Money and Banking Midterm

Suppose that the value of a​ bank's assets is ​$45 billion and the value of its liabilities is ​$32 billion. If the bank has ROA=4​%, then what is its​ ROE? ROE=____​%

Bank assets ROE = ROA *----------- = bank capital =13.85%

In​ symbols, write the two components of the rate of return on a stock investment.

D^e t+1 (P^e t+1 -Pt) R=----------- + ---------- Pt Pt

An article in the Wall Street Journal noted​ that, "U.S. oil producers ... are using hedges to lock in prices ...." In this scenario oil producers be worried about prices ▼ and would take a ▼ position in the futures market to lock in future prices to hedge against the possibility that they are ▼ than today.

Falling, short, lower

Choose in which category of debt instrument a car loan belongs. A. Discount bond B. ​Fixed-payment loan C. Simple loan D. Coupon bond

Fixed-payment loan

Choose in which category of debt instrument a mortgage loan belongs. A. Coupon bond B. Simple loan C. ​Fixed-payment loan D. Discount bond

Fixed-payment loan

What is the difference between the primary market for a bond and the secondary​ market? Part 2 A. The corporation or government issuing the bond is directly involved in transactions in the secondary market. B. If a bond is purchased directly from the company issuing the​ bond, it was purchased in the primary market. If the bondholder decides to sell the bond to another​ investor, the transaction would take place in the secondary market. C. Financial arbitrage is most likely to occur in the primary market than in the secondary market. D. If a bond is purchased in the primary​ market, yields are always higher than those bonds purchased in the secondary market.

If a bond is purchased directly from the company issuing the​ bond, it was purchased in the primary market. If the bondholder decides to sell the bond to another​ investor, the transaction would take place in the secondary market.

How does the graph indicate that there was a bull market in bonds during the time period​ shown? A. Lower interest rates indicate that bond prices were​ rising, an indication of a bull market. B. Higher interest rates indicate the investors could make a better profit on bonds than stocks. C. Higher interest rates indicate that bond prices were​ falling, an indication of a bull market. D. Lower interest rates indicate that investors could make more profit on stocks than on bonds.

Lower interest rates indicate that bond prices were​ rising, an indication of a bull market.

Using the information​ above, compute the growth rates of the monetary aggregates for the dates shown below. ​(Enter your responses rounded to two decimal​ places.)

M1 12.5212.52​% 358.86358.86​% M2 10.8810.88​% 26.8926.89​%

Suppose you withdraw ​$3,000 from your checking account and use the funds to invest in a savings account at the bank. How will these actions affect M1 and​ M2? A. M1 will decrease and M2 will increase. B. M1 will decrease and M2 will not change. C. M1 and M2 will increase. D. M1 and M2 will not change.

M1 will decrease and M2 will not change.

What is the equation of​ exchange?

MV=PY

Someone with no connection to an industry that places financial bets on futures contracts within the industry in an attempt to profit from changes in asset prices is called a ▼ speculator hedger analyst .

speculator

*Real-time data provided by Federal Reserve Economic Data​ (FRED), Federal Reserve Bank of Saint Louis. Part 3 Using the data from​ FRED, enter the values for the monetary aggregates indicated for the dates shown below. ​(Enter your responses exactly as they appear in​ FRED.) Part 4 ​Year-Month-Day Series Series ID 2022−02−01 2021−02−01 2020−02−01 M1 M1SL ​$enter your response here ​$enter your response here ​$enter your response here M2 M2SL ​$enter your response here ​$enter your response here ​$enter your response here

​$20666.820666.8 ​$18367.718367.7 ​$4002.94002.9 ​$21749.721749.7 ​$19615.419615.4 ​$15458.7

The article also notes​ that: "Bonds are meant to be​ safe, dull investments." Which of the following is a risk bond investors buying bonds during a​ bull-market are most likely to​ face? A. ​Interest-rate risk. B. ​Short-term bonds replacing​ long-term bonds. C. Decrease in value of the underlying stock. D. None—bonds are backed by FDIC insurance.

​Interest-rate risk.

If the purchasing power parity theory allowed us to exactly determine exchange rates in the short​ run, the exchange rate between the Israeli shekel and the Swiss franc would be enter your response here shekels per franc. ​(Enter your response rounded to three decimal places​.)

11.9 shekels = 1 big mac =6.5 swiss francs

Suppose that​ Coca-Cola is currently paying a dividend of ​$2.83 per​ share, the dividend is expected to grow at a rate of 8​% per​ year, and the rate of return investors require to buy​ Coca-Cola's stock is 13​%. Calculate the price per share for​ Coca-Cola's stock. The price per share of​ Coca-Cola stock is ​$______

2.83* (1+8%) -------- (13%-8%) =$61.13

How does the creation of a secondary market in mortgages help to promote home​ ownership? A. By allowing banks to transfer the risk of holding a loan to firms that have economies of scale in risk assessment. B. By allowing banks to offer a lower interest rate than if they held the loan themselves. C. By allowing banks to offer​ non-securitized loans to​ high-risk borrowers. D. A and B only. E. All of the above.

A and B only.

What are the key differences between using a deerskin as money and using a dollar bill as​ money? A. Using a deerskin as money incurs a much larger transactions cost because it is bigger and heavier than paper money. B. Using a deerskin as money may not be as widely accepted as using paper money. C. Using a deerskin as money cannot fulfill the key functions of​ money: a medium of​ exchange, a unit of​ account, a store of​ value, and a standard of deferred payment. D. A and B only. E. All of the above.

A and B only.

What is the cause of​ hyperinflation? A. A very high rate of growth in the money supply. B. An undervalued currency. C. A very large tax increase. D. All of the above.

A very high rate of growth in the money supply.

What is the difference between moral hazard and adverse​ selection? Adverse selection occurs when bad risks are more likely to​ seek/accept a financial contract than are good risks. Moral hazard occurs in financial markets when borrowers use borrowed funds differently than they would have used their own funds. Part 2

Adverse selection Moral hazard

How do banks manage credit​ risk? A. Banks can manage credit risk by performing credit risk​ analysis, requiring borrowers to put up​ collateral, and using credit rationing. B. Banks can manage risk by creating​ long-term business relationships by which the bank could acquire information about the creditor. C. Banks can manage credit risk by diversifying their assets. D. All of the above are correct.

All of the above are correct.

Why is the demand for money curve downward​ sloping? A. As interest rates​ decrease, the demand for money increases. B. As interest rates​ decrease, the quantity demanded of money decreases. C. As interest rates​ decrease, the quantity demanded of money increases. D. As interest rates​ decrease, the demand for money decreases.

As interest rates​ decrease, the quantity demanded of money increases.

Use following the​ T-account for National City Bank to show how it is affected after the check clears.

Assets: Reserves +140 Liabilites: Checkable desposits +140

Consider a bond with a face value of ​$1,000 that sells for an initial price of ​$700. It will pay no coupons for the first nine years and will then pay 5​% coupons for the remaining 19 years. Choose an equation showing the relationship between the price of the​ bond, the coupon​ (in dollars), and the yield to maturity. A. 700=1,000(1+i)9+19 B. 700=50(1+i)9+1+50(1+i)9+2​+...+50(1+i)9+19−1+50(1+i)9+19+1,000(1+i)9+19 C. 700=1,000(1+i)19−9 D. 700=50(1+i)9+50(1+i)9+1​+...+

B. 700= 50 ------ (1+i)^9+1 + 50 ------ (1+i)^9+2 ​+... + 50 ---------- (1+i)^9+19−1 + 50 -------- (1+i)^9+19 + 1,000 ---------- (1+i)^9+19

Which of the following are examples of commodity​ futures? ​(Check all that​ apply.) A. Selling U.S. dollar futures contracts. B. Selling oil futures to hedge against falling oil prices. Your answer is correct. C. Selling corn futures to hedge against falling corn prices. Your answer is correct. D. Selling Treasury note futures contracts.

B. Selling oil futures to hedge against falling oil prices. C. Selling corn futures to hedge against falling corn prices.

​[Related to Making the​ Connection] According to an article on the junk bond market in Europe published in the Economist in​ 2016, "The spread​ (the interest premium over government borrowing​ rates) paid by​ junk-bond issuers has risen by nearly​ three-and-a-half percentage points since March last year." ​Source: "The Crazy World of ​Credit," Economist​, January​ 30, 2016. Part 2 What of the following ratings would you expect a junk bond to​ have? A. Baa B. BBB C. AAA D. Ba

Ba

How do banks manage​ interest-rate risk? ​(Check all that apply.​) A. Banks can reduce​ interest-rate risk by making more floating rate​ loans, or ARMs. Your answer is correct. B. ​Interest-rate swaps can reduce​ interest-rate risk exposure. Your answer is correct. C. Banks can manage​ interest-rate risk by keeping some funds as repurchase agreements. D. Banks can increase their borrowings to manage​ interest-rate risk.

Banks can reduce​ interest-rate risk by making more floating rate​ loans, or ARMs. ​Interest-rate swaps can reduce​ interest-rate risk exposure.

How do banks manage liquidity​ risk? ​(Check all that apply.​) A. Banks manage this risk by keeping some funds very​ liquid, such as in the federal funds market. B. Banks manage this risk by keeping some funds very​ liquid, such as a reverse repurchase agreement. C. Banks can increase their borrowings to cover liquidity risk. D. Banks can increase their assets to cover liquidity risk.

Banks manage this risk by keeping some funds very​ liquid, such as in the federal funds market. Banks manage this risk by keeping some funds very​ liquid, such as a reverse repurchase agreement. Banks can increase their borrowings to cover liquidity risk.

How does the lemons problem lead many firms to borrow from banks rather than from individual​ investors? ​(Check all that​ apply.) A. Because banks specialize in gathering​ information, they are able to overcome the problem of distinguishing good borrowers from bad borrowers. B. Because banks have difficulty in distinguishing good borrowers from bad​ borrowers, they offer good borrowers terms they are reluctant to accept. C. Because potential investors have difficulty in distinguishing good borrowers from bad​ borrowers, they offer good borrowers terms they are reluctant to accept. D. Because potential investors specialize in gathering​ information, they are able to overcome the problem of distinguishing good borrowers from bad borrowers.

Because banks specialize in gathering​ information, they are able to overcome the problem of distinguishing good borrowers from bad borrowers. Because potential investors have difficulty in distinguishing good borrowers from bad​ borrowers, they offer good borrowers terms they are reluctant to accept.

An article on the stock market​ observes: "To protect​ profits, investors can buy put​ options, which act as​ insurance, while investors who want to add exposure to the market can buy call​ options." ​ Source: Ben​ Levisohn, "How to Rock at Lower​ Volume," Wall Street Journal​, August​ 31, 2012. How does buying a put option provide insurance against a fall in stock​ prices? A. Because put options lock in gains and eliminate the possibility of additional gains or losses. B. By allowing investors to increase their shares in a stock when the stock price is above the strike price. C. Because investors can pay an option premium for a put option that can be exercised if the stock price falls below the strike price. D. All of the above are correct.

Because investors can pay an option premium for a put option that can be exercised if the stock price falls below the strike price.

Why is the yield to maturity a better measure of the interest rate on a bond than is the coupon​ rate? A. Because the coupon rate often calculates a much lower return than the yield to maturity. B. Because the coupon rate takes into account the present value adjusted yield on the purchase price. C. Because the coupon rate does not take into account the present value adjusted yield on the purchase price. D. Because the coupon rate can change whereas the yield to maturity is always constant.

Because the coupon rate does not take into account the present value adjusted yield on the purchase price.

Which of the following is an example of speculating using commodity​ futures? A. Selling a wheat futures contract expecting the future spot price to exceed the current futures price. B. Selling Treasury futures expecting future interest rates to be lower than indicated by the current price of Treasury futures. C. Buying a wheat futures contract expecting the future spot price to exceed the current futures price. D. Buying Treasury futures expecting future interest rates to be lower than indicated by the current price of Treasury futures.

Buying a wheat futures contract expecting the future spot price to exceed the current futures price.

Which of the following might indicate that a currency is​ overvalued? A. Purchasing power parity exceeding currency value. B. Central banks are selling the currency to meet demand. C. Central banks are buying currency on the open market. D. Exports are becoming less expensive.

Central banks are buying currency on the open market.

Choose in which category of debt instrument a U.S. Treasury bond belongs. A. ​Fixed-payment loan B. Simple loan C. Coupon bond D. Discount bond

Coupon bond

Based on the data​ above, is 12.01​% of M1.

Currency

Now suppose the price of the bond changes to $900. Assuming an investor purchased the bond at a price of $900​, the investor would receive a current yield equal _________%

Current Yeild = ( Coupon pmt (65) ---------------- x100 Price paid (900) ) =7.22%

What is the relationship between the price of a financial asset and the payments investors will receive from owning that​ asset?

D^e t+1 Pt= -------- (1+re) D^e t+1 + -------- + (1+re) ^2 D^e t+1 + -------- + (1+re) ^2

Large banks like Citigroup hold more capital relative to their assets than they did prior to the​ 2007-2009 financial crisis. Holding other factors​ constant, this change would ▼ decrease increase a​ banks' return on equity as a ▼ larger smaller pool of assets are available to generate returns on a larger capital base.

Decrease, smaller

A certified financial planner notes that with an unsubsidized student loan the borrower has the choice of whether to make interest payments on the loan while still in college. She notes that making the interest payments rather than postponing them until after graduation is "always to your financial benefit ... because otherwise​ [the interest​ payments] will capitalize ...." ​Source: Robert​ Powell, "How to Handle Your Student Loans while​ You're Still in ​School," marketwatch.comopens in a new tab​, January​ 29, 2016. Which of the following statements best reflects the planners​ position? A. Deferring interest payments increases capital gains. B. Deferring interest payments increases the principal​ balance, effectively "capitalizing" the interest. C. Deferring interest payments increases capital losses. D. Paying the interest now avoids having to pay it later.

Deferring interest payments increases the principal​ balance, effectively "capitalizing" the interest.

An article in the Wall Street Journal​, ​began: "Yields on the​ 10-year government debt of Germany and the U.K. fell to​ all-time lows, a stark demonstration of the modern era of scant​ inflation, weak growth and outsize monetary policy." ​Source: Jon​ Sindreu, "​Rock-Bottom Bond Yields in Europe Hit​ All-Time ​Lows," Wall Street Journal​, June​ 8, 2016. In the table​ below, identify the effect on the equilibrium interest rate in the bond market for each of the three factors. Factor Shifts effect on equil int rates low inflation weak growth budget deficits

Demand, decrease demand, decrease supply, increase

Choose in which category of debt instrument a​ three-month U.S. Treasury bill belongs. A. Simple loan B. Discount bond C. ​Fixed-payment loan D. Coupon bond

Discount bond

An article on the web site of the Financial Times describes Eurodollars as "dollars which somehow escaped the US system." ​Source: Izabella​ Kaminska, "All about the ​Eurodollars," ft.comopens in a new tab​, September​ 5, 2014. Part 2 Eurodollars​ are: A. Euro deposits in banks in the United States. B. Dollar deposits in banks in Europe. C. Dollar deposits in banks outside the United States. D. Dollars backed by depository accounts held in Euros.

Dollar deposits in banks outside the United States.

Consider the case of a​ two-year discount bond—that ​is, a bond that pays no coupon and pays its face value after two years rather than one year. Suppose the face value of the bond is ​$1,000​, and the price is ​$800. What is the​ bond's yield to​ maturity? The​ bond's yield to maturity is __%.

Face value Price = ---------------- (1+i)^2 (square root 1000 ------- -1) X 100% 800 =11.8

Which of the following might explain why a country without a strong financial system would struggle to achieve high rates of economic​ growth? A. ​Lower-yields on savings and investments. B. Funds flow from savers directly to entrepreneurs without going through an intermediary. C. Firms are unable to acquire funds they need to expand. D. Households and firms have too much debt.

Firms are unable to acquire funds they need to expand.

Which of the following is not true regarding forward contracts and futures​ contracts? A. Futures contracts lack the flexibility of forward contracts. B. Futures contracts are traded on exchanges. C. Futures contracts have a price that changes up until the settlement date with standardized settlement dates. D. Forward contracts have reduced counterparty risk and lower information costs.

Forward contracts have reduced counterparty risk and lower information costs.

What is the difference between gap analysis and duration​ analysis? ▼ Gap analysis Duration analysis looks at the difference between the dollar value of a​ bank's variable-rate assets and the dollar value of its​ variable-rate liabilities. ▼ Gap analysisDuration analysis is an analysis of how sensitive a​ bank's capital is to changes in market interest rates.

Gap duration

b. If Halliburton enters a forward​ contract, agreeing to buy ¥200 million in one year at an exchange rate of ¥97=$1​, it will need ​$enter your response here today if it plans to invest the dollars at the U.S. interest rate of 7​%. ​(Round your response to the nearest​ dollar.)

Halliburton needs ​$1,926,968 today to invest in​ one-year U.S. Treasury bills at an interest rate of 7​%.

What is the difference between hedging and​ speculating? ▼ Speculating Hedging serves to reduce risk in financial​ markets, while ▼ hedgingspeculating may increase risk by placing financial bets on assets in an attempt to earn higher profits in the market.

Hedging, Speculating

In​ 2016, the Federal Reserve proposed a new rule that would limit how exposed a large bank could be to the risk of counterparty default by another large bank. At the same​ time, a report by a government agency indicated that by both buying and selling credit default swaps banks may still be exposed to significant​ counter-party risk even though the use of credit default swaps had dropped by more than​ 75% since the financial crisis. An article in the Wall Street Journal on proposals to change the regulations governing the trading of financial derivatives contained the​ following: The SEC and the Commodity Futures Trading Commission are both seeking greater authority to police the​ over-the-counter market and hope new powers can help them reduce the risks that​ over-the counter trading may pose to the broader system. ​Source: Katy​ Burne, "U.S. Watchdog Warns on​ Banks' Counterparty ​Exposures," Wall Street Journal​, March​ 8, 2016. Part 2 A bank would buy a credit default swap if they expected the underlying asset to have a ▼ lowhigh risk of default. A bank might sell a credit default swap if they expected the underlying asset to have a ▼ highlow risk of default.

High Low

Periods of hyperinflation often hurt bank​ profits, especially if inflation is higher than the bank expected it to be when making loans.

Hurt, Higher

What does the statistical evidence show about the link between the growth rate of the money supply and the inflation rate in the long​ run? A. Inflation will occur when real GDP and the quantity of money increase at the same rate. B. Inflation will occur when real GDP increases faster than the quantity of money. C. Inflation will occur when the quantity of money increases faster than real GDP. D. There is no link between the growth rate of the money supply and the inflation rate in the long run.

Inflation will occur when the quantity of money increases faster than real GDP.

