ECON 311 TAMU EXAM 1

the yield to maturity on a one year discount bond equals

(F-P)/P

$1 received n years from now has a value today of

1/(1+i)^n

equation for the yield of maturity of a three year fixed payment loan of $1400 which has payments of $500 a year?

1400=$500/(1+i) + 500/(1+i)^2 + 500/(1+i)^3

if the real interest rate is 2% and expected inflation is 2%, the nominal interest rate is

4%

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

U.S. Treasury Bonds

which of the following 1000 face value securities has the highest yield to maturity?

a 5 percent coupon bond with a price of $600 (cheapest/lowest price)

Which of the following is an example of a debt instrument?

a BOND issued by general motors

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 maturity

which of the following can be described as involving direct finance

a corporation issues new shares of stock

Discount Bond

a credit market instrument that is bought at a price below its face value and whose face value is repaid at the maturity date; it does not make any interest payments (also called zero-coupon bond)

Simple Loan

a credit market instrument that provides the borrower with an amount of funds that must be repaid to the lender at the maturity date, along with an additional payment (interest).

Fixed-Payment Loan

a credit market instrument that provides the borrower with an amount of money that is repaid through fixed monthly payments made over a set number of years (includes both principal and interest)

the supply curve for bonds would be shifted to the left by

a decrease in government spending

factors that decrease the demand for bonds include

a decrease in the riskiness of stocks

which of the following is an example of an intermediate term debt

a five year car loan

which of the following is an example of an intermediate term debt

a sixty-month car loan

Which of the following is NOT a financial intermediary?

a stock exchange

the problem created by asymmetric information before the transaction occurs is __________, while the problem created after the transaction occurs is called __________?

adverse selection; moral hazard

a liquid asset is

an asset that can easily and quickly be sold to raise cash

The demand curve for bonds would be shifted to the left by

an increase in expected return on other assets

the main role of financial intermediaries is to

borrow funds from savers and lend them to borrowers

Coupon Bond

borrower initially receives the face value of the bond, then make regular interest payments over the life of the bond and at maturity repay face value and final interest payments.

which of the following best describes a repurchase agreement?

borrowers agree to sell assets for cash, and simultaneously to buy those assets back at an agreed upon price

Equity securities are traded in the

capital

equity securities are traded in what market?

capital

financial markets

channel funds directly from lenders to borrowers

a ______ pays the owner a fixed coupon payment every year until the maturity date, when the _______ value is repaid

coupon bond; face

if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future, the interest rate on corporate bonds would _____ and the interest rate on Treasury Securities would _______.

decrease; increase

a lower level of income causes the demand for money to _______ and the interest rate to ________ everything else held constant

decrease;decrease

a decrease in marginal tax rates would likely have the effect of ________ the demand for municipal bonds, and _______ the demand for U.S. government bonds

decreasing; increasing

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 called

default risk

the nominal interest rate minus the expected inflation rate

defines the real interest rate

with ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets

direct

for simple loans, the simple interest rate is ______ the yield to maturity

equal to

On a coupon bond, the yield to maturity

equates the present value of all the bonds payments to its price today

when secondary market buyers and sellers of securities meet in one central location to conduct trades the market is called

exchange

an increase in the riskiness of bonds relative to alternative assets causes the demand for bonds to _______ and the demand curve to shift to the ________.

fall; left

a credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a

fixed payment loan

the financial system has a basic function of

getting people with funds to lend together with people who want to borrow funds

the demand curve for bonds would be shifted to the left by an

increase in expected inflation

an ________ in the liquidity of corporate bonds will ________ the price of corporate bonds and ______ the yield of corporate bonds, all else equal.

increase; increase; decrease

higher government deficits ________ the supply of bonds and shift the supply curve to the ________.

increase; right

a rise in the price level causes the demand for money to ______ and the interest rate to _____, everything else held constant

increase;increase

an increase in the expected inflation rate causes the supply of bonds to _______ and the supply curve to shift to the ______, everything else held constant.

