Money and Banking Test #1

If you borrow $1,000 today to be paid back one year from today at 5% interest, the payment you will have to make in one year will be $1,005. $1,050. $1,055. $1,500.

$1,050.

If the annual interest rate is 2%, what is the quarterly interest rate? 0.001 0.005 0.0204 0.0166

0.005

What is the face value of a bond, also known as the bond principal? The rate of interest to be paid to the holder of the bond The original amount of money borrowed by the bond issuer The final amount of money collected by the bondholder The original amount of money borrowed by the bondholder plus the first year's interest

The original amount of money borrowed by the bond issuer

Your friend Jacob is looking at a steep yield curve and makes an attempt to understand the implications using segmented market theory. He says more information will be needed to make economic predictions, as this type of yield curve could be either good news or bad news. Are his comments about this yield curve, using segmented market theory, true or false? True False

True

A 10-year, $10,000 bond with a coupon rate of 5% is a promise by the issuer of the bond to make a single payment to the bondholder of $10,500 in 10 years. pay the bondholder $500 every year for the first nine years and also a $10,000 payment in 10 years. make a payment to the bondholder of $500 in the first year and $10,000 in 10 years. pay the bondholder $500 every year for 10 years and also a $10,000 payment in 10 years.

pay the bondholder $500 every year for 10 years and also a $10,000 payment in 10 years.

A major advantage that municipal bonds have over corporate bonds for investors is that municipal bonds have a lower default risk. the income earned on municipal bonds is not subject to federal income tax. corporate bonds are not as readily available as municipal bonds. municipal bonds have a shorter term to maturity.

the income earned on municipal bonds is not subject to federal income tax.

Armand buys a 10-year, $10,000 bond that pays him $500 every year for 10 years and repays the face value in year 10. During the 10-year period, the rate of inflation holds steady at 3% per year. The real rate of return on Armand's investment is 5%. 3%. 2%. 0%.

2%.

Emily is in the 10% marginal income tax bracket and earned a 2.5% return on the corporate bonds that just matured. The nominal interest rate paid on these bonds was 2.96%. 3.28%. 2.78%. 3.96%.

2.78%.

Sarah is considering the purchase of a 10-year, $10,000 bond being issued by Disreputable, Inc. The bond offers an interest rate of 5.5%. The rate on a similar US Treasury bond is 2.5%. All else equal, what will Sarah's default premium be if she purchases the Disreputable, Inc. bond? 3.5% 2.5% 3.0% 5.5%

3.0%

Which of the following occurrences will shift the supply of bonds to the right An expectation of deflation in the future Federal government budget surpluses A more optimistic outlook by business about the future A reduction in investment tax credits available from government

A more optimistic outlook by business about the future

Rosa goes to the grocery store to buy groceries, and at the checkout counter she pays cash. This is an example of money being used as a store of value. barter. a medium of exchange. a unit of account.

a medium of exchange.

What is the best description of the relationship between the price of bonds and the quantity of bonds supplied, all else equal? Inverse Direct Negative Exponential

Direct

A corporate bond offering an interest rate of 5% is as good a deal as a municipal bond offering the same interest rate. True False

False

True or False: The after-tax rate of return increases with the marginal tax rate. True False

False

With measurements of monetary aggregates such as M1 and M2, the money supply is relatively easy to measure. True False

False

Which entities, by definition, issue the legal contracts known as bonds? Corporations and government agencies Governments and banks Governments, corporations, and government agencies Government agencies only

Governments, corporations, and government agencies

Commonly accepted and widely used money that has no intrinsic value is known as commodity money. fiat money. disenfranchised money. counterfeit money.

fiat money.

Some of the most important central banks in the world include the People's Bank of China, the European Central Bank, and the Federal Reserve. the Deutsche Bundesbank, the People's Bank of China, and the Federal Reserve. the People's Bank of China, the Federal Reserve, and the Bank of England. the Federal Reserve, the European Central Bank, and the Bank of England.

the Federal Reserve, the European Central Bank, and the Bank of England.

When a coffee shop lists a tall coffee on its menu at $2.95, the coffee shop is using money as a unit of account. medium of exchange. store of value. source of profit.

unit of account.