Which of the following does not describe​ derivatives? A. These financial instruments are often used to hedge against risk. B. Insurance is required when purchasing derivative securities. C. They are assets that derive their economic value from an underlying​ asset, such as a stock or bond. D. These financial instruments are often used to speculate.

Insurance is required when purchasing derivative securities.

Which of the following is not a key fact about the term​ structure? A. Interest rates on​ long-term bonds are usually higher than interest rates on​ short-term bonds. B. Interest rates on​ short-term bonds are occasionally higher than interest rates on​ long-term bonds. C. Interest rates on bonds of all maturities tend to rise and fall together. D. Interest rates on​ short-term bonds are usually higher than interest rates on​ long-term bonds.

Interest rates on​ short-term bonds are usually higher than interest rates on​ long-term bonds.

Suppose that the Dow Jones Industrial Average is above the 13,500 level. If the Dow were to fall to 10,500​, who would gain the​ most? A. Investors who had bought call options. B. Investors who had sold put options. C. Investors who had bought put options. D. Investors who had sold call options.

Investors who had bought put options.

Suppose that you are considering investing in a bank that is earning a higher ROE than most other banks. You learn that the bank has​ $300 million in capital and​ $5 billion in assets. Would you become an investor in this​ bank? A. It would be wise to invest in a bank with a​ capital/asset ratio that is this low. B. It would be unwise to invest in a bank with an​ asset/capital ratio that is this high. C. It would be unwise to invest in a bank with such a low leverage. D. There is not enough information to make an investment decision.

It would be unwise to invest in a bank with an​ asset/capital ratio that is this high.

What is the most important source of external funds to​ small- to​ medium-sized firms? A. Loans from financial intermediaries. B. The​ owners' personal funds. C. Loans from the federal​ government's Small Business Administration. D. Trade credit.

Loans from financial intermediaries.

Why would money being barren mean that lenders should not charge interest on​ loans? A. Money was to be used in exchange and not increase​ (reproduce) by charging interest. B. As borrowers were often unable to repay a​ loan, money was viewed by lenders as​ barren, or having no value. C. Aristotle was incorrect as money has always been fruitful because it can reproduce by charging interest on loans. D. Money has no use​ value; therefore, lenders should not charge interest on loans and instead use a barter system.

Money was to be used in exchange and not increase​ (reproduce) by charging interest.

The quantity equation​ is:

M×V=P×​Y

An option writer is the ▼ of an option and​ he/she has ▼ the underlying asset.

Seller, the obligation to sell

Which of the following is not a debt​ instrument? A. Stocks B. Simple loans C. Coupon bonds D. Discount bonds

Stocks

Why would the spread between government bonds and junk bonds have been​ rising? A. The yield on government bonds was increasing. B. The demand for junk bonds was increasing. C. The yield on junk bonds was decreasing. D. The default credit risk on junk bonds was increasing.

The default credit risk on junk bonds was increasing.

Investors believe that the level of risk in the stock market has declined. A. The demand curve shifts to the left. B. The supply curve shifts to the left. C. The demand curve shifts to the right. D. The supply curve shifts to the right.

The demand curve shifts to the left.

Consider the adjacent graph when answering the following question. ​Note: Percentage changes are measured as the compound annual rate of change using quarterly data. Which of the following best explains the growth rates of M1 and M2 during the early​ 1990s? A. Investors were moving money into stocks. B. Money market checking accounts were introduced. C. The economy was in a recession. This is the correct answer. D. Laid off workers were depleting their checking accounts.

The economy was in a recession.

The government eliminates the tax deduction for interest homeowners pay on mortgage loans. A. The demand for loanable funds would remain constant. B. The increase in the expected​ after-tax real interest rate would increase the demand for loanable funds. C. The increase in the expected​ after-tax real interest rate would reduce the demand for loanable funds. D. An​ individual's desire to earn more due to changes in the interest rate would increase the demand for loanable funds

The increase in the expected​ after-tax real interest rate would reduce the demand for loanable funds.

What does​ Moody's mean by​ "credit risk"? A. The risk that the buyer of a bond may not be creditworthy. B. The risk that the bond issuer will fail to make payments of interest or principal. C. The risk that arises from market volatility. D. The risk that the buyer of a bond will sell the bond prior to maturity.

The risk that the bond issuer will fail to make payments of interest or principal.

The federal government runs a series of budget surpluses. A. The supply curve shifts to the left. B. The demand curve shifts to the left. C. The supply curve shifts to the right. D. The demand curve shifts to the right.

The supply curve shifts to the left.

What is the most important source of funds to​ small- to​ medium-sized firms? A. Government grants and subsidized loans. B. The​ owners' personal funds and profits. C. Banks loans​ (other than​ mortgages). D. Trade credit.

The​ owners' personal funds and profits.

Why might the federal government decide to intervene in the housing market to promote home​ ownership? A. To promote economic stimulus through the construction of new homes. B. To make it easier for families to borrow money to purchase a home. C. To increase profits for investment banks by creating​ mortgage-backed securities. D. All of the above.

To make it easier for families to borrow money to purchase a home.

Who would be interested in exchanging dollars for​ yen? A. Japanese companies importing or buying U.S. products. B. U.S. companies exporting to Japan. C. U.S. companies importing or buying Japanese products. D. The Japanese government.

U.S. companies importing or buying Japanese products.

If everyone were perfectly​ honest, would there be a role for financial​ intermediaries? A. No B. Yes

Yes

Is charging interest generally an accepted practice in​ today's economy? A. ​Yes, interest today is viewed as the cost of credit. B. ​No, interest today is viewed as taking advantage of those individuals that want to purchase the extra luxuries of life. C. ​Yes, interest today is viewed as an easy way to increase​ (reproduce) money.

Yes, interest today is viewed as the cost of credit.

According to the efficient markets​ hypothesis, stock prices predictable.

are not

What the price is In the bond​ market, the price is ▼ and in the loanable funds​ market, the price is ▼

bond price, interest rate

Who the seller is In the bond​ market, the seller is the ____ and in the loanable funds​ market, the seller is the ___-

borrower, lender

Explain whether each of the following is included in only​ M1, only​ M2, or both M1 and M2. ​Traveler's checks are included in both M1 and M2. Savings deposits are included in only M2 Certificates of deposit are included in only M2 Checking account deposits are included in both M1 and M2 .

both M1 and M2. only M2 only M2 both M1 and M2

A financial planner writing in the New York Times gave the following sarcastic investment​ advice, "On Jan. 1 of each​ year, just figure out which asset class will do really well and move all your money into that investment." ​Source: Carl​ Richards, "Diversification Is the Sane Alternative to Betting Big on One ​Investment," New York Times​, March​ 16, 2015. Part 2 All of the following are considered an asset​ class, except: A. cash equivalents. B. bonds. C. debts. D. equities.

debts.

Securitizing loans ▼ does not does reduce the risk of such moral hazards as it is ▼ still not possible for individuals to pursue objectives different from those of shareholders.

does not still

Financial intermediaries take advantage of ▼ economies of scale interest spreads ​, which refers to the ▼ reduction increase in average cost that results from ▼ a decrease an increase in the volume of a good or a service produced.

economies of scale reduction an increase

According to an article in the New York Times​, the majority of United States currency in circulation is held by foreigners. Part 2 According to the​ article, all of the following are reasons why central banks might consider eliminating​ high-denomination notes,​ except: ​Source: John Carney and Joshua​ Zumbrun, "The Plot to Kill the​ $100 ​Bill," Wall Street Journal​, February​ 16, 2016. A. to reduce tax evasion. B. to curtail terrorism financing. C. to curb illicit activities. D. decreasing demand for​ high-denomination notes.

foreigners., decreasing demand for​ high-denomination notes.

What are the key differences between​ foreign-exchange forward contracts and​ foreign-exchange futures​ contracts? ▼ contracts are private agreements among traders to exchange any amount of currency on any future​ date, while▼ forwardfutures contracts are traded on exchanges and are​ standardized, including a stated settlement date.

forward, futures

With ▼ ​contracts, the exchange rate changes continually as contracts are bought and sold on the​ exchange, and with ▼ forward futures ​contracts, the exchange rate is fixed at the time the contract is agreed to.

futures, forward

This is ▼ good bad news for U.S.​ consumers, as Japanese goods become ▼ more less ​expensive, and ▼ good bad news for U.S.​ firms, as the dollar has ▼ depreciated appreciated against the yen.

good less bad appreciated

Who the buyer is In the bond​ market, the buyer is the ▼ and in the loanable funds​ market, the buyer is the ▼

lender, borrower

Why are forward contracts more widely used in the​ foreign-exchange market than are futures​ contracts? Forward contracts are used 10 times more than futures contracts because the counterparty risk between big banks is relatively ▼ highlow​, and these banks value the ▼ rigidityflexibility of the forward contract.

low flexability

-------------must be done within a given time​ frame, while ---------- can be done at any time and is not subject to an expiration date.

only executing put options, only selling stocks

In looking at its​ components, it can be seen that 5.61 percent of M2 is composed of ▼ small time deposits retail money funds .

retail money funds

The​ principal-agent problem occurs A. when lenders and borrowers cannot reach a consensus about the interest rate of the loan. B. when managers succumb to adverse selection. C. when managers follow their own self interests rather than the interest of the shareholders. D. when managers follow the interest of the shareholders rather than the interests of the employees.

when managers follow their own self interests rather than the interest of the shareholders.

What does it mean for payments to be made​ "in kind"? How might moving from a system of payments being made in gold and silver coins to a system of payments being made in kind affect the economy of the​ empire? A. ​"In kind" means to repay a service or good with another service or​ good, which would likely make trade and compensation more difficult for the empire. B. ​"In kind" means to repay a service or good with another service or​ good, which would likely have no effect on the economy of the empire. C. ​"In kind" means to repay a service or good with another service or​ good, which would likely make trade and compensation easier for the empire. D. ​"In kind" means to repay a service or good with another service or good. It would depend on the type of good or service being repaid to determine the effect on the economy of the empire.

"In kind" means to repay a service or good with another service or​ good, which would likely make trade and compensation more difficult for the empire.

When the bond​ matures, the investor would receive a final payment of

$1,000+$65= $1065.

What would you prefer to receive if the interest rate is 24​%? A. ​$62 one year from now B. ​$84 three years from now C. ​$95 four years from now D. ​$74 two years from now

$62 one year from now

Suppose that Ford issues a coupon bonds at a price of $1,000​, which is the same as the​ bond's par value. Assume the bond has a coupon rate of 6.5​%, pays the coupon once per​ year, and has a maturity of 25 years. If an investor purchased this bond at the price of $1,000​, for each year except the last​ year, the investor would receive a payment of ​$enter your response here.

$65

What is the present value of ​$1,200 to be received in four years if the interest rate is 10​%? The present value is ​

$819.62

Write the equation for the Gordon growth model.

(1+g) Pt=Dt X ------------ (re-g)

Click the following link to view M2 and Components data from FREDopens in a new tab​.* Then use that data to answer the following questions. LOADING... Part 3 The following table​ contains, along with​ M1, the series IDs corresponding to the​ non-M1 components of​ M2, which are measured weekly and seasonally adjusted. Complete this table by​ recording, for each series​ ID, the most recent observation ​(2021−02−01​). ​(Enter your responses exactly as they appear in​ FRED.) Series ID Value M1 ​$18105.1 billion. SAVINGS WRMFSL ​ WSMTIME ​

0, 1075.4, 0

If during 2012 the money supply increases by 6​%, the inflation rate is 5​%, and the growth of real GDP is 2​%, what must have happened to the value of velocity during 2012​? During 2012​, the value of velocity increases by

1%

For this​ exercise, you will need to enter data from FRED for the velocity of money for M1 and M2. Then you will be asked to compute statistics based on that data.​ Finally, you will use what​ you've learned to identify the curves in the graph to the right. Using the data from​ FRED, enter the values for the first quarters of 2009 and 1949 for the M1 and M2 velocity of​ money: ​(Enter your responses exactly as they appear in​ FRED.) ​Year-Month-Day M1 Velocity ​(M1V) M2 Velocity ​(M2V) 2009−01−01 enter your response here enter your response here 1949−01−01 enter your response here enter your response here

1.1811.181 1.1221.122 4.079 1.7461.746

Many retired people buy annuities. With an​ annuity, a saver pays an insurance​ company, such as Berkshire Hathaway Insurance Company or Northwestern Mutual Insurance​ Company, a​ lump-sum amount in return for the​ company's promise to pay a certain amount per year until the saver dies. With an ordinary​ annuity, when the buyer​ dies, there is no final payment to his or her heirs. Suppose that at age 64​, David Alexander pays ​$100,000 for an annuity that promises to pay him ​$10,000 per year for the remaining years of his life. Part 2 If David dies 15 years after buying the​ annuity, choose an equation that would allow you to calculate the interest rate that David received on his annuity. A. i=100,000−10,00015×100,000 B. i=10,000100,000 C. 100,000=10,0001+i+10,000(1+i)2​+...+10,000(1+i)15−1+10,000(1+i)15 D. 100,000=10,000(1+i)15

10,000 100,000=. ------- 1+i +. 10,000 --------- (1+i)^2​ +... +10,000 ---------- (1+i)^15−1 +10,000 --------- (1+i)^15

What is the present value of ​$1,100 to be received in four years if the interest rate is 9​%? The present value is ​$enter your response here. ​ (Round your response to the nearest​ cent.)

1100 + (1+3%) ^4 = 779.27

Click the following link to view Monetary Data from FREDopens in a new tab​.* Then use that data to answer the following questions. LOADING... ​*Real-time data provided by Federal Reserve Economic Data​ (FRED), Federal Reserve Bank of Saint Louis. Part 3 For this exercise you will need to enter data from FRED for M1 and M2​ (the respective Series IDs are​: M1SL and M2SL​). Part 4 The following table gives the nominal GDP​ (billions of current​ dollars) in the first quarter of 2022 and 2012. Using data from​ FRED, enter the values for M1 ​(M1SL​) and M2 ​(M2SL​) for the two comparable​ month/year periods​ (shown as 2022−02−01 and 2012−02−01 in​ FRED). ​(Enter your responses exactly as they appear in FRED.​) ​Month/Yr M1 ​ (billions of​ dollars) M2 ​ (billions of​ dollars) Nominal GDP​ (billions of current​ dollars) Feb​/2012 enter your response here enter your response here 16068.8 Feb​/2022 enter your response here enter your response here

2207.1 9785.7 20666.8 21749.7

​RNB's capital is what percentage of its​ assets? ​Capital/asset ratio=

25.47

The following entries​ (in millions of​ dollars) are from the balance sheet of Rivendell National Bank​ (RNB): U.S. Treasury bills $18 Demand deposits $47 ​Mortgage-backed securities $34 Loans from other banks $9 ​C&I loans $49 Discount loans $7 NOW accounts $39 Savings accounts $12 Reserve deposits with Federal Reserve $6 Cash items in the process of collection $9 Municipal bonds $6 Bank building $3 If​ RNB's assets have an average duration of five years and its liabilities have an average duration of two ​years, what is​ RNB's duration​ gap? Duration gap​ =

3

Using the data recorded​ above, complete the following table by computing the velocity of money for each money stock measure in each of the given time periods.​ (Enter your responses rounded to two decimal​ places.) ​Month/Yr M1 Velocity M2 Velocity Feb​/2012 7.287.28 1.641.64 Feb​/2022 1.181.18 1.121.12

7.287.28 1.641.64 1.181.18 1.121.12

What difficulties did credit default swaps cause during the financial crisis of 2007-​2009? A. Those selling credit default swaps undercharged buyers relative to the actual risk involved.​ Thus, when buyers attempted to collect on payments from the price​ declines, firms lacked sufficient collateral to meet their obligations and faced possible bankruptcy. B. Because credit default swaps were NOT issued against collateralized debt​ obligations, but should​ have, (CDOs), owners of those securities experienced severe losses when the price of the underlying security declined in value. C. Credit default swaps were issued against​ mortgage-backed securities without having sufficient reserves to offset the losses incurred when the housing bubble burst.​ Thus, when the value of the underlying asset​ plummeted, firms were liable to the buyers of CDSs. D. A and B are correct. E. All of the above.

A and B are correct.

How might an investor use a pricing anomaly to earn​ above-average returns? A. By using the January effect in which rates of return in January have been abnormally high during some years. B. By using the small firm effect in which rates of return in small firms tend to be larger than returns in large firms. C. By using a widely known trading strategy. D. A and B only. E. All of the above.

A and B only.

Is the United States likely to become a​ "cashless society"? A. ​No, because many people worry about protecting their privacy in an electronic system. B. ​No, because the infrastructure for an​ e-payments system is expensive to build. C. ​Yes, because as the efficiency of the payments system​ increases, transactions costs will decrease—benefitting both the consumer and the economy. D. A and B only.

A and B only.

Is the​ store-of-value function unique to​ money? If​ not, give some other examples of stores of value. A. ​No, money is only one of many assets that can be used to store value. Personal possessions such as a home or expensive artwork represent a store of value. B. ​No, money is only one of many assets that can be used to store value. Items such as shares of stock and Treasury bonds represent a store of value. C. ​Yes, money is the only asset that can be used to store value. D. A and B only.

A and B only.

Stocks are called​ "equities" because: A. ownership of a​ firm's stock represents a legal claim on the​ firm's profits. B. ownership of a​ firm's stock represents partial ownership of the firm. C. owners of a​ firm's stock are protected by the legal provision of limited liability. D. A and B only. E. all of the above.

A and B only.

What is the difference between a stock exchange and an​ over-the-counter market? A. A stock exchange is a physical location where trading occurs​ face-to-face, while​ over-the-counter markets are virtual markets where dealers are linked by computers to buy and sell stocks. B. ​Over-the-counter markets trade preferred​ stock, and a stock exchange trades common stock. C. An​ over-the-counter market is a physical location where trading occurs​ face-to-face, while a stock exchange is a virtual market where dealers are linked by computers to buy and sell stocks. D. A stock exchange trades preferred​ stock, and​ over-the-counter markets trade common stock.

A stock exchange is a physical location where trading occurs​ face-to-face, while​ over-the-counter markets are virtual markets where dealers are linked by computers to buy and sell stocks.

What is a pricing​ anomaly? A. The concept that actual prices appear to fluctuate much more than their fundamental values. B. The tendency of recently​ high-earning stocks to experience low returns in the future. C. A strategy that investors might use to earn​ above-average returns. D. The theory that investors cannot consistently earn high returns by buying and selling stocks.

A strategy that investors might use to earn​ above-average returns.

