Exam 1 Financial Markets

Which of the following is an example of a financial institution? Multiple choice question. a. The Federal Reserve System b. Banks c. The New York Stock Exchange d. Mortgages

b. Banks

When the price of a bond rises, its yield ______. Therefore, when a bond's price is lower than its face value, its yield to maturity must be ______ its coupon rate. Multiple choice question. rises; above falls; below falls; above rises; below

falls; above

Which of the following can be considered part of the interest rate? Multiple select question. Compensation for risk The real interest rate Actual inflation Expected inflation

Compensation for risk The real interest rate Expected inflation

The time to bond maturity is called the _____. Multiple choice question. current yield expected value investment horizon yield to maturity

investment horizon

All else equal, when the demand for a bond increases Multiple choice question. both its price and its yield fall. its price falls and its yield rises. both its price and its yield rise. its price rises and its yield falls.

its price rises and its yield falls.

Suppose you are borrowing $2,500,000 over 30 years at 4%. Determine the annual payment amount. Multiple choice question. $100,000 $144,575.25 $83,333.33 $10,629.25

$144,575.25

Select all that apply Indicate which of the following financial instruments are used primarily to transfer risk. Multiple select question. -Stocks -Asset-backed securities - Swaps -Home mortgages -Futures contracts -Options

- Swaps -Futures contracts -Options

Select all that apply Examples of standardized financial instruments include ________. Multiple select question. - verbal agreements between buyers and sellers - trip-specific insurance contracts - mortgage applications - auto insurance contracts

- mortgage applications - auto insurance contracts

Select all that apply In general, a well-run financial market is characterized by which of the following? Multiple select question. -Accurate and available information -above-average rate of return -Low taxable assets -Low transaction costs -Investor protection

-Accurate and available information -Low transaction costs -Investor protection

Select all that apply Indicate which of the following financial instruments are used primarily as stores of value. Multiple select question. -Options -Asset-backed securities -Home mortgages -Swaps -Futures contracts -Stocks

-Asset-backed securities -Home mortgages -Stocks

Select all that apply Which of the following are considered the major financial institutions? Multiple select question. -The central bank -Insurance companies -The FOMC -Depository institutions -Pension funds -Securities firms

-Insurance companies -Depository institutions -Pension funds -Securities firms

Which of the following refer to present value? Multiple select question. -It is sometimes called present discounted value. -It is the value today of a payment that is promised in the future. -It is that value in the future of a payment made today. -It is an integral component of the computation of the price of all financial instruments.

-It is sometimes called present discounted value. -It is the value today of a payment that is promised in the future. -It is an integral component of the computation of the price of all financial instruments.

Select all that apply Identify characteristics that make a financial instrument relatively more valuable. Multiple select question. -Payments that are made when we need them most -A relatively larger promised payment -A payment that is made sooner rather than later -Payments that are made when we need them least -A payment that is more likely to be made

-Payments that are made when we need them most -A relatively larger promised payment -A payment that is made sooner rather than later -A payment that is more likely to be made

Select all that apply Identify the financial instruments that are used primarily as a store of value. Multiple select question. -Stocks -Futures -Home loans -Options -Swaps -Bonds

-Stocks -Home loans -Bonds

Select all that apply In terms of fixed payments, Multiple select question. -the longer the payments go on, the higher their value. -the higher the interest rate, the lower the present value. -the shorter the duration of the payments, the higher their value. -the longer the payments go on, the lower their value.

-the longer the payments go on, the higher their value. -the higher the interest rate, the lower the present value.

Which of the following happens when inflation is expected to increase in an economy? Multiple choice question. The supply curve for bonds shifts leftward and the price of bonds falls. The supply curve for bonds shifts rightward and the price of bonds rises. The supply curve for bonds shifts leftward and the price of bonds rises. The supply curve for bonds shifts rightward and the price of bonds falls.

...

