Econ 311 Test 1
When the money supply increases (everything else remaining equal), interest rates will __
decline.
Holding the expected return on bonds constant, an increase in the expected return on common stocks would ________ the demand for bonds, shifting the demand curve to the ________.
decrease; left
If people expect real estate prices to increase significantly, the ________ curve for bonds will shift to the ________, everything else held constant.
demand; left
The bond demand curve is ________ sloping, indicating a(n) ________ relationship between the price and quantity demanded of bonds.
downward; inverse
a higher level of income causes the demand for money at each interest rate to __ and the demand curve to shift to the__.
increase; right
If the expected return on bonds increases, all else equal, the demand for bonds increases, the prices of bonds _, and the interest rate _
increases; decreases
The interest rate falls when either the demand for bonds _ or the supply of bonds _
increases; decreases
The riskiness of a bond's returns due to changes in interest rates is
interest-rate risk
The __ liquid an asset is relative to alternative assets, holding everything else unchanged, the __ desirable it is and the greater the quantity demanded will be.
more; more (or less; less)
The GDP deflator, is __ divided by __.
nominal GDP; real GDP
The real interest rate (r) equals the nominal interest (i) rate minus the expected inflation rate formula?
r = i - πexpected
holding everything else constant, if an asset's risk ___ relative to that of alternative assets, its quantity demanded will __
rises; fall (and inverse)
An example of economies of scale in the provision of financial services is
spreading the cost of writing a standardized contract over many borrowers.
Holding everything else constant
the more liquid is asset A, relative to alternative assets, the greater will be the demand for asset A.
I purchase a 10 percent coupon bond. Based on my purchase price, I calculate a yield to maturity of 8 percent. If I hold this bond to maturity, then my return on this asset is
8 percent
A __ is a debt security that promises to make periodic payments for a specified period of time.
BOND
A discount bond (a zero-coupon bond) is _
Bought at a price below its face value (at a discount), and the face value is repaid at the maturity date. A discount bond does not make any interest payments; it just pays off the face value. EG: U.S. Treasury bills, U.S. savings bonds.
Real interest rates are adjusted for _, whereas nominal interest rates are not.
Inflation
a continual increase in the price level is __
Inflation
Prices and returns for long-term bonds are __ volatile than those for shorter-term bonds.
MORE
The theory of portfolio choice suggests that 1. quantity demanded of an asset is __ related to wealth. 2. The quantity demanded of an asset is __ related to its expected return relative to alternative assets. 3. The quantity demanded of an asset is __ related to the risk of its returns relative to alternative assets. 4. The quantity demanded of an asset is __ related to its liquidity relative to alternative assets.
Positively; positively; negatively; positively
Present value is also called?
Present discounted value.
________ are short-term loans in which Treasury bills serve as collateral.
Repurchase agreements
Wealth is __
The total resources owned by an individual
The most accurate measure of interest rates is _
Yield to Maturity
Which of the following bonds would you prefer to be buying?
a 10,000 face-value security with a 10% coupon selling for 9,000.
Which of the following $5,000 face-value securities has the highest yield to maturity?
a 12 percent coupon bond selling for 4500.
Equity and debt instruments with maturities greater than one year are called ________ market instruments.
capital
Real GDP is
constant prices
Nominal GDP is
current prices
If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is
3 percent
in a business cycle expansion with growing wealth, the demand for bonds rises and the demand curve for bonds shifts to the __. Applying the same reasoning, in a recession, when income and wealth are falling, the demand for bonds falls, and the demand curve shifts to the __.
Right; left.
Liquidity is __
The ease and speed with which an asset can be turned into cash
4 Parts of a Coupon Bond
The face value; the corporation or government agency that issues the bond; the maturity date of the bond; and the bond's coupon rate.
What is discounting the future?
The process of calculating today's value of dollars received in the future. Expressed as: PV = CF/(1 + i)^n
Which of the following are TRUE concerning the distinction between interest rates and returns?
