FIN3244
Intermediaries who link buyers and sellers by buying and selling securities at stated prices are called
dealers
Holding everything else the same, if a corporation's earnings rise, then the default risk on its bonds will ________ and the expected return on those bonds will ________.
decrease; increase
If Moody's or Standard and Poor's downgrades its rating on a corporate bond, the demand for the bond ________ and its yield ________.
decreases; increases
A credit market instrument that pays the owner the face value of the security at the maturity date and nothing prior to then is called a
discount bond
Typically, increasing interest rates
discourages corporate investments
Financial intermediaries
do all of these - exist because there are substantial information and transaction costs in the economy - improve the lot of the small saver - are involved in the process of indirect finance
The risk premium on corporate bonds becomes smaller if
either of these occur: the liquidity of corporate bonds increases OR the riskiness of corporate bonds decreases
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
U.S. dollars deposited in foreign banks outside the United States or in foreign branches of U.S. are referred to as
eurodollars
Stock prices since the 1980s have been
extremely volatile
Corporate bonds are not as liquid as government bonds because
fewer bonds for any one corporation are traded, making them more costly to sell.
The presence of transaction costs in financial markets explains, in part, why
financial intermediaries and indirect finance play such an important role in financial markets.
Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called
financial markets
A loan that requires the borrower to make the same payment every period until the maturity date is called a
fixed-payment loan.
Bonds that are sold in a foreign country and are denominated in that country's currency are known as
foreign bonds
Typically, yield curves are
gently upward-sloping
A bond rating of Aa or AA would mean that the quality of the bond is
high
Interest rates are important to financial institutions since an interest rate increase ________ the cost of acquiring funds and ________ the income from assets
increases; increases
An important financial institution that assists in the initial sale of securities in the primary market is the
investment bank
A security
is a claim on the issuers future income.
A $10,000, 8 percent coupon bond that sells for $10,100 has a yield to maturity
less than 8 percent
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
When the borrower engages in activities that make it less likely that the loan will be repaid, ________ is said to exist.
moral hazard
Which of the following can be described as involving direct finance?
none of the above - A pension fund manager buys commercial paper in the secondary market. - People buy shares in a mutual fund. - A corporation's stock is traded in an over-the-counter market. - An insurance company buys shares of common stock in the over-the-counter markets.
Which of the following are primary markets?
none of the above - The over-the-counter stock market - The options markets - The New York Stock Exchange - The U.S. government bond market
The concept of ________ is based on the notion that a dollar paid to you in the future is less valuable to you than a dollar today.
present value
A corporation acquires new funds only when its securities are sold in the
primary market by an investment bank.
Moody's and Standard and Poor's are agencies that
produce information about the probability of default on corporate bonds.
The spread between the interest rates on bonds with default risk and default-free bonds, both of the same maturity, is called the
risk premium
The money market is the market in which ________ are traded.
short-term debt instruments
When the lender provides the borrower with an amount of funds that must be repaid to the lender at the maturity date, along with an additional payment for the interest, it is called a
simple loan
If income tax rates were lowered, then
the interest rate on municipal bonds would rise
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.
The government regulates financial markets for two main reasons:
to ensure soundness of the financial system and to increase the information available to investors.
The spread between interest rates on low-quality corporate bonds and U.S. government bonds ________ during the Great Depression
widened significantly
The spread between interest rates on low-quality corporate bonds and U.S. government bonds ________ during the Great Depression.
widened significantly
The relationship among interest rates on bonds with identical default risk but different maturities is called the
yield curve
The interest rate that equates the present value of the cash flow received from a debt instrument with its market price today is the
yield to maturity.
The interest rate that financial economists consider to be the most accurate measure is the
yield to maturity.
If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is
$650
With an interest rate of 6 percent, the present value of $100 received one year from now is approximately
$94
(I) Debt markets are often referred to generically as the bond market. (II) A bond is a security that is a claim on the earnings and assets of a corporation.
(I) is true, (II) false.
