Money, Credit, and Banking Practice Exam

Part ownership of a corporation, such as General Electric, is represented by ownership of

a share of General Electric stock.

​If the market interest rate is lower than the coupon rate on a newly issued bond, then the bond will sell

above par

When a newly issued bond sells above its face value, it is said to sell

at a premium

If 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

$1,050

​Consider a share of stock in a company that will pay a dividend of $25 one year from today and immediately liquidate its assets. Your expected share of the liquidated assets is $5. Your time value of money is such that you consider $1.05 a year from today is equivalent to $1.00 today. What is the maximum you would be willing to pay for a share of stock in this company?​

$28.57

Shonda says that she would need to earn 3% interest in order to lend you money which you will pay back in two years. This implies that for Shonda the present value of $100 to be received two years from today is

$94.26

Emmel is the CFO for ABC Corporation. Ten years ago, under Emmel's instructions, the company invested in 10-year US Treasury bonds that paid 3% interest. At the time, Emmel's projection was that inflation over the 10-year period would be 0.5% per year. As it turns out, the annual rate of inflation over the 10-year period was 1.5%. As a result, the ex-post rate of return on ABC Corporation's investment was _____, instead of the _____ return that Emmel expected ex-ante.​

1.5%;2.5%

You give your friend %10,000 to help start a business, and you get $1,000 back. Your rate of return is

10%

​Daniella is considering the purchase of a 10-year, $10,000 bond being issued by Disreputable, Inc. The bond offers an interest rate of 5.5%. The rate on a similar US Treasury bond is 2.5%. All else equal, Daniella will be getting a default premium of _____, if she purchases the Disreputable, Inc. bond.

3.0%

​Saladin is willing to lend her friend Astro $500 to buy a new smart phone. Saladin wants a 3% real rate of return on the loan when it is paid back at the end of the year. She believes that during the year the general level of prices will rise by 2%, so she should charge her friend Astro a nominal interest rate of

5%

The bond market makes up ______ of the ________ market.

90%; debt

​Consider the graph below. Which of the following would lead to a shift in the demand for bonds from Demand 1 to Demand 0?

A decrease in societal wealth

Consider the accompanying figure above. An increase in the quality supplied is best illustrated by a movement from

A to B

Today, in the United States, several assets function as money. Which of the following would NOT be considered money?

Credit cards

In order for a corporation to be able to pay off its bond before the maturity date, the bond must have a(n)

call provision.

A type of stock that entitles the owner to a claim on the corporation's assets at liquidation and gives the owner voting rights for the board of directors and corporate policy is known as __________ stock.

common

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.

The supply of bonds is best described as a(n) __________ relationship between the price of bonds and the quantity of bonds supplied, all else equal.

direct

The stock market is sometimes referred to as the

equality market

You have just read an article in today's Wall Street Journal that states that the US economy is growing at a healthy 3% per year, US interest rates are falling, and emerging economies around the world are growing at a healthy 7% per year.​ Based on this information, you predict that US stock prices will

increase

When three is too much money chasing too few goods, the likely impact is

inflation

One of the most important prices determined in financial markets is the ________ rate.

interest

Bonds are issued by

many kinds of borrowers

​Mandy goes to the grocery store to buy groceries, and at the checkout counter she pays cash. This is an example of money being used as

medium of exchange

Financial assets include which of the following?

money, bonds, and stocks

​Paul is an economist who believes the efficient market hypothesis. Thus, Paul believes that the stock market is a good approximation of a(n) __________ market.

perfectly competitive

A bond's maturity refers to the

period of time when the issuer of the bond makes repayment of the bond's principal

The secondary market is where __________ is/are sold.​

previously owned stocks

​In the autumn of 2008, a flight to __________ occurred as investors pulled their money out of markets with various levels of uncertainty and put it into "safe" markets such as Treasury securities.

quality

Selling shares of stock is a way for corporation to

raise capital

Three things fully describe the aspects of a bond. They are

the face value, the coupon rate, and the term of maturity.

Harold would be equally happy with receiving $95 today or $100 one year from today. Harold's friend Maud 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 Harold and Maud?​

Maud has a higher rate of time preference than Harold.

​Throughout time, many commodities have performed the function of money. Which of the following would NOT be a likely commodity to serve as money?

Milk

B&G corporation issues convertible bonds. Convertible bonds allow B&G bondholders to convert their bonds into __________ at some point in the future.

Shares of common stock

​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

Ryan owns 1,000 shares of preferred stock in Grant Corporation. This means that Ryan

will receive a fixed dividend payment.

A major advantage that municipal bonds have over corporate bonds for investors is that

​the income earned on municipal bonds is not subject to federal income tax.

​Consider the bond market illustrated in the accompanying figure above. If the current market price is lower than P 1, which of the following statements is true?

There is a shortage of bonds in the market, and the market price will increase toward P1.

Inflation is a benefit to

borrowers

Jordan recently purchased a 20-year bond from the federal government with a face value of $10,000. Jordan has purchased a

treasury bond