3355 - Exam 1
When a newly issued bond sells above its face value, it is said to sell
at a premium
How many different prices would there be in a barter economy with 100 goods?
4,950
Refer to Figure 3-4. Which of the following would lead to a shift in the demand for bonds from Demand1 to Demand0?
A decrease in societal wealth
Suppose the market for loanable funds is currently in equilibrium. Which of the following factors will cause an increase in the interest rate
An increase in business confidence
If the market interest rate is the same as the coupon rate on a newly issued bond, then the bond will sell
At par
Edward would be equally happy with receiving $95 today or $100 one year from today. Edward's friend Bella would be just as happy receiving $90 today or $100 one year from today. Based on this information, which of the following best describes the difference between Edward and Bella?
Bella has a higher rate of time preference than Edward.
If the market interest rate is higher than the coupon rate on a newly issued bond, then the bond will sell
Below par
Unlike older bonds, which were printed on paper with mail-in coupons used to trigger interest payments, bonds today are mostly recorded in a different way. Which statement best describes how bond details are recorded for most bonds today?
Bonds are recorded electronically.
Inflation is a benefit in the short run to
Borrowers
Today, in the United States, several assets function as money. Which of the following would NOT be considered money?
Credit Cards
Which of the following statements is not true of cryptocurrency?
Cryptocurrency is only centralized by two banks worldwide.
Which of the following are included in the M1 definition of the money supply?
Currency, demand deposits, and other checkable deposits
An increase in the price of bonds will cause a decrease in the demand for bonds.
False
If the market interest rate exceeds the coupon rate on a bond, the selling price of the bond will be greater than the bond's face value.
False
Lenders benefit from inflation in the short run.
False
f the market interest rate exceeds the coupon rate on a bond, the selling price of the bond will be greater than the bond's face value.
False
Commonly accepted and widely used money that has no intrinsic value is known as
Fiat Money
Which of these entities are part of the so-called shadow banking industry?
Finance companies, mutual funds, and insurance companies
Which entities, by definition, issue the legal contracts known as bonds?
Governments, corporations, and government agencies
The coupon rate of a bond refers to the
Interest rate to be paid to the holder of the bond.
What is the best description of the relationship between the price of bonds and the quantity of bonds demanded, all else equal?
Inverse
Which of the following statements most accurately describes the measurements of the money supply known as M1 and M2?
M1 was a measure of the money supply that worked well until the mid-1970s; then M2 became a more accurate measure until the 1990s.
Money is most accurately defined by which of the following statements?
Money is anything generally accepted in exchange for goods and services.
Financial assets include which of the following?
Money, bonds, and stocks
Financial assets include intangibles that can change in value, such as stocks and bonds.
True
Financial markets bring together __________ and __________.
borrowers; lenders
The best way to measure the default risk premium that a borrower is paying is to
compare the interest rate the borrower pays with the risk-free premium, usually represented by the rate on US Treasury Securities.
In a barter economy, the number of prices necessary will
depend on the number of goods exchanged in the economy.
What is the best description of the relationship between the price of bonds and the quantity of bonds supplied, all else equal?
direct
An inverted yield curve likely means the
economy is headed for recession.
When there is too much money chasing too few goods, the likely impact is
inflation.
Bond prices and interest rates are
inversely related
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 a
medium of exchange
1. An increase in the quantity supplied is best illustrated by a movement from
movement along the same supply curve upwards/to the right
A 10-year, $10,000 bond with a coupon rate of 5% is a promise by the issuer of the bond to
pay the bondholder $500 every year for 10 years and also a $10,000 payment in 10 years.
On payday you get paid in cash, so each week you put $10 into a shoebox in your closet so that you can buy a big-screen TV at the end of the year. In this situation, money is serving as a
store of value
A yield curve illustrates the relationship between the
term to maturity of bonds and the interest rate they pay, at a particular point of time.
Three things fully describe the aspects of a bond. They are
the face value, the coupon rate, and the term to maturity.
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.
What is the face value of a bond, also known as the bond principal?
the original amount of money borrowed by the bond issuers
The three theories that economists have developed to explain the shape of the yield curve are
the pure expectations theory, the term premium theory, and the segmented market theory
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
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
f 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
$1050
You own a 10-year, $10,000 US Treasury bond with a coupon rate of 2%. There are two years left to maturity, and you are planning to sell the bond in the secondary market. If the interest rate is 5%, how much can you expect to get for the bond?
