Econ 3229 Final Mizzou

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the monetary base is

$480.8 billion

If you deposit a $50 check in the bank, the immediate impact on your bank's balance sheet will be a

$50 increase in reserves and a $50 increase in checkable deposits

If a British automobile sells for £40,000 and one dollar buys 0.8 pounds, then the dollar price of the automobile is

$50,000

If a bank has $200,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is

$50,000

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $1000 billion, and excess reserves total $1 billion, then the monetary base is

$501 billion

If a bank has $500 million of checkable deposits, a required reserve ratio of 15%, and it holds $126 million reserves, then the maximum deposit outflow it can sustain without running into reserve deficiency is

$60 million

Your bank has the following balance sheet: Assets Liabilities Reserves$15 millionCheckable deposits $65 million Securities $11 million Loans$43 millionBank capital$4 million If the required reserve ratio is 20%, what will be the size of this bank (as measured by its total assets or liabilities) after $5 million deposit outflow if it just meets reserve deficiency by borrowing on federal funds market?

$66 million

If a consol is offering an annual coupon of $50 and the annual interest rate is 6%, the price of the consol is:

$833.33

What is the price of a two-year coupon bond that has annual coupon payments of $12, a face value of $1000, a yield to maturity of 8%?

$878.7

Your bank has the following balance sheet: Assets Liabilities Reserves $12 million Checkable deposits $100 million Securities $25 million Loans $65 million Bank capital $2 million If the required reserve ratio is 10%, what will be the size of this bank (as measured by its total assets or liabilities) after $8 million deposit outflow if it just meets reserve deficiency by selling securities?

$94 million

If the annual interest rate is 5% (.05), the price of a one-year Treasury bill per $100 of face value would be:

$95.24

If a $1,000 face-value discount bond maturing in one year has an yield of 5%, then its price is

$952.4

A 30-year Treasury bond as a face value of $1,000, price of $1,200 with a $50 coupon payment. Assume the price of this bond decreases to $1,100 over the next year. The one-year holding period return is equal to:

-4.17%

If reserves in the banking system increase by $100, then checkable deposits will increase by $1000 in the simple model of deposit creation when the required reserve ratio is

0.10

Suppose that your marginal federal income tax rate is 20%, and the yield on thirty-year U.S. Treasury bonds is 2.5% and the yield on thirty-year municipal bond 2.2%. What is the tax adjusted risk premium on municipal bond?

0.2%

If reserves in the banking system increase by $100, then checkable deposits will increase by $500 in the simple model of deposit creation when the required reserve ratio is

0.20

If the required reserve ratio is 10 percent, currency in circulation is $1,200 billion, checkable deposits are $1,600 billion, and excess reserves total $2,500 billion, then the M1 money multiplier is

0.73

Suppose current 1-year, 2-year and 3-year interest rates are 0.6, 0.8 and 1 percent. Then, according to the expectations theory, expected interest rate on 1-year bond next year is

1 percent

If a bank has a capital to equity ratio of 0.1 and a return on equity of 10%, what is its return on assets?

1%

A one-year bond currently pays 0.9% interest. It's expected that it will pay 0.9% next year and 1.2% the following year. The two-year term premium is 0.15% while the three-year term premium is 0.2%. What is the interest rate on a two-year bond currently according to the liquidity premium theory?

1.0%

What is the rate of return on a $1,000 face-value, 4% coupon bond that was purchased for $950 and sold one year later for $920?

1.05%

A one-year bond currently pays 1% interest. It's expected that it will pay 1.2% next year. According to the expectations theory, what is the interest rate on two-year bond currently?

1.1 percent

If current 1-year and 2-year interest rates are 1.1 and 1.2 percent, what's the expected 1-year interest rate next year according to the liquidity premium theory if the 2-year term premium is 0.1 percent?

1.1 percent

A one-year bond currently pays 1.1% interest. It's expected that it will pay 1.0% next year and 0.9% the following year. The two-year term premium is 0.1% while the three-year term premium is 0.15%. What is the interest rate on a three-year bond according to the liquidity premium theory?

1.15%

A one-year and two-year bonds currently pays 4.9% and 3.4%, respectively. What is the expected interest rate on a one-year bond next year according to the liquidity premium theory if the two-year term premium is 0.1%?

1.7%

If a borrower wants to pay a real interest rate of 0.5% and expects inflation to be 1.2%, he/she should agree to pay a nominal interest rate of:

1.7%

Suppose 1-year, 2 year and 3 -year interest rates today are 1.0%, 1.2% and 1.4%, respectively. What's the expected 1-year interest rate two years from now according to the expectations theory?

