Finance Midterm

If the imports of goods and services exceed exports, GDP will be higher.

False

True or False: An ordinary annuity exists when the equal payments occur at the beginning of each time period.

False

True or False: Business will increase current long-term borrowing if they forecast a decrease in interest rates.

False

True or False: Cost-push inflation during economic expansions when demand for goods and services is greater than supply.

False

True or False: Holding demand constant, an increase in supply for one currency relative to another will cause its value to appreciate relative to that currency.

False

True or False: Holding demand constant, an increase in the supply of loanable funds will result in an increase in interest rates.

False

True or False: Holding supply constant, an increase in the demand for loanable funds will result in a decrease in interest rates.

False

True or False: Interest rate parity (IRP) states that the currency of a country with relatively higher interest rate will appreciate relative to the currency of a country with a relatively lower interest rate.

False

True or False: Interest rates generally fall during periods of economic expansion and rise during economic contraction.

False

True or False: Interest rates in the United States are only influenced by domestic factors.

False

True or False: The largest proportion of government revenue comes from corporate income taxes.

False

True or False: The federal debt is the same thing as the budget deficit.

False; A budget deficit occurs when spending is greater than revenue. The federal debt is the accumulation of budget deficits.

True or False: Net exports are exports of goods and services plus imports of goods and services.

False; Net exports are exports of goods and services minus imports of goods and services.

True or False: The interest portion increases and the principal portion decreases over time under a typical loan amortization schedule.

False; Principal increases and interest decreases over time.

True or False: In recent years, the United States has been running large trade surpluses with both Japan and China.

False; The United States has been running large trade deficits with both Japan and China.

True or False: Economic Risk is the risk associated with the possibility that a national government might confiscate or expropriate assets held by foreigners.

False; this is a political risk

True or False: A loan amortization schedule shows the breakdown of each payment between interest and principal, as well as the remaining balance after each payment.

True

True or False: Arbitrage is the simultaneous buying of securities in one market and selling them in another to make a profit from price differences in the two markets.

True

True or False: Compound interest is interest earned on interest in addition to interest earned on the principal.

True

True or False: Default risk is the risk that a borrower will not pay interest and/or repay the principal on a loan or other debt instrument according to the agreed contractual terms.

True

True or False: Discounting is an arithmetic process whereby a future sum decreases at a compounding interest rate over time to reach a present value.

True

True or False: For the same annual percentage rate, more frequent compounding increases the future value of an investor's funds more quickly.

True

True or False: Holding demand constant, a decrease in the supply of loanable funds will result in an increase in interest rates.

True

True or False: Interest rates will move from one equilibrium level to another if an anticipated change occurs that causes the demand for loanable funds to change.

True

True or False: Speculative inflation is caused by the expectation that prices will continue to rise, resulting in increased buying to avoid even higher future prices.

True

True or False: The bankers' acceptance is a draft drawn on and accepted by a bank rather than the importing firm.

True

True or False: The capital account balance includes all foreign private and government investment in the United States netted against U.S. investments in foreign countries.

True

True or False: The demand for loanable funds comes from all sectors of the economy.

True

True or False: The international monetary system consists of institutions and mechanisms that foster international trade, manage the flow of financial capital, and determine currency exchange rates.

True

True or False: The liquidity premium is the compensation that investors demand for holding securities that cannot easily be converted to cash without major price discounts.

True

True or False: The loanable funds theory states that interest rates are a function of the supply of and demand for loanable funds.

True

True or False: The maturity risk premium is the compensation expected by investors due to interest rate risk on debt instruments with longer maturity.

True

True or False: The risk-free rate of interest is equal to the real rate of interest plus a premium for inflation.

True

True or False: The term structure of interest rates indicates the relation between interest rates and the maturity of comparable quality debt instruments.

True

True or False: Under the system of flexible exchange rates, exchange rates are determined by the actual process of supply and demand in the foreign exchange market.

True

True or False: When taxes and general revenues fail to meet expenditures, a budgetary deficit occurs.

True

True or False: Local governments depend heavily on property taxes for their revenues, while state governments depend largely on sales taxes and special taxes, such as those on tobacco products.

True

True or False: The effective annual rate (EAR) is the true opportunity cost measure of the interest rate.

True; The annual percentage rate (APR) is not the true opportunity cost.

True or False: If the compound inflation rate were greater than the compound interest rate, future purchasing power on our savings would fall.

True; The return you receive is not keeping up with inflation, therefore your purchase power declines.

Interest earned only on an investment's principal or original amount is referred to as: a. simple interest b. compound interest c. discount interest d. annuity interest

a.

The federal government spends the largest percentage of its annual funds on which of the following? a. Social Security, Medicare, and other retirement programs b. Social programs (including Medicaid) c. National defense, veterans, and foreign affairs d. Net interest on the national debt

a.

What does the risk-return finance principal imply? a. Higher returns are expected for taking on more risk b. Lower returns are expected for taking on more risk c. Money has a time value d. Default risk premiums are zero

a.

What is the inflation that occurs when prices are raised to cover rising production costs such as wages? a. Cost-push inflation b. Demand-pull inflation c. Speculative inflation d. Administrative inflation

a.