$9,442
A bond's maturity refers to the
period of time when the issuer of the bond makes repayment of the bond's principal.
You are having a conversation with your friend Yvonne about the upward-sloping yield curve that currently exists in the bond market. She explains this to you by saying that the upward slope to the yield curve is because the market expects future short-term interest rates to be higher than current interest rates. Her observation means that she is a proponent of the __________ theory of interest rates.
pure expectations
Which of the following best represents an increase in supply?
shift entire curve to the right
. Imagine you live in a country experiencing a decrease in societal wealth, with a decline in expected returns to bonds relative to other assets, and an increase in the relative riskiness of bonds. Which of the following shows the change in demand for bonds?
shift of entire demand curve to the left
Joshua says that he would need 3% interest in order to lend you money which you will pay back in two years. This implies that for Joshua the present value of $100 to be received two years from today is what amount?
$94.26
Sherry says that she requires a 3% rate of interest in order to lend you some money. This implies that for Sherry the present value of $100 to be received one year from today is
$97.09
Which of the following could cause an increase in the supply of loanable funds?
. Expansionary monetary policy being followed by the Federal Reserve
Your good friend Megan is starting a new business and you decide to invest with $20,000. If you get back $2,000, what is your rate of return?
10%
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
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
2.78%.
Which of these could be a reason for a decrease in the demand for loanable funds?
A decrease in expectations about future inflation
Suppose the market for loanable funds is currently in equilibrium. Which of the following factors will cause an increase in the interest rate?
An increase in business confidence
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?
Cigarettes and cognac functioned as money in Germany in this period following World War II.
If gold and silver became the primary types of commodity money in circulation, what would most likely be expected if there was a sudden and great amount of hoarding of these two items?
There would likely not be enough money, and the economy could slide into an economic recession.
Harper just got a big raise at work, which pushed her from the 15% federal marginal tax bracket to the 25% marginal tax bracket. Which of the following best describes how this might affect her decision to buy municipal bonds?
This will make her more likely to buy municipal bonds because it will increase the difference between the nominal interest rate paid on the bonds and the after-tax interest rate she will receive relative to corporate bonds.
For a social justice class, you take a field trip to a prison, where you notice prisoners exchanging cigarettes for other items, such as a candy bar, a magazine, a soft drink, and so on. In this circumstance, cigarettes could be considered money.
True
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
What is the face value of a bond, also known as the bond principal?
The original amount of money borrowed by the bond issuer
Refer to Figure 2-1. What concept does this diagram illustrate?
The price level tends to move in the same direction as the money supply.
Travis buys a 20-year, $10,000 US Treasury bond with a coupon rate of 5%. After three years, he has some unexpected expenses and decides to sell the bond. In which market will Travis sell his bond?
The secondary bond market
if the interest rate is 5%, the value of $1,000 at the end of 10 years is
$1,628.89.
Which of these most accurately defines possible effects of fluctuating interest rates in the financial markets?
Prices and levels of employment
Jenny has had a portion of stock in an e-commerce company for some time. She is ready to resell her stock. In what market would she do this?
Secondary market
Imagine you live in a country suffering from extreme inflation of 20% per month. The money you earn, every single molino, is worth a little less each week, so you and many others around you begin to use the currency of a more prosperous neighboring country, the dolingo. What is the term for this practice of adopting another country's currency?
Dollarization
Which of the following could cause an increase in the supply of loanable funds?
Expansionary monetary policy being followed by the Federal Reserve
Which of these statements most fully expresses why it is crucial to understand the basics of finance and economics?
Failure to understand and implement sound financial practices can lead to both personal and global financial collapse.
A corporate bond offering an interest rate of 5% is as good a deal as a municipal bond offering the same interest rate.
False
A flight to quality is most likely to have which of these effects?
It will increase the default risk premium that higher risk borrowers will pay and may cause some businesses to cut costs.
Assets accepted for repayment of debt to the government as well as private transactions are known as
Legal tender
Which of these groups of people is most hurt by inflation?
Lenders and working class people