1.8 percent

If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to

10 times its excess reserves

If we ignore transportation costs and the price of a pair of Nike shoes in Detroit is 100 U.S. dollars what should be the price of the Nike shoes in Windsor, Canada (in Canadian dollars) if the nominal exchange rate is 1.36 Canadian dollars/1 U.S. dollar?

136

If a bank's ratio of assets to capital is 5 and it's return on assets is 3%, what is its return on equity?

15%

The FDIC was created in

1934

If 1-year interest rates for the next three years, starting with this year, are expected to be 1, 1, and 1 percent, and the 2-year and the 3-year term premiums are 0.5 and 1 percent, respectively, than the 3-year bond rate will be

2 percent

If the required reserve ratio is one-third, currency in circulation is $300 billion, checkable deposits are $900 billion, and there is no excess reserve, then the M1 money multiplier is

2.0

A one-year and two-year bonds currently pays 1.2% and 1.6%, respectively. What is the expected interest rate on a one-year bond next year according to the expectations theory?

2.0%

If the required reserve ratio is 15 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is

2.3

Suppose 1-year, 2 year and 3 -year interest rates today are 2.0%, 2.0% and 2.2%, respectively. What's the expected 1-year interest rate two years from now according to the expectations theory?

2.6 percent

Suppose that your marginal federal income tax rate is 40%, and the yield on thirty-year U.S. Treasury bonds is 4.5%. You would be indifferent between buying a thirty-year Treasury bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield of

2.7%

What is the length of a term for the Chairman of the Board of Governors?

4 years

Assume the expectations hypothesis regarding the term structure of interest rates is correct. If the current one-year interest rate is 3% and the one-year-ahead expected one-year interest rate is 5%, then the current two-year interest rate should be:

4%

If the required reserve ratio is 25 percent, the simple deposit multiplier is

4.0

If the current 3-year interest rate is 5.2% and the expected 1-year interest rate three years from now is 5%, what is the interest rate on 4-year bond today according to the expectations theory?

5.15 percent

If the real interest rate is 4% and expected inflation is 2%, the nominal interest rate is:

6%

Suppose the tax rate is 25% and the taxable bond yield is 8%. What is the equivalent tax-exempt bond yield?

6%

A one-year discount bond with a par value of $1000 sold today, at issuance, for $943 has a yield to maturity of

6.04

Suppose that your marginal federal income tax rate is 20% and the yield on thirty-year U.S. Treasury bonds is 8%. You would be indifferent between buying a thirty-year Treasury bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield of

6.4%

How many members are on the Board of Governors of the Federal Reserve System?

7

Suppose nominal GDP is $14 trillion and the money supply is $2 trillion. What is the velocity of money?

7

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 the future one-year rate to be:

8%

If a bank's capital-to-asset ratio is 0.025 and it's return on assets is 0.2%, what is its return on equity?

8%

Holding liquidity and default risk constant, an investor earning 6% from a tax-exempt bond who is in a 25% tax bracket would be indifferent between that bond and a taxable bond with a(n):

8% yield

If a $1,000 face-value discount bond maturing in one year is selling for $915, then its yield to maturity is

9.3 percent.

Consider the bonds below. Which is subject to the smallest interest-rate risk?

A Treasury bill

A borrower who makes a $1,000 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 nominal rate of 7.5% and a real rate of 5.5%.

What is the yield to maturity on a $1,000-face-value discount bond maturing in one year that sells for $880? Under what conditions will this bond have a negative yield?

YTM=1000-880/880=13.6% Bond would have a negative yield if the selling price exceeds $1,000 face value. This means that you are paying more now than what you can expect to receive in the future.

Which of the following bonds has the lowest yield to maturity? Please explain your answer.

Yield for bond A can't be directly calculated. However, since it's selling above par, its yield will be lower than 1.2%. For bond B, it's selling at par, therefore its yield equals to 2%. The last bond it's selling below par, thus its yield will be above 3%. Therefore, Bond A has the lowest yield.

Let's say open a saving deposit with $5,000 at a local bank. The current market real interest rate is 1.1%, and inflation is expected to be 1.8% over the next year.a) If you could negotiate, what nominal interest rate would you ask the bank to pay on your savings?

You would ask for a nominal interest rate of 1.1%+1.8%=2.9%

Which of the following $5,000 face-value securities has the highest yield to maturity?

a 12 percent coupon bond selling for $4,500

Which of the following $1,000 face-value securities has the lowest yield to maturity?

a 4 percent coupon bond with a price of $1,200

Which of the following $100 face-value securities has the lowest yield to maturity?

a 6 percent coupon bond with a price of $101

Which of the following is an example of fiat money?

a Federal Reserve Note used as money in the twenty-first century United States

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 bond with one year to maturity

Financial instruments used primarily as stores of value would not include:

a car insurance policy.

