Econ 3229 exam 1

If a $1000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon payment every year is A) $37.50. B) $3.75. C) $375.00. D) $13.75

A

What is a future value of $50 five years from now at 2%? A) $48.5 B) $51.3 C) $55.2 D) $58.4

C

What is price of $100 face value, two year, 5% coupon bond with an yield of 8%? A) 92 B) 92.6 C) 94.6 D) 95

C

When would you be indifferent between receiving $100 now and $100 next year? A) when interest rate=1% B) when interest rate=100% C) when interest rate=0% D) None of the above

C

Which of the following $1,000 face-value securities has the highest yield to maturity? A) A 5 percent coupon bond selling for $1,000 B) A 10 percent coupon bond selling for $1,000 C) A 12 percent coupon bond selling for $1,000 D) A 12 percent coupon bond selling for $1,100

C

Which of the following benefits directly from any increase in the corporation's profitability? A) a bond holder B) a commercial paper holder C) a shareholder D) a T-bill holder

C

A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of A) 3 percent. B) 20 percent. C) 25 percent. D) 33.3 percent.

D

An example of economies of scale in the provision of financial services is A) investing in a diversified collection of assets. B) providing depositors with a variety of savings certificates. C) hiring more support staff so that customers don't have to wait so long for assistance. D) spreading the cost of writing a standardized contract over many borrowers.

D

If 2 year and 10 year Treasury bonds pay 1.5% and 2.5%, respectively and 10 year corporate bond pays 3.4%, what's the risk spread on corporate bond? A) 0.9% B) 1.5% C) 1.9% D) 5.9%

A

What is the return on a 5 percent coupon $1000 face value bond that initially sells for $1,000 and sells for $1,200 next year? A) 5 percent B) 10 percent C) -5 percent D) 25 percent

D

What is yield to maturity of the same, $100 face value one year discount bond, now selling for $95? A) 2% B) 2.04% C) 5% D) 5.26%

D

What yield does one year 4% coupon rate $1000 face value bond offer if it currently sells for $1050? A) 4% B) 2% C) 1% D) -1%

D

t bills

available for everyone. meant for gov to raise money

direct finance

borrowers borrow funds directly from lenders in financial markets by selling them securities

money market mutual fund

buy highly liquid assets (very safe)

mutual funds

buy wide variety of assets

in what market does it deal in long term debt and equity instruments (ex: bonds, securities, and equity)

capital market

NYSE and chicago board of trade are examples of what?

centralized exchange

example of indirect finance

commercial banks, mutual funds

examples of direct finance

financial markets: NYSE, bond market

hedge funds and mutual funds

investors money are not insured in these institution

commercial paper

issued by corporations, raise money

in what makes does it deal in short term debt(ex: cash)

money market

foreign exchange and federal funds are examples of what?

over the counter

Investment banks underwrite securities in what market?

primary

newly issued securities are sold on what market?

primary

brokers and dealers work in what market?

secondary

in what market are securities traded many times?

secondary

negotiable cds

sold by commercial banks

provide liquidity service

-can access money anytime

depository instruments

-commercial banks -savings and loans association

Indirect finance

-common -funds flow from lenders to borrowers indirectly through financial intermediaries

economies of scale

-cost per transaction lowers a more is done

lower transaction cost

-economies of scale -bigger firms can do more for cheaper than we can ourselves -time and money spent in carrying out financial transactions

Key components of a financial system

-financial market -financial assets or securities -financial intermediaries -federal reserve and regulation of the financial system

contractual savings institutions

-life and casualty insurance -pension funds

what do financial instruments do?

-lower transaction cost -provide liquid service -risk sharing and diversification -collect and make important info available to savers and investors

investment intermediaries/finance companies

-mutual funds and money market mutual funds -hedge funds -investment banks

capital market instruments

-stocks -corporate bonds -gov bonds -municipal bonds -securitized loans and mortgage-backed-securities

money market instruments

-treasury bills -commercial paper -negotiable CDs -Federal funds

federal funds

bank to bank

A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond.

A

An important source of short-term funds for commercial banks are ________ which can be resold on the secondary market. A) negotiable CDs-certificate of deposit B) commercial paper-for corporations C) mortgage-backed securities-long term D) municipal bonds-long term

A

Credit union is an example of A) Depository institution B) Insurance company C) Pension fund D) Securities firms

A

Currency includes A) paper money and coins. B) paper money, coins, and checks. C) paper money and checks. D) paper money, coins, checks, and savings deposits.

A

Holding the expected return on bonds constant, an increase in the expected return on common stocks would ________ the demand for bonds, shifting the demand curve to the ________. A) decrease; left B) decrease; right C) increase; left D) increase; right

A

If an individual moves money from a small-denomination time deposit to a checking deposit account A) M1 increases and M2 stays the same. B) M1 stays the same and M2 increases. C) M1 stays the same and M2 stays the same. D) M1 increases and M2 decreases.

