Econ Final

The price of a stock is currently $158 and the stock will pay a $2.5 dividend. The interest rate is 12.5%. Based on the dividend-discount model, what is the expected price of this stock for next year?

A. $175. 25 Solve for FV

You have two savings accounts at an FDIC insured bank. You have $225,000 in one account and $40,000 in the other. If the bank fails, you will receive:

A. $250,000 ( this is the max)

If a bank has 4,200 depositors, each of whom deposits $2,100 in the bank makes 350 loans of $25,200 each, then each depositor has contributed:

A. $6 to each loan: 25,200/4200=6

You start with a $8200 portfolio; it loses 30% over the next year, the following year it gains 40% in value. At the end of two years your portfolio is worth:

A. $8036 simple calculation

What is the present value of $960 promised four years from not at 4% annual interest?

A. $820.61

An investor puts $200,000 into an investment that will return $180,000 one-fourth of the time, $215,000 one-fourth of the time and $249,500 the remainder of the time. The expected return for this investor is:

A. 11.75%

A credit card that charges a monthly interest rates of 3.2% has an effective annual interest rate of:

A. 45.9% (1+.032/12)^12-1

A 30-year Treasury bond as a face value of $1,000, price of $993 with a $45 coupon payment. Assume the price of this bond increases to $1,006 over the next year. The one-year holding period return is equal to

A. 5.84%

A $1,000 face value bond, with an annual coupon of $35, one year to maturity and a purchase price of $993 has:

A. A current yield that equals 3.52% and a yield to maturity that equals 4.23% Current yield=35/993; YTM= solve for IY in calc.

For every $100 in assets, a bank has $15 in interest-rate sensitive assets, and the other $85 in non-interest-rate sensitive assets. The same bank has $70 for every $100 in liabilities in interest-rate sensitive liabilities, the other $30 are in liabilities that are not interest-rate sensitive. IF the interest rate assets rise from 4.5 percent to 5.5 percent, and the interest rate on liabilities increases from 3 to 3.5 percent, the impact on the bank's profits per $100 of assets will be:

A. A reduction of $.20

Asymmetric information poses two important obstacles to the smooth flow of funds from savers to investors. They are:

A. Adverse selection, which arises before the transaction occurs, and moral hazard, which occurs after the transaction

Recession can cause widespread bank rises for all of the following reasons except:

A. Bank capital increases

Financial intermediaries handle a larger flow of funds than do primary markets primarily because financial intermediaries:

A. Can lower transaction costs and increase liquidity for savers

One reason that financial regulations restrict the assets that banks can own is to:

A. Combat the moral hazard that government safety nets provide

Many financial instruments are standardized because:

A. Complexity is costly, the more complex a contract, the more it costs to create

Identify which item is not one of the six parts of the financial systems

A. Credit cards

A bank's return on equity (ROE) is calculated by:

A. Dividing the bank's net profit after taxes by the bank's capital

Government supervise banks mainly to do each of the following, except:

A. Eliminate all risk faced by investors

Which of the following statements is most correct?

A. Financial regulators work to prevent monopolies but also work to prevent strong competition in banking

The acronym CAMELS, which is the criteria used by supervisors to evaluate the health of banks, includes the following, except:

A. Losses

In a one-year bond currently yields 2$ and is expected to yield 3% next year, the Liquidity Premium Theory suggests the yield today on a two-year bond will be:

A. More than 2.5%

All of the following US banks experienced bank runs during the financial crisis of 2007-2009, except for

A. Northern Rock Bank

The fact that banks often make loans to other banks means:

A. One bank's failure can be contagious and spread to other banks

Fill in the blanks: on 4,27/2011, the Fed Chair Ben Bernanke held a first ever ______ with the journalists. As he spoke, the DJIA ______.

A. Press conference; rose

Recent history has shown that the government regulations requiring the disclosure of information from public corporations have:

A. Reduced but not eliminated the problems from asymmetric information

The store of value characteristics of money refers to the fact that:

A. Sellers are less likely to accept perishable goods in exchange for goods they sell

Which of the following is not a feature of common stock?

A. Stockholders receive regular fixed payments on their shares

Economies of scale associated with financial intermediaries means:

A. The cost per transaction falls as a larger volume of similar transactions are handled

Net interest income for a bank is:

A. The difference between interest income and interest expense

The U.S government finances its budget deficits:

A. Using direct finance

All of the possible policies below are Macro-prudent, except for

A. Visit the bank and examine its operation on site

We would expect the risk spread between Baa bonds and U.S Treasury securities of the same maturity to:

A. Widen during periods of economic recession

Assume the expectations hypothesis regarding the term structure of interest rates is correct. If the current one-year interest rate is 4% and the expected one-year interest rate is 3%, then the current two-year interest rate should be:

B. 3.5%

An investment grows from $385 to $490 or 27.7% over six years. What annual increase gives a 27.27% increase over six years?

