FIN 3244 Exam 1 FSU

In which of the following situations would you prefer to be making a loan?

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

"Thrift institutions" include savings and loan associations, mutual savings banks, and credit unions.

True

A critical function of financial markets is an efficient allocation of capital.

True

A mutual fund is not a depository institution.

True

Adverse selection refers to those with high credit risks, being most aggressive in their search for funds.

True

Liquidity services are services that make it easier for customers to conduct financial transactions.

True

Many common stocks are traded over the counter, although a majority of the largest corporations have their shares traded at organized stock exchanges.

True

The current yield goes up as the price of a bond falls.

True

Adverse selection is a problem associated with equity and debt contracts arising from

the lender's relative lack of information about the borrower's potential returns and risks of his investment activities.

Financial economists consider the ________ to be the most accurate measure of interest rates.

yield to maturity

For a simple loan, the simple interest rate equals the

yield to maturity.

When the real interest rate is high, there are greater incentives to borrow and fewer incentives to lend.

False

With an interest rate of 8 percent, the present value of $100 received one year from now is approximately

$93. P = F / (1 + r) ^ n = 100 / (1 + 0.08) ^ 1 = 100 / 1.08 ^1 = 100 / 1.08 = 92.59 (Answer)

If a $10,000 face value discount bond maturing in one year is selling for $5,000, then its yield to maturity is

100 percent. Yield to maturity= (Face Value/Price)^(1/maturity)-1=(10000/5000)^(1/1)-1=100.00000%

If a $10,000 face value discount bond maturing in one year is selling for $9,000, then its yield to maturity is approximately

11 percent. Price of the bond is = Face value/(1+Yield to maturity)^n

The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100 one year later is

15 percent. Return on the bond = ((P1 - P0 + C) ÷ P0) *100 = (($1,100 - $1,000 + $50) ÷ $1,000) *100 = ($150 ÷ $1,000) *100 = 15%

If you expect the inflation rate to be 5 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is

2 percent.

The yield to maturity on a consol bond that pays $100 yearly and sells for $500 is

20 percent. 100/500 = 20%

The yield to maturity on a consol bond that pays $200 yearly and sells for $1,000 is

20 percent. Yield to maturity=(Coupon interest/Market Price)*100 Yield to maturity=($200/$1000)*100 Yield to maturity=20%

An $8,000 coupon bond with a $400 annual coupon payment has a coupon rate of

5 percent. 400/8,000 = 5%

With an interest rate of 5 percent, the present value of $100 received one year from now is approximately

95 Present value= P×(1÷(1+r)^n) P is Payment r is interest rate per period n is number of payments = $100×(1÷(1+5%)^1) = $95.24

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

A 12 percent coupon bond selling for $1,000

Which of the following statements about financial markets and securities are true?

A corporation acquires new funds only when its securities are sold in the primary market.

Which of the following statements about financial markets and securities are true?

A debt instrument is long term if its maturity is ten years or longer.

Which of the following are securities? (remember: Securities are financial instruments issued by a company or government that give ownership rights, debt rights, or rights to buy, sell) A Treasury bill A share of Texaco common stock A bond issued by Apple All of the above

All of the above

Which of the following statements about the characteristics of debt and equity are true? They both involve a claim on the issuer's income. They both enable a corporation to raise funds. They both can be long-term financial instruments. All of the above.

All of the above

Which of the following are generally true of all bonds? The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period. The longer a bond's maturity, the greater is the price change associated with a given interest rate change. A rise in interest rates is associated with a fall in bond prices, resulting in capital losses on bonds whose term to maturities are longer than the holding period. All of the above are true. Only A and B of the above are true.

All of the above are true.

Fire and casualty insurance companies are what type of intermediary?

Contractual savings institution

The current yield is the best measure of an investor's return from holding a bond.

False

The process of financial intermediation is also known as direct finance.

False

Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known as

Eurobonds.

Foreign currencies that are deposited in banks outside the home country are known as

Eurocurrencies.

U.S. dollars deposited in foreign banks outside the United States or in foreign branches of U.S. are referred to as

Eurodollars.

A bond denominated in euros and issued in a country that uses the euro as its currency is an example of a Eurobond.

False

Discounting the future is the procedure used to find the future value of a dollar received today.

False

The capital market is a financial market in which only short-term debt instruments (generally those with an original maturity of less than one year) are traded.

False

Which of the following are true for a coupon bond? The price of a coupon bond and the yield to maturity are positively related. When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. The yield to maturity is greater than the coupon rate when the bond price is above the par value. All of the above are true. Only A and B of the above are true.

When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.

A coupon bond pays the owner of the bond

a fixed interest payment every period, plus the face value of the bond at the maturity date.

When the borrower engages in activities that make it less likely that the loan will be repaid, ________ is said to exist.

adverse selection

Successful financial intermediaries have higher earnings on their investments because they are better equipped than individuals to screen out good from bad risks, thereby reducing losses due to

adverse selection.

The nominal interest rate minus the expected rate of inflation: defines the real interest rate. is a more accurate indicator of the tightness of credit market conditions than the nominal interest rate. is a better measure of the incentives to borrow and lend than the nominal interest rate. all of the above. only A and B of the above.

all of the above

The current yield on a coupon bond is the bond's ________ divided by its ________.

annual coupon payment; price

In financial markets, lenders typically have inferior information about potential returns and risks associated with any investment project. This difference in information is called

asymmetric information.

Long-term debt and equity instruments are traded in the ________ market.

capital

A bond's future payments are called its

cash flows.

Intermediaries who link buyers and sellers by buying and selling securities at stated prices are called

dealers.

Security ________ link buyers and sellers by buying and selling securities at stated prices, while ________ are agents of investors who match buyers with sellers of securities.

dealers; brokers

The process of calculating what dollars received in the future are worth today is called

discounting the future.

Stocks or Equities often make periodic payments, called ________, to their holders and are considered long-term securities.

dividends

Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage of

economies of scale.

For simple loans, the simple interest rate is ________ the yield to maturity.

equal to

The real interest rate is actually the ex ante real interest rate because it is adjusted for ________ changes in the price level.

expected

The DAX (Germany) and the FTSE 100 (London) are examples of

foreign stock market indexes.

The SEC restricts trading by the largest stockholders (known as ________) in corporations issuing securities.

insiders

An important financial institution that assists in the initial sale of securities in the primary market is the

investment bank.

Dollars received in the future are worth ________ than dollars received today. The process of calculating what dollars received in the future are worth today is called ________.

less; discounting

A debt instrument is called ________ if its maturity is greater than 10 years.

long-term

A consol bond is a bond that

pays interest in perpetuity and never matures

A corporation acquires new funds only when its securities are sold in the

primary market by an investment bank.

The money market is the market in which ________ are traded.

short-term debt instruments