increase;right

which of the following is NOT a likely impact on the bond market if corporations become convinced that a robust economic recovery is underway?

increased demand for bonds

If the expected return on bonds increases, all else equal, the demand for bonds increases, the price of bonds ______, and the interest rate_______.

increases; decreases

the interest rate falls when either the demand for bonds______ or supply of bonds _______?

increases;decreases

Funds flow from lenders to borrowers

indirectly through financial intermediaries

simple loans and discount bonds differ from coupon bonds and fixed-payment loans in that

interest on simple loans and discount bonds is paid in a single payment, while issuers of coupon bonds and fixed-payment loans make multiple payments of interest and principal.

which of the following bonds would have the highest default risk?

junk bond

of the four effects on interest rates from an increase in the money supply, the one that works in the opposite direction of the other three is

liquidity effect

three factors explain the risk structure of interest rates

liquidity, default risk, and the income tax treatment of a security

the demand curve for bonds has the usual downward slope, indicating that at _______ prices of the bond, everything else equal, the ______ is higher

lower; quantity demanded

issuers of coupon bonds

make a single payment of principal when the bond matures, but multiple payments of interest over the life of the bond

a financial market in which only short term debt instruments are traded is what kind of market

money market

an example of the problem of _________ is when a corporation uses the funds raised from selling bonds to fund to pay for Caribbean cruise for their employees and families

moral hazard

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

negatively

a simple loan involves

payment of interest by the borrower to the lender only at the time the loan matures

a discount bond

pays the bondholder the face value at maturity

this is defined as the payments to the owner plus the change in a securities value expressed as a fraction of the security's purchase price

rate of return

which interest rate more accurately reflects the true cost of borrowing

real interest rate

real interest rate formula

real interest rate = nominal interest rate - expected inflation rate

if interest rates are expected to fall in the future, the demand for long term bonds today ______ and the demand curve shifts to the _______.

rises; right

when the price level _____, the demand curve for money shifts to the _______ and the interest rate _______, everything else held constant.

rises;right;rises

a financial market in which previously issued securities can be resold is called a

secondary market

a credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a

simple loan

when i purchase _______, I own a portion of a firm and have the right to vote on issues important to the firm and to elect its directors

stock

financial securities that represent partial ownership of a corporation are known as

stocks

in a business cycle expansion, the _____ of bonds increases and the ______ curve shifts to the _______ as business investments are expected to be more profitable.

supply; supply; right

long term debt has a maturity of

ten years or longer

long term debt maturity has a maturity that is

ten years or longer

during an economic recession

the bond demand and supply curves both shift to the left and the equilibrium interest rate usually falls

the total rate of return on bonds is equal to

the current yield plus the rate of capital gain

the rate of return on a bond is equal to

the current yield plus the rate of capital gains

if the expected returns on stocks rise, while the expected returns on bonds do not change, then

the equilibrium interest rate will rise

the yield to maturity is equal to

the interest rate at which the present value of an asset's future payments is equal to it's price today

the bond demand curve slopes down because

the lender is willing and able to purchase more bonds when the price of bonds is low

for a specific change in the yield to maturity

the longer the time until a bond matures, the greater will be the change in its price

if, while you are holding a coupon bond, the interest rates on other similar bonds fall, you can be sure that

the market price of your bond will rise

holding everything else constant

the more liquid is asset A, relative to alternative assets, the greater the demand will be for asset A

the ex ante real interest rate equals

the nominal interest rate minus the expected inflation rate

which of the following statement about the total rate of return on bonds is NOT correct

the total rate of return may never be negative

of the four factors that influence asset demand, which factor will cause the demand for all assets to increase when it increases, everything else held constant

wealth

Fisher Effect

when expected inflation rises, interest rates will rise

the interest rate that equates the present value of future payments received from a debt instrument with its price today is the

yield to maturity

which of the following would NOT be an example of a financial market transaction?

you deposit $100 in your bank checking account

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

you make a deposit at a bank