Money and Banking hw 1

An increase in the time to the promised future payment ________ the present value of the payment.

decreases

An equal decrease in all bond interest rates

increases the price of a ten-year bond more than the price of a five-year bond.

Adverse selection is a problem associated with equity and debt contracts arising from

the lender's relative lack of information about the borrower's potential returns and risks of his investment activities.

"If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is"

12 percent

"What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?"

25 percent

"If $22,050 is the amount payable in two years for a $20,000 simple loan made today, its yield to maturity is"

5 percent.

"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.

The interest rate on a consol equals the

Coupon payment divided by the price

Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as

Eurobonds.

If an individual moves money from a demand deposit account to a money market deposit account

M1 decreases and M2 stays the same.

"Which of the following $1,000 face-value securities has the highest yield to maturity?"

a 12 percent coupon bond selling for $1,000"

"If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is"

10 percent.

"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

A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of"

33.3 percent.

In which of the following situations would you prefer to be the borrower?

The interest rate is 25 percent and the expected inflation rate is 50 percent

Which of the following are TRUE concerning the distinction between interest rates and returns?

The rate of return on a bond will not necessarily equal the interest rate on that bond.

Which of the following can be described as involving indirect finance?

You buy shares in a mutual fund

Which of the following are TRUE of fixed payment loans?

Installment loans and mortgages are frequently of the fixed payment type.

"When compared to exchange systems that rely on money, disadvantages of the barter system include"

the requirement of a double coincidence of wants.

The ________ is below the coupon rate when the bond price is ________ its par value.

yield to maturity; above