A $1,000 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%.

A futures contract is an example of:

a derivative instrument.

A bank run involves:

a large number of depositors withdrawing their funds during a short time span.

If the Fed were to purchase euros for dollars and at the same time sell U.S. Treasury securities in the open market, this would be an example of:

a sterilized foreign exchange intervention.

The sale of foreign assets by a central bank accompanied by an open market purchase of securities of the same size results in:

a sterilized intervention

The main difference between a sterilized intervention and unsterilized intervention in the foreign exchange market is:

a sterilized intervention does not change the monetary base

If the federal government decreases its spending and doesn't decrease taxes, the bond supply shifts to the

left and the equilibrium bond interest rate falls.

Everything else held constant, when stock prices become less volatile, the demand curve for bonds shifts to the ________ and the interest rate ________.

left; rises

The Glass-Steagall Act was designed to

legally separate investment banking from commercial banking.

d. You expect bond yields to increase in the future.

less because of future capital loss (depreciation).

Considering the balance sheet for all commercial banks in the U.S., the largest category of assets is:

loans

Secondary reserves for banks are:

mainly the bank's liquid securities.

Most of the TARP funds were used to

make direct purchases of preferred stock in banks to increase their capital.

The Board of Governors of the Fed performs each of the following functions, except:

making discount loans

The U.S. has many banks because:

many states outlawed bank branching

The U.S. has many banks because:

many states outlawed bank branching.

Kevin purchasing concert tickets with his debit card is an example of the ________ function of money.

medium of exchange

Open market purchases raise the ________ thereby raising the ________.

monetary base; money supply

c. Brokerage commissions on stocks increase.

more because it's harder to trade stocks now.

Explain why you would be more or less willing to buy long-term Microsoft bonds under the following circumstances: a. Commissions on buying and selling these bonds decrease.

more because of higher bond liquidity.

b. You expect a bearish stock market to last for a while (stock prices are expected to decrease).

more because of lower expected return on stocks.

Higher the bank's asset-to-capital ratio,

more exposed to insolvency it is.

In the market for reserves, when the federal funds rate is above the interest rate paid on excess reserves, the demand curve for reserves is

negatively sloped

An open market sale of U.S. Treasury securities by the Fed will cause the Banking System's balance sheet to show:

no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing

A primary financial market is:

one in which newly issued securities are sold.

The quantity of securities held by the Federal Reserve is controlled through:

open market operations

Which of the following is NOT an activity carried out by Federal Reserve district banks?

open market operations

Buying and selling U.S. Treasury Securities for the Fed's own portfolio is called:

open market operations.

Expansionary monetary policy consists of all of the following EXCEPT

open market sales

If Ford Mustang costs $30,000 in the US and 40,000 pounds in the UK and the current exchange rate between pound and dollar is $1.2 per pound, then according to PPP pound is ______ and should ________.

overvalued; depreciate

The payoff method used by the FDIC to address the insolvency of a bank is when the FDIC:

pays off the depositors up to the current $250,000 limit, so it is possible that some depositors will suffer losses.

Investors usually obtain bond ratings from:

private bond-rating agencies

The gram-Leach-bailey Act:

repealed the Glass-Steagall Act's prohibition of mergers between commercial banks and insurance or securities firms.

The Glass-Steagall Act of 1933:

required commercial banks to sell off their investment banking operations

The Glass-Steagall Act of 1933:

required commercial banks to sell off their investment banking operations.

As a result of an open market purchase, bank reserves

rise and interest rates fall.

If the 2018 inflation rate in Eurozone is 1.8 percent, and the inflation rate in UK is 2.1 percent, then the theory of purchasing power parity predicts that, during 2018, the value of euro in terms of pounds will

rise by 0.3 percent

The purchasing power of money

rises when prices fall.

Suppose BiC (headquartered in France) sells its razors in the USA for $4 and currently it's selling 10 million units annually. Also, the current exchange rate is 0.8 euros per dollar. a) Calculate BiC's sales revenue in the US both in dollars and euros (hint: sales revenue=price *number of units sold).

sales revenue in dollars=$4*10 million=$40 million. Sales revenue in euros=$4*0.8 *10 million =32 millions euros.

Considering the balance sheet for all commercial banks in the U.S., the largest category of liabilities is:

saving's deposits and time deposits.