The rate of returns on a bond will not necessarily equal the interest rate on that bond.
Examples of discount bonds include
U.S. Treasury bills
Fisher effect?
When expected inflation rises, interest rates will rise.
The financial system has the basic function of
getting people with funds to lend together with people who want to borrow funds.
Holding everything else constant, an ___ in wealth ___ the quantity demanded of an asset.
increase; raises
a rise in the price level causes the demand for money at each interest rate to __ and the demand curve to shift to the __
increase; right
An increase in expected inflation causes the supply of bonds to __ and the supply curve to shift to the __.
increase; right.
Higher government deficits __ the supply of bonds and shift the supply curve to the __
increase; right.
___ is the rate of change of the price level, usually measured as a percentage change per year
inflation rate
The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the.
liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
Higher expected future interest rates __ the expected return for long-term bonds, __ the demand, and shift the demand curve to the __.
lower; decrease; left.
An increase in the expected rate of inflation __ the expected return on bonds, causing their demand to __ and the demand curve to shift to the __.
lowers; decline; left.
A financial market in which only short-term debt instruments are traded is called the _ market.
money
Everything else held constant, when stock prices become _ volatile, the demand curve for bonds shifts to the _ and the interest rate _/
more; right; falls
The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________.
negatively; rises; falls (because yield to maturity equals the interest rate!!!)
an increase in the money supply engineered by the Federal Reserve will shift the supply curve for money to the __
right
when income is rising during a business cycle expansion (holding other economic variables constant), interest rates will __
rise
when the price level increases, with the supply of money and other economic variables held constant, interest rates will __
rise
Everything else held constant, an increase in the liquidity of bonds results in a _ in demand for bonds and the demand curve shifts to the _
rise; right
A ___ also called a financial instrument) is a claim on the issuer's future income or___ (any financial claim or piece of property that is subject to ownership).
security; assets
If the maturity of a debt instrument is less than one year, the debt is called
short-term
When I purchase ________, I own a portion of a firm and have the right to vote on issues important to the firm and to elect its directors.
stock
When the price of a bond is above the equilibrium price, there is an excess ________ bonds and price will ________.
supply; fall
The nominal interest rate minus the expected rate of inflation
Defines the real interest rate
A rise in the price level causes the demand for money to ________ and the interest rate to ________, everything else held constant.
Increase; increase;
an ___in an asset's expected return relative to that of an alternative asset, holding everything else unchanged, ___ the quantity demanded of the asset.
Increase; raises
A coupon bond is_
Pays the owner of the bond a fixed interest payment (coupon payment) every year until the maturity date, when a specified final amount (face value or par value) is repaid.
A bond's interest rate does not necessarily indicate how good an investment the bond is, because what the _ does not necessarily equal its interest rate.
Rate of return
If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of
adverse selection
When secondary market buyers and sellers of securities meet in one central location to conduct trades the market is called a(n)
exchange
When the price level falls, the _ for money__, and interest rates__, everything else held constant.
demand; decreases; fall
If there is an increase in the expected return on stocks, everything else held constant, the _ curve for bonds shifts _ and the interest rate _.
demand; left; rises
U.S. Treasury bills pay no interest but are sold at a ________. That is, you will pay a lower purchase price than the amount you receive at maturity.
discount
For simple loans, the simple interest rate is ________ the yield to maturity.
equal to
A simple loan is _
where the lender provides the borrower with an amount of funds that must be repaid to the lender at the maturity date, along with an additional payment for the interest. EG: commercial loans to businesses.
A fixed-payment ( fully amortized loan) loan is _
where the lender provides the borrower with an amount of funds that the borrower must repay by making the same payment, consisting of part of the principal and interest, every period (such as a month) for a set number of years. EG: Mortgages are frequently of the fixed- payment type.
The interest rate that equates the present value of payments received from a debt instrument with its value today is the
yield to maturity