Suppose that you are considering investing in a​ 4-year bond that has a face value of ​$1,000 and a coupon rate of 5.7​%. Part 2 ​ a.) If the market interest rate on similar bonds is 5.7​%, the price of the bond is ​$enter your response here. ​(Round your response to the nearest​ cent.) The​ bond's current yield is __________% ​b.) Suppose that you purchase the​ bond, and the next day the market interest rate on similar bonds falls to 4.7%. The price of the bond will be ​$ The current yield will be ____% ​ c.) Now suppose that 1 year has gone by since you bought the​ bond, and you have received the first coupon payment. The market interest rate on similar bonds is still 4.7​%. At an interest rate of 4.7​%, the price an investor is willing to pay for the bond is ​$enter your response here. ​(Round your response to the nearest​ cent.) Your rate of return on the bond was_______% Suppose investor A bought the bond a year ago for the amount that was calculated in part​ (b). Investor​ A's rate of return would have been enter your response here​%. ​(Round your response to two decimal​ places.) d.) Now suppose that 2 years have gone by since you bought the bond and that you have received the first two coupon payments. At this​ point, the market interest rate on similar bonds unexpectedly rises to 9​%. At an interest rate of 9​%, the price an investor is willing to pay for the bond is ​$enter your response here. ​(Round your response to the nearest​ cent.)

A. 1000 ; 5.7% B. 1035.71 ; 5.50% C. $1027.39 ; 8.44% ; 4.7% Rate of return= $57 +($1027.39-$1000) ------------------------- $1000 = 8.44% D. $941.95; 6.05%; -2.77

According to an article in the Wall Street Journal​, in May​ 2016, "Social Finance​ Inc., known as​ SoFi, for the first time received the highest possible credit rating from​ Moody's on a new bond deal." ​Source: Telis Demos and Peter​ Rudegeair, "Online Lender​ SoFi's Bond Deal Receives Highest​ Moody's ​Rating," Wall Street Journal​, May​ 21, 2016. What is​ Moody's highest possible credit​ rating? A. A B. AA C. AAA D. Aaa

Aaa

What is the difference between adaptive expectations and rational​ expectations? A. Adaptive expectations assume that​ investors' expectations are based on past values of a​ variable, whereas rational expectations assume that investors make forecasts of future values using all available information. B. Rational expectations assume that​ investors' expectations are based on past values of a​ variable, whereas adaptive expectations assume that investors make forecasts of future values using all available information. C. Adaptive expectations assume that​ investors' expectations are based on the future values of a​ variable, whereas rational expectations assume that investors make forecasts using all available information. D. Adaptive expectations assume that​ investors' expectations are based on one​ variable, whereas rational expectations assume that investors make forecasts of future values using multiple variables.

Adaptive expectations assume that​ investors' expectations are based on past values of a​ variable, whereas rational expectations assume that investors make forecasts of future values using all available information.

The author of a newspaper article providing advice to renters observes that​ "landlords will always know more than you​ do." ​Source: Marc​ Santora, "How to Be a Brainy​ Renter," New York Times​, June​ 3, 2010. Part 2 Do you agree with this​ statement? If​ so, what do landlords know that potential renters might​ not? A. ​Agree; Landlords know more about the quality of the​ property, and hence its true​ value, than renters. B. ​Disagree; Renters know more about their​ income, and thus what they are able to afford. C. ​Disagree; Landlords​ don't know more than the potential renter. D. ​Agree; Landlords know that the price of any property will always fall in the future.

Agree; Landlords know more about the quality of the​ property, and hence its true​ value, than renters.

A bank executive was quoted as arguing​ that: ​"TARPLOADING... successfully stabilized not only the banking industry but a number of other industries as​ well." ​Source: Jeffrey​ Sparshott, "Bank​ CEO: History Will Be Kind to​ TARP," Wall Street Journal​, August​ 15, 2012. Part 2 Why might stabilizing the banking industry have stabilized other​ industries? A. A stabilized banking industry maintains the flow of credit to other​ industries, allowing them to avoid disruptions. B. Financial intermediation is crucial to the smooth operation of the modern economy. An unstable banking industry makes all other industries unstable. C. The steady flow of credit is the lifeblood of most​ industries; when it is​ disrupted, production suffers. D. All of the above. E. A and B only.

All of the above.

Following the end of World War II in​ 1945, the​ Reichsmark, the German​ currency, lost so much value that a barter economy arose. During this​ period, many Germans used U.S. cigarettes as currency. Why might​ cigarettes, rather than another​ commodity, have been used as currency in this​ situation? A. Cigarettes are smaller and more convenient to carry as a form of payment than another commodity. B. Cigarettes must have been an acceptable equivalent to the Reichsmark as payment. C. Cigarettes are more easily divisible to use as a source of payment than another commodity may be. D. A and B only. E. All of the above.

All of the above.

What are the determinants of asset​ demand? Part 2 A. The total amount of savings to be allocated among investments. B. The liquidity of the investment compared with other investments. C. The expected rate of return and the degree of risk for an investment compared to alternative investments. D. All of the above.

All of the above.

What are the main reasons that lenders charge interest on​ loans? A. To compensate for default risk. B. To compensate for the opportunity cost of spending the funds being loaned. C. To compensate for inflation. D. A and B only. E. All of the above.

All of the above.

What makes a dollar bill​ money? A. A dollar bill is durable yet easily transportable. B. A dollar bill is easily divisible. C. A dollar bill is accepted as a means of payment and standardized in terms of quality. D. All of the above.

All of the above.

What problems did the decline in housing prices that began in 2006 cause for the financial​ system? A.The value of​ mortgage-backed securities declined sharply—causing heavy losses for the investment institutions owning these securities. B.Many subprime and​ Alt-A borrowers, borrowers with adjustable-rate​ mortgages, and borrowers who had made only small down payments defaulted on their mortgages. C.Banks began to restrict credit to all but the safest borrowers—limiting the flow of funds from savers to borrowers. D.All of the above.

All of the above.

Why are supporters of the efficient markets hypothesis unconvinced that differences between the theoretical and actual behavior of financial markets actually invalidate the​ hypothesis? A. They fail to take into account the costs of the tax implications of alternative strategies. B. They fail to take into account how risk affects the returns of alternative strategies. C. They fail to take into account the costs of transaction costs of alternative strategies. D. All of the above.

All of the above.

Why do bonds that have the same maturities often have different interest​ rates? A. Interest rates may vary due to risk. B. Interest rates may vary due to information costs and costs from taxation. C. Interest rates may vary due to liquidity. D. All of the above.

All of the above.

Why might bubbles be difficult to​ identify? A. For every overvalued​ asset, there is always an investor willing to buy the asset at an even higher price. B. Investors may not exhibit rational behavior when purchasing an overvalued stock. C. Poor investor​ psychology, such as herd​ behavior, may not allow investors to see an asset as overvalued. D. All of the above.

All of the above.

Look at the figure... and answer the following questions. Part 2 Why is the demand curve for foreign exchange downward​ sloping? A. As the exchange rate​ falls, it becomes cheaper to convert a foreign currency into​ dollars, so there is a larger quantity of dollars demanded. B. As the exchange rate​ rises, it becomes more expensive to convert a foreign currency into​ dollars, so there is a larger quantity of dollars demanded. C. As the exchange rate​ falls, it becomes more expensive to convert a foreign currency into​ dollars, so there is a smaller quantity of dollars demanded. D. As the exchange rate​ rises, it becomes cheaper to convert a foreign currency into​ dollars, so there is a larger quantity of dollars demanded.

As the exchange rate​ falls, it becomes cheaper to convert a foreign currency into​ dollars, so there is a larger quantity of dollars demanded.

Suppose that​ Lena, who has an account at SunTrust​ Bank, writes a check for ​$140 to​ Jose, who has an account at National City Bank. Part 2 Use following the​ T-account for SunTrust Bank to show how it is affected after the check clears.

Assets: Reserves +140 Liabilites: Checkable desposits +140

The following entries​ (in millions of​ dollars) are from the balance sheet of Rivendell National Bank​ (RNB):

Assets: U.S. Treasury bills $20 Mortgage-backed securities $30 C and I loans $54 Reserve deposits with Federal Reserve $10 Cash items in the process of collection $9 Municipal bonds $9 Bank building $4 Total Assets = 136 Liabilites + bank captial Demand deposits$36 Loans from other banks $7 Discount loans $5 NOW accounts $39 Savings accounts $14 Total Liabilities = 101 Bank Capital =35

The key accounting equation on which balance sheets are based is given by A. Assets​ = Liabilities​ + Shareholders' Equity. B. Assets​ = Liabilities − ​Shareholders' Equity. C. Assets​ + Shareholders' Equity​ = Liabilities. D. Assets​ = Liabilities.

Assets​ = Liabilities​ + Shareholders' Equity.

What is behavioral​ finance, and how is it related to behavioral​ economics? A. Behavioral finance studies the rational choices of people in the​ markets, while behavioral economics studies the choices that do not appear to be economically rational. B. Both behavioral finance and behavioral economics study how investors make rational​ decisions, further proving​ efficient-market theory. C. Behavioral finance studies how people make choices in the markets by applying concepts from behavioral economics. Your answer is correct. D. Behavioral finance studies how people make choices in the​ markets; however, it is unrelated to behavioral economics.

Behavioral finance studies how people make choices in the markets by applying concepts from behavioral economics.

In the adjacent​ figure, countries that are above the upward sloping line have relatively high levels of real GDP per capita for their levels of financial development and countries that are below the line have relatively low levels of real GDP per capita for their levels of financial development. Part 2 Holding constant all other factors that might affect a​ country's rate of economic​ growth, would we expect future growth rates to be higher for countries above the line or for countries below the​ line? A. Below the line because these countries have underperformed so far given the strength of their financial system. B. Above the line because past performance is a reliable indicator of future performance. C. Above the line because these countries have underperformed so far given the strength of their financial system. D. Below the line because poor performance in the past provides greater room for improvement in the future.

Below the line because these countries have underperformed so far given the strength of their financial system.

Consider the following information on two U.S. Treasury​ bonds: Maturity Coupon. Bid Asked Chg asked yeld Bond A July​ 31, 2024 1.625 101.8984 101.9141 0.5000 1.151 Bond B July​ 31, 2024 2.000 103.4141 103.4297 0.5000 1.151 Briefly explain how two securities that have the same yield to maturity can have different asked prices. A. Bond A has a low coupon rate and a lower price. Bond B has a higher coupon rate and a higher price. Because of the bond price​ formula, if coupon rates​ fall, the yield will​ fall, which requires prices to fall to keep the yield the same. If the two bonds have different risk​ profiles, the law of one price brings bond yields to the same level. B. Bond A has a low coupon rate and a lower price. Bond B has a higher coupon rate and a higher price. Because of the bond price​ formula, if coupon rates​ fall, the yield will​ fall, which requires prices to fall to keep the yield the same. If both bonds have the same risk​ profile, the law of one price brings bond yields to the same level. C. Bond A has a low coupon rate and a lower price. Bond B has a higher coupon rate and a higher price. Because of the bond price​ formula, if coupon rates​ fall, the yield will​ rise, which requires prices to rise to keep the yield the same. If both bonds have the same risk​ profile, the law of one price brings bond yields to the same level. D. Bond A has a low coupon rate and a lower price. Bond B has a higher coupon rate and a higher price. Because of the bond price​ formula, if coupon rates​ rise, the yield will​ fall, which requires prices to fall to keep the yield the same. If both bonds have the same risk​ profile, the law of one price brings bond yields to the same level.

Bond A has a low coupon rate and a lower price. Bond B has a higher coupon rate and a higher price. Because of the bond price​ formula, if coupon rates​ fall, the yield will​ fall, which requires prices to fall to keep the yield the same. If both bonds have the same risk​ profile, the law of one price brings bond yields to the same level.

Compare the bond market approach to the loanable funds approach by explaining the following for each approach. What the good is In the bond​ market, the good is the ▼ and in the loanable funds​ market, the good is the ▼

Bond, use of funds

c. If Halliburton invests today at the U.S. interest rate of 7​%, without entering into any other type of​ contract, does the firm know how many dollars it needs today to fulfill its equipment contract in one​ year? A. ​No, it depends on the exchange rate at the end of the contract. B. ​No, but it takes the risk. C. ​Yes, it would need ​$1,926,968. D. Both A and B are correct.

Both A and B

In​ 1960, federal regulations prohibited banks from paying interest on checking accounts.​ Today, banks are legally allowed to pay interest on checking​ accounts, yet the value of checking accounts has shrunk from more than​ 50% of commercial bank liabilities in 1960 to less than​ 12%. Because checking accounts now pay​ interest, shouldn't they have become more popular with households rather than less​ popular? A. All else​ constant, this would increase the popularity of checking accounts.​ However, at the same time that interest became payable on checking​ accounts, banks were creating several new savings​ instruments, including certificates of deposit and money market deposit accounts. B. As wealth increases over​ time, households hold less money in checking accounts relative to other financial assets. C. Both A and B are correct. D. Only A is correct.

Both A and B are correct.

The Economist magazine tracks the prices of the​ McDonald's Big Mac hamburger in countries around the world. The following table shows the price of Big Macs in the United States and in five other​ countries, along with the exchange rate between that​ country's currency and the U.S. dollar. Country Big Mac price in domestic currency Exchange rate​ (units of foreign currency per U.S.​ dollar) United States ​$4.33 — Brazil 10.08 reals 2.04 Israel 11.9 shekels 4.08 South Korea ​3,700 won ​1,151 Switzerland 6.5 Swiss francs 0.99 Venezuela 34 Bolivars 4.29 ​Source: "The Economist Big Mac​ Index," Economist​, July​ 26, 2012. Part 2 With respect to the theory of purchasing power​ parity, the statistics in this table are Part 3 A. inconsistent since the domestic currency prices of Big Macs​ (for the​ non-U.S. countries), when converted into​ dollars, differ markedly from​ $4.33. B. consistent since the domestic currency prices of Big Macs​ (for the​ non-U.S. countries), when converted into​ dollars, would not differ from​ $4.33 if transportation costs are included. C. ​inconsistent, since purchasing power parity implies that​ $4.33, when converted into other​ currencies, should be sufficient to just purchase a Big Mac in the​ non-U.S. countries. D. neither consistent or​ inconsistent, since purchasing power parity only applies to​ non-traded products. E. Both A and C are correct.

Both A and C are correct.

----- allow you to avoid any losses from decreasing stock​ prices, while ------ also allows you to benefit from increases in stock prices. Part 4

Both selling stocks and buying put options only buying put options

The federal government imposes a tax of​ $10 per bond on bond sales and bond purchases. A. Both the demand and supply curves shift to the right. B. Both the demand and supply curves shift to the left. C. The demand curve shifts to the right and the supply curve shifts to the left. D. The demand curve shifts to the left and the supply curve shifts to the right.

Both the demand and supply curves shift to the left.

Suppose that you have ​$1,000 to invest in the bond market on January​ 1, 2012. You could buy a​ one-year bond with an interest rate of 3​%, a​ two-year bond with an interest rate of 4​%, a​ three-year bond with an interest rate of 4.5​%, or a​ four-year bond with an interest rate of 5​%. You expect interest rates on​ one-year bonds in the future to be 5.5​% on January​ 1, 2013, 6​% on January​ 1, 2014, and 8​% on January​ 1, 2015. You want to hold your investment until January​ 1, 2016. Which of the following investment alternatives gives you the highest return by​ 2016? Part 2 A. Buy a​ four-year bond on January​ 1, 2012. B. Buy a​ three-year bond January​ 1, 2012, and a​ one-year bond January​ 1, 2015. C. Buy a​ two-year bond January​ 1, 2012, a​ one-year bond January​ 1, 2014, and another​ one-year bond January​ 1, 2015. D. Buy a​ one-year bond January​ 1, 2012, and then additional​ one-year bonds on the first days of​ 2013, 2014, and 2015

Buy a​ one-year bond January​ 1, 2012, and then additional​ one-year bonds on the first days of​ 2013, 2014, and 2015.

Which of the following is an example of speculating using financial​ futures? A. Selling a wheat futures contract expecting the future spot price to exceed the current futures price. B. Buying Treasury futures expecting future interest rates to be lower than indicated by the current price of Treasury futures. C. Buying a wheat futures contract expecting the future spot price to exceed the current futures price. D. Selling Treasury futures expecting future interest rates to be lower than indicated by the current price of Treasury futures.

Buying Treasury futures expecting future interest rates to be lower than indicated by the current price of Treasury futures.

Mutual funds that follow a​ "momentum trading" strategy are known on Wall Street as​ "momos." How might a mutual fund manager use a momentum trading​ strategy? A. By predicting that​ low-earning stocks are likely to produce high returns in the future and should be purchased. B. By predicting that​ high-earning stocks are likely to produce low returns in the future and should be sold. C. By buying when stock prices are rising and selling when prices are falling. Your answer is correct. D. By buying when stock prices are falling and selling when prices are rising.

By buying when stock prices are rising and selling when prices are falling. Your answer is correct.

How can herd behavior lead to a bubble in a financial​ market? A. By carrying a stock price lower than its fundamental​ value, even leading to a speculative bubble. B. By carrying a stock price higher than its fundamental​ value, even leading to a speculative bubble. C. By causing investors to buy and hold assets for a long period of time. D. None of the above.

By carrying a stock price higher than its fundamental​ value, even leading to a speculative bubble.

Which of the following would shift the supply curve for bonds to the​ right? ​ A. Corporate taxes increase. B. Expected inflation decreases. C. ​Firm's expected profitability increases. D. Government borrowing increases. E. Subsidies to business increase.

C. ​Firm's expected profitability increases. D. Government borrowing increases. E. Subsidies to business increase.

Which of the following ratings is this bond likely to​ receive? A. AAA B. CCC C. DDD D. BBB

CCC

How does buying call options allow an investor to add exposure to the stock market to his or her​ portfolio? A. Call options expose investors to more risk than buying the underlying stock without the option. B. Call options allow investors to benefit from increases in stock prices but limit losses if stock prices fall. C. Call options allow investors to benefit from decreases in stock prices but expose investors to losses if stock prices rise. D. Call options never expire so investors are exposed to fluctuations in stock prices until the call option is executed.

Call options allow investors to benefit from increases in stock prices but limit losses if stock prices fall.

What makes a personal check​ money? A. Checks are accepted as a medium of exchange. Your answer is correct. B. Checks serve as wealth. C. Checks serve as commodity money. D. All of the above.

Checks are accepted as a medium of exchange.

What makes a personal check​ money? A. Checks serve as commodity money. B. Checks serve as wealth. C. Checks are accepted as a medium of exchange. D. All of the above.

Checks are accepted as a medium of exchange.

he Fed considers all the following as desirable outcomes for a payments​ system, except: A. Speed. B. Closed to international transactions. C. Efficiency. D. Security.

Closed to international transactions.

What are the three most important stock market​ indexes? ​(Check all that​ apply.) A. AMERITRADE. B. Dow Jones Industrial Average. C. Standard​ & Poor's. D. NASDAQ Composite. E. ​S&P 500.