Which of the following is a bank liability?

savings deposits

Discount loans intended for banks that are not financially healthy are called

secondary credit

Both ________ and ________ are Federal Reserve assets

securities; loans to financial institutions

If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can

sell $3 million of securities

If the Fed wants to reduce the value of the dollar, it will

sell dollars and buy foreign assets

Money markets are where trades occur for:

short-term bonds issued by both governments and private companies.

Under the liquidity premium theory a flat yield curve implies:

short-term interest rates are expected to decrease

Municipal bonds are issued by:

states and cities and their interest is exempt from U.S. government taxation.

Over the last twenty years in the U.S., the number of banks has:

steadily decreased.

Capital is the cushion banks have against:

sudden drops in the value of their assets.

If the U.S. government's borrowing needs increase, all other factors constant the:

supply of bonds will increase

If U.S. assets are seen as having greater risk relative to foreign assets in the market for foreign exchange, this should cause the:

supply of dollars to increase

The additional incentive that the purchaser of a Treasury security requires to buy a long-term security rather than bunch of short-term securities is called the

term premium

The three branches of the Federal Reserve System include each of the following, except:

the Federal Deposit Insurance Corporation.

The idea that nominal interest rates rise or fall one-for-one with expected inflation is known as

the Fisher effect.

If a bank has $200 million in deposits, the required reserve rate is 10 percent and the bank has $23 million in reserves:

the bank has excess reserves of $3 million.

The bond supply curve slopes up because

the borrower is willing and able to offer more bonds when the price of the bond is high

You would be more willing to buy AT&T bonds today (holding everything else constant) if

the brokerage commissions on bond sales become cheaper

The Reserve Banks of the Federal Reserve System are owned by:

the commercial banks in their districts

When the Fed sells foreign assets and buy domestic assets at the same time,

the composition of its assets changes, but its liabilities are unaffected

When the Fed sells foreign assets and buy domestic assets at the same time,

the composition of its assets changes, but its liabilities are unaffected.

The actual results of the McFadden Act included:

the continued operation of small inefficient banks

An expected appreciation of the dollar, everything else held constant, should cause:

the demand for dollars to increase.

If in late 2016 100 U.S. dollars exchanged for 118 euros and in mid-2017 100 U.S. dollars exchanged for 127 euros, then:

the dollar appreciated relative to the euro

Considering the theory of purchasing power parity, if inflation in Mexico is 5% while prices in the U.S. are stable; we should expect over the period of a year:

the dollar to appreciate 5% relative to the peso

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then

the liabilities of Citibank increase by $10

Newly issued U.S. Treasury Securities are sold in:

the primary financial market.

When compared to exchange systems that rely on money, disadvantages of the barter system include

the requirement of a double coincidence of wants.

During a "flight to quality"

the spread between Treasury bonds and Baa bonds increases.

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 indicate:

the yield curve is upward sloping.

An inverted yield curve is a valuable forecasting tool because:

the yield curve seldom is inverted and can signal an economic slowdown.

Bonds issued by the U.S. Treasury are referred to as benchmark bonds because:

they are highly liquid and virtually free of default risk.

One of the unique problems that banks face is:

they hold illiquid assets to meet liquid liabilities

The Federal Reserve System is composed of:

three branches with overlapping responsibilities.

If a bond's rating worsens it should cause the bond's price:

to decrease and its yield to increase, all other factors constant.

If a bond's rating improves it should cause the bond's price:

to increase and its yield to decrease, all other factors constant.

The primary use of derivative contracts is:

to shift risk among investors.

Compared to an economy that uses a medium of exchange, in a barter economy

transaction costs are higher.

Suppose Big Mac costs 120 pesos in Mexico City and 8 pounds in London. If the current exchange rate is 12 pesos per pound, then according to law of one price pound is ______ and should _______ in the long run.

undervalued; appreciate

The process by which investment banks guarantee a certain price to a firm issuing stocks or bonds is known as:

underwriting

A foreign exchange intervention that alters the domestic monetary base is:

unsterilized

When the price of a bond is below the face value, the yield to maturity:

will be above the coupon rate.

A U.S. resident who wants to purchase an automobile that comes from Japan:

will make up part of the supply of dollars on the foreign exchange market

An investor in a 30% marginal tax bracket, earning $10 in interest annually for a $100 U.S. Treasury bond:

would be indifferent between this bond and a municipal bond offering $7 annually per $100 of face value, assuming the same default risk and liquidity characteristics.

A society without any money:

would have to rely on barter.

As general business conditions improve, all other factors constant the:

yield on bonds will increase.