Which of the following can definitely not cause a curve to shift in the market for a bond? Multiple choice question. A change in government borrowing A change in the price of the bond A change in that bond's perceived risk as compared to other bonds A change in overall business conditions

A change in the price of the bond

ou prefer a fixed salary with the potential for raises to a variable salary that could include salary decreases. Under which Core Principle would this scenario fall? Multiple choice question. Core Principle 1 Core Principle 2 Core Principle 3 Core Principle 4 Core Principle 5

Core Principle 5

Select all that apply Future value can be given by Multiple select question. -FV = PV - PV x i -FV = PV x (1 + i) -FV = PV + PV x i -FV = PV + PV + i

FV = PV x (1 + i) -FV = PV + PV x i

A bondholder's investment horizon may be shorter than the time to maturity of the bond. This leads to which of the following kinds of risk? Multiple choice question. Default risk Interest-rate risk Inflation risk Systemic risk

Interest-rate risk

Which of the following is not a way securitization uses the efficiency of markets to lower the cost of borrowing? Multiple choice question. Making markets broader Removing systemic risk Allowing for risk diversification Increasing the liquidity of assets

Removing systemic risk

Which of the following is true about financial instruments? a. They require payment to be made immediately. b. They allow one party to transfer something of value to another, but they do not obligate that party to make the transfer. c. They are usually oral contracts as opposed to being written. d. They are legally enforceable.

They are legally enforceable.

Suppose you are borrowing $1,000,000 over 30 years at 3%. Determine the monthly payment amount. Multiple choice question. a. $4,216.04 b. $3,000.00 c. $2,777.78 d. $52,465.90

a. $4,216.04

Consider a one-year Treasury bill that pays $500 at maturity and interest in the amount of 4%. Which of the following would be its price rounded to the nearest penny? Multiple choice question. a. $480.77 b. $520 c. $540.80 d. $480.00

a. $480.77 calculated by dividing its face value by (1 + the interest rate): $500/(1 + 0.04) = $480.7

A promise to make a series of payments on specific dates in the future is called _____. Multiple choice question. a. a bond b. a stock c. a security d. present value

a. a bond

Good financial investors hold a diversified portfolio of securities (stocks and bonds) and various types of money. Financial markets assist them by Multiple choice question. a. allowing for risk sharing. b. regulating and supervising banks. c. keeping interest rates low. d. keeping inflation at a reasonable level.

a. allowing for risk sharing.

An example of a financial instrument that ensures payments are made under specific conditions is ________. Multiple choice question. a. an insurance contract b. a futures contract c. an option d. a default swap

a. an insurance contract

An options contract is an example of a(n) ______ instrument. Multiple choice question. a. derivative b. primitive c. underlying d. secondary

a. derivative

An asset that is generally accepted as payment for goods and services is called _____. Multiple choice question. a. money b. income c. wealth d. credit

a. money

The nominal interest rate is generally _________; the real interest rate is generally _________. Multiple choice question. a. observed; estimated b. estimated; observed c. estimated; estimated d. observed; observed

a. observed; estimated

The European Central bank and the U.S. Federal Reserve bank Multiple choice question. a. strive for transparency in their actions. b. are generally less important than other central banks. c. have been in existence since 1694. d. are both designed to conceal their actions in the interest of national security.

a. strive for transparency in their actions.

The interest rate that equates the present value of an investment with its cost is called ______. Multiple choice question. a. the internal rate of return b. compound rate of return c. the present rate of return d. the future value

a. the internal rate of return

In your car loan contract, the interest rate is listed as 7%. Inflation is expected to be 3% throughout the duration of the loan. Which of the following is therefore true? Multiple choice question. a. the nominal interest rate is 7%. b. The real interest rate is 7%. c. The real interest rate is 10%. d. The nominal interest rate is 4%.

a. the nominal interest rate is 7%.

We can value a coupon bond using Multiple choice question. a. the present value formula. b. the expected value formula. c. amortization. d. consols and perpetuities.

a. the present value formula.

The internal rate of return can be defined as the interest rate that equates Multiple choice question. a. the present value of an investment with its cost. b. interest paid with interest received on a loan. c. the cost of an investment with its future value. d. interest paid on a government bond with interest paid on a corporate bond.

a. the present value of an investment with its cost.