Dow Jones Industrial Average. NASDAQ Composite. ​S&P 500.

According to a New York Times​ article: "With yields on many municipal bonds extremely low ... even a small increase in their​ price, which would cause the yield to go down​, would cause a loss of principal." ​Source: Paul​ Sullivan, "Taxes Influence Investment​ Strategy, and Not Always for the ​Better," New York Times​, May​ 3, 2013.

Down, Loss

An article in the Wall Street Journal in​ 2016, observed that the price of​ Apple's stock had started to decline a year before "when fears of an iPhone slowdown surfaced." At the time the article was​ written, the author claims​ that, "The iPhone slump is now more than priced in." ​Source: Dan​ Gallagher, "Apple Has Upside as Investors ​Worry," Wall Street Journal​, April​ 24, 2016. Part 2 Which of the following best explains the​ author's comment, "The iPhone slump is now more than priced in"​? A. Equity premium. B. Efficient markets hypothesis. C. Systematic risk component of equity premium. D. Unsystematic risk component of equity premium.

Efficient markets hypothesis.

Which of the following best describes why younger investors are more likely to invest in equity funds while other investors are more likely to invest in bond​ funds? A. Equity funds provide greater return potential than bonds. B. Younger investors are more risk averse. C. Bond funds provide less of a return than equity funds. Your answer is not correct. D. Equity funds are favored by those with a​ long-term perspective.

Equity funds are favored by those with a​ long-term perspective.

An article in the Wall Street Journal describes one investment strategy that involves buying stocks on the London Stock Exchange at the beginning of​ November, selling them at the end of​ April, and then buying them again at the beginning of the following November. According to one investment​ analyst, this "Halloween effect" investment strategy will earn an​ above-average return. The article notes that the​ analyst's "results exclude transactions costs and taxes." ​ Source: Corrie Driebusch and Aaron​ Kuriloff, "Sell Stocks in​ May? Tempting but Not Very ​Smart," Wall Street Journal​, May​ 1, 2016. How does the exclusion of transaction costs affect the returns cited due to the "Halloween effect"​? A. Excluding transaction costs understates the return. B. Excluding transaction costs overstates the return. C. The effect of excluding transaction costs varies. D. Excluding transaction costs has no effect on the return.

Excluding transaction costs overstates the return.

Explain why each of the following changes might​ occur: Part 2 a. Which of the following would shift the demand curve for bonds to the​ left? ​(Check all correct​ answers.) A. Expected inflation increases. B. ​Households' wealth decreases. C. The liquidity of bonds increases. D. The expected return on bonds relative to other assets increases. E. The expected return on stocks increases.

Expected inflation increases. . ​Households' wealth decreases. The expected return on stocks increases.

Widespread use of handheld computers helps reduce business costs. A. The demand for loanable funds would remain constant. B. Expected profitability would​ rise, but the demand for loanable funds would fall. C. Expected profitability would​ fall, so the demand for loanable funds would fall. D. Expected profitability would​ rise, so the demand for loanable funds would rise.

Expected profitability would​ rise, so the demand for loanable funds would rise.

According to an​ op-ed column in the Wall Street Journal​: "Former Google staffers founded the online lender​ Upstart, which cuts deals based on​ grade-point average, SAT​ score, college attended and even major." ​Source: Andy​ Kessler, "My Tour of FICO​ Scores, Fido​ Loans, ​Whatever," Wall Street Journal​, November​ 15, 2015. Part 2 How does this approach to credit scoring differ from the approach used by Fair​ Isaac? A. Fair Isaac bases their score off your earnings potential. B. Fair Isaac bases their score off information they gather directly from your creditors. C. Upstart and Fair Isaac use the same approach to credit scoring. D. Fair Isaac bases their score off your credit history compiled by​ third-party reporting agencies.

Fair Isaac bases their score off your credit history compiled by​ third-party reporting agencies.

Suppose that the U.S. firm Halliburton buys construction equipment from the Japanese firm Komatsu at a price of ¥200 million. The equipment is to be delivered to the United States and paid for in one year. The current exchange rate is ¥99=$1. The current interest rate on​ one-year U.S. Treasury bills is 7​%, and on​ one-year Japanese government bonds the interest rate is 5​%. Part 2 a. If Halliburton exchanges dollars for yen today and invests the yen in Japan for one​ year, it will need ​$enter your response here to exchange today in order to have ¥200 million in one year. ​(Round your response to the nearest​ dollar.)

Halliburton needs to exchange today ​$1,924,002 into yen and invest the yen in​ one-year Japanese government bonds in order to have ¥200 million in one year.

d. Which​ method(s) described in​ (a) through​ (c) provide(s) a hedge against​ exchange-rate risk? Which​ do(es) not? Which method is Halliburton likely to​ prefer? A. Hedges are provided by​ (a) and​ (c) but not​ (b), and Halliburton prefers​ (c) because it costs less. B. Hedges are provided by​ (a) and​ (b) but not​ (c), and Halliburton prefers​ (a) because it costs less. C. Hedges are provided by​ (a) and​ (b) but not​ (c), and Halliburton prefers​ (b) because it costs less. D. A hedge is provided by​ (a) but not​ (b) and​ (c), and thus Halliburton only prefers​ (a).

Hedges are provided by​ (a) and​ (b) but not​ (c), and Halliburton prefers​ (a) because it costs less.

An article in the Economist notes​ that: "If other people are making a fortune by buying tech​ stocks, or by trading up in the housing​ market, then there is a huge temptation to take​ part, in case one gets left behind." ​Source: "​What's Wrong with Finance" Economist​, May​ 1, 2015. What do economists call​ this? A. Noise trading. B. Greater fool theory. C. Follow the leader. D. Herd behavior.

Herd behavior.

Why​ don't insurance companies just raise the annual premiums they charge instead of canceling​ policies? A. Changing the rate would have no impact on the type of person that would apply for insurance would have no impact on profits. B. Higher rates will attract riskier people to buy policies and discourage safer people. C. Higher rates will attract only safer people and the insurance companies want risky people also. D. Changing the rate would have no impact on the type of person that would apply for insurance it would just lead to fewer people buying policies.

Higher rates will attract riskier people to buy policies and discourage safer people.

An article in the Wall Street Journal quoted a young investor who works for the social network site LinkedIn who explained that after losing money trading securities linked to crude oil futures prices he was going to "stick to investing in what he​ knows, like tech." ​Source: Ben​ Eisen, Nicole​ Friedman, and Saumya​ Vaishampayan, "The New Oil​ Traders: Moms and ​Millennials," Wall Street Journal​, May​ 26, 2016. Part 2 All of the following are reasons why might someone like this investor who has a​ full-time job would have trouble earning a profit buying and selling oil futures​ (or other securities linked to the prices of oil​ futures), except: A. He would need a superior knowledge of how the oil market works. B. His trading costs are higher than those of Wall Street professionals. C. He would need to have a better understanding than Wall Street professionals of how news is likely to affect oil prices. D. He would need to follow news about the oil industry carefully.

His trading costs are higher than those of Wall Street professionals.

What is a​ hyperinflation? A. Hyperinflation is inflation that exceeds​ 100% per year. Your answer is correct. B. Hyperinflation is inflation that is less than​ 100% per year. C. Hyperinflation is inflation that is equal to​ 100% per year. D. All of the above. Part 2

Hyperinflation is inflation that exceeds​ 100% per year.

What​ factors, if​ changed, would affect your willingness to accept a dollar bill or a check as​ money? A. If others were unwilling to accept a dollar bill or a check as a means of payment. B. If others were unwilling to accept a dollar bill or a check as commodity money. C. If the dollar bill or check was no longer a sign of wealth. D. The dollar bill or check will always be accepted as money.

If others were unwilling to accept a dollar bill or a check as a means of payment.

What​ factors, if​ changed, would affect your willingness to accept a dollar bill or a check as​ money? A. If others were unwilling to accept a dollar bill or a check as commodity money. B. If others were unwilling to accept a dollar bill or a check as a means of payment. C. If the dollar bill or check was no longer a sign of wealth. D. The dollar bill or check will always be accepted as money.

If others were unwilling to accept a dollar bill or a check as a means of payment.

An article in the Wall Street Journal notes that​ "investors tend to view​ [preferred stock] more like bonds than like​ [common] stock." ​Source: Ari I.​ Weinberg, "Playing​ 'Preferred' Shares," Wall Street Journal​, September​ 7, 2012. In what sense is preferred stock more like bonds than like common​ stock? ​(Check all that apply​) Part 2 A. If the corporation declares bankruptcy preferred stockholders are paid before common stockholders. B. Preferred stockholders get fixed dividend payments while common stockholders receive fluctuating dividend payments. C. Preferred stockholders are less likely to get dividend payments during difficult financial times than common stockholders. D. Preferred stock represents partial ownership of a corporation while common stock does not.

If the corporation declares bankruptcy preferred stockholders are paid before common stockholders. Preferred stockholders get fixed dividend payments while common stockholders receive fluctuating dividend payments.

Why might the fund manager expect to earn an​ above-average return? A. Provided the stock price is above the mean reversion point and other investors follow a momentum​ strategy, the fund manager is likely to earn an​ above-average return. B. Provided the stock price is below the mean reversion point and other investors follow a momentum​ strategy, the fund manager is likely to earn an​ above-average return. C. If the fund manager follows a momentum strategy and buys a stock as the price is increasing and other investors also follow a momentum​ strategy, then it is likely the stock price will continue to rise. D. If the fund manager follows a momentum strategy and buys a stock as the price is increasing while other investors follow a mean reversion​ strategy, then it is likely the stock price will continue to rise.

If the fund manager follows a momentum strategy and buys a stock as the price is increasing and other investors also follow a momentum​ strategy, then it is likely the stock price will continue to rise.

If a coupon bond has a face value of​ $1,000, I​ don't understand why anyone who owns the bond would sell it for less than​ $1,000. After​ all, if the owner holds the bond to​ maturity, the owner knows he or she will receive​ $1,000, so why sell for​ less? Answer the​ student's question. A. Bonds are sold at price that is significantly less than the face value of the​ bond, and then the price rises over time.​ Thus, you can always sell the bond for more than you paid for it and realize a capital gain. B. If the market interest rate has increased since purchasing the​ bond, the price of the bond will have risen relative to what you paid for it and you will realize a capital gain. C. If the market interest rate has decreased since purchasing the​ bond, the price of the bond will have risen relative to what you paid for it and you will realize a capital gain. D. None of the above.

If the market interest rate has decreased since purchasing the​ bond, the price of the bond will have risen relative to what you paid for it and you will realize a capital gain.

In what ways is the market for rental apartments like the market for used​ cars? A. In both​ markets, the​ "lemons" are the responsibility of the renter or buyer forever. B. In both​ markets, the owner knows more than the potential renter or buyer. C. Neither the rental apartment market nor the used car market face the​ "lemons problem." D. The market for rental apartments is not similar to the market for used cars

In both​ markets, the owner knows more than the potential renter or buyer.

An article in the Wall Street Journal described "a sea change in the fund business in which investors are increasingly opting for products that track the market rather than relying on managers to pick winners." ​Source: Kirsten​ Grind, "Investors Pour Into​ Vanguard, Eschewing Stock ​Pickers," Wall Street Journal​, August​ 21, 2014. Based on the information in the​ article, which of the following investments are investors increasingly​ choosing? A. Derivatives. B. Money market funds. C. Mutual funds. D. Index funds.

Index funds.

How does the interest rate on a bond with high information costs compare with the interest rate on a bond with low information​ costs? A. Interest rates are usually higher on a bond with high information costs. B. Interest rates are usually lower on a bond with high information costs. C. Interest rates are usually the same regardless of information costs. D. The bond rating is needed to determine the effect on interest rates.

Interest rates are usually higher on a bond with high information costs.

In April​ 2009, as part of the stimulus package intended to fight the recession of 2007−​2009, Congress authorized​ "Build America​ Bonds," which states and cities could issue to build​ roads, bridges, and schools. Unlike with regular municipal​ bonds, however, the coupons on Build American Bonds are taxable. ​Source: Ianthe Jeanne​ Dugan, "Build America Pays Off on Wall​ Street," Wall Street Journal​, March​ 10, 2010. Would you expect the interest rates on these bonds to be higher or lower than the interest rates on comparable municipal​ bonds? Briefly explain. A. Interest rates on Build America Bonds are likely to be higher because taxing the coupon reduces the coupon paid to the bond purchaser. B. Interest rates on Build America Bonds are likely to be the same as interest rates on comparable municipal bonds. C. Interest rates on Build America Bonds are likely to be lower as investors will accept a lower interest rate in order to support​ Obama's American Recovery and Reinvestment Act. D. Interest rates on Build America Bonds are likely to be lower because fewer investors will prefer these bonds when​ tax-exempt municipal bonds are available.

Interest rates on Build America Bonds are likely to be higher because taxing the coupon reduces the coupon paid to the bond purchaser.

All of the following are reasons why savers with small amounts to invest rarely make loans directly to individuals or​ firms, except A. Interest rates would not be high enough. B. They cannot take advantage of economies of scale. C. Information costs associated with these loans are too high. D. Transaction costs associated with these loans are too high.

Interest rates would not be high enough.

All of the following describe why an investor should NOT follow the​ planner's advice,​ except: A. Returns on a diversified portfolio are more stable than returns on individual assets. B. Investing in a single asset class increases idiosyncratic risk. C. Investing in a single asset class minimizes market risk. D. Expected returns are not actual returns.

Investing in a single asset class minimizes market risk.

What key assumptions does the Gordon growth model​ make? ​(Check all that​ apply.) A. Investors receive their first dividend immediately rather than at the end of the year. B. The growth rate of dividends is fluctuating. C. The growth rate of dividends is constant. D. The required rate of return is greater than the dividend growth rate of the stock.

Investors receive their first dividend immediately rather than at the end of the year. The growth rate of dividends is constant. The required rate of return is greater than the dividend growth rate of the stock.

An article in the Wall Street Journal in 2016 referred to the past 35 years as "the biggest bond bull market in history." ​Source: James​ MacKintosh, "​35-Year-Old Bond Bull Is on Its Last ​Legs," Wall Street Journal​, July​ 13, 2016. Part 2 What does the article mean by a bull market in​ bonds? A. Investors were taking their money out of the bond market. B. Bond prices were lower than normal. C. Bonds were paying higher levels of interest. D. Investors were increasing their demand for bonds.

Investors were increasing their demand for bonds.

In the spring of​ 2016, an article on cnbc.comopens in a new tab noted​ that, "Yields on the benchmark​ 10-year JGB​ [Japanese government​ bond] have turned​ negative, which essentially means that bondholders are paying for the privilege of lending money to the Japanese government." ​Source: Leslie​ Shaffer, "Why JGB Yields​ Won't Keep Falling Deeper Into Negative ​Yield," cnbc.comopens in a new tab​, April​ 3, 2016. Why would bondholders pay to lend money to the Japanese​ government? A. Investors were looking for safe havens at a time when virtually all other investments seemed very risky. B. The Japanese government was short of funds. C. The Japanese government stopped issuing​ short-term bonds. D. Banks stop lending money to the Japanese government.

Investors were looking for safe havens at a time when virtually all other investments seemed very risky.

Who would be hurt the​ most? A. Investors who had bought put options. B. Investors who had sold call options. C. Investors who had sold put options. D. Investors who had bought call options.

Investors who had sold put options.

Which of the following might explain why investors might expect to receive a higher return in the long run from buying index funds rather than actively managed​ funds? A. It is extremely difficult to outperform the​ long-run average return on stocks. B. Generating better than average​ long-run returns is less risky with actively managed funds. C. Actively managed funds have higher expenses. D. Index funds outperform the overall market.

It is extremely difficult to outperform the​ long-run average return on stocks

Ford Motor Company has issued bonds with a maturity date of November​ 1, 2046 that have a coupon rate of​ 7.40%, and coupon bonds with a maturity of February​ 15, 2047 that have a coupon rate of​ 9.80%. Why would Ford issue bonds with coupons of​ $74 and then a little more than a year later issue bonds with coupons of​ $98? Why​ didn't the company continue to issue bonds with the lower​ coupon? Part 2 A. It is likely that Ford had to increase the coupon rate because either the price increased or the interest rate fell. B. It is likely that Ford had to increase the coupon rate because either the price or the interest rate rose. C. It is likely that Ford had to increase the coupon rate because both the price and interest rate fell. D. None of the above.

It is likely that Ford had to increase the coupon rate because either the price increased or the interest rate fell.

If the statement is​ correct, what are the implications for the market for rental​ apartments? A. The market faces the possibility of the​ principal-agent problem. B. Landlords will attempt to charge a lower price than they otherwise would receive in the absence of this information asymmetry. C. Landlords will attempt to charge a higher price than they otherwise would receive in the absence of this information asymmetry. D. The statement is not correct​ and, thus, there are no implications for the market for rental apartments.

Landlords will attempt to charge a higher price than they otherwise would receive in the absence of this information asymmetry.

What does it mean to say that the coinage had become​ debased? A. Less valuable metals were added to the​ coins, causing the coins to lose value. B. More gold and silver were added to the​ coins, depleting the supply of such metals in the empire. C. The coins were replaced with paper currency. D. Many people were robbed while transporting gold and silver​ coins, which lowered the value of the coins.

Less valuable metals were added to the​ coins, causing the coins to lose value. People would have to believe the coins had legitimate value

Define liquidity. Rank the following assets in terms of​ liquidity, from most to least​ liquid: money market mutual​ fund, savings​ account, corporate​ stock, dollar​ bill, house, gold​ bar, checking account. A. Liquidity is the ease with which an asset can be converted to definitive money. Ranking from most to least​ liquid: dollar​ bill, checking​ account, gold, money market mutual​ fund, savings​ account, corporate​ stock, house. B. Liquidity is the ease with which an asset can be converted to definitive money. Ranking from most to least​ liquid: dollar​ bill, checking​ account, money market mutual​ fund, savings​ account, corporate​ stock, gold, house. Your answer is correct. C. Liquidity is the ease with which an asset can be converted to definitive money. Ranking from most to least​ liquid: dollar​ bill, money market mutual​ fund, checking​ account, savings​ account, corporate​ stock, gold, house. D. None of the above.

Liquidity is the ease with which an asset can be converted to definitive money. Ranking from most to least​ liquid: dollar​ bill, checking​ account, money market mutual​ fund, savings​ account, corporate​ stock, gold, house.

