Econ 3301 Exam 1

Sarah 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, what will Sarah's default premium be if she purchases the Disreputable, Inc. bond?

3.0%

The market for bonds is a subset of the market for loanable funds. T/F?

True

Imagine you live in a country suffering from extreme inflation of 20% per month. The money you earn, every single Molino, is worth a little less each week, so you and many others around you begin to use the currency of a more prosperous neighboring country the Dolingo. What is the term for this practice of adopting another country's currency?

Dollarization

Atwood and spearman, Inc. bonds are selling for more than Boehm and Bull Inc. bonds. The difference in yields between these two bond options is known as the - default risk premium - default risk premium spread - expected yield premium - anticipated yield stretch

Expected yield premium???????

A corporate bond offering an interest rate of 5% is a good deal as a municipal bond offering the same interest rate. T/F?

False

Imagine you run a company that produces recycled paper products. The selling price for items you produce is going up, so you increase production. After a time, you see that you have increased production more than the market is actually demanding. Which of these is the most likely reason for less demand than you had estimated based on a higher price for your items? - changing interest rates - inflation - default risk - scarcity of alternatives

Inflation

What is the best description of the relationship between the price of bonds and the quantity of bonds demanded, all else equal? - linear - positive - direct - inverse

Inverse

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

legal tender

An inverted yield occurs when

long term interest rates are lower than short term interest rates

Rosa 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

You own a 10-year, $10,000 US Treasury bond with a coupon rate of 2%. There are two years left to maturity, and you are planning to sell the bond in the secondary market. If the interest rate is 5%, how much can you expect to get for the bond?

$9,442

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? - reichsmarks were plentiful and valuable, but Germans preferred to barter - Germans wanted to disassociate themselves from the Third Reich. - Cigarettes and cognac functioned as money in Germany in this period following World War II. - cigarettes and cognac were more plentiful than Reichsmarks, so Germans found them more convenient to use for transactions than Reichsmarks.

- Cigarettes and cognac functioned as money in Germany in this period following World War II.

Edward would 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?

- Edward has a higher rate of time preference than Bella - Bella has a higher rate of time preference than Edward - Edward is in a more urgent need of money today - Bella is more easygoing about her finances Bella has a higher rate of time preference than Edward.

Unlike older bonds, which were printed on paper with mail-in coupons used to trigger interest payments, bonds today are mostly recorded in a different way. Which statement best describes how bond details are recorded for most bonds today? - bonds are recorded electronically - bonds are recorded electronically and on paper - bonds are recorded electronically, but coupons are still used to collect interest - bonds are recorded on paper, which both parties keep, and electronically

- bonds are recorded electronically

Which entities, by definition, issue the legal contracts known as bonds? - corporations and government agencies - governments and banks - governments, corporations, and government agencies - government agencies only

- governments, corporations, and government agencies

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

- increases

A flight to quality is most likely to have which of these effects? - it will be more difficult for individual borrowers to borrow, but ease borrowing for businesses. - it will be asker for both individuals and businesses that want to sell high-risk bonds - it will decrease the default risk premium that higher risk borrowers have to pay and may bring about economic growth. - it will increase the default risk premium that higher risk borrowers will pay and may cause some businesses to cut cost.

- it will increase the default risk premium that higher risk borrowers will pay and may cause some businesses to cut cost.

Which of these groups is most hurt by inflation? - borrowers and the wealthy - the very wealthy - lenders and working class people - working class people

- lenders and working class people

Regulation Q, passed following the Great Depression, set a - maximum on the interest rates banks can charge - maximum on the rest rate thank banks can pay on deposits - maximum on the quantity of money that the US Treasury can print - floor on the interest rate that banks can pay on deposits.

- maximum on the rest rate thank banks can pay on deposits

A 10-year, $10,000 bond with a coupon rate of 5% is a promise by the issuer of the bond to - make a single payment to the bond holder of $10,500 in 10 years - pay the bondholder $500 every year for the first nine years and also a $10,000 payment in 10 years. - make a payment to the bond holder of $500 in the first year and $10,000 in 10 years. - pay the bond holder $500 every year for 10 years and also a $10,000 payment in 10 years.