Size of the future payment, the time until the payment is made, and the interest rate are all properties of Multiple choice question. a. the present value. b. the past value. c. future value. d. compound interest.

a. the present value.

An inflation-adjusted interest rate is called ______. Multiple choice question. a. the real interest rate b. the nominal interest rate c. internal rate of interest d. the present value interest rate

a. the real interest rate

Current yield has ______ relationship with bond price; when the bond price rises, current yield ______. Multiple choice question. a direct (positive); falls an inverse; rises a direct (positive); rises an inverse; falls

an inverse; falls

A one-year Treasury bill with a face value of $100 sells for $95.24. The interest paid in this case is equal to $ _____ and the rate of interest in percentage terms is equal to _____. Multiple choice question. a. $95.24; 95.24% b. $4.76; 5% c. $95.24; 100% d. $5; 5.2%

b. $4.76; 5%

Consider a consol (perpetuity) that promises to pay $20 per year forever at an interest rate of 5%. What would the price of the consol be? Multiple choice question. a. $4,000 b. $400 c. $4 d. $40

b. $400 divide that yearly coupon payment by the interest rate in decimal form: here $20/0.05 = $400.

Which of the following is not an example of a financial instrument? Multiple choice question. a. An insurance policy b. A credit union c. A share of stock d. A car loan

b. A credit union

Your student loan contract states that you will pay 4% interest for the 10-year duration of the loan, over which inflation is expected to be 1%. Given this information, which of the following is true? Multiple choice question. a. The nominal interest rate is 3%. b. The real interest rate is 3%. c. The real interest rate is 5%. d. The nominal interest rate is 5%.

b. The real interest rate is 3%.

Which of the following determines whether debt is traded in money markets versus bond markets? Multiple choice question. a. Whether the debt is issued by firms or the government b. The time until the debt is fully repaid c. The amount of risk the debt carries. d. Whether the debt is a stock or a bond

b. The time until the debt is fully repaid

What is the yield to maturity? Multiple choice question. a. The amount owed on consols and perpetuities held until maturity b. The yield bondholders receive if they hold the bond until maturity c. The amount owed by bondholders if they liquidate a bond prior to maturity d. The amount paid on consols and perpetuities held until maturity

b. The yield bondholders receive if they hold the bond until maturity

Which of the following does not correctly describe financial instruments? Multiple choice question. a. A share of stock sold to one person is the same as a share sold to another. b. They are written in specialized language that varies from contract to contract. c. They assist with asymmetric information problems. d. They help buyers and sellers of financial instruments avoid the costs of complexity.

b. They are written in specialized language that varies from contract to contract.

A collection of dealers trading securities via computer is referred to as ______. Multiple choice question. a. an electronic communication network b. an over-the-counter market c. a centralized market

b. an over-the-counter market

The Fisher equation implies that, all else equal, higher expected inflation is Multiple choice question. a. generally unrelated to nominal and real interest rates. b. generally associated with higher nominal interest rates. c. generally associated with higher real interest rates. d. generally associated with lower nominal interest rates

b. generally associated with higher nominal interest rates.

All else equal, the price of a one-year Treasury bill will be ______ than that of a six-month Treasury bill; in other words. the ______ the time to maturity, the more we are willing to pay. Multiple choice question. a. lower; longer b. lower; shorter c. higher; shorter d. higher; longer

b. lower; shorter

The future value of a financial investment ________ as its time to maturity increases due to _______. Multiple choice question. a. falls; compound interest b. rises; compound interest c. rises; inflation d. falls; inflation

b. rises; compound interest

Research related to the Fisher equation indicates that higher nominal interest rates are _________ associated with ______ inflation rates. Multiple choice question. a. closely; higher b. somewhat; higher c. closely; lower d. somewhat; lower

b. somewhat; higher

Real-world evidence related to the Fisher equation is generally Multiple choice question. a. not supportive of its claim that higher inflation rates are related to lower nominal interest rates. b. supportive of its claim that higher inflation rates are related to higher nominal interest rates. c. supportive of its claim that higher inflation rates are related to lower nominal interest rates. d. not supportive of its claim that higher inflation rates are related to higher nominal interest rates.

b. supportive of its claim that higher inflation rates are related to higher nominal interest rates.