Which of the following is a correctly explained key feature of the financial​ system? ​(Check all that​ apply.) A. The bond market is a less important source of external funds to corporations than is the stock market. This is because there is less moral hazard involved with stocks than with bonds. B. Debt contracts usually require collateral or restrictive covenants. The purpose of the collateral is to reduce moral hazard. C. Debt contracts usually require collateral or restrictive covenants. The purpose of the collateral is to reduce adverse selection. D. The stock market is a less important source of external funds to corporations than is the bond market. This is because there is less moral hazard involved with bonds than with stocks. E. Trade credit is the most important external source of funds for​ small- to​ medium-sized firms. Trade credit can reduce the transaction costs of borrowing for small firms. F. Loans from financial intermediaries are the most important external source of funds for​ small- to​ medium-sized firms. Financial intermediaries can reduce the transaction costs of borrowing for small firms.

Loans from financial intermediaries are the most important external source of funds for small to medium sized firms. Financial intermediaries can reduce the transaction costs of borrowing for small firms. The stock market is a less important source of external funds to corporations than is the bond market. This is because there is less moral hazard involved with bonds than with stocks. Debt contracts usually require collateral or restrictive covenants. The purpose of the collateral is to reduce moral hazard.

Are the assets included in M1 more or less liquid than the assets included in​ M2? A. M1 assets are less liquid than M2 assets. B. M1 assets have no liquidity. C. M1 assets are more liquid than M2 assets. D. M1 assets have the same liquidity as M2 assets

M1 assets are more liquid than M2 assets.

Use the graph to determine which of the following statements is​ true: A. M1 fluctuates quite a bit from week to​ week, but is fairly stable month to month B. The weekly and monthly data differ because they consist of different money components C. M1 fluctuates quite a bit from month to​ month, but is fairly stable week to week D. The monthly data is smoother becuse it is simply the average of the weekly observations

M1 fluctuates quite a bit from week to​ week, but is fairly stable month to month

Click the following link to view M1 and Components data from FREDopens in a new tab​*. Then use that data to answer the following questions. LOADING... Part 2 The following series IDs correspond to M1 and its components. For each series​ ID, enter the value for the most recent observation ​(May 2022​).​ (Enter your responses exactly as they appear in​ FRED.) Series ID Value M1SL CURRSL DEMDEPSL OCDSL

M1SL ​$20,632.920,632.9 CURRSL ​$2175.12175.1 DEMDEPSL ​$4895.74895.7 OCDSL ​$1390.71390.7

According to this FRED figureopens in a new tab that charts the growth rate of M1 and​ M2, the growth rate of A. M2 always exceeds that of M1. Your answer is not correct. B. M2 is more volatile than that of M1. C. M2 tracks closely with the growth rate of M1. This is the correct answer. D. M2 has been higher in the most recent decade.

M2 tracks closely with the growth rate of M1.

where M is the money​ supply, V is the velocity of​ money, P is a price index for​ GDP, and y is real GDP. Rearranging for M​ yields:

M= Nominal GDP/ V

A money demand​ curve, MD1​, is shown in the adjacent graph. Identify the effects of each of the given scenarios on the demand curve by selecting the resulting curve. An increase in real GDP ▼ MD 2MD2 MD 3MD3 A decrease in real GDP ▼ MD 2MD2 MD 3MD3 An increase in the price level ▼ MD 3MD3 MD 2MD2 A decrease in the price level

MD2 MD3 MD2 MD3

Why might the managers of a bank want the bank to be highly​ leveraged? A. Managers want the bank to be highly leveraged in order to minimize operational risk. B. Managers of the bank make bonuses on quarterly performance of the company and on its​ stock, which gives them an incentive to take high risks and keep the banks highly leveraged to increase ROA. C. Managers want the bank to be highly leveraged in order to minimize​ counter-party risk. D. Managers of the bank make bonuses on quarterly performance of the company and on its​ stock, which gives them an incentive to take high risks and keep the banks highly leveraged to increase ROE.

Managers of the bank make bonuses on quarterly performance of the company and on its​ stock, which gives them an incentive to take high risks and keep the banks highly leveraged to increase ROE.

Some companies offer their employees defined benefit pension plans. Under these​ plans, employees are promised a fixed monthly payment after they retire. The federal government regulates some aspects of these plans. A reporter for the Wall Street Journal wrote that under a former​ employer's pension plan she was to receive ​$423 per month beginning in 14 years when she turned 65 years old. She received a letter from her former employer offering a​ one-time payment of ​$32,088 in exchange for her agreeing not to receive the monthly pension payments. ​Source: Anne​ Tergesen, "Should You Take a​ Lump-Sum Pension ​Offer?" Wall Street Journal​, June​ 5, 2015. Part 2 Suppose that the​ reporter's former employer expects that the reporter will live to be 85 years old. That means she would receive the pension payments for 20 years. The total amount she would receive would be ​$423 per month×12 months per year×20 years=​$101,520. Should she turn down the​ one-time payment? A. ​No, her employer might go out of business. B. ​Yes, the interest rate would have to be higher than 8.5​% to justify such a low​ one-time payment. C. ​Maybe, the present value of future payments depends on interest​ rates, which are unknown. D. ​Yes, the​ one-time payment is less than a third of the amount she would receive in pension payments.

Maybe, the present value of future payments depends on interest​ rates, which are unknown.

What did Aristotle mean in arguing that money is​ "barren"? A. Money cannot produce other money because the technology to do so did not exist in​ Aristotle's time. B. Money produces wealth but it cannot produce happiness like a family. C. Money produces other​ money; however, it has no use value. D. Money cannot produce other​ money; it does not have the capacity to reproduce itself like crops or livestock.

Money cannot produce other​ money; it does not have the capacity to reproduce itself like crops or livestock.

How would the following events affect the demand for loanable funds in the United​ States? Many U.S. cities increase business taxes to help close their budget deficits. A. Net expected profitability would​ fall, but the demand for loanable fund would rise. B. Net expected profitability would​ fall, so the demand for loanable funds would fall. C. The demand for loanable funds would remain constant. D. Net expected profitability would​ rise, so the demand for loanable funds would rise.

Net expected profitability would​ fall, so the demand for loanable funds would fall.

Based on the criteria for​ it's loans, it is likely that Upstart is targeting ▼ existing new credit customers with ▼ a long no credit history

New No

The growth rate is calculated​ as:

New value - Old value --------------------------- X 100 Old value

Suppose that a friend has started a business selling software. The software is a great​ hit, and the firm quickly grows large enough to be able to sell stock. Your​ friend's firm promises to pay a dividend of ​$7 per share every year for the next 54 ​years, at which point your friend intends to shut down the business. The​ firm's stock is currently selling for ​$76 per share. If you believe that the company really will pay dividends as stated and if you require a rate of return of 10​% to make this​ investment, should you buy the​ stock? A. ​No, according to the fundamental value​ equation, the price will be equal to ​$76. B. ​Yes, according to the fundamental value​ equation, the price will be less than ​$76. C. ​Yes, according to the fundamental value​ equation, the price will be more than ​$76. D. ​No, according to the fundamental value​ equation, the price will be less than ​$76.

No, according to the fundamental value​ equation, the price will be less than ​$76

If iPhone sales continue to decline as investors expect them​ to, will the decline lead to a further fall in the price of​ Apple's stock? A. ​Yes, a decline in sales will lead to a price decrease. B. ​Yes, a decline in sales will lead to a decline in profit. C. ​No, Apple will make up for the decline by selling more Apple Watches. D. ​No, the share price already reflects the expected future sales decline.

No, the share price already reflects the expected future sales decline.

A student makes the following​ observation: "The Dow Jones Industrial Average currently has a value of​ 13,500, while the​ S&P 500 has a value of​ 1,500. Therefore, the prices of the stocks in the DJIA are nine times as high as the price of the stocks in the​ S&P 500." Is the​ student's observation​ correct? A. ​Yes, since these indexes reflect actual stock​ prices, the student is correct. B. ​No, the student failed to include the value of the NASDAQ Composite index in his observation. C. ​No, these indexes are averages of stock prices and indicate the overall performance of the stock market. D. ​Uncertain, as the base year is required to determine whether the​ student's observation is correct.

No, these indexes are averages of stock prices and indicate the overall performance of the stock market.

According to an article in the Economist​ magazine: In 1958 American onion​ farmers, blaming speculators for the volatility of their​ crops' prices, lobbied a congressman from Michigan named Gerald Ford to ban trading in onion futures. Supported by the​ president-to-be, they got their way. Onion futures have been prohibited ever since. ​Source:​ "Over the​ Counter, Out of​ Sight," Economist​, November​ 12, 2009. Part 2 Is it likely that banning trading futures contracts in onions reduced the volatility in onion​ prices? Are onion farmers as a group better off because of the​ ban? A. ​Yes, by prohibiting the sale of onion​ futures, it removed speculators from the market and thus reduced price​ volatility, making onion farmers better off as a group. B. ​Yes, by prohibiting the sale of onion​ futures, farmers can better hedge against volatile onion​ prices, making them better off as a group. C. ​No, volatility is driven by changes in supply and​ demand, so banning onion futures has likely eliminated the ability of onion farmers to hedge against volatile onion​ prices, making them worse off as a group. D. ​Uncertain, even though banning onion futures eliminated the ability of onion farmers to hedge against volatile onion​ prices, onion farmers can sell onions at a higher price​ now, making them better off as a group.

No, volatility is driven by changes in supply and​ demand, so banning onion futures has likely eliminated the ability of onion farmers to hedge against volatile onion​ prices, making them worse off as a group.

Is it likely that the investor would have more success buying and selling derivatives or other securities related to tech​ firms? A. ​Yes; everyone is making money in tech derivatives and securities. B. ​No; he's not a Wall Street professional so he​ wouldn't have success in the derivatives market. C. ​No; few individual investors are able consistently to earn a profit by buying and selling derivatives. D. ​Yes; his has a more intimate working knowledge of the tech industry.

No; few individual investors are able consistently to earn a profit by buying and selling derivatives.

What is the difference between the nominal exchange rate and the real exchange​ rate? A. The real exchange rate is the price of one​ country's currency in terms of another​ country's currency. B. The nominal exchange rate measures the rate at which goods and services of one country can be exchanged for goods and services of another country. C. Nominal exchange rates tell you how​ many, say, euros you will receive in exchange for a U.S.​ dollar, but they do not tell you how much of another​ country's goods and services you can buy with that U.S. dollar. D. All of the above.

Nominal exchange rates tell you how​ many, say, euros you will receive in exchange for a U.S.​ dollar, but they do not tell you how much of another​ country's goods and services you can buy with that U.S. dollar.

What is the difference between the nominal interest rate on a loan and the real interest​ rate? A. There is no difference between nominal interest rates and real interest rates. B. Nominal interest rates adjust for​ inflation; real interest rates do not adjust for inflation. C. Nominal interest rates do not adjust for​ inflation; real interest rates adjust for inflation. Your answer is correct. D. There is no correct answer.

Nominal interest rates do not adjust for​ inflation; real interest rates adjust for inflation.

In late​ 2009, Amazon introduced​ PayPhrase, an electronic payments system intended to compete with PayPal. Less than three years​ later, in early​ 2012, Amazon discontinued the program. PayPal is by far the largest electronic payments system. Which of the following is not a problem that competitors might encounter in trying to set up a competing​ system? A. Paypal has an established history of insuring users receive payments or crediting accounts if payments are not received. A new system would not have the same confidence from users at the beginning. B. Paypal is widely accepted and used by many people and firms. A new system would have to start with zero users and slowly encourage people to use a system that is only available to a few users. C. Paypal may have cost advantages over a new competitor because of economies of scale. It may be difficult for a new system to compete with​ Paypal's established set of fees. Your answer is not correct. D. Paypal is a well established company that already meets the necessary government regulations. A new system may find it difficult to get all of the necessary government approvals.

Paypal is a well established company that already meets the necessary government regulations. A new system may find it difficult to get all of the necessary government approvals.

It is now​ November, and you sell 40,000 bushels of wheat at the spot price of ​$2.82 per bushel. If the futures price is ​$3.07 and you settle your position in the futures​ market, what was your gain or loss on your futures market​ position? The gain on your futures market position was ​$ The -----on your futures market position was The ---on your spot market position was *enter as a postive #* Therefore, you ---- successful in completely hedging your risk from price fluctuations in the wheat market.

Profit(loss) = contracts value in august - contracts value in november ​$118,800​(8×5,000×$2.97​)−​$122,800​(8×5,000×$3.07​) =Loss of $4,000 ​$112,800​(8×5,000×$2.82​)−​$108,800​(8×5,000×$2.72​) ​= Gain of $4,000 Were

All of the following are reasons why investors might be concerned about​ Moody's rating of these​ bonds, except: A. ​Moody's may have an incentive to give higher ratings than might be justified. B. Rating agencies charge issuers for their services. C. SoFi chose the agency that rated its bonds. D. Rating agencies charge investors for their services.

Rating agencies charge investors for their services.

The most important bank assets are A. Reserves and Real estate loans. B. Consumer loans and Reserves. C. Real estate loans and​ Commercial/industrial loans. D. Real estate loans and U.S.​ government/agency securities.

Real estate loans and U.S.​ government/agency securities.

How have the types of loans banks make changed over​ time? A. The types of loans banks make has remained consistent over time. B. Real estate loans have​ declined, while commercial loans have become a much higher percentage of total loans since 1973. C. Real estate loans have become a much higher percentage of total loans since​ 1973, while commercial loans have declined. D. Growing importance of commercial and industrial loans has fundamentally changed the nature of commercial banking.

Real estate loans have become a much higher percentage of total loans since​ 1973, while commercial loans have declined.

An article in the Wall Street Journal in 2016 noted that in explaining the low stock price of the Citigroup​ bank: "Investors ... have only to look to the​ bank's return on equity. That was just​ 7% in the second quarter." ​Source: John​ Carney, "From BofA to Wells​ Fargo, Here's a Breakdown of Bank Stress Test ​Results," Wall Street Journal​, June​ 23, 2016. Part 2 Why would a​ bank's stock price be related to its return on​ equity? A. Return on equity increases the assets of the​ bank, making the stock more valuable. B. Return on equity decreases the liabilities of the​ bank, making the stock more valuable. C. Return on equity increases either​ owner's equity or the dividends paid by the​ company, making the stock more valuable.

Return on equity increases either​ owner's equity or the dividends paid by the​ company, making the stock more valuable.

Which of the following are examples of financial​ futures? ​(Check all that​ apply.) A. Selling corn futures to hedge against falling corn prices. B. Selling oil futures to hedge against falling oil prices. C. Selling U.S. dollar futures contracts. D. Selling Treasury note futures contracts.

Selling U.S. dollar futures contracts. . Selling Treasury note futures contracts

Why might the​ bank's shareholders want the bank to be less highly​ leveraged? A. Shareholders who have invested in the company often want the best return over​ 10-20 years, and want the bank to take less risk which would typically be associated with less leverage. B. Shareholders want the bank to be less leveraged because low leverage implies that the size of​ bank's assets is high. C. Shareholders want to increase their dividend​ payments, which are correlated with low leverage. D. Shareholders want the bank to be less leveraged in order to maximize the risk and profit.

Shareholders who have invested in the company often want the best return over​ 10-20 years, and want the bank to take less risk which would typically be associated with less leverage.

How was Easterly able to tell that​ Brazil's currency was​ overvalued? A. Since the U.S. is a developed nation with a strong currency and Brazil is a developing nation with a weaker currency it must be true that their currency is overvalued relative to the U.S. dollar. B. Since the Brazilian currency traded at a rate above the equal rate of one for one with the U.S. currency. C. Since the price of U.S. goods in terms of the Brazilian currency was significantly lower than the price of the same items in Brazil. D. Since prices in Brazil are lower than prices in the U.S. in general.

Since the price of U.S. goods in terms of the Brazilian currency was significantly lower than the price of the same items in Brazil.

In another​ article, the owner of a construction firm in New Hampshire stated​ that: "We want a bank that will stick with us and ride out the tough times." Why might a small bank be more likely to provide the​ firm's owner credit than would a large​ bank? A. Small banks are more flexible in the standards they apply in granting loans. B. Large banks prefer large customers. C. Large banks charge higher interest rates on business loans. D. Small banks prefer small customers because they are easier to monitor.

Small banks are more flexible in the standards they apply in granting loans.

According to an article in the Wall Street Journal​: "Jorge ​Rodriguez, owner of a Peruvian restaurant in Los​ Angeles, said Wells Fargo​ & Co.—his bank for several years—turned him down ... when he sought financing to remodel and expand his business.​ 'They wouldn't even look at me as a viable​ client,' said Mr. Rodriguez." ​Sources: Ruth​ Simon, "Big Banks Cut Back on Loans to Small ​Business," Wall Street Journal​, November​ 26, 2015; and Saabira​ Chaudhuri, "New Hampshire Businessman Files to Set Up Rare New ​Bank," Wall Street Journal​, December​ 15, 2014. Part 2 Why have large banks like Wells Fargo cut back on their lending to small​ businesses? A. They want to increase their profits by making larger loans to larger customers. B. Small business loans are more difficult to securitize. C. They are providing low interest credit cards to small businesses instead of making loans. D. Small business lending has a history of high default rates.

Small business loans are more difficult to securitize.

The most important bank liabilities are A. Borrowings and​ Small-denomination time deposits. B. ​Large-denomination time deposits and Checkable deposits. C. Checkable deposits and Bank capital. D. ​Small-denomination time deposits and Checkable deposits.

Small-denomination time deposits and Checkable deposits.

What is the difference between a spot transaction and a forward transaction in the​ foreign-exchange market? A --- transaction is trade today​, and a ▼ transaction is trade in the future.

Spot, Forward

What are​ TIPS? Why would investors buy TIPS rather than conventional Treasury​ bonds? A. TIPS are bonds that have their interest payments separated and sold individually. Investors would buy TIPS because it allows them to customize their cash flows to meet their individual needs. B. TIPS are bonds that have their principal payments separated and sold individually. Investors would buy TIPS because it generates high real yields during periods of high inflation. C. TIPS are Treasury Inflation Protected​ Securities, which are securities that adjust the principal to compensate for inflation. Investors would buy TIPS because it generates high real yields during periods of low inflation. D. TIPS are Treasury Inflation Protected​ Securities, which are securities that adjust the interest rate to compensate for inflation. Investors would buy TIPS to hedge against high expected inflation rates.

TIPS are Treasury Inflation Protected​ Securities, which are securities that adjust the interest rate to compensate for inflation. Investors would buy TIPS to hedge against high expected inflation rates.

