gold, real estate D) gold, money, US government bonds, stocks, real estate

money, Us government bonds, stocks, gold, real estate

The price of a coupon bond and the yield to maturity are______ related; that is, as the yield to maturity _______, the price of the bond _______. A) positively; rises; rises B) negatively; falls; falls C) positively; rises; falls D) negatively; rises; falls

negatively; rises; falls

In a(n) ________ market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices A) exchange B) over-the-counter C) common D) barter

over-the-counter

Currency includes A) paper money and coins B) paper money, coins, and checks C) paper money and checks D) paper money, coins, checks, and savings deposits

paper money and coins

Financial instruments are used to channel funds from: A) savers to borrowers in financial markets but not through financial institutions B) savers to borrowers in financial markets via financial institutions C) borrowers to savers in financial markets but not through financial institutions D) borrowers to savers through financial institutions, but not in financial markets

savers to borrowers in financial markets via financial institutions

Four basic categories of debt instruments:

simple loans, discount bonds, coupon bonds, fixed payment loans

Discount Bond (zero coupon bond)

sold at discount (below face value), no coupons, pay face value at maturity

Economists define liquidity as A) the fraction the assets make up of an investor's portfolio B) the difference between the total demand for assets and total supply of the asset C) the ease with which an asset can exchanged for money D) the difference between the return on the asset and the return on a long-term U.S. treasury bond

the ease with which an asset can exchanged for money

Dennis notices that jackets are on sale for $99. In case money is functioning as a A) medium of exchange B) unit of account C) store of value D) payments-system ruler

unit of account

Suppose in 2014 you buy 4% coupon rate, $100 face value bond for $100 that has 2 year left till maturity. If in 2015 interest rates increase to 6%, what will be the price of your bond and what will be your rate of return if you decide to sell it? A) $98.1 and 2.1% B) $99.4 and 3.4% C) $101.6 and 7.6% D) $102 and 8%

$98.1 and 2.1%

An advantage money have over other assets is that it: A) increases in value over time B) has lower transaction costs to use as a means of payments than other assets C) provides higher return to the owner D) is a safer asset to hold during times of inflation

Has lower transaction costs to use as a means of payments than other assets

Which of the following is true about ten year $1000 face-value 6% coupon bond that's selling for $1050? A) Its yield to maturity and coupon rate equal to 5.7% B) Its current yield and coupon rate equal to 6% C) Its yield to maturity is 8% D) Its current yield is 5.7%

Its current yield is 5.7%

Which of the following benefits directly from any increase in the corporation's profitability? A) a bond holder B) a commercial paper holder C) a shareholder D) a T-bill holder

a shareholder

Equity instruments are traded in the ________ market A) money B) bond C) capital D) commodities

capital

The M1 measure of money includes A) small denomination time deposits B) checking account deposits C) money market deposit accounts D) money market mutual fund shares

checking account deposits

A financial market in which previously issued securities can be resold is called a _______ market A) primary B) secondary C) tertiary D) used securities

secondary

Hyperinflation

very high rates of inflation (50% or more)

What yield does one year 4% coupon rate $1000 face value bond offer if it currently sell for $1050? A) 4% B) 2% C) 1% D) -1%

-1%

Which of the following can be described as involving direct finance? A) A corporation issues new shares of stock B) People buy shares in a mutual fund C) A pension fund manager buys a short-term corporate security in the secondary market D) An insurance company buys shares of common stock in the over-the-counter markets

A corporation issues new shares of stock

Which of the following coupon bonds has the lowest yield? A) $1000 face value, 4% coupon bond selling for $1020 B) $100 face value, 4% coupon bond selling for $100 C) $ 100 face value, 5% coupon bond selling for $98 D) $ 1000 face value, 4% coupon bond selling for $980

$1000 face value, 4% coupon bond selling for $1020

What is the price of a coupon bond that has annual coupon payments of $75, a face value of $1000, interest rate of 5%, and maturity of two years? A) $1000 B) $1043.08 C) $1046.49 D) $1150