The risk that a bond issuer will not be able to live up to the promise they make when they issue a bond is known as __________ risk. inflation default premium bankruptcy default

default

A person who believes the pure expectations theory of interest rates would explain a steeply upward-sloping yield curve is suggesting that savers currently have a better use for funds, or savers are worried about the future. central banks have cut short-term interest rates and home sales have increased, or central banks have cut interest rates out of a fear of a slowdown in economic activity. the economy is headed for a slowdown, or relief from inflationary pressure is imminent. higher inflation is in the future, or more rapid economic growth is on the horizon.

higher inflation is in the future, or more rapid economic growth is on the horizon.

The advantage of municipal bonds over corporate bonds increases as the federal marginal tax rate is eliminated. remains unchanged. decreases. increases.

increases.

Bond prices and interest rates are directly related. inversely related. unrelated. exponentially related.

inversely related.

A bond's maturity refers to the rate of interest to be paid to the holder of a bond. amount that the bond issuer must repay. period of time when the issuer of the bond makes repayment of the bond's principal. issuer of the bond.

period of time when the issuer of the bond makes repayment of the bond's principal.

A yield curve illustrates the relationship between the default risk associated with bonds of a given maturity and the interest rate they pay, at a particular point of time. term to maturity of bonds and the interest rate they pay, at a particular point of time. marginal tax rate and the after-tax interest rate of return on taxable bonds. rate of inflation and the real rate of return on bonds.

term to maturity of bonds and the interest rate they pay, at a particular point of time.

The quantity of loanable funds supplied is directly related to interest rates because as interest rates increase the opportunity cost of household consumption increases, causing households to bring more of their after-tax income to the pool of loanable funds. the opportunity cost to firms of funding projects with cash increases, causing firms to bring less of their cash to the pool of loanable funds. the opportunity cost of government borrowing increases, causing government to run budget surpluses instead of deficits and therefore bring more cash to the pool of loanable funds. in the United States, savers in the rest of the world will be more inclined to save in their domestic market, thereby bringing less of their saving to the US pool of loanable funds.

the opportunity cost of household consumption increases, causing households to bring more of their after-tax income to the pool of loanable funds.

The three theories that economists have developed to explain the shape of the yield curve are the term premium theory, the pure expectations theory, and the default premium theory. the pure expectations theory, the term premium theory, and the segmented market theory. the segmented market theory, the default premium theory, and the inflationary expectations theory. the pure expectations theory, the inflationary expectations theory, and the term premium theory.

the pure expectations theory, the term premium theory, and the segmented market theory.

According to the pure expectations theory, a flat yield curve means the market thinks that future interest rates will be higher than current interest rates. thinks that future interest rates will be lower than current interest rates. does not know what will happen to future interest rates. thinks that future interest rates will be exactly the same as current interest rates.

thinks that future interest rates will be exactly the same as current interest rates.

Suppose that the interest rate on a one-year bond is currently 3% and the market believes that the rate on a one-year bond one year from now will be 5%. If you follow the pure expectations theory of interest rates, then you would expect to see a(n) __________ yield curve. upward-sloping downward-sloping horizontal vertical

upward-sloping

Following World War II, inflation became so bad that Germans stopped using Reichsmarks for transactions, and instead used cigarettes for small transactions and cognac for large transactions. Which of the following best describes this situation? Reichsmarks were plentiful and valuable, but Germans preferred to barter. Germans wanted to disassociate themselves from the Third Reich. Cigarettes and cognac functioned as money in Germany in this period following World War II. Cigarettes and cognac were more plentiful than Reichsmarks, so Germans found them more convenient to use for transactions than Reichsmarks.

Cigarettes and cognac functioned as money in Germany in this period following World War II.

Imagine you run a company that produces recycled paper products. The selling price for items you produce is going up, so you increase production. After a time, you see that you have increased production more than the market is actually demanding. Which of these is the most likely reason for less demand than you had estimated based on a higher price for your items? Changing interest rates Inflation Default risk Scarcity of alternatives

Inflation

Which of the following are properties of yield curves? Select all that apply. The slope of a yield curve rarely changes. Generally, a yield curve slopes downward. Yield curves are subject to frequent parallel shifts. A yield curve shows yields of bonds of different maturities at one point in time.