What is the price of loanable funds in financial markets called? a. Interest rate b. Disequilibrium interest rate c. Supply of loanable funds d. Demand for loanable funds

a.

What is the written acceptance of goods for shipment by a transportation company and the terms under which the goods are to be transported to their destination called? a. Order bill of lading b. Commercial letter of credit c. Banker's acceptance d. Draft or bill of exchange

a.

Which of the following is the largest component of total gross domestic product? a. Personal consumption expenditures b. Government expenditures including gross investment c. Gross private domestic investment d. Net exports of goods and services

a.

Which of the following might be used by an international business in an effort to reduce currency exchange rate risk? a. Hedging b. Speculating c. Doing nothing d. None of the choices are correct.

a.

A country with a higher expected inflation rate relative to a country with a lower expected inflation rate can expect to have its currency do which of the following? a. Remain unchanged b. Depreciate c. Appreciate d. All of the choices are correct.

b.

Inflation is best described as which of the following? a. Increase in the price of goods or services that is offset by an increase in quality b. Increase in the price of goods or services that is not offset by an increase in quality c. Decrease in the price of goods or services that is offset by an increase in quality d. Decrease in the price of goods or services that is not offset by an increase in quality

b.

The largest private ownership group of public debt of U.S. Treasury securities is which of the following? a. State and local governments b. Foreign and international investors c. Depository institutions d. Mutual funds

b.

What is the federal government's largest annual source of revenues or income is from a. Social Security and other retirement taxes b. Personal income taxes c. Borrowing to cover the deficit d. Corporate income taxes

b.

What one of the following is not a source of loanable funds? a. Current savings b. Fed's sale of government securities c. Fed's purchase of government securities d. Expansion of deposits by depository institutions

b.

Which of the following describes a yield curve? a. A numerical presentation of the term structure of interest rates at a point in time b. A graphic presentation of the term structure of interest rates at a point in time c. A graphic presentation of the default risk premium at a point in time d. A numerical presentation of the default risk premium relative to length of maturity

b.

Which of the following is the name for the risk of changes in the price or value of fixed-rate debt instruments resulting from changes in market interest rates? a. Default risk b. Interest rate risk c. Liquidity risk d. Inflation risk

b.

If the risk free rate is 1 percent, the expected inflation premium is 2 percent, and the expected return on a corporate bond is 6 percent, what would be the default risk premium on the corporate bond? a. 1 percent b. 2 percent c. 3 percent d. 4 percent

c.

The relationship between interest rates and the time to maturity for debt instruments of comparable quality is called which of the following? a. Default risk premium b. Liquidity premium c. Term structure of interest rates d. Term structure of nonmarketable government securities

c.

What are debt securities with maturities longer than one year and corporate stocks referred to as? a. Money market securities b. Mortgage market securities c. Capital market securities d. Derivative securities

c.

What is the difference between an ordinary annuity and an annuity due? 1. Payments with an annuity due are made at the end of each period. 2. Payments with an annuity due are made at the beginning of each period. 3. Payments with an ordinary annuity are made at the end of each period. 4. Payments with an ordinary annuity are made at the beginning of each period. a. 1 and 4 b. 1 and 3 c. 2 and 3 d. 2 and 4

c.

What is the net difference between a country's import and export of goods called its a. Balance of payments b. Balance of trade c. Merchandise trade balance d. Current account

c.

What is the process of pooling and packing mortgage loans into debt securities called? a. Credit scoring b. Subprime lending c. Securitization d. Adjustable-rate lending

c.

Which of the following Treasury securities are issued on a discount basis and mature at par? a. Treasury bonds b. Treasury notes c. Treasury bills d. All marketable Treasury securities

c.

Which of these can be described as an instrument through which a bank retains title to goods until they are paid for? a. Commercial letter of credit b. Draft or bill of exchange c. Trust receipt d. Banker's acceptance

c.

An unconditional written order, signed by the party drawing it, requiring the party to whom it is addressed to pay a certain sum of money to order or to the bearer is called which of the following? a. Order bill of lading b. Commercial letter of credit c. Banker's acceptance d. Draft or bill of exchange

d.

In addition to supply and demand relationships, currency exchange rates are affected by which of the following? a. Relative inflation rates b. Relative interest rates c. Political and economic risks d. All of the choices are correct.

d.

The compensation for financial debt instruments that cannot be easily converted to cash at prices close to their estimated fair market values is called which of the following? a. Inflation premium b. Default-risk premium c. Maturity risk premium d. Liquidity premium

d.

Which of the following capital market securities does not have a stated maturity or life? a. Treasury bonds b. Municipal bonds c. Corporate bonds d. Corporate stocks

d.

While individuals were responsible for entering into very risky home mortgages, they were encouraged to do so during the mid-2000s decade by which of the following? a. Government officials b. Government-supported agencies c. Mortgage originators and financial institution lenders d. All of the choices are correct.

d.

Any forward rate situation will require the answer to which of the following questions? a. Is the person entering into the forward contract wanting to buy or sell the foreign currency? b. How much does the person wish to buy or sell? c. What is the time frame? d. What is the forward rate? e. All of the choices are correct

e.