A report on​ 401(k) plans notes​ that, "Younger participants tended to favor equity funds ... while older participants were more likely to invest in​ fixed-income securities such as bond funds." ​ Source: Jack​ VanDerhei, Sarah​ Holden, Luis​ Alonso, and Steven​ Bass, Employee Benefit Research​ Institute, Issue Brief​, No.​ 423, April 2016. A​ 401(k) savings plan is a ▼ investment vehicle which allows an individual to save for their ▼

Tax deffered, retirement

In​ 2016, when the interest rate on​ 10-year German government bonds became​ negative, an article in the Wall Street Journal noted that the interest rate on​ 10-year bonds depended in part on​ investors' expectations of future​ short-term interest rates. The article also noted that "investors ​don't seem to have changed their perception of ...​ [short-term] interest rates in the future ...." ​Source: Jon​ Sindreu, "Are German Bonds Riding a ​Bubble?" Wall Street Journal​, June​ 14, 2016. Which of the following theories best explains the scenario​ described? A. The Liquidity Premium Theory. B. The Expectations Theory. C. The Segmented Markets Theory. D. The Inverted Outlook Theory.

The Expectations Theory.

Why did nationwide banking come relatively late to the United States compared with other​ countries? A. The U.S. system of many​ small, geographically limited banks was the result of political views that the power of banks should be limited by keeping them small and that the deposits banks received should be used only to fund loans in the local area. B. Nationwide banking came relatively late to the United States compared with other countries because U.S. banks found it easier to minimize their credit risks in narrow areas. C. Nationwide banking came relatively late to the United States compared with other countries because for a long time all states had their own governments. D. Nationwide banking came relatively late to the United States compared with other countries because it was much more profitable for U.S. banks to have few operations.

The U.S. system of many​ small, geographically limited banks was the result of political views that the power of banks should be limited by keeping them small and that the deposits banks received should be used only to fund loans in the local area.

What is the tax treatment of the coupons on a bond issued by the city of​ Houston? A. The bond is subject to​ federal, state, and local taxes. B. The bond is subject to state and local taxes only. C. The bond is not subject to​ federal, state, or local taxes. D. The bond is subject to federal tax only.

The bond is not subject to​ federal, state, or local taxes.

What is the tax treatment of the coupons on a bond issued by the U.S.​ Treasury? A. The bond is subject to​ federal, state, and local taxes. B. The bond is subject to federal tax only. C. The bond is subject to state and local taxes only. D. The bond is not subject to​ federal, state, or local taxes.

The bond is subject to federal tax only.

What is the tax treatment of the coupons on a bond issued by​ GE? A. The bond is subject to federal tax only. B. The bond is not subject to​ federal, state, or local taxes. C. The bond is subject to state and local taxes only. D. The bond is subject to​ federal, state, and local taxes.

The bond is subject to​ federal, state, and local taxes.

When are economists most likely to use the bond market approach to analyze changes in interest​ rates? When are economists most likely to use the loanable funds​ approach? A. The bond market model is generally a​ long-term model that focuses on movements in the bond market. The loanable funds model is a​ medium-term model that focuses on movements in the loan market. B. The bond market model is a​ medium-term model that focuses on movements in the bond market. The loanable funds model distinguishes the correlation between the interest rate and the exchange rate. C. Both models are used to identify the relationship between the bond price and the interest rate. D. The bond market model is a​ medium-term model that focuses on movements in the bond market. The loanable funds model is generally a​ long-term model when discussing global savings and​ long-term global interest rates.

The bond market model is a​ medium-term model that focuses on movements in the bond market. The loanable funds model is generally a​ long-term model when discussing global savings and​ long-term global interest rates.

According to an article on nbcnews.comopens in a new tab​, in​ Sweden, "Shoe ​stores, clothing shops and restaurants are increasingly reliant on​ card-only or mobile banking​ transactions, and some—like the brand Swedish Hasbeens—​don't even have cash registers." ​Source: Mac William​ Bishop, "Sweden Sees Shift Away From ​Cash," nbcnews.comopens in a new tab​, February​ 6, 2016. A business might consider all of the following costs and benefits in making a decision as to whether to go​ cashless, except: A. The cost of printing paper currency. Your answer is correct. B. Credit card processing fees. C. Potential cash losses from theft. D. Expenses associated with maintaining cash drawers.

The cost of printing paper currency.

For each of the following​ situations, explain whether the demand curve for​ bonds, the supply curve for​ bonds, or both would shift. Be sure to indicate whether the​ curve(s) would shift to the right or to the left. Part 2 The Federal Reserve publishes a forecast that the inflation rate will average​ 5% over the next five years.​ Previously, the Fed had been forecasting an inflation rate of​ 3%. A. Both the demand and supply curves shift to the right. B. Both the demand and supply curves shift to the left. C. The demand curve shifts to the right and the supply curve shifts to the left. D. The demand curve shifts to the left and the supply curve shifts to the right

The demand curve shifts to the left and the supply curve shifts to the right

Explain what will happen to the equilibrium price and equilibrium quantity of bonds in each of the following situations.​ (If it is uncertain in which direction either the equilibrium price or equilibrium quantity will​ change, explain​ why.) Part 2 Wealth in the economy increases at the same time that Congress raises the corporate income tax. A. Both the demand curve and the supply curve will shift to the left. This decreases the price of bonds and the quantity of bonds is indeterminate. B. The demand curve will shift to the left and the supply curve will shift to the right. This decreases the price of bonds and the quantity of bonds is indeterminate. C. Both the demand curve and the supply curve will shift to the right. This increases the price of bonds and the quantity of bonds is indeterminate. D. The demand curve will shift to the right and the supply curve will shift to the left. This increases the price of bonds and the quantity of bonds is indeterminate.

The demand curve will shift to the right and the supply curve will shift to the left. This increases the price of bonds and the quantity of bonds is indeterminate.

Suppose that in a large open​ economy, the quantity of loanable funds supplied domestically is initially equal to the quantity of funds demanded domestically. Then an increase in business taxes discourages investment. Show how this change affects the quantity of loanable funds and the world real interest rate. Does the economy now borrow or lend​ internationally? Part 2 A. The demand curve would shift to the​ left, thus creating excess supply and making the economy a net lender. B. The supply curve would shift to the​ right, thus creating excess supply and making the economy a net borrower. C. The demand curve would shift to the​ left, thus creating excess demand and making the economy a net borrower D. The supply curve would shift to the​ left, thus creating excess demand and making the economy a net lender.

The demand curve would shift to the​ left, thus creating excess supply and making the economy a net lender.

The economy experiences a business cycle expansion. A. The demand for bonds shifts to the​ left, lowering price and decreasing the quantity of bonds. B. The supply for bonds shifts to the​ right, lowering price and increasing the quantity of bonds. C. The demand for bonds shifts to the​ right, raising price and increasing the quantity of bonds. D. The supply for bonds shifts to the​ left, raising price and decreasing the quantity of bonds.

The demand for bonds shifts to the​ right, raising price and increasing the quantity of bonds.

Briefly explain what typically happens to interest rates during a recession. Use a demand and supply graph for bonds to illustrate your answer. Part 2 A. The demand for bonds​ decreases, while the supply of bonds decreases by a greater magnitude than​ demand, resulting in a lower equilibrium interest rate. B. The demand for bonds​ increases, while the supply of bonds​ decreases, resulting in a lower equilibrium interest rate. C. The demand for bonds​ decreases, while the supply of bonds​ increases, resulting in a higher equilibrium interest rate. D. The demand for bonds​ increases, while the supply of bonds increases by a greater magnitude than​ demand, resulting in a higher equilibrium interest rate.

The demand for bonds​ decreases, while the supply of bonds decreases by a greater magnitude than​ demand, resulting in a lower equilibrium interest rate.

Why is crowdfunding likely to be a more important source of funding for small businesses than for large​ businesses? A. The dollar limits on crowdfunding may impede large businesses from raising capital sufficient to their needs. B. Large businesses are prevented by regulations from using equity crowdfunding. C. Small businesses need the funding more than large businesses. D. Large businesses can always issue public shares.

The dollar limits on crowdfunding may impede large businesses from raising capital sufficient to their needs.

Briefly explain why yields to maturity and bond prices move in opposite directions. A. The equation for bond prices shows that the higher the purchase price of the​ bond, the higher the rate of return. Buying a bond at a high price means that the difference made between the purchase price and face value can be high. The higher the​ price, the higher the overall rate of return is. B. The equation for bond prices shows that the higher the purchase price of the​ bond, the lower the rate of return. Buying a bond at a high price means that the difference made between the purchase price and face value can be small and even negative. The higher the​ price, the lower the overall rate of return is. Your answer is correct. C. The equation for bond prices shows that the lower the purchase price of the​ bond, the lower the rate of return. Buying a bond at a low price means that the difference made between the purchase price and face value can be very high. The lower the​ price, the lower the overall rate of return is. D. None of the above.

The equation for bond prices shows that the higher the purchase price of the​ bond, the lower the rate of return. Buying a bond at a high price means that the difference made between the purchase price and face value can be small and even negative. The higher the​ price, the lower the overall rate of return is.

Writing in the Wall Street Journal​, economist William Easterly of New York University notes​ that: "Around ​2010, ...the domestic currency in Brazil was so overvalued that tourists from Rio visiting Manhattan rented shipping containers to bring home their cheap purchases ...." ​Source: William​ Easterly, "Making Sense of ​Meltdowns," Wall Street Journal​, July​ 6, 2016. Part 2 What does Easterly mean that​ Brazil's currency was​ overvalued? A. The exchange rate for the U.S. dollar exceeds what the open market is willing to pay. B. The exchange rate for the U.S. dollar is less than what the open market is willing to pay. C. The exchange rate for​ Brazil's currency is less than what the open market is willing to pay. D. The exchange rate for the​ Brazil's currency exceeds what the open market is willing to pay.

The exchange rate for the​ Brazil's currency exceeds what the open market is willing to pay.

Does the existence of reserve requirements make it easier for banks to deal with bank​ runs? A. ​Yes, the existence of reserve requirements makes it easier for banks to deal with bank​ runs, because they are required to hold money with the Federal Reserve. B. ​No, the existence of reserve requirements does not make it easier for banks to deal with bank​ runs, because they still have to set aside money necessary to pay deposits back. C. The existence of reserve requirements does not change the situation that banks face during bank runs. D. The existence of reserve requirements makes it harder for banks to deal with bank runs because they are required to hold money with the Federal Reserve.

The existence of reserve requirements does not change the situation that banks face during bank runs.

Suppose that at the beginning of the​ year, you buy a share of IBM stock for ​$150. If during the year you receive a dividend of ​$2.36 and IBM stock is selling for ​$170 at the end of​ year, what was your rate of return from investing in the​ stock? The rate of return is ____%

The expected rate of return from investing in a stock equals the dividend yield plus the expected rate of capital gain.​ Thus: =14.91%

What happened in 2016 that made it a major source of funding to small​ businesses? A. The capital gains tax on​ privately-traded shares of stock was lower from​ 28% to​ 15%. B. Congress capped the fees that crowdfunding sites could charge. C. The federal JOBS act made it easier for startup firms to use crowdfunding. D. AIG began to insure​ investors' funds again lowering the possibility of a funded firm going bankrupt.

The federal JOBS act made it easier for startup firms to use crowdfunding.

e. In order for the results in​ (a) and​ (b) to be​ equivalent, the forward contract exchange rate in​ (b) has to be ¥enter your response here per dollar.

The forward contract exchange rate in​ (b) has to be ¥97.15=$1 in order for the results in​ (a) and​ (b) to be equivalent.

In what sense do investors face a​ trade-off between risk and​ return? Part 2 A. If an investor acquires enough accurate​ information, there should be no​ trade-off involved. B. The higher the risk that an asset​ has, the lower the demand for the asset. This raises the yield or return if the asset performs well.​ Low-risk assets have a high​ demand, which lowers their yield or return. C. The higher the risk that an asset​ has, the higher the demand for the asset. This raises the yield or return if the asset performs well.​ Low-risk assets have a lower​ demand, which lowers their yield or return. D. The lower the risk that an asset​ has, the lower the demand for the asset. This raises the yield or return if the asset performs well.​ High-risk assets have a high​ demand, which lowers their yield or return.

The higher the risk that an asset​ has, the lower the demand for the asset. This raises the yield or return if the asset performs well.​ Low-risk assets have a high​ demand, which lowers their yield or return.

If David dies 30 years after buying the​ annuity, will the interest rate be higher or lower than if he dies after 15 ​years? A. The interest rate should be lower since David received the ​$100,000 in a longer period of time. B. The interest rate should be higher since David received the ​$10,000 annual payment for a longer period of time. This is the correct answer. C. The interest rate should be lower since David received the ​$10,000 annual payment for a longer period of time. Your answer is not correct. D. The interest rate should not change.

The interest rate should be higher since David received the ​$10,000 annual payment for a longer period of time.

What is the yield to​ maturity? A. The value of the coupon expressed as a percentage of the par value of the bond. B. The amount to be repaid by the bond issuer​ (the borrower) at maturity. C. The interest rate that equates the present value of future payments of an asset with its current value. D. The length of time before a bond expires and the issuer makes the face value payment to the buyer.

The interest rate that equates the present value of future payments of an asset with its current value

In what ways is it​ different? A. The rental apartment market faces the​ "lemons problem," while the used car market does not. B. The used car market faces the​ "lemons problem," while the rental apartment market does not. C. The landlord is not selling the​ apartment, merely renting​ it, while the buyer of a used car makes an irreversible deal. D. There is no difference between the rental apartment market and the used car market.

The landlord is not selling the​ apartment, merely renting​ it, while the buyer of a used car makes an irreversible deal.

How is it related to the theory of purchasing power parity​ (PPP)? A. The law of one price is the basis for PPP. B. As the law of one price states that identical products should sell for the same​ price, PPP predicts that in the long​ run, the purchasing power of one unit of a currency should be the same in another country. C. As the law of one price states that identical products should sell for the same​ price, PPP predicts that in the short run​ only, the purchasing power of one unit of a currency should be the same in another country. D. Both A and B are correct. E. Both A and C are correct.

The law of one price is the basis for PPP.

How does the link between the growth rate of the money supply and the inflation rate differ between the short run and the long​ run? A. The link between the growth rate of the money supply and the inflation rate is stronger in the long run than in the short run. Your answer is correct. B. The link between the growth rate of the money supply and the inflation rate is stronger in the short run than in the long run. C. There is no link between the growth rate of the money supply and the inflation rate in the short run. D. There is no link between the growth rate of the money supply and the inflation rate in the long run.

The link between the growth rate of the money supply and the inflation rate is stronger in the long run than in the short run.

The chapter opener noted that in​ mid-2016 you could earn an interest rate of​ 0.25% by buying a​ 3-month Treasury bill or an interest rate of​ 2.6% by buying​ 30-year Treasury bond. How is the Treasury able to find buyers for​ 3-month Treasury bills when investors could earn an interest rate 10 times as high by buying​ 30-year Treasury​ bonds? A. The markets for bonds of different maturities are separate or segmented. B. Treasury discounts the price of​ 3-month Treasury bills to increase yield and demand. C. Investors see bonds of different maturities as being perfect substitutes for each other. D. The​ interest-carry-trade strategy drives the sale of​ 3-month Treasury bills.

The markets for bonds of different maturities are separate or segmented

Why does the Federal Reserve care about the payments​ system? A. The payments system saves the Fed money. B. It is under the control of the Federal Reserve. C. The modern U.S. payments system is a fiat money system. Your answer is correct. D. An effective payments system eliminates the problem of trust between a buyer and a seller.

The modern U.S. payments system is a fiat money system.

During the late nineteenth​ century, the United States experienced a period of sustained deflation​, or a falling price level. Explain in terms of the quantity theory of money how a deflation is possible. Is it necessary for the quantity of money to decline for deflation to​ occur? A. The money supply falling or the velocity of money falling can cause a deflation.​ However, it is necessary for the quantity of money and prices to decline for a deflation to occur. B. The money supply falling or real GDP falling can cause a deflation. There is a strong link between the money supply and​ prices; therefore, prices may not fall without the money supply​ falling, so it is necessary for the quantity of money to decline for a deflation to occur. C. The money supply falling or the velocity of money falling can cause a deflation. Although there is a strong link between the money supply and​ prices, prices can fall without the money supply​ falling, so it is not necessary for the quantity of money to decline for a deflation to occur. D. The money supply falling or the velocity of money falling can cause a deflation. The greater the percentage change in the quantity of​ money, the greater the chance of a deflation occurring.

The money supply falling or the velocity of money falling can cause a deflation. Although there is a strong link between the money supply and​ prices, prices can fall without the money supply​ falling, so it is not necessary for the quantity of money to decline for a deflation to occur.

An article in the Wall Street Journal notes​ that: "The Federal Reserve is designed to be independent of Congress and the president." If the Fed has enormous power over the U.S.​ economy, what reason would explain why it was designed to be independent of Congress and the president rather than under their direct​ control? ​Source: David​ Wessel, "Explaining ​'Audit the ​Fed,'" Wall Street Journal​, February​ 15, 2015. A. The more independent a central bank is of the rest of the​ government, the less it can control inflation. B. The more independent a central bank is of the rest of the​ government, the more it can resist political pressure in making decisions. C. The more dependent a central bank is on the rest of the​ government, the better it can control inflation. D. The more dependent a central bank is on the rest of the​ government, the more it can resist political pressure in making decisions.

The more independent a central bank is of the rest of the​ government, the more it can resist political pressure in making decisions.

According to​ Moody's, "Obligations rated Aaa are judged to be of the highest​ quality, with minimal credit​ risk." ​Source: ​Moody's Investors​ Services, ​Moody's Rating Symbols and Definitions​, September​ 2012, p.5. What​ "obligations" is​ Moody's referring​ to? A. The obligation the bond issuer has to pay the bond holder. B. The obligation the buyer of the bond has to hold the bond until maturity. C. The obligation of the bond issuer to provide a​ risk-free investment. D. The interest rate the bond issuer is obligated to pay the bond holder.

The obligation the bond issuer has to pay the bond holder.

According to an article in the​ Economist, in Germany​ 80% of household wealth is in the form of bank​ deposits, as opposed to only​ 20% in the United States. The article notes​ that, "If German ... savers are vulnerable to low​ rates, it is partly due to their own investment habits." Why would German savers be more vulnerable to low interest rates than U.S.​ savers? A. Interest rates in the U.S. are lower than interest rates in Germany. B. The percentage of household wealth held in bank deposits is higher in Germany than in the U.S. C. Interest rates in Germany are lower than interest rates in the U.S. D. Inflation in Germany is higher than in the U.S.

The percentage of household wealth held in bank deposits is higher in Germany than in the U.S.

If the current price in the bond market is above the equilibrium​ price, explain how the bond market adjusts to equilibrium. A. The price of bonds would​ fall, reducing both the quantity demanded and the quantity supplied. B. The price of bonds would​ fall, reducing the quantity demanded and increasing the quantity supplied. C. The price of bonds would​ fall, increasing the quantity demanded and reducing the quantity supplied. D. None of the above.

