Econ 3110

Legal Tender

Assets accepted for repayment of debt to the government as well as private transactions.

The advantage of municipal bonds over corporate bonds increases as the federal marginal tax rate

Increases

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

Face value (of a bond)

The original amount of money borrowed by a bond issuer. This is also sometimes called the bond principal.

Discount

When the market price is below the face value.

Functions of Money

medium of exchange, unit of account, store of value

Bond

A written legal contract that is a promise to repay with interest; issued by a corporation, government or government agency.

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

At a premium

Which of these groups of people is most hurt by inflation?

Lenders and working class people

Coupon rate

The stated rate of interest that will be paid to the holder of the bond.

What is the most likely reason that the market price for US Treasury Securities is higher than the market price for Charter Corp. bonds?

Their is a higher risk that Charter Corp. will default on its obligation

The three theories that economists have developed to explain the shape of the yield curve are

The pure expectations theory, the term premium theory, and the segmented market theory

What is the best description of the relationship between the price of bonds and the quantity of bonds supplied, all else equal?

Direct

A flight to quality is most likely to have which of these effects?

It will increase the default risk premium that higher risk borrowers will pay and may cause some businesses to cut costs

An inverted yield occurs when

long term interest rates are lower than short term interest rates

Medium of Exchange

usable for buying and selling goods and services

Edward used to be equally happy with receiving $95 today or $100 one year from today. Edward's friend Bella 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 Edward and Bella?

Bella has a higher rate of time preference than Edward

Following World war II, inflation became so bad that Germans stopped using Reichsmarks for transactions, and instead used cigarettes for small transactions and cognac for large transactions. Which of the following best describes this situation?

Cigarrettes and cognac functioned as money in Germany in this period following World War II

M2

M1 + savings deposits, including money market deposit accounts + small-denominated (less than $100,000) time deposits + money market mutual fund held by individuals

M1

M1 = currency + checkable deposits

Par

Market price of a bond equals the face value of the bond.

Time value of money

Money received today has a higher value than money received in the future.

Commodity Money

Money that has some other use other than being a medium of exchange, being a unit of account, and having a store of value.

Figure. The default risk premium paid by Charter Corp. in this market is represented by

PusPc