A

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) a bond with one year to maturity B) a bond with five years to maturity C) a bond with ten years to maturity D) a bond with twenty years to maturity

A

In the bond market, the bond demanders are the ________ and the bond suppliers are the ________. A) lenders; borrowers B) lenders; advancers C) borrowers; lenders D) borrowers; advancers

A

Suppose in 2014 you buy 4% coupon rate, $100 face value bond for $100 that has 2 years left till maturity. If in 2015 interest rates increase to 6%, what will be the price of your bond and what will be your rate of return if you decide to sell it? A) $98.1 and 2.1% B) $99.4 and 3.4% C) $101.6 and 7.6% D) $102 and 8%

A

Suppose investors anticipate that long-term bond yields will increase in the future, possibly due to the Fed increasing interest rates. Then the current demand for long-term bonds shifts A) left and the equilibrium interest rate rises. B) left and the equilibrium interest rate falls. C) right and the equilibrium interest rate rises. D) right and the equilibrium interest rate falls.

A

The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates ________ as the expected rate of inflation ________, everything else held constant. A) rise; increases B) rise; stabilizes C) fall; stabilizes D) fall; increases

A

The yield to maturity for a discount bond is ________ related to the current bond price. A) negatively B) positively C) not D) directly

A

What is another name for non-investment grade bonds? A) Junk B) High yield C) Unsafe D) Low grade

A

What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent? A) $453.51 B) $500.00 C) $476.25 D) $550.00

A

Which of the following can be described as involving direct finance? A. A corporation issues new shares of stock B. People buy shares in a mutual fund. C. A pension fund manager buys a short-term corporate security in the secondary market. D. An insurance company buys shares of common stock in the over-the-counter markets.

A

Which of the following is a common characteristic of mutual funds and hedge funds? A) Investor's money typically is not insured in these institutions B) They both make very safe investments C) They both have relatively few restrictions on opening a new account D) They both have relatively few restrictions on withdrawing money

A

financial markets have the basic function on: A. getting people with funds to lend together with people who want to borrow funds. B. assuring that the swings in the business cycle are less pronounced. C. assuring that governments need never resort to printing money D. providing a risk-free repository of spending power.

A

What is yield to maturity of $100 face value one year discount bond selling for $98? A) 2% B) 2.04% C) 5% D) 5.26%

B

A discount bond A) pays the bondholder a fixed amount every period and the face value at maturity. B) pays the bondholder the face value at maturity. C) pays all interest and the face value at maturity. D) pays the face value at maturity plus any capital gain.

B

A financial market in which previously issued securities can be resold is called a ________ market. A) primary B) secondary C) tertiary D) used securities

B

A vacation to Mexico costs $500 less than a vacation to Europe. When you make this comparison, which of the following functions of money do you use? A) Medium of exchange B) Unit of account D) Store of value E) Barter trade

B

Both Treasury bills and commercial paper share the following characteristic: A) They are both sold by treasury department B) They are both debt instruments C) They both carry relatively high risk for investors D) They can both be used as a collateral in order to borrow

B

Dennis notices that jackets are on sale for $99. In this case money is functioning as a A) medium of exchange -only happens when there's a transaction B) unit of account. - "want to know the value" C) store of value. - keep money in your hand for future purchase D) payments-system ruler.

B

Everything else held constant, when stock prices become ________ volatile, the demand curve for bonds shifts to the ________ and the interest rate ________. A) more; right; rises B) more; right; falls C) less; left; falls D) less; left; does not change

B

If the federal government decreases its spending and doesn't decrease taxes, the bond supply shifts to the A) left and the equilibrium interest rate rises. B) left and the equilibrium interest rate falls. C) right and the equilibrium interest rate rises. D) right and the equilibrium interest rate falls.

B

In which of the following situations would you prefer to be the lender? A) The interest rate is 9 percent and the expected inflation rate is 7 percent. B) The interest rate is 4 percent and the expected inflation rate is 1 percent. C) The interest rate is 13 percent and the expected inflation rate is 15 percent. D) The interest rate is 25 percent and the expected inflation rate is 50 percent.

B

NASDAQ is an example of A) Centralized exchange B) Over the counter market (OTC) C) Primary market D) Money market

B

Suppose you are planning to take a vacation in two years. How much would you need to save now in order to have 1,000 in two years at interest rate of 5%? A) 900 B) 907 C) 950 D) 1050

B

The M1 measure of money includes A) small denomination time deposits. B) checking account deposits. C) money market deposit accounts. D) money market mutual fund shares.

