finance 218

If a $10,000 face value discount bond maturing in one year is selling for $9,000, then its yield to maturity is approximately

11%

Between 1950 and 2016, Treasury Bill rates peaked near

1981

Higher expected interest rates in the future lower the expected return for long-term bonds, decrease the demand, and shift the demand curve to the left. True False

True

If the security markets are truly efficient, there is no need to pay for help selecting securities. True False

True

Technical analysts look at historical prices for information to project future prices. True False

True

The risk structure of interest rates describes the relationship between the interest rates of different bonds with the same maturities. True False

True

When an economy grows out of a recession, normally the demand for bonds increases and the supply of bonds increases. True False

True

Adverse selection is a problem associated with equity and debt contracts arising from

the lender's relative lack of information about the borrower's potential returns and risks of his investment activities.

A bond with default risk will always have a positive risk premium, and an increase in its default risk will raise its risk premium.

true

Corporations that issue new securities to raise capital now conduct more of this business in financial markets in Europe and Asia than in the U.S.

true

During the budget negotiations in Congress in 1995-1996, and then again in 2011-2013, the Republicans threatened to let Treasury bonds default, and this had an impact on the bond market. true false

true

In the U.S., financial intermediaries are restricted in what they are allowed to do and what assets they can hold.

true

Technical analysis is a popular technique used to predict stock prices by studying past stock price data and searching for patterns such as trends and regular cycles. True False

true

The spread between interest rates on low-quality corporate bonds and U.S. government bonds ________ during the Great Depression.

widened significantly

Items that have a direct impact on future income streams of the securities are also known as A. rational expectations. B. momentum effects. C. market fundamentals. D. current market trends.

c. market fundamentals

Bonds that are sold in a foreign country and are denominated in that country's currency are known as

foreign bonds

The price of one country's currency in terms of another's is called

foreign exchange rate

Typically, yield curves are

gently upward sloping

An important financial institution that assists in the initial sale of securities in the primary market is the

investment bank

a security

is a claim on the issuers future income

Dollars received in the future are worth ________ than dollars received today. The process of calculating what dollars received in the future are worth today is called ________.

less, discounting

Which of the following is a contractual savings institution?

life insurance

Figure 4.5 illustrates the effect of an increased rate of money supply growth. From the figure, one can conclude that the A. Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation. B. liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation. C. liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation. D. Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.

A. Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation

In Figure 4.3, an increase in the interest rate from i2 to i1 can be explained by A. a decrease in money growth. B. an increase in money growth. C. a decline in the price level. D. an increase in the expected price level.

A. a decrease in money growth

Holding everything else constant, an increase in the money supply causes A. interest rates to decline initially. B. interest rates to increase initially. C. bond prices to decline initially. D. both interest rates to decline initially and bond prices to decline initially. E. both interest rates to increase initially and bond prices to decline initially.

A. interest rates to decline inititally

When a market bubble occurs, A. prices of assets rise well above their fundamental values. B. a "thin layer" of trading masks true market movements. C. market fundamentals and actual security prices converge. D. prices of assets fluctuate rapidly above and below market fundamentals.

A. prices of assets rise well above their fundamental values.

In the good old days, when you took cash out of the bank or wanted to check your account balance, you got to say hello to a friendly human. Nowadays, you are more likely to interact with a(n) ________ when withdrawing cash.

ATM

Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is A. clearly inconsistent with the efficient market hypothesis. B. consistent with the efficient market hypothesis if the earnings were not as high as anticipated. C. consistent with the efficient market hypothesis if the earnings were not as low as anticipated. D. the result of none of these.

B. consistent with the efficient market hypothesis if the earnings were not as high as anticipated

Another way to state the efficient market hypothesis is that in an efficient market, A. unexploited profit opportunities will never exist as market participants, such as arbitrageurs, ensure that they are instantaneously dissipated. B. unexploited profit opportunities will not exist for long, as market participants will act quickly to eliminate them. C. every financial market participant must be well informed about securities. D. only unexploited profit opportunities will never exist as market participants, such as arbitrageurs, ensure that they are instantaneously dissipated and every financial market participant must be well informed about securities.