The market for bonds is initially described by the supply of bonds - S0, and the demand for bonds - D0, with the equilibrium price and quantity being P0 and Q0. Suppose that the expected return on bonds falls relative to other assets. In the bond market this will result in:

Bond demand curve to shift to D2

The members of Federal Reserve district bank boards of directors appointed by the Board of Governors are known as

Class C directors

Suppose currently 10-year Treasury bond yields 0.9% and 10-year municipal bond offers 0.8% yield. Also, your federal income tax rate is 30% and state income tax rate is 12%. Calculate the risk premium (spread) of this municipal bond.

Correct way of calculating risk spread is to calculate after tax yield on Treasury bond first and then take a difference. After-tax yield on Treasury bond=0.9% (1-0.3)=0.63%. Given than municipal bond offers 0.8%, risk spread=0.8-0.63=0.17%. State income tax rate of 14% is irrelevant because neither Treasury nor municipal bond is taxed under state income tax.

Suppose currently 10-year Treasury note offers 0.9% yield and the average yield on investment grade 10-year corporate bonds is 3.1%. Calculate the risk spread of corporate bonds. What will happen to the yields of corporate and treasury bonds as well as the risk spread if the federal government guarantees today that it will pay to bondholders if the corporations go bankrupt in the future.

Current risk spread is 3.1-0.9=2.2%.

In which of the following periods was the yield curve inverted?

February 2007

According to the recent release on US monetary aggregates by the Fed, M1 money supply showed a dramatic increase in May of 2020, with M2 increasing slightly. What was the directly responsible for these changes?

Fed classifying savings deposits as part of M1.

Which of the following is NOT considered one of the four groups in the Federal Reserve System?

Federal Deposit Insurance Corporation

According to the WSJ article, many money market and bond funds experienced a sudden run in March of 2020, when clients decided to liquidate and redeem their shares. Why were these institutions having a hard to meet the redemptions?

Finding buyers of commercial paper and municipal bonds became very hard.

Equity markets are markets:

For stocks

Given the selling price from part (a), what was your annual rate of return from owning this bond? You can assume you kept a single coupon payment during the year you owned the bond.

Given that you can sell your bond for $105.8, then your rate of return R=5/90+(105.8-90)/90=5.6%+17.6%=23.2%

b) Suppose you and the bank agreed on that nominal interest rate and inflation turned out to be 0.5% instead of 1.8%. Use nominal/real interest rate concepts covered in lecture to conclude who gained, you or the bank, from this inflation change.

If the inflation turned out to be 0.5% instead of 1.8%, then you would gain and bank would lose. Specifically, given that bank pays you agreed upon nominal interest rate of 2.9, your real interest rate will be 2.9-0.5=2.4%, lot higher than market real interest rate 1.1%.

When Argentine peso depreciates, are you more likely to buy wine produced in California or in Argentina? You can answer the question by running the following scenario: Suppose current peso price of Argentine bottle of cabernet is 1200 pesos, dollar price of California cabernet is $12 and the current exchange rate is 0.01 dollars per peso. Think about what would happen if there was 50% depreciation of peso, driving the value of peso to $0.005 dollars per peso.

Initially at $0.01 per peso, 1200 peso Argentine cabernet and $12 California cabernet cost the same to you (1200*0.01=$12). If peso loses half of its value and goes to $0.005 per peso, then 1200 peso Argentine wine will cost you 1200*0.005=$6, lot cheaper than cabernet from California. So, you are more likely to drink Argentine wine. Note: 50% depreciation of peso is equivalent of 50% discount of Argentine wines.

According to the WSJ article, Argentina sold very long-term bonds in 2017. Analysts pointed out that besides default risk, there was another risk investors had to worry about. What kind of risk was it?

Interest rate risk

Which of the following would not be considered a characteristic of money?

It must have intrinsic value.

Which of the following persons has served as Chairman of the Board of Governors?

Janet Yellen

The money aggregate M2 includes:

M1

If an individual moves money from a checking deposit to a money market mutual fund account

M1 decreases and M2 stays the same.

If an individual moves money from a savings deposit to currency

M1 increases and M2 stays the same.

Which of the following is not an example of bartering?

Mary paying for her new shoes with her credit card.

As a result of the 2007-2009 financial crisis, which of the following Big Five investment banks was acquired by Bank of America?

Merrill Lynch

Which of the following assigns widely followed bond ratings?

Moody's Investor Service

If a one-year bond currently yields 0.9% and is expected to yield 0.7% next year, the liquidity premium theory suggests the yield today on a two-year bond will be:

More than 0.8%

If a one-year bond currently yields 4% and is expected to yield 6% next year, the liquidity premium theory suggests the yield today on a two-year bond will be:

More than 5%.