B

The ________ interest rate more accurately reflects the true cost of borrowing. A) nominal B) real C) discount D) market

B

What is price of $100 face value, one year discount bond with an yield (of maturity) of 8%? (Hint: price of any bond equals to the present value of all the future payments it makes) A) 92 B) 92.6 C) 100 D) 108

B

Which of the following are NOT contractual savings institutions? (most unique- offers services to get savings and invest in market; includes pension and insurance. A) life insurance companies B) credit unions-commercial bank (aka depository institution) C) pension funds D) state and local government retirement funds-pension

B

Which of the following instruments are traded in a money market? (t bills, commercial paper, negotiable cd, and federal funds are all traded in money market) A) bank commercial loans B) commercial paper C) state and local government bonds D) residential mortgages

B

________ are the time and resources spent trying to exchange goods and services. A) Bargaining costs B) Transaction costs C) Contracting costs D) Barter costs

B

In a(n) ________ market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices. A) exchange (NYSE, same location) B) over-the-counter C) common D) barter

B. (key word: different locations. Ex: NASDAQ)

A consol paying $20 annually when the interest rate is 5 percent has a price of A) $100. B) $200. C) $400. D) $800

C

During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________, everything else held constant. A) falls; right B) falls; left C) rises; right D) rises; left

C

Equity instruments are traded in the ________ market. -equity is always short term(another ex: stocks) A) money-deals w short term instruments B) bond C) capital-short term instruments D) commodities

C

Suppose John deposits $100 bill to his savings account. A) Both M1 and M2 increase B) M1 decreases and M2 increases C) M1 decreases and M2 stays unchanged D) M1 and M2 stay unchanged

C

Suppose you buy a 30-year, $50 coupon payment Treasury bond with a face value of $1,000 for a price of $1,200. Assume the price of this bond decreases to $1,100 over the next year and you decide to sell it. The one-year holding period return is equal to: A) -9.17% B) -8.33% C) -4.17% D) -3.79%

C

Everything else held constant, when the government has higher budget deficits A) the demand curve for bonds shifts to the left and the interest rate rises. B) the demand curve for bonds shifts to the left and the interest rate falls. C) the supply curve for bonds shifts to the right and the interest rate falls. D) the supply curve for bonds shifts to the right and the interest rate rises.

D

Factors that decrease the demand for bonds include A) an increase in the volatility of stock prices. B) a decrease in the expected returns on stocks. C) a decrease in the inflation rate. D) a decrease in the riskiness of stocks.

D

Federal funds are(why: 10% of deposit is reserve in bank. The other 90% is not their and if someone wants their money back, the bank goes to another bank for a loan to pay that) A) funds raised by the federal government in the bond market. B) loans made by the Federal Reserve System to banks. C) loans made by banks to the Federal Reserve System. D) loans made by banks to each other.

D

If more money is good, why does not government just print and throw dollar bills from helicopters? A) It's unconstitutional B) It'd cause increase in crime C) It'd cause inflation D) With more dollars around, value of dollar would decrease

D

If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is A) 2 percent. B) 8 percent. C) 10 percent. D) 12 percent.

D

Of the following assets, the least liquid is A) stocks. B) traveler's checks. C) checking deposits. D) a house.

D

Other than savings deposits, small CDs and money market mutual fund shares (MMMFs), broader money supply M2 also includes money market deposit accounts (MMDAs). Which of the following about MMDAs is correct? A) They are just as liquid as checking or savings account deposits B) They pay lower interest rate than savings deposits C) They focus exclusively on stocks and long-term bonds D) They are very similar to MMMFs, except the fact that MMDAs are federally insured

D

Suppose in 2012 you buy 3% coupon rate, $100 face value bond for $100 that has 2 years left till maturity. If in 2013 interest rates decrease to 1%, what will be the price of your bond and what will be your rate of return if you decide to sell it then? A) $100 and 3% B) $100 and 4% C) $101 and 4% D) $102 and 5%

D

Suppose in 2015 you lend $100 to a friend who promises to repay $110 in 2016. You expect 5% inflation rate during that year. However, when your friend repays debt, you discover that actual inflation was 7% that year. Given this information, your expected real interest rate was _____, but actual real interest rate turned out to be _____. A) 10%; 7% B) 7%; 5% C) 5%; 7% D) 5%; 3%

D

The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________. A) positively; rises; rises B) negatively; falls; falls C) positively; rises; falls D) negatively; rises; falls

D

The riskiness of an asset's returns due to changes in interest rates is A) exchange-rate risk. B) price risk. C) asset risk. D) interest-rate risk.

D

What is the price of $1000 face-value one year zero coupon discount bond that offers 1.5% yield? A) $992.3 B) $1001.5 C) $998.5 D) $985.2

D

When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises

D

Which of the following $1,000 face-value securities has the lowest yield to maturity? A) a 5 percent coupon bond selling for $1,000 B) a 5 percent coupon bond selling for $900 C) a 12 percent coupon bond selling for $900 D) a 5 percent coupon bond selling for $1,200

D

Which of the following is true about ten year $1,000 face-value 6% coupon bond that's selling for $1,050? A) Its yield to maturity and coupon rate equal to 5.7%. B) Its current yield and coupon rate equal to 6%. C) Its yield to maturity is 8%. D) Its current yield is 5.7%

D

________ is used to make purchases while ________ is the total collection of assets that serve to store value. A) Money; income B) Wealth; income C) Income; money D) Money; wealth

D

example of otc

NASDAQ

decentralized location, can be in different locations

OTC

finance companies

accept funds and invest it and give it to another firm