Current yield measures Multiple choice question. a. the amount a borrower pays for borrowing, including fees paid to brokers or dealers. b. the proceeds a bondholder receives for lending. c. the difference between the yearly coupon payment on a bond and its price. d. the amount of risk on a corporate bond.

b. the proceeds a bondholder receives for lending.

An inflation-adjusted interest rate is called ______. Multiple choice question. a. the nominal interest rate b. the real interest rate c. the present value interest rate d. internal rate of interest

b. the real interest rate

Holding period return is calculated when a bond is sold ____ maturity. Multiple choice question. after at before

before

Suppose you are borrowing $1,000,000 over 30 years at 3%. Determine the monthly payment amount. Multiple choice question. a. $52,465.90 b. $3,000.00 c. $4,216.04 d. $2,777.78

c. $4,216.04

Which of the following is true about coupon bonds? Multiple choice question. a. A coupon bond's coupon payment refers to the coupon bond's value at maturity. b. A coupon bond's maturity date is the date on which the coupon bond is purchased. c. Coupon bonds are the most common type of bond. d. Coupon bonds pay interest all at once, at maturity, in terms of the difference between the price paid and the price for which the bond is redeemed.

c. Coupon bonds are the most common type of bond.

Which of the following statements is true about fixed-payment loans? Multiple choice question. a. The same dollar amount of each payment on a fixed-payment loan goes toward interest. b. Credit cards are a common type of fixed-payment loan. c. Each payment on a fixed-payment loan pays off some principal and some interest. d. The same dollar amount of each payment on a fixed-payment loan goes toward its principal.

c. Each payment on a fixed-payment loan pays off some principal and some interest.

Which of the following types of financial market was developed most recently? Multiple choice question. a. Over-the-counter markets b. Centralized exchanges c. Electronic communication networks

c. Electronic communication networks

Your student loan contract states that you will pay 4% interest for the 10-year duration of the loan, over which inflation is expected to be 1%. Given this information, which of the following is true? Multiple choice question. a. The nominal interest rate is 3%. b. The nominal interest rate is 5%. c. The real interest rate is 3%. d. The real interest rate is 5%.

c. The real interest rate is 3%

Which of the following is not true about zero-coupon bonds? Multiple choice question. a. One example of a zero-coupon bond is a US Treasury bill. b. They are also called pure discount bonds. c. They pay regular interest payments. d. They are redeemed for a face value higher than the price originally paid.

c. They pay regular interest payments.

To calculate the one-year holding period return, Multiple choice question. a.add the current yield to the capital gain. b. divide the capital gain by the current yield. c. add the price paid to the change in price. d. multiply the price paid by the coupon rate.

c. add the price paid to the change in price.

Futures, options, and swaps are examples of ________. Multiple choice question. a. underlying instruments b. primer instruments c. derivative instruments d. standardized instruments

c. derivative instruments

When a standardized financial instrument summarizes essential details about the issuer, the information communicated is designed to Multiple choice question. a. intensify the expensive and time-consuming process of collecting detailed information. b. bury critical information deep into the details of the contract. c. eliminate the expensive and time-consuming process of collecting detailed information. d. add value to the financial instrument by forcing the buyer to monitor the issuer.

c. eliminate the expensive and time-consuming process of collecting detailed information.

tocks are traded in ______ markets. Multiple choice question. a. money b. bond c. equity d. debt

c. equity

The real interest rate is general given by Multiple choice question. a. nominal interest rate minus actual inflation. b. nominal interest rate plus expected inflation. c. nominal interest rate minus expected inflation. d. nominal interest rate plus actual inflation.

c. nominal interest rate minus expected inflation.

