Test 1

Commercial paper is a short-term obligation of the U.S. government issued to cover government budget deficits and to refinance maturing government debt.

False

Corporate security issues are always directly involved in funds transfers in the secondary market

False

Earning a 5 percent interest rate with annual compounding is better than earning a 4.95 percent interest rate with semiannual compounding

False

Everything else is equal, the interest rate required on a callable bond will be less than the interest rate on a convertible bond

False

If you earn .5 percent a month in your bank account, this would be the same as earning a 6 percent annal interest rate with annual compounding.

False

Secondary markets are markets used by corporations to raise cash by issuing securities for time period.

False

The bond equivalent yield times 365/360 is equal to the single payment yield.

False

There are three types of major financial markets today: primary, secondary, and derivatives markets. The NYSE and NASDAQ are both examples of derivatives markets.

False

A repo is in essence a collateralized

Fed funds loan

Which of the following are capital market instruments?

10-year corporate bonds, 30 year mortgages, 20 year treasury bonds, 15 year US government agency bonds.

The term structure of interst rates is upward slowing for all bond types. A certain AAA rated non-callable 10-year corporate bond has been issued at a 6.15 percent promised yield. Which one of the following bonds probably has a higher promised yield?

A callable AAA rated corporate bond with a 15-year maturity.

You go to the wall street journal and notice that yields on almost all corporate and treasury bonds have decreased. The yield decreases may be explained by which one of the following?

A decrease in U.S. inflationary expectations

Of the following, the most likely effect of an increase in income tax rates would be?

A decrease in savings rate, decrease the supply of loanable funds, INcrease interest rate.

A Negotiable CD is

A marketable bank issued time deposit that specifies the interest rate earned and a fixed maturity date.

Commercial paper is

A short-term unsecured promissory note issued by a company to raise funds for a short time period.

The risk that a security cannot be sold at a predictable price with low transaction costs at short notice is called liquidity risk.

true

IBM creates and sells additional stock to the investment banker Morgan Stanley. Morgan Stanley then resells the issue to the U.S. public. Morgan Stanly is acting as a(n)

Asset Transformer

A time draft payable to a seller of goods, with payment guaranteed by a bank is a

Banker's acceptance

Depository institutions include

Banks and Thrifts

An increase in the perceived riskiness of investments would cause a movement up along the supply curve

False

A short-term unsecured promissory note issued by a company is

Commercial paper

A corporation seeking to sell new equity securities to the public for the first time in order to raise cash for capital investment would most likely

Conduct an IPO with the assistance of an investment broker.

Financial intermediaries can offer savers a safer, more liquid investment than a capital market security, even though the intermediary invests in risky illiquid instruments because

FIs can diversify away some of their risk and closely monitor the riskiness of their assets.

Depository institutions (DIs) play an important role in the transmission of monetary policy from the federal reserve to the rest of the economy because

DI deposits are a major portion of the money supply.

Match the Intermediary with the characteristic that best describes it's functions

Insurers, Mutual funds, Thrifts, Pension funds, Securities firms and investment banks.

Money markets trade securities that

Mature in one year or less, have little chance of lost principle

In the T-bill auction process, the competitive bidder is guaranteed a _______________and a noncompetitive bidder is guaranteed a __________________

Maximum price; Given quantity

Which of the following bond types pays interest tat is exempt from federal taxation.

Municipal bonds

Which of the following is/are money market instruments?

Negotiable CD's

Secondary markets help support primary markets because secondary markets,

Offer primary market purchasers liquidity for their holdings Update the price or value of the primary market claims Reduce the cost of trading the primary market claims.

IBM creates and sells additional stock to the investment banker Morgan Stanley, Morgan Stanley then resells the issue to the U.S. Public This transaction is an example of a(n)

Primary market transaction

The interest rate used to find the present value of a financial security is the

Required rate of return

A security has an expected return less than its required return. This security is

Selling for more than its PV

As of 2013, which one of the following derivatives instruments had the greatest amount of notional principal outstanding?

Swaps

An annuity and an annuity due with the same number of payments have the same future value if r=10%. Which one is the higher payment

THe annuity has the higher payment

The relationship between maturity and yield to maturity is called the

Term structure.

Liquidity risk at a financial intermediary (FI) is the risk

That a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices

360/n Times the difference between the face value and the current value divided by the face value gives you the discount yield on an instrument

True

An investor earned a 5 percent nominal risk-free rate over the year. However, over the year, prices increased by 2 percent. The investor's real risk-free rate was less than his nominal rate of return.

True

Commercial paper, treasure bills, and banker's acceptance rates are all quoted as discount yields

True

Convertible bonds will normally have lower promised yields than straight bonds of similar terms and quality

True

Everything else equal, an effective annual rate will be greater than the bond equivalent yield on the same security.

True

Fed funds are short-term unsecured loans while repos are short-term secured loans.

True

Financial intermediaries such as banks typically have assets that are riskier than their liabilities

True

For any positive interest rate the present value of a given annuity will be less than the sum of the cash flows, and the future value of the same annuity will be greater than the sum of the cash flows

True

Households generally supply more funds to the markets as their income and wealth increase, ceteris paribus

True

Money markets exist to help reduce the opportunity cost of holding cash balances.

True

Simple interest calculations assume that interest earned is never reinvested.

True

The NYSE is an example of a secondary market

True

The largest secondary money market in the united states is the secondary market for T-bills

True

The real risk-free rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption.

True

The term structure of interest rates is the relationship between interest rates on bonds similar in terms except for maturity

True

The U.S. treasury switched from a discriminating price auction to a single price auction because the latter lowered the average price paid by investors

false

The majority of money market securities are low-denomination, low-risk investments designed to appeal to individual investors with excess cash

false

An improvement in economic conditions would likely shift the supply curve down and to the right and shift the demand curve for funds up and to the right

true

An increase in the marginal tax rates for all U.S taxpayers would probably result in reduced supply of funds by households.

true

Money markets are the markets for securities with an original maturity of one year or less

true

Primary markets are markets in which users of funds raise cash by selling securities to fund suppliers

true

When the quantity of a financial security supplied or demanded changes at every given interest rate in response to a change in a factor, this causes a shift in the supply or demand curve.

true