Money Banking Exam1
The nominal GDP in Lala Land increased 5% in 2001 the Real GDP increased 3% and population increased 2% How much did the standard living increase GDP/POP
1%
If the real rate of interest is 2% and the expected inflation rate is 10% the nominal rate of interest is
12%
Bonds with the same maturity have different interest rates due to
Default Risk
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
What was the main cause of the 2007 recession
Defaults in sub prime residential mortgages
The nominal interest rate minus the expected rate of inflation
Defines the real interest rate
Money demand refers to
Demand for currency
According to the segmented markets theory of the term structure
Different investors have a preference for bonds with different maturities so bonds with different maturities have their own markets and are not substitutes
If a corporation begins to suffer large losses then the default risk on the corporate bond will
increase and the bonds return will become more uncertain meaning the expected return on the corporate bond will fall.
The higher the leverage ratio (assets divided by equity capital
The riskier the bank is
Evidence from the United States and other foreign countries indicate
There is a strong positive association between inflation and growth rate of money over long periods of time.
One major reason for why governments issue perpetuity bonds is
They don't want to pay the principal back.
When I purchase a corporate ________, I am lending the corporation funds for a specific time. When I purchase a corporation's ________, I become an owner in the corporation.
bond , stock
wealth, expected return, risk, expected inflation are all factors that affect
bond demand
You read the newspaper and see that interest rates are expected to decline at the end of the year If this happens and you sell the bond it will result in
capital loss
Which of the following is not money
credit card
If the exchange rate of the US dollar declines then inflation in the US
declines
The income effect on interest rates implies that when income increases the interest rate will
decrease
The yield to maturity for a 2200 one year discount that sells for 2000 is
10%
With an interest rate of 6% the present value $100 you receive next year is approx.
$94
If a $1000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon payment every year is
37.50
A consol(perpetuity bond) paying 20 annualy the interest rate is 5% has a price
400
A 100000 one year simple loan with 107000 payment at the end of the year has an interest of
7%
Which of the following is not a financial institution
A business college
An investment bank helps -------- issue new securities
A corporation
Which of the following can be described as involving direct finance
A corporation issues new shares of stock or new bonds.
If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of
Adverse selection
Junk bond are defined by Moody;s Standard and poors and Fitch as bonds with rating less than
Baa or BBB
What are municipal bonds
Bonds that have been issued by state or local governments
_________ do not own/sell their own stock, but they work in the secondary markets matching buyers with sellers of securities
Brokers
Equity and debt instruments with maturities greater than one year are called ________ market instruments.
Capital
Financial markets promote economic efficiency by
Channeling funds from investors to savers
------- money had intrinsic value and could be used for some other purpose other than as a medium of exchange
Commodity
If Microsoft sells a bond in London and it is denominated in dollars, the bond is a
Eurobond
In a -------- market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices.
Exchange
The government agency that oversees the banking system and is responsible for the conduct of monetary policy in the United States is
Federal Reserve system
The expected inflation effect has the impact to
Increase the interest rate
A rising stock market index due to higher share price
Increases people's wealth and as a result may increase their willingness to spend.
An equal increase in all bond interest rates
Increases the return to all bond maturities by an equal amount
Risk that is related to the uncertainty about interest rate movements is called
Interest rate risk
The interest rate and the price of bonds sold in secondary markets are
Inversely related, ie have a negative relationship
When money supply increases and the interest rate declines it is called the
Liquidity effect
When bankers decide how much reserves to have on hand to meet deposit outflows and other cash outflows is an example of
Liquidity management
When bankers try to attempt to acquire fund at low cost
Managing interest rate risk
A bank asset management involves
Managing risk of assets by seeking to purchase securities with high returns and low risk.
You buy a book. The function of money you are using is.
Medium of exchange
The management of money and interest rates is called ------ policy and is conducted by a nation's ------- bank
Monetary, Central
When tax revenues are greater than government expenditures, the government has a budget
Surplus
What is a liquid asset
One that can be quickly and cheaply converted to cash
You expect to get 1000 payment at the end of 3 years from now. IF you ask yourself how much money you have to put in a bank today at the prevailing interest in order to get a 1000 in three years you are calculation
Present Value
Money ------ transaction costs, allowing people to specialize in what they do best
Reduces
The difference between yield to maturity on a bond and the interest rate is that yield to maturity includes
Return based only on the interest rate
A financial Market in which previously issued securities can be resold is called a ------ market
Secondary
The liquidity premium theory of the term structure
Similar to expectations theory except for the fact that it assumes that investors are willing to pay premium for liquidity.
You want to save money to pay college for your kids, What function of money are you using,
Store value
Cavemen didn't use money because they didn't specialize
True
An investment bank guarantees corporations set a price on new securities. It purchases the securities from a corporation at a predetermined price and then resells them in the market. This process is called
Underwriting
You want to calculate the negative value of beef and pork and therefore checks the price per pound of each in dollars. What function of money are you using
Unit of Account
The price level effect on interest rates implies that
When money supply increases prices will increase and the interest rates will increase
Economists consider the ------ to be the most accurate measure of market interest rates
Yield to Maturity(return on bond)
Which of the following can be described as involving indirect finance
You make a deposit at a bank which lends money to IBM.
Money is defined as
anything that is generally accepted in payment for goods and services or in the repayment of debt
reserves, cash items in process of collection, deposits at other banks, securities, loans, are all categories on the banks balance sheet are classified as
assets
The present value of an expected future payment ------- as the interest rate increases
falls
Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called ________ money.
flat
When yield curves are steeply upward sloping
long-term interest rates are above short-term interest rates
Expected profitability of investments expected inflation and gov budget deficits are all factors that affect
money demand
Securities that are short term are traded in the
money market
An asset bubble is defined as when
none of the above is correct
The ------- of a coupon bond and the yield to maturity are inversely related
price
Sustained mild downward movements in the business cycle are referred to as
recessions
a 5 million deposit outflow from a bank has the immediate effect of
reducing deposits and reserves by 5 million
Everything else held constant, a decline in interest rates will cause spending on housing to
rise
The process where financial intermediaries create and sell low risk assets and use the proceeds to purchase riskier assets is known as
risk sharing
An inverted yield curve
slopes down
Bonds issued by local gov are usally
tax exempt
The term structure of interest rate is
the relationship among interest rates on bonds with different maturities
The M1 measure of money includes
travelers checks
Typically, yield curves are
upward sloping
