HW1
1. Financial markets have the basic function of 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
10. The present value of an expected future payment ________ as the interest rate increases. A) falls B) rises C) is constant D) is unaffected
A
11. An increase in the time to the promised future payment ________ the present value of the payment. A) decreases B) increases C) has no effect on D) is irrelevant to
A
12. A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond.
A
15. The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's A) coupon rate. B) maturity rate. C) face value rate. D) payment rate.
A
16. An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of A) 5 percent. B) 8 percent. C) 10 percent. D) 40 percent.
A
18. Which of the following are TRUE concerning the distinction between interest rates and returns? A) The rate of return on a bond will not necessarily equal the interest rate on that bond. B) The return can be expressed as the difference between the current yield and the rate of capital gains. C) The rate of return will be greater than the interest rate when the price of the bond falls during the holding period. D) The return can be expressed as the sum of the discount yield and the rate of capital gains.
A
7. Adverse selection is a problem associated with equity and debt contracts arising from A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. B) the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults. C) the borrower's lack of incentive to seek a loan for highly risky investments. D) the borrower's lack of good options for obtaining funds.
A
9. The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today. A) present value B) future value C) interest D) deflation
A
13. Which of the following are TRUE of fixed payment loans? A) The borrower repays both the principal and interest at the maturity date. B) Installment loans and mortgages are frequently of the fixed payment type. C) The borrower pays interest periodically and the principal at the maturity date. D) Commercial loans to businesses are often of this type.
B
20. The ________ interest rate more accurately reflects the true cost of borrowing. A) nominal B) real C) discount D) market
B
5. The concept of diversification is captured by the statement A) don't look a gift horse in the mouth. B) don't put all your eggs in one basket. C) it never rains, but it pours. D) make hay while the sun shines.
B
8. An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families. A) adverse selection B) moral hazard C) risk sharing D) credit risk
B
14. 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.
C
6. Typically, borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project. The difference in information is called A) moral selection. B) risk sharing. C) asymmetric information. D) adverse hazard.
C
17. A bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond.
D
19. What is the return on a 5 percent coupon 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
2. Which of the following can be described as involving indirect finance? A) You make a loan to your neighbor. B) A corporation buys a share of common stock issued by another corporation in the primary market. C) You buy a U.S. Treasury bill from the U.S. Treasury at TreasuryDirect.gov. D) You make a deposit at a bank.
D
3. With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets. A) active B) determined C) indirect D) direct
D
4. 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