In the equation for the price of a coupon bond, to the right of the equal sign, there are two parts. The first part represents ______, while the part on the far right represents ______. Multiple choice question. a. the risk-free interest rate; the risk premium b. the risk premium; the risk-free interest rate c. the interest; the value of the promise to repay the principal at maturity d. the value of the promise to repay the principal at maturity; the rate of inflation

c. the interest; the value of the promise to repay the principal at maturity

An interest rate that is expressed in current-dollar terms is called ______. Multiple choice question. a. the present value interest rate b. internal rate of interest c. the nominal interest rate d. the real interest rate

c. the nominal interest rate

The present value of three consecutive, yearly, $50 payments made at 5% interest is _____. Multiple choice question. a. $92.97 b. $18.33 c. $43.19 d. $136.16

d. $136.16

Consider a one-year 10% coupon bond with a face value of $100 that sells for $95. Rounded to four decimal places, the bond's current yield equals ______. Multiple choice question. a. 0.1000 b . 0.0526 c. 0.0500 d. 0.1053

d. 0.1053 the current yield equals the coupon payment (10% of the face value of $100 = $10) divided by the selling price of $95: $10/$95 = 0.1053.

Which of the following would we calculate to determine future value? Multiple choice question. a. How much our expected yearly income after college is worth today b. How much an expected future payment is worth today c. How much a given amount of money today can buy in the future, given inflation d. How much a financial investment made today will be worth later

d. How much a financial investment made today will be worth later

Which of the following is true about consols (perpetuities)? Multiple choice question. a. They are only issued privately, never by the government. b. They are also known as zeros or zero-coupon bonds. c. The price of a consol is the present value of all future principal payments. d. The borrower pays only interest, not the principal.

d. The borrower pays only interest, not the principal.

Which of the following is true about the real interest rate and the nominal interest rate? Multiple choice question. a. Neither the real interest rate nor the nominal interest rate are adjusted for inflation. b. The nominal interest rate is adjusted for inflation, while the real interest rate is not. c. Both the real interest rate and the nominal interest rate are adjusted for inflation. d. The real interest rate is adjusted for inflation, while the nominal interest rate is not.

d. The real interest rate is adjusted for inflation, while the nominal interest rate is not.

Why are governments the only borrowers of perpetuities or consols? Multiple choice question. a. Consols and perpetuities are only traded between governments. b. No other borrower would ever seek a consol. c. The statement is false. Many home loans are consols. d. They are the only borrowers that can credibly promise to make payments forever.

d. They are the only borrowers that can credibly promise to make payments forever.

The double coincidence of wants is a problem associated with _______. Multiple choice question. a. communism b. market economies c. capitalism d. a barter system

d. a barter system

An institution that gives households and corporations access to direct finance is called ________. Multiple choice question. a. the stock market b. a bank c. the central bank d. a brokerage

d. a brokerage

The market for loans, mortgages, and bonds is called ________. Multiple choice question. a. an equity market b. a money market c. the stock market d. a debt market

d. a debt market

The two fundamental classes of financial instruments are _____. a. primary instruments and derivative instruments b. stocks and bonds c. primary instruments and secondary instruments incorrect d. derivative instruments and underlying instruments

d. derivative instruments and underlying instruments

The value of a coupon bond varies _____ with the value of its yearly coupon payments and _______ with the interest rate paid on it. Multiple choice question. a. inversely; inversely b. directly; directly c. inversely; directly d. directly; inversely

d. directly; inversely

When the price of a bond rises, its yield ______. Therefore, when a bond's price is lower than its face value, its yield to maturity must be ______ its coupon rate. Multiple choice question. a. rises; above b. falls; below c. rises; below d. falls; above

d. falls; above

A debt instrument that is completely repaid in less than a year are traded in ________. Multiple choice question. a. stock markets b. debt markets c. equity markets d. money markets

d. money markets

After figuring out the amount of money you'll need to retire comfortably, you calculate the amount you'll need to invest now to have that amount when you retire in twenty years. To do so, you should calculate ______. Multiple choice question. a. compound interest b. future value c. opportunity cost d. present value

d. present value

You own a factory that produces clothing and are wondering whether you should borrow to purchase a new machine that processes textiles. To make your decision. you should set the present value of the revenues generated by the machine equal to _______. Multiple choice question. a. the interest payments you will make on the loan b. the payments you could receive by buying bonds with your money instead c. the future value of the revenues generated with your current machinery incorrect d. the cost of the machine

d. the cost of the machine

On the maturity date of a coupon bond, the bond issuer will pay Multiple choice question. a. the first coupon payment on the bond. b. the value of the bond plus all coupon payments. c. the value of the bond less any coupon payments. d. the face value of the bond.

d. the face value of the bond.