If you expect the inflation rate to be 15 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
-8 percent
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
The yield to maturity of a one-year, simple loan of $400 that requires an interest payment of $50 is
12.5 percent
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
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
The yield to maturity on a consol bond that pays $200 yearly and sells for $1,000 is
20 percent
If a $10,000 face value discount bond maturing in one year is selling for $8,000, then its yield to maturity is
25 percent
An $8,000 coupon bond with a $400 annual coupon payment has a coupon rate of
5 percent
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 $1,000 face value securities has the lowest yield to maturity?
A 7 percent coupon bond selling for $1,100
________ are an example of a financial institution.
All of the above - banks - fin companies - insurance companies
________ are investment advisory firms that rate the quality of corporate and municipal bonds in terms of probability of default.
Credit-rating agencies
In recent years, financial markets have become more stable and less risky.
False
The organization responsible for the conduct of monetary policy in the United States is the
Federal Reserve System
Every financial market performs the following function:
It channels funds from lenders-savers to borrowers-spenders.
Which of the following long-term bonds should have the lowest interest rate?
Municipal bonds
Which of the following are true concerning the distinction between interest rates and return?
Only these are true: The rate of return on a bond will not necessarily equal the interest rate on that bond. AND The return can be expressed as the sum of the current yield and the rate of capital gains
The central bank of the United States is
The Fed.
In which of the following situations would you prefer to be borrowing?
The interest rate is 25 percent and the expected inflation rate is 50 percent.
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.
Financial innovation has provided more options to both investors and borrowers.
True
In a bull market stock prices are rising, on average.
True
________ bonds are the most liquid of all long-term bonds.
U.S. Treasury
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
When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, ________ is said to exist.
adverse selection
Which of the following are secondary markets?
all of the above - The over-the-counter stock market - The U.S. government bond market - The options markets - The New York Stock Exchange
Which of the following are true of coupon bonds?
all of the above - The owner of a coupon bond receives a fixed interest payment every year until the maturity date, when the face or par value is repaid. - Corporate bonds are examples of coupon bonds. - U.S. Treasury bonds and notes are examples of coupon bonds.
Which of the following statements about the characteristics of debt and equity are true?
all of the above - They both enable a corporation to raise funds. - They both involve a claim on the issuer's income. - They both can be long-term financial instruments.
The nominal interest rate minus the expected rate of inflation
all of the above - is a better measure of the incentives to borrow and lend than the nominal interest rate. - defines the real interest rate. - is a more accurate indicator of the tightness of credit market conditions than the nominal interest rate.
Financial market activities affect
all of the above - personal wealth. - spending decisions by individuals and business firms. - the economy's location in the business cycle.
Yield curves can be classified as
all of the above - upward-sloping - downward-sloping - flat
Which of the following financial intermediaries are depository institutions?
all of these - A savings and loan association - A commercial bank - A credit union
Changes in stock prices
all of these - affect people's wealth and their willingness to spend - affect firms' decisions to sell stock to finance investment spending - are characterized by considerable fluctuations
________ are an example of a financial institution
all of these - banks - insurance companies - finance companies
Which of the following statements about financial markets and securities are true?
all of these are true - Most common stocks are traded over-the-counter, although the largest corporations have their shares traded at organized stock exchanges such as the New York Stock Exchange. - A corporation acquires new funds only when its securities are sold in the primary market. - Money market securities are usually more widely traded than longer-term securities and so tend to be more liquid.
The current yield on a coupon bond is the bond's ________ divided by its ________.
annual coupon payment; price
The presence of ________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets.
asymmetric information
When the lender and the borrower have different amounts of information regarding a transaction, ________ is said to exist.
asymmetric information
(I) A bond is a debt security that promises to make payments periodically for a specified period of time. (II) A stock is a security that is a claim on the earnings and assets of a corporation.
both are true
Financial markets have the basic function of
bringing together people with funds to lend and people who want to borrow funds.
Based on the expectations hypothesis, the steep upward sloping yield curve in June of 2013 indicted that short-term rates would ________ in the future.
climb
A frequently used approximation for the yield to maturity on a long-term bond is the
current yield