$1046.49

What is the price of $100 face-value 5.5% coupon bond with 3 years to maturity with yield of 3%? A) $107.06 B) $105.5 C) $103 D) $108.8

$107.06

If a $1000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon payment every year is A)$37.50 B) $3.75 C) $375 D) $13.75

$37.50

A consol paying $20 annually when the interest rate is 5 percent has a price of A) $100 B) $200 C) $400 D) $800

$400

What is the present value of $500 to be paid in two years if the interest rate is 5 percent? A) $453.51 B) $500 C) $476.25 D) $550

$453.51

What is the future value of $50 five years from now at 2%? A) $48.5 B) $51.3 C) $55.2 D) $58.4

$55.2

If a consol is offering an annual coupon of $50 and the annual interest rate is 6%, the price of the consol is: A) $8333.33 B) $833.33 C) $47.17 D) $813

$833.33

If annual interest rate is 5% (.05), the price of a one-year Treasury bill per $100 of face value would be: A) $97.50 B) $95 C) $95.24 D) $96.10

$95.24

Consider one-year, $1000 face value US treasury bill with an interest rate of 3.4%. What is its price? A) $986.12 B) $967.12 C) $1034 D) $966

$967.12

What is the price of $1000 face-value one year zero coupon discount bond that offers 1.5% yield? A) $992.3 B) $1001.5 C) $998.5 D) $985.2

$985.2

A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of A) 3 percent B) 20 percent C) 25 percent D) 33.3 percent

33.3 percent

What is the yield to maturity on a $5000 face value discount bond maturing in one year that sells for $4800? A) 4.2% B) 4.0% C) 4.8% D) -.5%

4.2%

According to the quantity theory of money, if the long-run economic growth rate is 2.5%, by how much should the Fed increase the money supply if it wants inflation to be 2%? A) .5% B) 1.25% C) 4.5% D) 5%

4.5%

What is the yield on a consol bond with $5 coupon and the selling price $102? A) 27.5% B) 4.9% C) 3.6% D) 2.75%

4.9%

What is yield to maturity of $100 face value 2.5% coupon bond with a selling price of $105 that has 1 year left to maturity? A) 2.5% B) 5% C) 7.5% D) -2.4%

-2.4%

Suppose you buy a 10-year, 2.5% rate Treasury bond with a face value of $100 for a price of $108. Assume the price of this bond decreases to $102 over the next year and you decide to sell it. The one-year holding period return is equal to: A) 8% B) -2.5% C) -3.2% D) -3.5%

-3.2%

If nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent the real rate of interest is A) 2 percent B) 8 percent C) 10 percent D) 12 percent

12 percent

Assuming constant velocity of money, if the inflation rate averages 2% and money supply grows at 4% annually, what must be change in real GDP? A) 2% increase B) 4% increase C) 2% decrease D) no change

2% increase

What is the return on a 5 percent coupon $1000 face value bond that initially sells for $1000 and sells for $1200 next year? A) 5 percent B) 10 percent C) -5 percent D) 25 percent

25 percent

A one-year discount bond with a par value of $5000 sold today, at issuance, for $4,750 has a yield to maturity of A) 5.26% B) 2.50% C) 5% D) 9.75%

5.26%

What is yield to maturity of $100 face value 2.5% coupon bond with a selling price of $95 that has 1 year left to maturity? A) -2.5% B) 4.9% C) 7.5% D) 7.9%

7.9%

Which of the following $1000 face-value securities has the lowest yield to maturity? A) a 5 percent coupon bond selling for $1000 B) a 5 percent coupon bond selling for $900 C) a 12 percent coupon bond selling for $900 D) a 5 percent coupon bond selling for $1200

A 5 percent coupon bond selling for $1200

Financial instruments used primarily as stores of value do not include: A) asset backed securities B) U.S. Treasury bonds C) a car insurance policy D) a bank loan

