Money, Banking and Financial Markets

If a $1000 face value coupon bond has a coupon rate of 3.75 percent then the coupon payment every year is

$37.50

What is a future value of $50 five years from now at 2%.

$55.2

What is the price of $1000 face-value one year zero coupon discount bond that offers 1.5% yield?

$985.2

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%

What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent?

$453.51

If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding?

a bond with one year to maturity

Factors that decrease the demand for bonds include

a decrease in the riskiness of stocks

The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates ______________ as the expected rate of inflation____________, everything else held constant.

rise; increases

During business cycle expansions when income and wealth are rising, the demand for bonds ______________ and the demand curve shifts to the ______________, everything else held constant

rises; right

Pays the bondholder the face value at maturity.

A discount bond

Which of the following is not included in the monetary aggregate M2?

Savings bonds

The ________ interest rate more accurately reflects the true cost of borrowing.

real

Everything else held constant, when the government has higher budget deficits

the supply curve for bonds shifts to the right and the interest rate rises.

When money prices are used to facilitate comparisons of value, money is said to function as a

unit of account

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

12%

The yield to maturity for a discount bond is ________ related to the current bond price.

negatively

What yield does one year 4% coupon rate $1000 face value bond offer if it currently sells for $1050?

-1%

Currently, a three-month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%. What is the risk premium of the typical A-rated ten-year corporate bond with a yield of 5.5%?

0.8%

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year? (Let's assume the face value of $1000)

25%

A consol paying $20 annually when the interest rate is 5 percent has a price of

400

Suppose in 2014 you buy 4% coupon rate, $100 face value bond for $100 that has 2 years left till maturity. If in 2015 interest rates decrease to 6%, what will be the price of your bond and what will be your rate of return if you decide to sell it?

98.1% and 2.1%

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

A 12 percent coupon bond selling for $1,000

Which of the following financial intermediaries is not a depository institution?

A finance company

Which of the following are not contractual savings institutions?

Credit unions

If an individual moves money from a money market deposit account to currency.

M1 increases and M2 stays the same.

In which of the following situations would you prefer to be the lender? A) The interest rate is 9 percent and the expected inflation rate is 7 percent. B) The interest rate is 4 percent and the expected inflation rate is 1 percent. C) The interest rate is 13 percent and the expected inflation rate is 15 percent. D) The interest rate is 25 percent and the expected inflation rate is 50 percent

The interest rate is 4 percent and the expected inflation rate is 1 percent.

Which of the following instruments are traded in a money market?

U.S. Treasury bills

Which of the following bonds are considered to be default-risk free?

U.S. Treasury bonds

A short-term debt instrument issued by well-known corporations is called?

commercial paper

A coupon bond that has no maturity date and no repayment of principal is called a

consol.

Which of the following long-term bonds has the highest interest rate?

corporate Baa bonds

A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a

coupon bond.

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

When the expected inflation rate increases, the demand for bonds_______________, the supply of bonds ________________, and the interest rate _________-, everything else held constant.

decreases, increases, rises

The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is

default risk

Reducing risk through the purchase of assets whose returns do not always move together is

diversification.

Paper currency that has been declared legal tenders but is not convertible into coins or precious metals is called __________ money.

fiat

The riskiness of an asset's returns due to changes in interest rates is

interest-rate risk

Bonds with relatively low risk of default are called _____________ securities and have ar ating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and are called _______________.

investment grade; junk bonds

In the bond market, the bond demanders are the ____________ and the bond suppliers are the ______________.

lenders, borrowers

Everything else held constant, when stock prices become ________ volatile, the demand curve for bonds shifts to the ________ and the interest rate ___________.

more, right, falls

A bond with default risk will always have a _____________ risk premium and an increase in its default risk will ___________ the risk premium.

positive; raise

A corporation acquires new funds only when its securities are sold in the

primary market by an investment bank.