Economic 3303

What is the price of coupon bond that has annual payments of $75a par value of $1,000 yield to maturity of 5\% and a maturity of two years?

1046.49

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?

25

If a $1000 face value coupon bond has a coupon rate of 3.75 percent then the coupon payment every year is

37.50

If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the interest rate is

5

If one-year securities are yielding 5 percent, but the market anticipates that rates for one-year securities will rise to 7 percent, the according to the expectations theory, current two-year securities should be yielding

6

If the expected path of one-year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's interest rate on the five-year bond is

6

If you deposit $500 in a savings account at an annual interest rate of 5%, how much will you have in the account at the end of five years?

638

A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of

8 %

With an interest rate of 6 percent, the present value of $ 100 next year is approximately

94

Which of the following bonds would you prefer to be buying?

A $10,000 face-value security with a 10 percent coupon selling for $9,000

Which of the following long-term bonds has the highest interest rate?

Corporate Baa bonds

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

Coupon bond

When the government has a surplus, as occurred in the late 1990s, the ________ curve of bonds shifts to the ________, everything else held constant.

Supply; left

Using the Gordon growth formula, if D1 is $1.00, ke is 10 percent or 0.10, and g is 5 percent or 0.05, then the currentstock price is ________.

The Gordon growth model formula is as follows: P = D1 /(Ke -g) , Where P = current stock price D1 = Expected dividend next year Ke = rate of return of the company g = growth rate expected for dividends P = $1.00 / (0.10 - 0.05) = 1 / 0.05 = 20

Which of the following is NOT true of a fixed payment loan?

The borrower is left with a substantial unpaid principal at the maturity of the loan.

Which of the following is TRUE of the segmented markets theory?

assumes that borrowers have particular periods for which they want to borrow .

In the liquidity preference framework, a one-time increase in the money supply results in a price level effect. The maximum impact of the price level effect on interest rates occurs:

at the moment the price level hits its peak (stops rising) because both the price level and expected inflation effects are at work.

A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid.

coupon bond; face

If the price of gold becomes less volatile, then, other things equal, the demand for stocks will ________ and the demand for antiques will ________.

decrease; decrease

A decrease in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities, everything else held constant.

decrease; increase

risk premiums on corporate bonds tend to _______ during business cycle expansions and _______- during recessions

decrease; increase

A decline in the expected inflation rate causes the demand for money to ________ and thedemand curve to shift to the ________, everything else held constant.

decrease; left

Falling stock prices ________ the funds that firms can raise, which ________ their spending on physical capital.

decreases; decreases

If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks ________ and the demand for long-term bonds ________.

decreases; increases

Bonds with no default risk are called

default-free bonds

If stock prices are expected to climb next year, everything else held constant, the ________ curve for bonds shifts ________ and the interest rate ________.

demand; left; rises

A bond that is bought a price below its face value and the face value is repaid at a maturity date is called a

discount bond.

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 ________.

negatively; rises; falls

if a mutual fun outperforms the market in one period, evidence suggest s that this fun is

not likely to consistenly outperform the market in subsequent periods

A simple loan involves

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

According to the liquidity premium theory of the term structure, a slightly upward sloping yield curve indicates that short-term interest rates are expected to

remain unchanged in the future.

An investor will generally find that hiring an investment firm to actively manage his or her portfolio will

result in about the same return, but be more expensive than placing money in an index mutual fund.

The mound-shaped yield curve in the figure above indicates that the inflation rate is expected to

rise moderately in the near-term and fall later on.

In asset markets, an asset's price is

set by the buyer willing to pay the highest price

When yield curves are downward sloping

short-term interest rates are above long-term interest rates.

Mean reversion refers to the fact that

stocks that have had low returns in the past are more likely to do well in the future

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

During an economic recession,

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

A discount bond resembles a simple loan in that

the borrower repays in a single payment.

Comparing a discount bond and a coupon bond with the same maturity

the discount bond has the greater effective maturity.

An increase in the corporate profits tax is likely to cause

the equilibrium interest rate to fall and the equilibrium price of bonds to rise.

The yield to maturity is equal to

the interest rate at which the present value of an asset's returns is equal to its price today.

According to the liquidity premium theory of the term structure

the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a liquidity premium.

When the growth rate of the money supply increases, interest rates end up being permanently lower if

the liquidity effect is larger than the other effects.

The fundamental value of a stock equals

the present value of all future dividends

A change in percieved risk of stock changes

the required reate of return

In an effort to increase government revenue, Congress and the president decide to increase the corporate profits tax. The likely result will be

the supply curve for bonds shifts to the left.

Suppose that Congress passes an investment tax credit. The likely result will be

the supply curve for bonds will shift to the right

The major criticism of the view that expectations are formed adaptively is that

this view ignores that people use more informantion than just past data to form their expectations

In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return;thus

when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.

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

yield to maturity

During the financial crisis of 2007 - 09 , the prices of U.S. Treasury securities

Rose and the price of corporate bond declined

When the price of a bond is above the equilibrium price, there is an excess ________ bonds and price will ________.