A car insurance policy

Money as a means of payments refers to: A) anything that is generally accepted as payments for goods and services B) only actual currency C) only coins, currency, and credit cards D) only coins and currency

Anything that is generally accepted as payments for goods and services

Simple loans

Borrowers receives from the lender an amount of funds called the principal and agrees to repay the lender the principal plus interest on when the loan matures

A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the the face value is called a A) simple loan B) fixed-payment loan C) coupon bond D) discount bond

Coupon bond

The purchasing power of money: A) rises when inflation rises B) decreases as the price level decreases C) decreases with inflation D) is not impacted by inflation, only by monetary policy

Decreases with inflation

Coupon Bond

Face value, coupon (annual payments) or coupon rate, maturity, issuing institution

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

It must have intrinsic value

Equation of exchange

M x V = P x Y

The store of value characteristic of money refers to the fact that: A) people save most of their money B) money allows people to shift purchasing power into the future C) money is not valuable unless it is stored D) money is the only way people have to store value

Money allows people to shift power into the future

The yield to maturity for a discount bond is ______ related to the current bond price A) negatively B) positively C) not D) directly

Negatively

Fiat money

No intrinsic value, valuable only because of government

One year holding period rate of return:

R=Coupon/initial price + change in price/ initial price or R= Current yield + rate of capital gain/loss

The_______ interest rate more accurately reflects the true cots of borrowing A) nominal B) real C) discount D) market

Real

Fixed payments loans

Requires the borrower to make regular periodic payments of principal and interest to the lender

_____ are the time and resources spent trying to exchange goods and services A) Bargaining costs B) Transaction costs C) Contracting costs D) Barter costs

Transaction costs

A vacation to Mexico costs $500 less than a vacation to Europe. When you make this comparison, which of the following functions of money did you use? A) medium of exchange B) Unit of account C) Store of Value D) Barter trade

Unit of account

Price of a bond is equal to its face value

When the price of a bond is equal to its face value, the bond's yield maturity will be equal to its coupon rate

When the price of a bond is below the face value, the yield to maturity: A) will equal the coupon rate B) is below the coupon rate C) will equal the current yield D) will be above the coupon rate

Will be above the coupon rate

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

Would have to rely on barter

Which of the following $5,000 face-value securities has the highest yield to maturity? A) a 6 percent coupon bond selling for $5,500 B) a 10 percent coupon bond selling for $5,000 C) a 6 percent coupon bond selling for $5,000 D) a 12 percent coupon bond selling for $4,500

a 12 percent coupon bond selling for $4,500

If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding? A) a bond with one year to maturity B) a bond with five years to maturity C) a bond with ten years to maturity D) a bond with twenty years to maturity

a bond with one year to maturity

A $1,000 face value bond purchased for $965, with an annual coupon of $60, and 20 years to maturity has a: A) a current yield equal to 6% B) a yield to maturity and current yield equal to 6% C) a coupon rate equal to 6.22% D) a current yield equal to 6.22%

a current yield equal to 6.22%

Of the following assets, the least liquid is A) stocks B) traveler's checks C) checking deposits D) a house

a house

Price of a one year discount bond

is the present value of its single payment

Federal funds are A) funds raised by the federal government in the bond market B) loans made by the Federal Reserve System to banks C) loans made by banks to the Federal Reserve System D) loans made by banks to each other

loans made by banks to each other

According to the equation of exchange, the money supply times the velocity of money equals the A) growth rate of the money supply B) price level C) real GDP D) nominal GDP

nominal GDP

An example of economies of scale in the provision of financial services is A) investing in a diversified collection of assets B) providing depositors with a variety of savings certificates C) hiring more support staff so that customers don't have to wait so long for assistance D) spreading the cost of writing a standardized contract over many borrowers

spreading the cost of writing a standardized contract over many borrowers