Which investment bank had to reorganize itself and become bank-holding company in order to receive Federal Reserve assistance during 2007-09 financial crisis?

Morgan Stanley

The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of government securities, but these purchases or sales are executed by the Federal Reserve Bank of

New York

The president of which Federal Reserve bank is always a voting member of the Federal Open Market Committee?

New York

The largest of the regional Federal Reserve Banks is located in:

New York City

Suppose this year you buy 5% coupon rate, $100 face value bond for $90 that has 3 years left till maturity. Suppose next year market interest rates decrease to 2% and you decide to sell it your bond that year.a) Calculate the selling price of your bond next year. In another words, what price would make your bond competitive when market yields are at 2.0%?

Next year you are selling a 2-year bond. The buyer who buys it from you will get 2 coupon payments and face value. The value for the next investor should be P=5/1.02+5/1.022+100/1.022=4.9+4.8+96.12=105.8. So are you going to have to sell your bond at higher price than you paid for it a year before.

What is the price of $100 face-value 1.5% coupon bond with 3 years to maturity with yield of 5%?

P=1.5/1.05+1.5/1.052+1.5/1.053+100/1.053=$90.47

Which of the following lists correctly orders assets from most liquid to least liquid?

Paper currency, savings deposits, stocks, house

A Ford mustang sells for $50,000 in the US. What is the pound price of Ford Mustang in London the exchange rate is $1.2 per pound?

Pound price is 50,000/1.2=41,666.7 pounds

According to the WSJ article, in March of 2020, spread of Coronavirus and resulting economic fears lead to the very dramatic Treasury bond market outcome, something analysts referred to a"flight to quality." What exactly happened to Treasury bond prices and yields in March of 2020?

Prices increased and yields fell.

According to the WSJ article, US banks experienced a reverse bank run in the first quarter of 2020 when $1 trillion deposits flowed into the banking system. This is in contrast to massive bank runs in 2007-08 when banks lost deposits. What do you think explains this?

Relative safety and resilience of the banks today.

Think about different assets: currency, stocks, corporate bonds, Treasury bonds, bitcoin and commodities like gold. Think about return on these assets as well as the risk involved. Now plot each assets' risk and reward on the two-dimensional graph, where x axis measures risk and y axis measure reward (location of points does not have to be precise). What do you notice and is there correlation?

Riskier assets offer higher reward, meaning that there is a positive correlation between risk and reward.

What is yield to maturity of $100 face-value 5% coupon bond with a selling price of $90 that has 1 year left to maturity? What if the selling price was $108?

Solve for i: 90=5/(1+i)+100/(1+i)> 1+i=105/90->i=16.7%. At $108=5/(1+i)+100/(1+i)->i=-2.8% This bond now has negative yield (because what you pay now exceeds total payments you will receive in the future).

The two best known bond rating services are:

Standard & Poor's and Moody's Investment Services.

Which of the books used at the FOMC meetings contains anecdotal information collect by the Federal Reserve Banks?

The Beigebook

Which of the following is not a financial intermediary?

The New York Stock Exchange

Which of the following will take place in the foreign exchange market if there is an increase in the demand for products made in the United States?

The demand for dollars will increase

Which of the following statements is not true of the yield curve for U.S. Treasury securities?

The yield curve usually is inverted.

Let's say you discovered that your checking account balance consistently stays above $500. You decided to set up a money market mutual fund account where you deposit any monies from your checking account in excess of $500. How does this action change M1 and M2, as opposed to a scenario where you leave all your money in the checking account?

This will decrease M1 and M2 will stay unchanged.

Considering a bank's balance sheet, which of the following statements is false?

Total Bank Assets + Total Bank Liabilities = Total Bank Capital

The most common form of zero-coupon bonds found in the United States is:

U.S. Treasury bills.

According to the WSJ article, in 2019 investors developed a strong appetite for municipal bonds, especially for lower rated ones. What do you think explains it?

Ultra low yields everywhere else.

According to the WSJ article, the Federal Reserve unleashed a three-phase policy response to the economic slowdown caused by COVID pandemic. Which of those three phases is the most controversial one?

Various lending facilities.for money market funds, municipal governments, etc.

Which of the following banned most proprietary trading by commercial banks?

Volcker rule

What will happen to sales revenue in dollars and euros if euro appreciates to 0.75 euros per dollar, assuming BiC keeps charging the same price in the USA and keeps selling the same number of razors? Generalize how domestic currency appreciation affects corporate bottom line.