Supply fall

When interest rates are relatively low, investors generally expect interest rates to __________. Thus, investors prefer to hold __________ securities

Rise, short-term

Increase in interest rates

Decrease the quantity of money

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 ________.

Decrease, left

When the interest rate is above the equilibrium interest rate, there is an excess ____ and the interest rate will ______.

Demand ; fall

In an efficient market with rational expectations, the actual price of an asset

Equal it's expected price plus a random error terms

A phenomenon closely related to market overreaction is

Excessive volatility

The present value of an expected future payment ________ as the interest rate increases.

Fall

The ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation.

Fisher equation

According to pure expectations theory, the yield curve should on average be

Flat

Which of the following statements about junk bonds is FALSE?

Given the likelihood of default, it is never profitable to purchase junk bonds.

The demand for houses decreases, all else equal, when

Gold price are expected to increase

If gold becomes acceptable as a medium of exchange, the demand for gold will _______ and the demand for bonds will ________, everything else held constant.

Increase, decrease

If the federal government decreases its spending and doesn't change taxes, the bond supply shifts to the

Left and the equilibrium interest rates rise

Which of the following financial institutions is likely to have a preferred habitat in long term securities

Life insurance company

Which of the following is NOT a popular stock market index?

Moody's

The global financial crisis lead to a decline in stock prices because

Of low expected dividend growth rate

When talking about a coupon bond, value and a mean the same thing

Par value

According to the pure expectations approach to term structure, investors view securities with different maturities as

Perfect substitute

A bond with default risk will always have a_______risk premium and an increase in its default will ______ the risk premium

Positive, raise

The amount of funds the borrower receives from the lender with a simple loan is called the

Principal

The ________ interest rate more accurately reflects the true cost of borrowing.

Real

In which of the following situations would you prefer to be borrowing?

The interest rate is 25 percent and the expected inflation rate is 50 percent.

When the growth rate of the money supply increases, interest rates end up being permanentlylower if

The liquidity effect is larger than the other effects

Which of the following statements is TRUE? The more liquid the bondthe lower the yield. Tax-free bonds normally have a higher interest rate than other types of bonds. The price of a bond increases as it becomes more risky. The yield curve illustrates the relative default risks of alternative types of bonds.

The more liquid the bondthe lower the yield.

The term structure is usually defined with yields on which securities?

Us treasury securities

The spread between interest rates on low quality corporate bonds and U.S. government bonds

Widened significantly during the Great Depression

If you have a very low tolerance for risk, which of the following bonds would you be least likely to hold in your portfolio?

a corporate bond with a rating of Baa

In the figure above, the decrease in the interest rate from i1 to i2 can be explained by ________.

a decline in the expected price level an increase in money growth

You read a story in the newspaper announcing the proposed merger of Dell computer adn gateway. the merger is expected to greatly increase Gateway's profitability. if you decide to invest in gateway stock yu can expect to earn

a normal return since stock prices adjust to reflect expected changes in profitability amost immediately

When the interest rate on a bond is ________ the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________.

above;demand;fall

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

an increase in expected returns on other assets.

In the figure above, one factor NOT responsible for the decline in the demand for money is

an increase in income.

Bond Ratings

are published by private bond−rating agencies.

Economists have focused more attenton on the formation of expectations in recent years. this increase in interest can probably best be explained by the recognition that

expectations influence the behavior of the participants in the economy and thus have a major impact on economic activity

When Happy Feet Corporation announces that their fourth quarter earnings are up 10%, their stock price falls. This is consistent with the efficient markets hypothesis

if earnings were not as high as expected.

A(n) _______ in the riskiness of corporate bonds will ______ the price of corporate bonds and ______ the yield on corporate bonds, all else equal.

increase; decrease; increase

Higher government deficits ________ the supply of bonds and shift the supply curve to the ________, everything else held constant.

increase; right

The collapse of the subprime mortgage market

increased the Baa-Aaa spread.

An equal decrease in all bond interest rates

increases the price of a ten-year bond more than the price of a five-year bond.

As their relative riskiness ________, the expected return on corporate bonds ________ relative to the expected return on default-free bonds, everything else held constant.

increases; decreases

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

If there is an excess supply of money

individuals buy bonds, causing interest rates to fall.

A coupon bond involves A. periodic payments by the borrower to the lender that include​ principal, but not interest. B. interest and principal payments from the borrower to the lender periodically during the life of the loan. C. interest payments from the borrower to the lender periodically during the life of the loan and payment by the borrower to the lender of the face value of the loan at maturity. D. periodic payments by the borrower to the lender that include both principal and interest.

interest payments from the borrower to the lender periodically during the life of the loan and payment by the borrower to the lender of the face value of the loan at maturity.

For simple loans, the yield to maturity

is always equal to the specified simple interest rate.

In the generalized dividend model, if the expected sales price is in the distant future

it does not affect the current stock price.

The preferred habitat theory of the term structure is closely related to the

liquidity premium theory of the term structure

When a corp announces a major decline in earnings, the stock price may initially decline significantly and then rise back to normal levels over the next few weeks. this impact is called

market overreaction