B. 4.1%

Banks are required to disclose certain information. This disclosure is done for all of the following reasons except:

B. Create uniform prices for standard bank services

Which of the following is a bank liability?

B. Demand deposits

The collapses of Bear Stearns and Lehman Brothers due to their difficulties in the repo market and the commercial paper market showed the importance of

B. Funding liquidity

As recently reported by the Wall Street Journal, which company received a subpoena from the Manhattan district attorney requesting information related to a recent report by the U.S Senate on the firm's dealing before and during the financial crisis of 2007-2009

B. Goldman Sachs Group Inc.

The interest rates charged on most credit cards is:

B. High due to the problem of adverse selection

A bank that makes most of its long-term loans at adjustable interest rates is:

B. Increasing credit risk and reducing interest rate risk

If the government did not offer the too-big-to-fail safety net:

B. Large banks would be more disciplined by the potential loss of large corporate accounts

Considering the methods available to the FDIC for dealing with a failed bank, the depositors of the failed bank should:

B. Prefer the purchase and assumption method since their deposits over $250,000 will also be protected

The standard deviation is generally more useful than the variance because:

B. Standard deviation is calculated in the same units as payoffs and variance isn't

If the ratio on bank's assets to its capital remains constant, by the bank's return on equity decreases:

B. The bank's return on assets must have decreased

The impact of a decrease in expected inflation in the bond market will have a relatively large effect on the prices of bonds prices because:

B. The bond demand curve will shift right but the bond supply curve shifts left

Suppose the nominal interest rate on a one-year car loan is 4.99% and the inflation rate is expected to be 1.5% over the next year. Based on this information, we know:

B. The ex ante real interest rate is 3.49% 4.99-1.5

The principal-agent problem is quite common in large public corporations due to:

B. The fact that the people making the operational decisions are usually not the owners

One reason lenders usually require a lot of information from loan applications is to avoid:

B. The problem of adverse selection

The existence of a lender of last resort creates moral hazard for bank managers because:

B. They have an incentive to take too much risk in their operations

Often a bank will require a loan officer to make personal visits on customers with loan outstanding, This is encouraged because:

B. This is an effective monitoring technique and should reduce moral hazard

If a bank increases it assets by adding $1 to capital for every $1 added to assets:

B. leverage decreases

The goal of Macro-prudential regulation is to

B. limit systematic risks to ensure financial stability

A company currently pays a dividend of $.58 per share. It expects the growth rate of the dividend to be 12% annually. If the interest rate is 15% what does the dividend-discount model predict the current price of the stock should be?

C. $21.65

A stock has an annual dividend of $.16 and is expected not to grow. It is believed the stock will sell for $68.5 one year from now, and an investor has a discount (interest) rate of 21%. The dividend discount model predicts the stock's current price should be:

C. $56.74 (68.5+.16)/1.21

The yield on a discount basis for a $100 Treasury bill that sells for $99.20 and matures in 180 days is:

C. 1.62% (par value-purchase price)/par value TIMES 360/ days to maturity

If a bank has $1104 million in assets and a net worth of $96 million, its debt-to-equity ratio is:

C. 10.5 to 1 1104-96=1008/96=10.5

You have a portfolio value at $1800. Over the next twelve months it loses 20% of its value. What return does the portfolio need to earn over the following twelve months to restore the portfolio to its original value?

C. 25% (simple Calculation)

Suppose that the return on assets other than bonds falls. In the bond market this will result in:

C. An increase in the price on bonds

Suppose that even though general business conditions improve, and at the same time, but wealth decreases. Based on this information, we know that

C. Bond prices decrease

The value of fiat money:

C. Comes from government decree

Who, a leading contender to succeed Mr. Buffet as chief executive, recently resigned from Berkshire Hathaway?

C. David L. Sokol

Everything else equal, if the ratio of bank assets to bank capital decreases, the bank's return on equity should:

C. Decrease

The price for private information is likely higher than it should be and the number of subscribers is lower than the users due to the problem of:

C. Free-riders

The Dow Jones Industrial Average:

C. Gives greater weight to shares with higher prices

A borrower is offered a choice between a fixed rate mortgage and a variable rate mortgage. The variable rate mortgage may be more attractive to the lender if the leader expects:

C. Inflation to increase

Which social networking company's stock price soared 109% on the date of its IPO in May 2011

C. Linkedin

Which of the following is not a bank asset?