When euro appreciates, given that BiC does not change pricing or sales numbers, its dollar revenue will stay at $40 million. Its euro revenue now will be $4*0.75*10 million=30 million euros. BiC euro revenues decreased by 2 million euros. In general, domestic currency (just as euro is for BiC) appreciation hurts domestic corporations and decreases their bottom line.

Roles served by financial markets include the following, except:

eliminating risk

Total reserves are the sum of ________ and ________.

excess reserves; required reserves

If expected inflation declines by 2%, what should happen to nominal interest rates according to the Fisher effect?

fall by 2%

If interest rates are expected to rise, the bond prices will:

fall, due to the demand for bonds decreasing.

Under the purchase-and-assumption method of dealing with a failed bank, the FDIC:

finds another bank to take over the insolvent bank.

The Governors of the Federal Reserve System serve terms of:

fourteen years.

Financial instruments used primarily as stores of value include each of the following, except:

futures contracts.

A derivative instrument:

gets its value and payoff from the performance of the underlying instrument.

The law of one price fails as a result of:

goods that cannot be traded

The national economic forecast for the next two years prepared by the staff of the Board of Governors is published in the

green book

An advantage that money has over other assets is that it:

has lower transaction costs to use as a means of payment than other assets.

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, increasing the interest rate paid on excess reserves from 1% to 2%

has no effect on the federal funds rate

An unsterilized intervention in which the central bank sells foreign assets to purchase domestic currency will result in

higher domestic interest rates

Which of the following assets is the least liquid?

house

The Federal Deposit Insurance Corporation (FDIC) was created:

in 1933 as a part of the Glass-Steagall Act

If Great Britain experiences higher rates of inflation than the United States over a long period of time, we should expect the British £ (pound) per U.S. $ (dollar) exchange rate to:

increase

When the Fed extends a $100 discount loan to the First National Bank, reserves in the banking system

increase by $100

Everything else held constant, abolishing the individual income tax will

increase the interest rate on municipal bonds.

Suppose that the Federal Reserve conducts an open market sale. Everything else held constant, this will cause the demand for U.S. dollar to ________ and the U.S. dollar will ________.

increase; appreciate

When the Federal Reserve purchases a government bond from a primary dealer, reserves in the banking system ________ and the monetary base ________, everything else held constant.

increase; increases

When the Federal Reserve purchases a government bonds from banks, reserves in the banking system ________ and the monetary base ________, everything else held constant.

increase; increases

An increase in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities, everything else held constant.

increase; reduce

An open-market purchase of foreign bonds to increase a central bank's international reserves:

increases the central bank's liabilities and assets.

An open market purchase

increases the monetary base

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves and below the discount rate, an open market purchase ________ the ________ of reserves which causes the federal funds rate to fall, everything else held constant.

increases; supply

Under the expectations hypothesis, a downward-sloping yield curve suggests:

investors expect future short-term interest rates to fall.

The Federal Reserve Bank of New York is unique from other Reserve banks because it:

is where the Federal Reserve System's portfolio is managed

The Fed does not have to go through the normal congressional appropriations process because

it is self-financing

One reason a country would be better off fixing its exchange rate is if:

it is well-integrated with the economy of the country to whose currency its currency is fixed.

If the Fed desired to reduce the federal funds rate,

it would conduct an open market purchase, increasing reserve supply

According to law of one price, what must be the exchange rate between dollar and peso if a bottle Corona costs $4.5 in the US and 12 pesos in Mexico.

$0.375 per peso

Suppose in 2019 you buy two year $1,000 face-value 2% coupon bond for $990. In 2020, interest rates fall to 2%. If you decide to sell your bond in 2020, what will be the selling price and one-year rate of return for you?

$1,000; 3.03%

In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, deposits in the banking system can potentially increase by

$100 times the reciprocal of the required reserve ratio.

Small-denomination time deposits refer to certificates of deposit with a denomination of less than

$100,000.

Suppose in 2019 you buy two-year $100 face-value 4.5% coupon bond for $102. In 2020, interest rates fall to 1%. If you decide to sell your bond in 2020, what will be the selling price and one-year rate of return for you?

$103.5; 5.9%

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 a maturity of two years?

$1046.49

If a perpetuity (a consol bond) has coupon payments of $80 and an interest rate of 6%, then its price is

$1333.3

If a bank has $100 million of checkable deposits, a required reserve ratio of 10%, and it holds $28 million reserves, then the maximum deposit outflow it can sustain without running into reserve deficiency is

$20 million

When a central bank buys foreign assets,

its holdings of foreign assets and the monetary base rise by the amount of the purchase.