- pay the bond holder $500 every year for 10 years and also a $10,000 payment in 10 years.

A bonds maturity refers to the - rate of interest to be paid to the holder of a bond - amount that the bond issuer must repay - period of time when the issuer of the bond makes repayment of the bonds principal - issuer of the bond

- period of time when the issuer of the bond makes repayment of the bonds principal

Three things fully describe the aspects of a bond. They are - the face value, the coupon rate, and the term to maturity - the face value, the term to maturity, and the bond price - the coupon rate, the term to maturity, and the issuer of the bond - the face value, the coupon rate, and the bond price

- the face value, the coupon rate, and the term to maturity

A major advantage that municipal bonds have over corporate bonds for investors is that - municipal bonds have a lower default risk - the income earned on municipal bonds is not subject to federal income tax - corporate bonds are not as readily available as municipal bonds - municipal bonds have a shorter term to maturity

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

A major advantage that municipal bonds have over corporate bonds for investors is that - municipal bonds have a lower default risk - the income earned on municipal bonds is not subject to federal income tax - corporate bonds are not as readily available as municipal bonds - municipal bonds have a shorter term to maturity

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

If gold and silver became the primary types of commodity money in circulation, what would most likely be expected if there was a sudden and great amount of hoarding of these two items? - people would start to print and use various forms of currency - bartering would simply replace gold and silver - there would likely not be enough money, and the economy could slide into an economic recession. - there would be too much money of other types, and the economy could endure rapid inflation.

- there would likely not be enough money, and the economy could slide into an economic recession.

According to pure expectations theory, a flat yield curve means the market - thinks that future interest rates will be higher than current interest rates - thinks that future interest rates will be lower than current interest rates - does not know what will happen to future interest rates - thinks that future interest rates will be exactly the same as current interest rates

- thinks that future interest rates will be exactly the same as current interest rates

Armand buys a 10-year, $10,000 bond that pays him $500 every year for 10 years and repays the face value in year 10. During the 10-year period, the rate of inflation holds steady at 3% per year. The real rate of return on Armand's investment is

2%

If the market interest rate exceeds the coupon rate on a bond, the selling price of the bond will be greater than the bonds face value. T/F?

False

Lenders benefit from inflation in the short run. T/F?

False

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

Inflation is a benefit in the short run to - no one - borrowers - lenders - borrowers and lenders

Borrowers

The term monetary aggregates refers to things like - M1 and M2 - interest rates - The price of money - the consumer price index

M1 and M2

Which of these most accurately defines possible effects of fluctuating interest rates in the financial markets? - inflation - prices and levels of employment - the rate of saving - risk levels

Prices and levels of employment

You are having a conversation with your friend Jasmine about the inverted yield curve that currently exists in the bond market. She explains this by saying that the inverted yield curve is because the Federal Reserve is implementing a contraction arm monetary policy, which usually impacts on the short-term bond market. Her observation means that she is a proponent of the _ theory of interest rates. - term premium - default premium - pure expectations - segmented market

Pure expectations?????

Harper just got a big raise at work, which pushed her from the 15% federal marginal tax bracket to the 25% marginal tax bracket. Which of the following best describes how this might affect her decision to buy municipal bonds? - this will make her more likely to buy municipal bonds rather than corporate bonds because she is wealthier - This will make her more likely to buy municipal bonds because it will increase the difference between the nominal interest rate paid on the bonds and the after-tax interest rate she will receive relative to corporate bonds. - this will make her less likely to buy municipal bonds rather than corporate bonds because the increase in taxes will reduce her wealth - this will make her neither more nor less likely to buy municipal bonds rather than corporate bonds

This will make her more likely to buy municipal bonds because it will increase the difference between the nominal interest rate paid on the bonds and the after-tax interest rate she will receive relative to corporate bonds.

A yield curve illustrates the relationship between the - default risk associated with bonds of a given maturity and the interest rate they pay, at a particular point of time. - term to maturity of bonds and the interest rate they pay, at a particular point of time. - marginal tax rate and the after-tax interest rate of return on taxable bonds. - rate of inflation and the real rate of return on bonds

term to maturity of bonds and the interest rate they pay, at a particular point of time.