B. unexploited profit opportunities will not exist for long, as market participants will act quickly to eliminate them.

was the stock market's worst one-day drop in history in the 1980s.

Black Monday

(I) An increase in default risk on corporate bonds shifts the demand curve for corporate bonds to the left. (II) An increase in default risk on corporate bonds shifts the demand curve for Treasury bonds to the right. A. (I) is true, (II) false. B. (I) is false, (II) true. C. Both are true. D. Both are false.

C. both are true

Tests used to rate the performance of rules developed in technical analysis conclude that A. technical analysis outperforms the overall market. B. technical analysis far outperforms the overall market, suggesting that stockbrokers provide valuable services. C. technical analysis does not outperform the overall market. D. technical analysis does not outperform the overall market, suggesting that stockbrokers do not provide services of any value.

C. technical analysis far outperforms the overall market, suggesting that stockbrokers provide valuable services

Important implications of the efficient market hypothesis include which of the following? A. Future changes in stock prices should, for all practical purposes, be unpredictable. B. Stock prices will respond to announcements only when the information in these announcements is new. C. Sometimes a stock price declines when good news is announced. D. All of these. E. Only Future changes in stock prices should, for all practical purposes, be unpredictable and Stock prices will respond to announcements only when the information in these announcements is new.

D. all of these

The liquidity premium theory of the term structure A. assumes investors tend to prefer short-term bonds because they have less interest-rate risk. B. assumes that interest rates on the long-term bond respond to demand and supply conditions for that bond. C. assumes that an average of expected short-term rates is an important component of interest rates on long-term bonds. D. assumes all of these. E. assumes none of these.

D. assumes all of these

When the demand for bonds ________ or the supply of bonds ________, bond prices fall. A. increases; increases B. increases; decreases C. decreases; decreases D. decreases; increases

D. decreases; increases

According to the efficient market hypothesis A. one cannot expect to earn an abnormally high return by purchasing a security. B. information in newspapers and in the published reports of financial analysts is already reflected in market prices. C. unexploited profit opportunities abound, thereby explaining why so many people get rich by trading securities. D. All of these are true. E. only one cannot expect to earn an abnormally high return by purchasing a security and information in newspapers and in the published reports of financial analysts is already reflected in market prices are true.

E. only one cannot expect to earn an abnormally high return by purchasing a security and information in newspapers and in the published reports of financial analysts is already reflected in market prices are true.

A person who is risk averse prefers to hold assets that are more, not less, risky. True False

False

In which of the following situations would you prefer to be making a loan?

The interest rate is 4 percent and the expected inflation rate is 1 percent.

The country whose banks are the most restricted in the range of assets they may hold is

USA

reinvestment risk is the risk that

a bond's future coupon payments may have to be invested at a rate lower than the bond's yield to maturity

As shown in the text, the yield curve in May of 2016 was A. upward-sloping. B. downward-sloping. C. flat. D. bowl shaped. E. mound shaped.

a. upward-sloping

When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, ________ is said to exist.

adverse selection

Which of the following are securities?

all of these

Determining asset prices using stocks of assets rather than flow is called

asset market approach

The liquidity premium theory of the term structure

assumes all of these

The major differences between financial regulation in the United States and abroad relate to bank regulation. Specifically, in the past, the U.S. was the only industrialized country to subject banks to restrictions on

branching

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

below, supply, rise

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

decline sharply in the future

As expected inflation falls for the coming year, we expected the price of gold to ________ due to a leftward shift the in ________ curve.

decrease, demand

Financial intermediaries

do all of these

financial markets and institutions

do all of these

A pension fund is not a contractual savings institution.

false

A corporation acquires new funds only when its securities are sold in the

primary market by an investment bank

If an investor's holding period is longer than the term to maturity of a bond, he or she is exposed to

reinvestment risk

If municipal bonds were to lose their tax-free status, then the demand for Treasury bonds would shift ________, and the interest rate on Treasury bonds would ________.

right, fall