Which of the following would lead to a decrease in bond demand?

An increase in expected inflation.

A share of Microsoft stock would best be described as which of the following?

An underlying instrument

When Argentina fixed the exchange rate of their peso to the U.S. dollar, one outcome was:

Argentinean central bankers effectively gave control of their domestic interest rate to the FOMC.

The beige book is prepared by

district banks

There are two types of open market operations: ________ open market operations are intended to change the level of reserves and the monetary base, and ________ open market operations are intended to offset movements in other factors that affect the monetary base.

dynamic; defensive

The government's too-big-to-fail policy applies to:

large banks whose failure would start a widespread panic in the financial system.

For each of the following assets, indicate which of the monetary aggregates (M1 and/or M2) includes them: a. Currency b. Checking account deposits c. Money Market Mutual Funds d. State of Missouri issued bonds e. TD Ameritrade brokerage account

a. M1 and M2 b. M1 and M2 c. M2 d. neither e. neither

A sterilized foreign exchange intervention would:

alter the asset side of a central bank's balance sheet but leave the domestic monetary base unchanged.

A change in the dollar value of the British pound from $1.60 to $1.50 represents

an appreciation of the dollar relative to the pound

If you have a checking account at First National Bank, the account is

an asset to you and a liability to First National

In the figure above, a factor that could cause the demand of bonds to shift to the left is

an expected increase in future bond yields.

Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve. The Fed's balance sheet will show:

an increase in the asset category of securities and the liability category of reserves by $2 billion.

A purchase of foreign assets by a central bank has the same impact on the monetary base as:

an open market purchase of government securities

Money as a means of payment refers to:

anything that is generally accepted as payment for goods and services.

Members of the Board of Governors are

appointed by the President of the United States, subject to confirmation by the Senate.

U.S. Treasury securities

are considered default-risk-free instruments

Loans made in the federal funds market:

are unsecured loans.

Defensive open market transactions

are used to offset temporary disturbances to the supply or demand for reserves

Which of the following monetary policy tools is more effective when the economy faces the interest rate zero-lower-bound problem?

asset purchase program

Reserves are:

assets of the commercial banks and liabilities of the central bank.

The bond demand curve slopes downward because:

at lower prices the reward for holding the bond increases.

If the FOMC revises target federal funds rate upwards, the manager of the trading desk at the Federal Reserve Bank of New York will likely conduct a ________ open market ________ of securities.

dynamic; sale

Which of the following is NOT a form of a short-term liability in the shadow banking system?

bank deposits

The process by which simultaneous withdrawals by a particular bank's depositors results in the bank closing is known as a

bank run

When expected inflation increases, then:

bond supply curve shifts right.

The presence of a term spread that is usually positive indicates that:

bonds of similar risk but with different maturities are not perfect substitutes.

Default risk arises from the fact that

borrowers differ in their ability to repay in full the principal and interest required by a loan agreement

If a central bank wishes to raise the foreign-exchange value of its currency, it will

buy domestic currency and sell foreign assets

Once a bond rating is assigned, it:

can change as the financial position of the issuer changes.

In order to increase its target for the federal funds rate, the Fed would normally

conduct open market sales

If domestic residents are restricted in their ability to purchase foreign assets then their government is imposing:

controls on capital outflows

Securitization is the process of

converting loans into securities

Which of the following is included in both M1 and M2?

currency

Both ________ and ________ are monetary liabilities of the Fed.

currency in circulation; reserves

Which of the following is most likely to lead to an increase in the value of the dollar?

decrease in exports from the United States

Everything else held constant, an increase in the required reserve ratio on checkable deposits causes the M1 money multiplier to ________ and the money supply to ________.

decrease; decrease

When a primary dealer buys a government bond from the Federal Reserve, reserves in the banking system ________ and the monetary base ________, everything else held constant.

decrease; decreases

If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will ________ and that of Treasury bills will ________.

decrease; increase

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 ________.

decrease; left

Holding everything else constant, if interest rates are expected to increase, the demand for bonds today ________ and the demand curve shifts ________.

decreases; left

Everything else held constant, eliminating federal income tax would likely have the effect of ________ the demand for municipal bonds, and ________ the demand for U.S. government bonds

decreasing; increasing

If the demand for reserves is expected to decrease temporarily, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

defensive; drain

When the inflation rate is expected to increase, the ________ for bonds falls, while the ________ curve shifts to the right, everything else held constant.

demand; supply

Under a fixed exchange rate regime, if a country has an overvalued exchange rate, then its central bank's attempt to keep its currency from ________ will result in a ________ of international reserves.

depreciating; loss