Yield curves are subject to frequent parallel shifts. A yield curve shows yields of bonds of different maturities at one point in time.

The best way to measure the default risk premium that a borrower is paying is to look at the borrower's bond rating as reported by Moody's Investors Services. look at the borrower's bond rating as reported by Standard and Poor's Bond Rating Services. compare the interest rate the borrower pays with the risk-free premium, usually represented by the rate on US Treasury Securities. look at the profitability of the lender relative to its industry.

compare the interest rate the borrower pays with the risk-free premium, usually represented by the rate on US Treasury Securities.

The rate of interest a bond pays is called the bond's: rating rate. coupon rate. face value. bond rating.

coupon rate.

Which of these most accurately defines possible effects of fluctuating interest rates in the financial markets? Inflation Prices and levels of employment The rate of saving Risk levels

Prices and levels of employment

Which of the following are likely consequences of rising inflation? Select all that apply. An improved price-signaling mechanism Savers wanting to save less and borrowers wanting to borrow more A misallocation of resources A redistribution of wealth in favor of the wealthy

Savers wanting to save less and borrowers wanting to borrow more A misallocation of resources A redistribution of wealth in favor of the wealthy

Which of the following is a key argument for the segmented market theory? Short-term and long-term bonds are usually traded in the same market. The short-term, medium-term, and long-term bond markets are all different markets, characterized by market players who have different objectives in participating in these market. Everything else constant, bondholders prefer short-term bonds to long-term bonds. Short-term interest rates are based on the expectations of what long-term interest rates will be in the future.

The short-term, medium-term, and long-term bond markets are all different markets, characterized by market players who have different objectives in participating in these market.

How do different models explain a steep yield curve? Select all that apply. It could be good news (lower interest rates strengthen real estate market) or it could be bad news (central banks have cut interest rates because they are worried about an impending economic slowdown and there are too many homes being built and sold). The economy is headed for a slowdown or a recession. It could be good news (savers have uses for funds) or bad news (savers are worried about the future). Economic and financial market conditions are not expected to change much at all over time. It could be good news (faster growth) or bad news (higher inflation).

It could be good news (lower interest rates strengthen real estate market) or it could be bad news (central banks have cut interest rates because they are worried about an impending economic slowdown and there are too many homes being built and sold). It could be good news (savers have uses for funds) or bad news (savers are worried about the future). It could be good news (faster growth) or bad news (higher inflation)

A flight to quality is most likely to have which of these effects? It will be more difficult for individual borrowers to borrow, but ease borrowing for businesses. It will be easier for both individuals and businesses that want to sell high-risk bonds. It will decrease the default risk premium that higher risk borrowers have to pay and may bring about economic growth. It will increase the default risk premium that higher risk borrowers will pay and may cause some businesses to cut costs.

It will increase the default risk premium that higher risk borrowers will pay and may cause some businesses to cut costs.

Which of the following accurately describes a principal argument of the term premium theory of the yield curve? Shorter-term bonds have higher yields than longer-term bonds to incentivize investors to purchase shorter-term bonds, which are generally less desirable than longer-term bonds. Long-term interest rates are based on the expectations of what short-term interest rates will be in the future. Longer-term bonds have higher yields than shorter-term bonds to incentivize investors to purchase longer-term bonds, which are generally less desirable than shorter-term bonds. Short-term and long-term bonds are traded in segmented markets.

Longer-term bonds have higher yields than shorter-term bonds to incentivize investors to purchase longer-term bonds, which are generally less desirable than shorter-term bonds.

Money is most accurately defined by which of the following statements? Money is whatever a nation's government declares it to be. Money is currency printed by the local government. Money is a measure of the wealth of a nation. Money is anything generally accepted in exchange for goods and services.

Money is anything generally accepted in exchange for goods and services.

Inflation is a benefit in the short run to no one. borrowers. lenders. both borrowers and lenders.

NOT both borrowers and lenders.

If the market interest rate is the same as the coupon rate on a newly issued bond, then the bond will sell at par. above par. below par. at a discount.

at par.

If the market interest rate is higher than the coupon rate on a newly issued bond, then the bond will sell at par. below par. above par. at a premium.

below par.