The price of bonds would​ fall, increasing the quantity demanded and reducing the quantity supplied.

What is the purpose of gap analysis and duration​ analysis? A. The purpose of both analysis is to determine the​ bank's sensitivity to interest rate movements. B. The purpose of gap analysis is to determine the​ bank's sensitivity to interest rate​ movements, whereas the purpose of duration analysis is to determine the​ bank's sensitivity to the liquidity risk. C. The purpose of gap analysis is to determine the​ bank's sensitivity to the liquidity​ risk, whereas the purpose of duration analysis is to determine the​ bank's sensitivity to interest rate movements. D. The purpose of both analysis is to determine the​ bank's sensitivity to the liquidity risk.

The purpose of both analysis is to determine the​ bank's sensitivity to interest rate movements.

Why is the supply curve for foreign exchange upward​ sloping? A. The quantity of dollars supplied will decrease as the exchange rate increases. B. As the exchange rate​ decreases, the U.S. dollar price of foreign goods and services becomes cheaper. C. The quantity of dollars supplied will increase as the exchange rate increases. D. The quantity of dollars supplied will increase as the exchange rate decreases.

The quantity of dollars supplied will increase as the exchange rate increases.

In​ words, write the two components of the rate of return on a stock investment. A. The rate of return is equal to the rate of return on the dividend minus the rate of return on the price change from the purchase price. B. The rate of return is equal to the rate of return on the dividend multiplied by the rate of return on the price change from the purchase price. C. The rate of return is equal to the rate of return on the price change from the purchase price minus the rate of return on the dividend. D. The rate of return is equal to the rate of return on the dividend plus the rate of return on the price change from the purchase price.

The rate of return is equal to the rate of return on the dividend plus the rate of return on the price change from the purchase price.

What is the risk structure of interest​ rates? A. The relationship among the interest rates on bonds that have the same characteristics but a different maturity. B. The relationship among the interest rates on bonds that have different characteristics but the same maturity. C. The relationship among the interest rates on bonds and the bond ratings assigned to each bond. D. The relationship among the interest rates on bonds and the level of risk associated with each bond.

The relationship among the interest rates on bonds that have different characteristics but the same maturity.

What are the key developments in electronic​ banking? ​(Check all that apply​.) Part 2 A. The spread of automated teller machines​ (ATMs). Your answer is correct. B. The introduction of​ non-counterfeitable currency. C. The appearance of virtual​ (entirely online) banks. Your answer is correct. D. The development of banking apps for smart phones. Your answer is correct.

The spread of automated teller machines​ (ATMs). The appearance of virtual​ (entirely online) banks. The development of banking apps for smart phones.

The economy experiences a period of rapid​ growth, with rising corporate profits. A. The demand curve shifts to the right. B. The supply curve shifts to the right. C. The demand curve shifts to the left. D. The supply curve shifts to the left.

The supply curve shifts to the right.

The expected rate of inflation increases. A. Both the supply of bonds and the demand for bonds shift to the left. This increases the quantity of bonds and the price is indeterminate. B. Both the supply of bonds and the demand for bonds shift to the right. This increases the quantity of bonds and the price is indeterminate. C. The supply of bonds shifts to the left and the demand for bonds shifts to the right. This increasses the quantity of bonds and the price of bonds is indeterminate. D. The supply of bonds shifts to the right and the demand for bonds shifts to the left. This decreases the price of bonds and the quantity of bonds is indeterminate.

The supply of bonds shifts to the right and the demand for bonds shifts to the left. This decreases the price of bonds and the quantity of bonds is indeterminate.

The federal government runs a budget deficit. A. The demand for bonds​ decreases, shifting the demand curve to the​ left, thus forcing the price and quantity down. B. The supply of bonds​ increases, shifting the supply curve to the​ right, thus forcing the price down and the quantity up. C. The demand for bonds​ increases, shifting the demand curve to the​ right, thus forcing the price and quantity up. D. The supply of bonds​ decreases, shifting the supply curve to the​ left, thus forcing the price up and the quantity down.

The supply of bonds​ increases, shifting the supply curve to the​ right, thus forcing the price down and the quantity up.

What is a random​ walk? A. The unpredictable movements of stock prices—that ​is, on any given​ day, stock prices are as likely to rise as to fall. B. Even​ though, on any given​ day, stock prices are as likely to rise or​ fall, the market is predictable to a certain degree. C. When investors fail to use rational expectations with respect to stocks and instead use only adaptive expectations. D. The unpredictable strategy of investors—that ​is, on any given​ day, investors are as likely to buy as to sell stock.

The unpredictable movements of stock prices—that ​is, on any given​ day, stock prices are as likely to rise as to fall.

​What are the costs and sources of inefficiency in a barter​ system? ​(Check all that​ apply.) A. Transactions costs are almost always high. B. There is a lack of standardization. C. Each good has only one price. D. There is increased time and effort spent looking for trading partners. E. Productivity is increased by specialization. F. There is difficulty in accumulating wealth.

There is a lack of standardization There is difficulty in accumulating wealth. There is increased time and effort spent looking for trading partners. Transactions costs are almost always high.

When will the real interest rate differ from the expected real interest​ rate? A. There will be a difference between the real interest rate and the expected real interest rate when previous inflation rates are known. B. There will be a difference between the real interest rate and the expected real interest rate when future inflation is unknown. C. The real interest rate and the expected real interest rate will not differ. D. None of the above.

There will be a difference between the real interest rate and the expected real interest rate when future inflation is unknown.

What services do forward contracts provide in the financial​ system? ​(Check all that apply​) Part 2 A. They give firms and investors an opportunity to hedge the risk on transactions that depend on future prices. B. They allow transactions to be agreed to in the present but to be settled in the future. C. They allow firms to delay signing contracts until a commodity or financial asset is actually delivered. D. They add additional risk to the market which increases the returns that farmers earn since demand for agricultural products is usually price elastic. E. They allow an agreement in the present to exchange a given amount of a commodity or a financial asset at a particular date in the future for a set price.

They give firms and investors an opportunity to hedge the risk on transactions that depend on future prices. They allow transactions to be agreed to in the present but to be settled in the future. They allow an agreement in the present to exchange a given amount of a commodity or a financial asset at a particular date in the future for a set price.

Suppose that the current exchange rate is €1.13=£​1, but it is expected to be €1.12=£1 in one year. If the current interest rate on a​ one-year government bond in the United Kingdom is 9​%, what does the​ interest-rate parity condition indicate the interest rate will be on a​ one-year government bond in​ Germany? Assume that there are no differences in​ risk, liquidity,​ taxation, or information costs between the bonds. The German interest rate will be enter your response here​%

The​ interest-rate parity condition states that the interest rate on a domestic bond is equal to the interest rate on a foreign bond minus the expected appreciation of the domestic currency​ (expressed as the percentage change in the indirect exchange​ rate). In this​ case, the German interest rate will​ be: 1.12−1.13 9%=iGermany −------x100% 1.13 1.12−1.13 9%+--------×100% 1.13 =8.12%.

Would this possible difference be of more concern to you if you were considering making a loan to be paid back in 1 year or a loan to be paid back in 10​ years? A. This difference would affect the decision to take out a​ 1-year loan versus a​ 10-year loan because the real interest rate can change over 10 years. B. This difference would not affect the decision made. C. This difference would affect the decision to take out a​ 10-year loan versus a​ 1-year loan because the real interest rate cannot change over 10 years. D. None of the above.

This difference would affect the decision to take out a​ 1-year loan versus a​ 10-year loan because the real interest rate can change over 10 years.

Evaluate the following​ statement: "The United States has more than​ 6,000 banks, while Canada has only a few.​ Therefore, the U.S. banking industry must be more competitive than the Canadian banking​ industry." A. The logic of the statement is true. The Canadian banking system is more​ monopolistic, because the Canadian law is more monopolistic. B. The statement is incorrect. The U.S. banking industry is less competitive than the Canadian banking​ industry, because all 6000 banks are subjected to strict regulation by the Fed. C. This statement is misleading because branching restrictions in the United States give local banks more monopoly power than that possessed by branches of Canadian national banks. D. The statement is correct. The U.S. banking industry is more competitive than the Canadian banking industry.

This statement is misleading because branching restrictions in the United States give local banks more monopoly power than that possessed by branches of Canadian national banks.

Suppose that Congress changes the law to require all firms to accept paper currency in exchange for whatever they are selling. Part 2 Briefly discuss who would gain and who would lose from this legislation. A. Those who hold only cash and those who prefer to remain anonymous when making a purchase are likely to gain. ​ Companies, such as​ Apple, are likely to lose as they may be unable to contact cash buyers with information about future products and offers. B. Those who hold only cash and those who prefer to remain anonymous when making a purchase are likely to gain. ​ Companies, such as​ Apple, are likely to lose as they are unable to track​ purchases, making it possible for buyers to resell the product at a higher price when there is a shortage. C. Those who hold only cash and those who hope to resell the product on internet sites such as Ebay are likely to gain. ​ Companies, such as​ Apple, are likely to gain from the increase in sales—even if the product is resold on Ebay. D. Everyone is likely to win with the new legislation. Those who hold only cash and those who prefer to remain anonymous when making a purchase are likely to gain. ​ Companies, such as​ Apple, are likely to gain as well as more product is likely to be sold.

Those who hold only cash and those who prefer to remain anonymous when making a purchase are likely to gain. ​ Companies, such as​ Apple, are likely to lose as they are unable to track​ purchases, making it possible for buyers to resell the product at a higher price when there is a shortage.

According to an article in the Wall Street Journal​, bonds issued in 2016 by the toy store chain Toys"R"Us that matured in 2018 and had a​ 10% coupon were trading at "31 cents on the dollar." ​Source: Matt Wirz and Matt​ Jarzemsky, "​Toys'R'Us Poses a Test for​ Junk-Bond ​Markets," Wall Street Journal​, February​ 21, 2016. Which of the following would explain why an investor would sell one of these bonds for 31 cents on the dollar rather than hold the bond for two years and receive 100 cents on the dollar when the bond​ matured? A. Toys"R"Us bonds have a low default risk. B. Toys"R"Us has a high creditworthiness. C. Toys"R"Us bonds have a high default risk. D. The investor wants to liquidate his Toys"R"Us bond holdings to invest in stocks.

Toys"R"Us bonds have a high default risk.

Suppose that you live in a simple farm economy where milk is accepted as the primary form of money. Discuss the difficulties with using milk as money by answering whether each of the following statements is true or false. Milk may not serve its function as a medium of exchange because it is not easily transportable or durable. Milk may not serve its function as a unit of account because the value of milk changes depending on supply and demand—therefore allowing for inconsistent pricing. Milk serves its function as a store of value with no difficulties. Milk may adequately serve as a standard of deferred payment because future milk can be promised for present goods.

True, True, False, True

An article in the Wall Street Journal ​observes: ​"When volatility is​ low, options are​ cheaper." ​Source: Ben​ Levisohn, "How to Rock at Lower​ Volume," Wall Street Journal​, August​ 31, 2012. What is the reasoning behind this​ observation? A. Volatility is an important part of the​ Black-Scholes options pricing model. All else being​ equal, the lower the volatility in the price of the underlying​ asset, the smaller the option​ premium, and thus cheaper the option. B. Volatility is an important part of the​ Black-Scholes options pricing model. All else being​ equal, the lower the volatility in the price of the underlying​ asset, the larger the option​ premium, and thus cheaper the option. C. Volatility is an important part of the​ Black-Scholes options pricing model. All else being​ equal, the lower the volatility in the price of the underlying​ asset, the larger the time value of the option​ premium, and thus cheaper the option. D. None of the above.

Volatility is an important part of the​ Black-Scholes options pricing model. All else being​ equal, the lower the volatility in the price of the underlying​ asset, the smaller the option​ premium, and thus cheaper the option.

What is the difference between a commodity future and a financial​ future? A. You should take a short position with commodity​ futures, and you should take a long position with financial futures. B. What is the difference between a commodity future and a financial​ future? C. Commodity futures take a long or short position in the agricultural​ market, while financial futures take a long or short position on a currency. D. You should take a long position with commodity​ futures, and you should take a short position with financial futures

What is the difference between a commodity future and a financial​ future?

Interest rates on U.S. Treasury bills are typically much lower than interest rates on U.S. Treasury notes and bonds. If the federal government wants to reduce the interest charges it pays when it borrows​ money, why​ doesn't the Treasury stop selling Treasury notes and bonds and sell only​ bills? A. If the Treasury stopped selling Treasury notes and​ bonds, it increases the risk for default on its​ short-term bills. B. If the Treasury stopped selling Treasury notes and​ bonds, it faces the risk that fewer investors will purchase the​ short-term bills. C. When the Treasury rolls over the​ short-term bills, it faces the risk that interest rates on new​ short-term bills may have fallen. D. When the Treasury rolls over the​ short-term bills, it faces the risk that interest rates on new​ short-term bills may have risen.

When the Treasury rolls over the​ short-term bills, it faces the risk that interest rates on new​ short-term bills may have risen.

Suppose that on January​ 1, 2022​, the price of a​ one-year Treasury bill—with a face value of ​$1000— is ​$904.57. Investors expect that the inflation rate will be 2​% during 2022​, but at the end of the​ year, the inflation rate turns out to have been 1​%. The nominal interest rate on the bill is = What is the expected real interest​ rate? The expected real interest rate equals the difference of the nominal interest rate and the expected rate of inflation. The nominal interest rate is 10.55​%, and the expected rate of inflation is 2​%. ​Therefore, the expected real interest rate is____ % What is the actual real interest​ rate? The actual real interest rate equals the difference of the nominal interest rate and the actual inflation rate. The nominal interest rate is 10.55​%, and the expected rate of inflation is 1​%. ​Therefore, the actual real interest rate is enter your response here​ ---------%

YTM = Face value - Price ---------------------- Price 1000 - 904.57 ---------------- = 10.55% 904.57 =8.55% =9.55%

According to an article in the Wall Street Journal​, Canadian firms that import goods that are priced in U.S. dollars​ "buy futures contracts that guarantee that they can exchange Canadian dollars for U.S.​ [dollars] at fixed​ prices..." ​Source: Phred Dvorak and Andy​ Georgiades, "Strong Loonie Sets Off a Retail​ Tiff," Wall Street Journal​, May​ 19, 2010. Do you agree that futures contracts make it possible to fix the price of the underlying​ asset? A. ​No, it is not possible to fix the price of the underlying asset. B. ​Yes, futures contracts make it possible to lock into a price if futures contracts are not sold for profit or loss.

Yes, futures contracts make it possible to lock into a price if futures contracts are not sold for profit or loss.

If the decrease in​ Burberry's profits had not been a​ surprise, would the effect of the announcement on its stock price have been​ different? A. ​No, before the announcement there is not complete certainty that profits will decrease therefore all investors will wait for the official announcement. B. ​No, it does not matter when investors knew about the decrease in profits since they are not allowed to sell their stocks until after the announcement. C. ​Yes, investors would have already decreased their demand for this stock causing its price to drop before the announcement was made. D. ​Yes, investors would not have been as surprised by the announcement and would not have sold their​ shares, thus keeping the price stable.

Yes, investors would have already decreased their demand for this stock causing its price to drop before the announcement was made.

In one of his annual letters to shareholders of Berkshire​ Hathaway, Warren Buffett wrote that​ "even experienced investors and analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with derivatives​ contracts." Why might it be difficult for investors to analyze the financial condition of firms that are buying and selling large numbers of​ derivatives? Does it matter what type of derivatives the firms are buying and​ selling? A. ​No, the type of derivative does not​ matter, as all derivatives are difficult to analyze. B. ​Yes, it depends on the type of derivative. Those that are not standardized or not traded on exchanges​ and/or that involve high counterparty risk can be difficult to​ price, and they are also highly illiquid. C. ​Uncertain, as it seems quite unlikely that experienced investors would encounter problems analyzing markets.

Yes, it depends on the type of derivative. Those that are not standardized or not traded on exchanges​ and/or that involve high counterparty risk can be difficult to​ price, and they are also highly illiquid.

Must money be a store of value to serve its function as a medium of​ exchange? Why or why​ not? A. ​No, these are separate functions independent of each other. B. ​Yes, people will not accept the form of money unless it can be stored easily. C. ​Uncertain, people may spend all of their​ money, making the​ store-of-value function unnecessary.

Yes, people will not accept the form of money unless it can be stored easily.

What is the difference between the yield to maturity on a coupon bond and the rate of​ return? Part 2 A. Yield to maturity is the value of the coupon expressed as a percentage of the price of the bond. Rate of return is the return over a specific holding period that takes into account not just the coupon rate but the price change. B. There is no fundamental difference between the yield to maturity and the rate of return. C. Yield to maturity is the return on a bond assuming the bondholder holds the bond for the full maturity. Rate of return is the return over a specific holding period that takes into account not just the coupon rate but the price change. D. None of the above.

Yield to maturity is the return on a bond assuming the bondholder holds the bond for the full maturity. Rate of return is the return over a specific holding period that takes into account not just the coupon rate but the price change.

Suppose that you are a wealthy investor. Although you have no connection with the oil​ industry, you are convinced from studying the determinants of demand and supply in the oil market that the price of oil will decline sharply in the future. How might you use forward contracts to profit from your​ forecast? A. You could sell oil futures with the intention of buying them back at the lower price on or before the settlement date. B. You could wait until the settlement date and buy at the spot rate if your prediction is correct. C. You could buy oil futures with the intention of selling them back at the lower price on or before the settlement date. D. You could buy oil futures and hold them until the settlement date.

You could sell oil futures with the intention of buying them back at the lower price on or before the settlement date.

An article in the Wall Street Journal says this about Burton​ Malkiel: "Even before index funds​ existed, the​ now-retired Princeton University professor argued that they could outperform actively managed funds....." ​Source: Silvia​ Ascarelli, "Burton Malkiel Is Still an Indexing​ Fan, but a​ 'Smart Beta' ​Skeptic," Wall Street Journal​, May​ 8, 2016. Index funds buy ______- ​, whereas actively managed funds frequently _______

a set portfolio of stocks buy and sell individual stocks.

reader wrote to an advice column in the New York Times complaining that his insurance company canceled his​ homeowner's policy after he had filed two claims. The advice columnist discovered that "a lot of people have shared a version of​ [this man's] experience ... a couple of small claims ... then nonrenewal." ​Source: David​ Segal, "Spurned by an Insurer after Filing Small ​Claims," New York Times​, April​ 25, 2015. Part 2 By canceling these​ people's policies, insurance companies are attempting to avoid

adverse selection

An article in the Wall Street Journal contained the​ following: "Burberry Group issued a surprise profit warning on Tuesday. . . . The announcement sent​ Burberry's stock down​ 21%." ​Source: Paul Sonne and Peter​ Evans, "Burberry Sends a​ Warning," Wall Street Journal​, September​ 12, 2012. Buying stock in a company gives an investor a legal claim on​ _____. Part 2 A. a​ firm's equity B. the value of a​ firm's assets minus the value of its liabilities C. a​ firm's profits D. all of the above

all of the above

A​ T-account is A. an accounting tool used to show changes in revenues and costs. B. special bank account used for​ T-bills. C. an accounting tool used to show changes in balance sheet items. D. All of the above are correct. Use a​ T-account to show the effect on Bank of​ America's balance sheet of your depositing ​$100 in currency in your checking account.

an accounting tool used to show changes in balance sheet items. Asset +100 Liabilites +100

A swap​ is: A. an agreement to buy or sell an asset at an agreed price at a future time. B. a contract that gives the buyer the right to buy the underlying asset at a set price during a set period of time. C. an agreement between two or more counterparties to exchange sets of cash flows over some future period. D. a contract that gives the seller the right to sell the underlying asset at a set price during a set period of time.

an agreement between two or more counterparties to exchange sets of cash flows over some future period.