An interest rate that is expressed in current-dollar terms is called ______. Multiple choice question. a. internal rate of interest b. the present value interest rate c. the real interest rate d. the nominal interest rate

d. the nominal interest rate

An asset-backed security is used primarily Multiple choice question. a. to standardize value. b. as a unit of account. c. to transfer risk. d. to store value.

d. to store value.

Select all that apply Central banks Multiple select question. operate in much the same way they always have. were numerous and prolific in 1900. have changed a great deal since the 17th century. were established, originally, to finance wars.

have changed a great deal since the 17th century. were established, originally, to finance wars.

There is some evidence that increased inflation is associated with ______ nominal interest rates, particularly in nations where inflation is especially _________. Multiple choice question. higher; unstable higher; stable lower; unstable lower; stable

higher; unstable

The Fisher equation is given by ______. Multiple choice question. i = r + π^e i = r - π^e i = r x π^e i = r/π^e

i = r + π^e

Even if bond payments are made, increases in overall prices may reduce those payments' real value. This is referred to as ______. Multiple choice question. inflation risk default risk interest-rate risk idiosyncratic risk

inflation risk

As a bond is perceived to provide a higher return, or to be more liquid or less risky than other bonds, Multiple choice question. its price will rise and its yield will fall. its price will fall and its yield will rise. both its price and its yield will fall. both its price and its yield will rise.

its price will rise and its yield will fall.

Consider a coupon bond with a face value of $500. If its price is currently $525, then Multiple choice question. its yield to maturity must be above its coupon rate, because price and yield have a direct (positive) relationship. its yield to maturity must be above its coupon rate, because price and yield have an inverse relationship. its yield to maturity must be below its coupon rate, because price and yield have a direct (positive) relationship. its yield to maturity must be below its coupon rate, because price and yield have an inverse relationship.

its yield to maturity must be below its coupon rate, because price and yield have an inverse relationship.

Risk tends to Multiple select question. reduces the yield received by investors. raises the yield received by investors. reduce the expected value of a given promise. lower the price an investor is willing to pay.

raises the yield received by investors. lower the price an investor is willing to pay.

When financial institutions pool assets that generate payment streams and turn them into tradeable bonds, this is called ______. Multiple choice question. insurance securitization spreading risk hedging

securitization

An increase in expected inflation, Multiple select question. -shifts bond supply to the left. -shifts bond demand to the right. -shifts bond demand to the left. -shifts bond supply to the right.

shifts bond demand to the left. shifts bond supply to the right.

When the government wants to spend more relative to the taxes it brings in, Multiple choice question. the price of bonds falls and their yield rises. both the price of bonds and their yield fall. both the price of bonds and their yield rise. the price of bonds rises and their yield falls.

the price of bonds falls and their yield rises.

When general business conditions decline, Multiple choice question. both the price of bonds and their yield fall. both the price of bonds and their yield rise. the price of bonds increases and their yield falls. the price of bonds decreases and their yield rises.

the price of bonds increases and their yield falls.

The investment horizon describes the Multiple choice question. current yield. expected value. return on yield to maturity. time to a bond's maturity.

time to a bond's maturity.

The investment horizon describes the Multiple choice question. expected value. return on yield to maturity. time to a bond's maturity. current yield.

time to a bond's maturity.

The most useful measure of the return on holding a bond is _____, which can be defined as the interest rate that _____. Multiple choice question. yield to maturity; bondholders receive if they hold the bond until the final principal payment is made the coupon rate; bondholders receive if they sell the bond for exactly the price they paid for it yield to maturity; bondholders receive if they sell the bond for exactly the price they paid for it the coupon rate; bondholders receive if they hold the bond until the final principal payment is made

yield to maturity; bondholders receive if they hold the bond until the final principal payment is made