C. Non-transaction deposits

Financial intermediaries pool the resources of many small savers so that they can:

C. Obtain the funds necessary to make loans to borrowers seeking large amounts

Bank's hold marketable securities as part of their assets. For U.S. banks these marge table securities include:

C. Only bonds

The difference between standard deviation and value at risk is:

C. Standard deviation reflects the spread of possible outcomes where value at risk focuses on the value of the worst outcome

In recent weeks, the Wall Street Journal reports on an insider trading case against a hedge fund in a series of articles, the case is often called:

C. The Galleon Trial

Commercial banks increased their involvement in mortgages over the years due to

C. The ability to securitize mortgages which made them more liquid

If the federal government were to offer larger tax breaks on the purchase of new equipment for businesses, all other factors constant, we would expect to see:

C. The bond supply curve shift right

Which of the following statements is most correct?

C. The higher the deposit insurance limit the greater the risk of moral hazard

Financial regulators set capital requirements for banks. One characteristic about these requirements is:

C. The riskier the asset holdings of a bank, the more capital it will be required to have

If the market prices the shares of stock of two companies, one of high quality and the other of lower quality, are the same average price and potential buyers cannot distinguish the prospects of the companies

C. The shares on the high quality firm will disappear from the market

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:

C. Time has value

A bank's assets tend to be long-term while its liabilities are short-term. Therefore, when interest rates rise, the value of the bank's assets:

C. Will decrease by more than the value of its liabilities

Without the stockholders' limited liability, the risk from the use of leverage:

C. Would be significantly greater

One argument for not raising the deposit insurance limit above $250,000 is that the increase:

C. Would mainly benefit a small percentage of depositors who are capable of monitoring the risks their banks take

A company currently pays a dividend of $1.50 per share. It expects the growth rate of the dividend to be 4% annually. If the interest rate is 12% what does the dividend-discount model predict the current price of the stock should be?

D. $19.50

Suppose Tom receives one-year loans form Seventh fourth Bank for $15100. At the end of the year, Tome repays $16200 to Seventh Fourth Bank. Assuming the simple calculation of interest, the interest rate on Tom's loan was:

D. 7.28% 16,200/15,100=1.0728-1

Money eliminates the need for:

D. A search for double coincidence of wants

The scandals involving Enron, World Com, Global Crossing and other large firms:

D. Are examples of asymmetric information and have led, at least temporarily, to a less well functioning stock market

Martha Stewart Living Omnimedia Inc. has retained the help from which company to explore offers to partner or invest in the company, among other opportunities, as reported recently in the Wall Street Journal?

D. Blackstone Group LP

As inflation increases, for any fixed nominal interest rate, the real interest rate:

D. Decreases

A bank that does not want to hold a lot of excess reserves but wants to manage liquidity risk is likely to:

D. Hold a lot in highly liquid securities

The default-risk premium:

D. Is also known as the risk spread

During a bank crisis:

D. It is important for regulators to be able to distinguish insolvent from illquid banks

Mary Jones is the president of a local bank. She knows that half of the loan applicants in town she would classify a high risk and the other half as low risk. She observes that the other bank in town charge two different interest rates, a lower rate of low risk borrowers and the higher for high risk borrowers. She decides that to have an advantage over the other banks she will offer an average rate to everyone. The likely result will be:

D. Mary's bank will experience adverse selection and have a disproportionate number of high risk borrowers

A bank that specializes in granting loans to firms in a specific line of business

D. May decrease its operating costs and increase its credit risk

Using long-run stock markets return from countries around the world, Professor Dimson from the London Business School shows that

D. Not all stock markets in all the countries can provide positive long-term returns like the Us stock market

Economists study the link between money and inflation because:

D. Research suggests that controlling money growth helps us to control moderate inflation

During the financial crisis of 2007-2009 in the U.S it was revealed that the function of a lender of last record had not kept place with the evolving financial system because:

D. Shadow banks lacked access to the financial capital available through the lender of last resort

Usually an investment will be profitable if:

D. The cost of borrowing is less than internal rate of return

As the corporation uses more debt financing, which of the following holds true for the stockholders?

D. The expected return to the stockholders increases and the standard deviation of the return increases

Which of the following statements pertaining to the yield curve is not true?

D. The yield curve shows the difference in default risk between securities

How would you expect the mayors of most U.S cities to respond to a proposed significant reduction in U.S income taxes

D. Unfavorably, the demand for municipal bonds will fall and their yields will increase

Which of the following statements is most correct?

D. stockholders can dislodge members of the board and have limited liability

A bank has $300 million in interest-rate sensitive assets, and the other $1,200 million in non-interest-rate sensitive assets. It also has $1,000 million liabilities in interest-rate sensitives liabilities, the other $250 million are in liabilities are not interest-rate sensitive. If the interest rate on assets decrease from 6-5 percent, and the interest rate on liabilities decreases from 4-2.5 percent, the impact on the bank's profits will be:

B