Money and banking exam 1

15. If Volkswagen, a German company, sells a euro-denominated bond in London, the bond is a A. Eurobond. B. foreign bond. C. currency bond. D. Duetsche bond.

A. Eurobond.

12. Which of the following statements uses the economists' definition of money? A. I hope that I have enough money to buy my lunch today. B. Betsy is rich-she has a lot of money. C. I plan to earn a lot of money over the summer. D. The job with New Company gave me the opportunity to earn more money.

A. I hope that I have enough money to buy my lunch today.

25. The concept of diversification is captured by the statement A. don't put all your eggs in one basket. B. don't look a gift horse in the mouth. C. it never rains, but it pours. D. make hay while the sun shines.

A. don't put all your eggs in one basket.

16. Everything else held constant, if the expected return on U.S. Treasury bonds falls from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected return of corporate bonds ________ relative to U.S. Treasury bonds and the demand for corporate bonds ________. A. falls; falls B. falls; rises C. rises; falls D. rises; rises

A. falls; falls

9. Holding everything else constant, if the price of a Bitcoin becomes less volatile, the demand for bonds ________, the price of bonds ________, and the interest rate ________. A. falls; falls; rises B. rises; falls; rises C. rises; rises; rises D. falls; falls; falls

A. falls; falls; rises

10. The higher a security's price in the secondary market the ________ funds a firm can raise by selling securities in the ________ market. A. more; primary B. less; primary C. more; secondary D. less; secondary

A. more; primary

33. What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year? A. 25 percent B. 10 percent C. 5 percent D. -5 percent

A. 25 percent

37. If the prices would have been much higher ten years ago for the items the average consumer purchased last month, then one can likely conclude that A. the aggregate price level has declined during this ten-year period. B. the average inflation rate for this ten-year period has been positive. C. the average rate of money growth for this ten-year period has been positive. D. the aggregate price level has risen during this ten-year period.

A. the aggregate price level has declined during this ten-year period.

21. If the price level increases from 200 in year 1 to 220 in year 2, the rate of inflation from year 1 to year 2 is A. 120%. B. 10%. C. 11%. D. 20%.

B. 10%

35. What is the approximate yield to maturity on a discount bond that matures one year from today with a maturity value of $21,000 and the price today is $18,000? A. 14% B. 17% C. 20% D. 21.5%

B. 17%

8. If an individual moves money from a savings deposit account to a money market deposit account A. M1 stays the same and M2 increases. B. M1 stays the same and M2 stays the same. C. M1 increases and M2 decreases. D. M1 decreases and M2 stays the same.

B. M1 stays the same and M2 stays the same.

19. Which of the following can be described as involving indirect finance? A. A corporation buys a share of common stock issued by another corporation in the primary market. B. You make a deposit at a bank. C. You buy a U.S. Treasury bill from the U.S. Treasury at TreasuryDirect.gov. D. You make a loan to your neighbor.

B. You make a deposit at a bank.

23. 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. a bond with ten years to maturity B. a bond with one year to maturity C. a bond with five years to maturity D. a bond with twenty years to maturity

B. a bond with one year to maturity

32. When in 1985 a British pound cost approximately $1.30, a Shetland sweater that cost 100 British pounds would have cost $130. With a weaker dollar, the same Shetland sweater would have cost A. $130, since the demand for Shetland sweaters will decrease to prevent an increase in price due to the stronger dollar. B. more than $130. C. $130, since the exchange rate does not affect the prices that American consumers pay for foreign goods. D. less than $130.

B. more than $130.

1. If there is an excess demand for money, individuals ________ bonds, causing interest rates to ________. A. buy; rise B. sell; rise C. sell; fall D. buy; fall

B. sell; rise

36. What is the present value of $250 to be paid in three years if the interest rate is 5%? A. $303.88 B. $289.41 C. $215.96 D. $205.68

C. $215.96

29. If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is A. 7.5 percent. B. 10 percent. C. 5 percent. D. 2.5 percent.

C. 5 percent.

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

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

3. Which of the following $1,000 face-value securities has the highest yield to maturity? A. a 10 percent coupon bond selling for $1,000 B. a 5 percent coupon bond selling for $1,000 C. a 12 percent coupon bond selling for $1,000 D. a 12 percent coupon bond selling for $1,100

C. a 12 percent coupon bond selling for $1,000

30. Which of the following is NOT a contractual savings institution? A. a pension fund B. a fire and casualty insurance company C. a savings and loan association D. a life insurance company

C. a savings and loan association

13. In the figure above, one factor NOT responsible for the decline in the demand for money is A. a decline in income. B. a decline the price level. C. an increase in income. D. a decline in the expected inflation rate.