An article in the Wall Street Journal in 2016 observed​ that: "Equity crowdfunding promises to be a major new source of funding for small businesses." ​Source: Louise​ Lee, "The Missing Piece That Could Hold Back Equity ​Crowdfunding," Wall Street Journal​, May​ 1, 2016. Part 2 Equity crowdfunding​ is: A. the buying and selling of​ publicly-traded shares of stock through a website and not through an exchange. B. an opportunity for​ high-income individuals to get in on the ground floor of small startup companies. C. an opportunity for individuals to directly invest in small startup firms online. D. a funding mechanism that reduces transaction costs and corrects the asymmetric information flow between small investors and firms.

an opportunity for individuals to directly invest in small startup firms online.

According to the theory of purchasing power​ parity, if the inflation rate in Japan is lower than the inflation rate in​ Canada, what should happen to the exchange rate between the Japanese yen and the Canadian dollar in the long​ run? In the long​ run, the Japanese yen will --- relative to the Canadian dollar because of ---- inflation in Japan.

appreciate lower

The difference between a call option and a put option is that a call option gives the buyer the right to​ _______ while the buyer of a put option has the right to​ _______. Part 2 A. double the size of any investment within a protected investment​ portfolio: cancel the purchase of any stock within a protected investment portfolio B. buy the underlying asset at a predetermined price before its expiration​ date: sell the underlying asset asset at a predetermined price during a set period of time C. cancel the purchase of any stock within a protected investment​ portfolio: double the size of any investment within a protected investment portfolio D. sell the underlying asset asset at a predetermined price during a set period of​ time: buy the underlying asset at a predetermined price before its expiration date

buy the underlying asset at a predetermined price before its expiration​ date: sell the underlying asset asset at a predetermined price during a set period of time

An investor would "hedge Apple" by ▼ buying selling Apple put options. If prices of Apple stock ▼ falls rises ​, you can exercise your puts and sell at the strike​ price, thereby minimizing your losses. If prices of Apple stock ▼ falls rises you can allow your puts to expire without exercising​ them, thereby keeping most of the gains from the price rise.

buying, falls, rises

Assume that the interest rate is 12​%. What would you prefer to​ receive? A. ​$74 two years from now B. ​$95 four years from now C. ​$84 three years from now D. ​$62 one year from now

d.​$95 four years from now

Bonds are not equities because they represent .

debt for a firm

Suppose that the euro rises in value relative to the dollar. What is the likely effect on European exports to the United​ States? What is the likely effect on U.S. exports to​ Europe? European exports will ---- and U.S. exports will ----

decrease increase

Since the velocity of money measures the volume of goods and servives included in GDP that a given money stock​ purchases, it is sometimes casually referred to as the​ "workload" performed by money. Given the values recorded in the preceding​ table, it might be said that for the preiod under​ consideration, the​ "workload" has ▼ decreased for both M1 and M2 changed in an indeterminate way increased for both M1 and M2 .

decreased for both M1 and M2

How does a credit default swap differ from the other swap contracts discussed in this​ chapter? Credit default swaps​ are: A. contracts where counterparties agree to swap interest payments over a specified period on a fixed dollar amount. B. contracts where counterparties agree to exchange principle amounts denominated in different currencies. C. derivatives requiring sellers to make payments to buyers if the price of the underlying security declines in value. D. contracts in which​ interest-rate payments are​ exchanged, with the intention of reducing default risk.

derivatives requiring sellers to make payments to buyers if the price of the underlying security declines in value.

Many companies issue preferred stock with a provision that allows the company to buy back the preferred stock at its original price after five years. The article notes that this provision​ "can produce unexpected losses for​ investors." Companies would be likely to buy back their preferred shares when​ _______. A. the price on preferred stocks fall below the price of common stock B. dividends on new issues of preferred stock are higher than those on outstanding shares C. the price on preferred stocks fall below their face value D. dividends on new issues of preferred stock are lower than those on outstanding shares

dividends on new issues of preferred stock are lower than those on outstanding shares

If the exchange rate between the yen and the dollar changes from ¥75 ​= $1 to ¥80 ​= $1, is this good news for​ Sony? A yen depreciation is ▼ badgood news for Sony.

good

The term​ "exposure" to the stock market describes​ _______. A. how much an investor has at risk to potential gains or losses in the stock market B. how long an investor has been trading on the stock market C. whether an investor trades in person or through an intermediary

how much an investor has at risk to potential gains or losses in the stock market

The law of one price states​ that: A. arbitrage profits are always possible with identical products. B. similar​ (yet differentiated) products should sell for the same price everywhere. C. identical products should sell for the same price everywhere. D. all products should sell for the same price everywhere

identical products should sell for the same price everywhere.

Suppose that on​ January, 1,​ 2013, you purchased a coupon bond with the following​ characteristics: • Face​ value: ​$1,000 • Coupon​ rate: 8 3​/8 • Current​ yield: 7​% • Maturity​ date: 2015 Part 2 If the bond is selling for ​$890 on January​ 1, 2014, then the rate of return on this bond during the holding period of calendar year 2013 was enter your response here​%

inital $ = Coupon ------------ current yeld 0.08375 X $1000 = ------------- 0.07 =$1,196.43 change in $ Rate of return = ------------ inital $ $890 - $1196.43 = 0.07 +-------------------- $1196.43 = -18.612%

Suppose that the current exchange rate between the yen and the dollar is ¥108=​$1 and that the interest rate is 6​% on a​ one-year bond in Japan and 5​% on a comparable bond in the United States. According to the​ interest-rate parity​ condition, what do investors expect the exchange rate between the yen and the dollar to be in one​ year? The exchange rate will be ¥enter your response here=​$1.​

int rate on domestic bond = int rate on foreign bond - expected appreciation of domestic currency Investors believe that the U.S. dollar will appreciate by​ 1%, which would change the exchange rate to ¥109.08=​$1.

In his​ memoirs, former Federal Reserve Chair Ben Bernanke remarked​ that, "In setting​ longer-term rates, market participants take into account their expectations for the evolution of​ short-term rates." ​Source: Ben S.​ Bernanke, The Courage to​ Act: A Memoir of a Crisis and Its Aftermath​, New​ York: W.W.​ Norton, &​ Company, 2015, p. 75. The expectations theory holds that the ▼ on a​ long-term bond is ▼ interest rate investors expect on ▼ bonds over the lifetime of the​ long-term bond.

interest rate, an average of the, short-term

How does the interest rate on an illiquid bond compare with the interest rate on a liquid​ bond? A. Interest rates are usually higher on an illiquid bond. B. Interest rates are usually the same on liquid and illiquid bonds. C. Interest rates are usually lower on an illiquid bond. D. The bond rating is needed to determine the effect on interest rates.

interest rates are usually higher on an illiquid bond.

The reporter also noted​ that, "regulations that took effect in 2012 ... allow companies to use corporate bond interest​ rates, rather than the lower ones of Treasury​ bonds, to calculate the discounted present value of an​ employee's future pension." If employers were still allowed to use the corporate bond interest rate in offering employees​ one-time payments for giving up their right to a monthly​ pension, the reporter might be less inclined to take the offer because the offer would be lower than the offer calculated using Treasury bond rates.

less, lower

If preferred stocks are initially purchased at above face value a buyback might cause​ _______ for investors since the buyback price is​ _______. A. ​losses: below the initial purchase price resulting in a capital loss B. ​gains: above the initial purchase price resulting in a capital gain C. ​losses: above the initial purchase price resulting in a capital loss D. ​gains: below the initial purchase price resulting in a capital gain

losses: below the initial purchase price resulting in a capital loss

The United States is said to have a dual banking system because banks A. may operate as profit making institutions or as nonprofits. B. may be chartered either by state governments or by the federal government. C. may have service areas that are either strictly local or national. D. can either be privately owned or publically owned.

may be chartered either by state governments or by the federal government.

The figure on the right displays U.S. M2 data over the past​ year, measured both weekly and monthly. Knowing that weekly data is typically more volatile than monthly data enables one to deduce that the blue line represents ▼ weekly monthly data.

monthly

Because U.S. goods are now ▼ less more ​expensive, this is ▼ good bad news for Japanese consumers.

more bad

When a newspaper article uses the term​ "the exchange​ rate," it is typically referring to the ▼ nominal real exchange rate.

nominal

Because credit default swaps are traded ▼ over the counter through an exchange rather than ▼ through an exchange over the counter ​, a default on a security might lead to ▼ greater smaller losses for the firms that sold credit default swaps on the security.

over the counter though an exchange greater

An​ option's intrinsic value is​ the: A. price at which the buyer of an option has the right to buy or sell the underlying asset. B. payoff to the buyer of the option from exercising it immediately. This is the correct answer. C. price of the underlying asset of the option. D. price of the option.

payoff to the buyer of the option from exercising it immediately. This is the correct answer.

An option premium is​ the: A. price of the underlying asset of the option. B. price of the option. C. payoff to the buyer of the option from exercising it immediately. D. price at which the buyer of an option has the right to buy or sell the underlying asset.

price of the option.

Suppose that for a price of ​$960 you purchase a 10​-year Treasury bond that has a face value of ​$1,000 and a coupon rate of 3​%. If you sell the bond one year later for ​$1,130​, what was your rate of return for that​ one-year holding​ period? Part 2 The rate of return for the​ one-year holding period was enter your response here​%. ​(Round your response to one decimal​ place.)

rate of return coupon chng in $ --------- +. ----------- initial $ initial $ 30 1,130-960 ---- + ------------ =20.8 960 960

On the graph to the​ right, the velocity of M1 is the ▼ curve and the velocity of M2 is the ▼ curve.

red, blue

The​ "lemons problem" A. refers to the adverse selection problem that arises from asymmetric information. B. refers to either the adverse selection or moral hazard problem that arises from asymmetric information. C. refers to the moral hazard problem that arises from asymmetric information. D. is a problem that buyers of used cars​ face, but there is no such problem in the financial market.

refers to the adverse selection problem that arises from asymmetric information

An increase in the money supply will shift the money supply curve to the right ​, causing the nominal interest rate to decrease and the quantity of money to increase .

right, decrease, increase

A columnist on marketwatch.comopens in a new tab offers the following​ advice: "If I were to hedge​ Apple, I'd use ...​ 90-day puts as​ I've done at times in the past." ​Source: Cody​ Willard, "What Happens When Apple Gets to​ $1,000 per ​Share?" marketwatch.comopens in a new tab​, February​ 24, 2015. A put option gives the buyer the ▼ to ▼ the underlying asset at the strike price during a set period of time.

right, sell

Suppose that you are a wheat farmer. Answer the following questions. It is August​, and you intend to have 40,000 bushels of wheat harvested and ready to sell in November. The current spot market price of wheat is ​$2.72 per​ bushel, and the current December futures price of wheat is ​$2.97 per bushel. Part 2 If each wheat futures contract is for 5,000 ​bushels, how many contracts will you buy or​ sell? You will ▼ buysell enter your response here contracts. The total value of these futures contracts is ________

sell 40000/5000 = 8 contracts 8* 5000 * $2.97 = $118,800

An article in the New York Times discussed the consequences in financial markets of​ Brexit, the vote in a 2016 referendum in the United Kingdom to leave the European​ Union: "investors have dumped much that seems risky — the​ pound, the euro and shares on stock exchanges around the world. They have entrusted the proceeds to that rare sure​ thing, United States Treasury bills." The article described this process as a "flight to safety." ​Source: Peter S.​ Goodman, "Taking Refuge in Dollar Could Expose World Economy to New ​Perils," New York Times​, July​ 1, 2016. Part 2 A "flight to safety" is a ▼ suddengradual shift in investments where investors seek to ▼ buysell assets perceived as risky and ▼ sellbuy assets perceived as safe.

sudden sell buy

A swap is different from a futures contract​ because: A. swaps only offer​ shorter-term hedging. B. swaps offer less privacy. C. swaps are subject to increased government regulation. D. swaps are private agreements between counterparties and its terms are flexible.

swaps are private agreements between counterparties and its terms are flexible.

In​ 2012, an article in the Wall Street Journal had the headline​ "As Corporate-Bond Yields​ Sink, Risks for Investors​ Rise." ​ Source: Matt​ Wirz, "As​ Corporate-Bond Yields​ Sink, Risks for Investors​ Rise," Wall Street Journal​, August​ 14, 2012. The risks of holding​ long-term corporate bonds at low interest rates include the risk that​ _______​ and, more importantly for​ investors, the risk that​ ________. A. the corporations will​ default: interest rates will fall further B. interest rates will fall​ further: the economy falls into a recession C. the corporations will​ default: interest rates will rise D. the economy falls into a​ recession: there may be deflation in the future

the corporations will​ default: interest rates will rise

Using the data above and the values for nominal GDP​ below, calculate the value of the money supply for M1 and​ M2: ​(Enter your responses rounded to one decimal​ place.)

​$12219.212219.2 ​$12861.812861.8 ​$67.467.4 ​$157.5157.5

Using the data recorded​ above, the most recent observation of M2 is ​$enter your response here billion.

​$19180.519180.5 billion.

Is the equation of exchange a​ theory? A. ​Yes, the equation of exchange is a statement about the world that might possibly be false. Your answer is not correct. B. ​No, a theory is a statement about the world that might possibly be false. This is the correct answer. C. ​No, it is not a theory because velocity is assumed to be constant. D. None of the above.

​No, a theory is a statement about the world that might possibly be false.

Would derivative markets be better off if the only people buying and selling derivative contracts were​ hedgers? A. ​Yes, with only hedgers in the​ market, the number of investments would​ increase, thus increasing the flow of funds in the financial system. B. ​Yes, because speculators may cause artificially high asset​ prices, the market is more efficient with hedgers only. C. ​No, as in all​ markets, at least two parties are required for each​ transaction, and speculators help provide liquidity and efficiency in financial markets. D. ​Uncertain, it depends on how much risk hedgers are willing to assume.

​No, as in all​ markets, at least two parties are required for each​ transaction, and speculators help provide liquidity and efficiency in financial markets.

A student makes the following​ observation: It currently takes 80 yen to buy 1 U.S.​ dollar, which shows that the United States must be a much wealthier country than Japan. But it takes more than 1 U.S. dollar to buy 1 British​ pound, which shows that Great Britain must be a wealthier country than the United States. Part 2 Do you agree with the​ student's reasoning?​ Why? A. ​Yes, exchange rates measure price fluctuations and thus would indicate the wealth of a country. B. ​Yes, exchange rates measure the wealth of one country against the wealth of another country. C. ​No, exchange rates do not measure the wealth of a country. D. ​Uncertain, as we would need to know the good or service being consumed to determine this answer.

​No, exchange rates do not measure the wealth of a country.

If we lived in a world in which everyone was perfectly​ honest, would the difference in the transactions costs faced by financial intermediaries when they make loans and those faced by small savers when they make loans​ disappear? A. ​No; while information costs might decrease there are still significant legal and other transaction costs involved in matching savers and borrowers. B. ​No; there will always be people who try to cheat the system. C. ​Yes; all transactions could be handled by​ computers, eliminating transaction costs. D. ​Yes; there would be no need for independent analysts to gather and analyze​ information, eliminating transaction costs.

​No; while information costs might decrease there are still significant legal and other transaction costs involved in matching savers and borrowers.

LendingClub is one of the largest fintech​ firms, which attempt to match lenders and borrowers. Unlike some other fintech​ firms, LendingClub securitizes some of the loans it makes and sells them to investors. According to an article in the Wall Street Journal​, it took that step to "expand the pool of investors" in its loans. In​ 2016, its CEO was fired after​ LendingClub's board of directors learned that the dates on loans in some securities had been falsified. ​Source: Peter Rudegeair and Annamaria​ Andriotis, "Inside the Final Days of LendingClub CEO Renaud ​Laplanche," Wall Street Journal​, May​ 16, 2016. Part 2 What moral hazard problem do you face when investing funds on a site like​ LendingClub? A. Asymmetric information. B. Restrictive covenants. C. ​Principal-agent problem. D. Adverse selection.

​Principal-agent problem.

An article in the Wall Street Journal in 2016 noted that banks in China have been experiencing problems with business borrowers defaulting on loans and have had difficulty attracting enough deposits to fund new loans. ​Source: Anjani​ Trivedi, "Why ​China's Big Banks​ Aren't Looking So ​Large," Wall Street Journal​, May​ 3, 2016. Part 2 Are these problems likely to matter for the future growth of the Chinese​ economy? A. ​No; China has mostly small banks which would not be harmed much by defaults on loans. B. ​No; China's banks have sufficient reserves. C. ​Yes; banks will have less funds available and will be hesitant to make loans to Chinese businesses. D. ​Yes; high default rates and the lack of deposits will lead to lower interest rates in​ China, thus slower growth.

​Yes; banks will have less funds available and will be hesitant to make loans to Chinese businesses.

A column in the Wall Street Journal ​observes: "Many​ regulators, politicians and academics consider credit default swaps to be insurance​ contracts." Briefly explain the reasoning behind this observation. ​Source: Stuart M. Turnbull and Lee M.​ Wakeman, "Why Markets Need​ 'Naked' Credit Default​ Swaps," Wall Street Journal​, September​ 11, 2012. A credit default swap​ ______ like an insurance contract since​ _______. Part 2 A. is​ not: the seller of the credit default swap is not required to reimburse the buyer unless the government requires it of them B. ​is: the buyer of the credit default swap can sell the underlying asset to the seller at a strike price if the asset drops in value C. is​ not: the seller of credit default swaps do not hold collateral to cover losses from defaults like an insurance company would D. ​is: the buyer pays a yearly fee to the seller and the seller agrees to cover any losses if there is a default

​is: the buyer pays a yearly fee to the seller and the seller agrees to cover any losses if there is a default