C. an increase in income.

31. When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant. A. increases; increases; rises B. increases; decreases; falls C. decreases; increases; rises D. decreases; decreases; falls

C. decreases; increases; rises

22. The present value of an expected future payment ________ as the interest rate increases. A. is unaffected B. rises C. falls D. is constant

C. falls

18. If real estate prices are expected to drop, all else equal, the demand for bonds ________ and the interest rate ________. A. decreases; rises B. decreases; falls C. increases; falls D. increases; rises

C. increases; falls

40. An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families. A. risk sharing B. credit risk C. moral hazard D. adverse selection

C. moral hazard

11. When the government has a surplus, as occurred in the late 1990s, the ________ curve of bonds shifts to the ________, everything else held constant. A. demand; left B. supply; right C. supply; left D. demand; right

C. supply; left

14. If a coupon bond has two years to maturity, a coupon rate of 8%, a par value of $900, and a yield to maturity of 10%, then the coupon bond will sell for A. $938.56 B. $ 900 C. $885.41 D. $868.75

D. $868.75

39. Which of the following are generally TRUE of all bonds?A. Prices and returns for short-term bonds are more volatile than those for longer term bonds. B. The longer a bond's maturity, the greater is the rate of return that occurs as a result of the increase in the interest rate. C. A fall in interest rates results in capital losses for bonds whose terms to maturity are longer than the holding period. D. Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise.

D. Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise.

38. In which of the following situations would you prefer to be the lender? A. The interest rate is 25 percent and the expected inflation rate is 50 percent. B. The interest rate is 13 percent and the expected inflation rate is 15 percent. C. The interest rate is 9 percent and the expected inflation rate is 7 percent. D. The interest rate is 4 percent and the expected inflation rate is 1 percent.

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

6. Which of the following statements about the characteristics of debt and equities is TRUE? A. The income from bonds is typically more variable than that from equities. B. Bonds pay dividends. C. Bond holders are residual claimants. D. They can both be long-term financial instruments.

D. They can both be long-term financial instruments.

28. When I purchase a corporate ________, I am lending the corporation funds for a specific time. When I purchase a corporation's ________, I become an owner in the corporation. A. stock; debt security B. bond; debt security C. stock; bond D. bond; stock

D. bond; stock

26. A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid. A. coupon bond; discount B. discount bond; face C. discount bond; discount D. coupon bond; face

D. coupon bond; face

7. High interest rates might ________ purchasing a house or car but at the same time high interest rates might ________ saving. A. encourage; encourage B. encourage; discourage C. discourage; discourage D. discourage; encourage

D. discourage; encourage

27. In the figure above, a factor that could cause the demand for bonds to shift to the right is A. a decrease in wealth. B. an increase in the riskiness of bonds relative to other assets. C. an increase in the expected rate of inflation. D. expectations of lower interest rates in the future.

D. expectations of lower interest rates in the future.

20. In the market for money, when the Fed ________ the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant. A. decreases; right; rises B. decreases; left; falls C. increases; left; rises D. increases; right; falls

D. increases; right; falls

2. The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________. A. negatively; falls; falls B. positively; rises; rises C. positively; rises; falls D. negatively; rises; falls

D. negatively; rises; falls

17. Suppose an economy produces only eggs and ham. In 2019, 100 dozen eggs are sold at $3 per dozen and 50 pounds of ham sold at $4 per pound. In 2020, the base year, eggs sold at $1.50 per dozen and ham sold at $5 per pound. For 2019, A. nominal GDP is $400, real GDP is $500, and the GDP deflator is 80. B. nominal GDP is $400, real GDP is $500, and the GDP deflator is 125. C. nominal GDP is $500, real GDP is $400, and the GDP deflator is 80. D. nominal GDP is $500, real GDP is $400, and the GDP deflator is 125.

D. nominal GDP is $500, real GDP is $400, and the GDP deflator is 125.

34. Everything else held constant, when the inflation rate is expected to rise, interest rates will ________; this result has been termed the ________. A. rise; Keynes effect B. fall; Fisher effect C. fall; Keynes effect D. rise; Fisher effect

D. rise; Fisher effect

4. Patrick places his pocket change into his savings bank on his desk each evening. By his actions, Patrick indicates that he believes that money is a A. medium of exchange. B. unit of account. C. unit of specialization. D. store of value.

D. store of value.

5. When compared to exchange systems that rely on money, disadvantages of the barter system include A. encouraging specialization and the division of labor. B. lowering the cost of exchange to those who would specialize. C. lowering the cost of exchanging goods over time. D. the requirement of a double coincidence of wants.

D. the requirement of a double coincidence of wants.