Macro CHapter 11 questions

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade. Each company's stock currently sells for $100 per share. If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change. If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change. There is a 50 percent chance that it will be colder than average next year, and a 25 percent chance that it will be warmer than average. If you purchase two shares of XYZ stock and no shares of ABC stock, your expected gain will be ________.

$10

ydney purchases a newly issued, two-year government bond with a principal amount of $10,000 and a coupon rate of 6 percent paid annually. One year before the bonds matures (and after receiving the coupon payment for the first year), Sydney sells the bond in the bond market. What price (rounded to the nearest dollar) will Sydney receive for his bond if newly issued one-year government bonds are paying a 5 percent coupon rate?

$10,095

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade. Each company's stock currently sells for $100 per share. If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change. If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change. There is a 50 percent chance that it will be colder than average next year, and a 25 percent chance that it will be warmer than average. If you purchase one share of ABC stock and one share of XYZ stock, your expected gain will be ________.

$15

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade. Each company's stock currently sells for $100 per share. If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change. If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change. There is a 50 percent chance that it will be colder than average next year, and a 25 percent chance that it will be warmer than average. If you purchase two shares of ABC stock and no shares of XYZ stock, your expected gain will be ________.

$20

Fred purchases a bond, newly issued by the Big Time Corporation, for $20,000. The bond pays $1,000 to its holder at the end of the first, second, and third years and pays $21,000 upon its maturity at the end of four years. The principal amount of this bond is ________, the coupon rate is ________, and the term of this bond is

$20,000; 5 percent; four years

ou expect a share of EconNews.Com to sell for $65 a year from now and to pay a $2 dividend per share in one year. What should you pay (rounded to the nearest dollar) for the stock today if you require an 8 percent return?

$62

If the principal amount of a bond is $10,000,000, the coupon rate is 7 percent, and the inflation rate is 4 percent, then the annual coupon payment made to the holder of the bond is:

$700,000.

You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $62.73 for one share of the stock today, and you expect a dividend payment of $4, what rate of return do you require?

10 percent

One year before maturity, the price of a bond with a principal amount of $1,000 and a coupon rate of 5 percent paid annually rose to $1,019. The one-year interest rate must be:

3 percent.

You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $61.06 for one share of the stock today, you expect a dividend payment of $4, and the rate of return on safe assets is 5 percent, how much is your risk premium?

8.0 percent

Each of the following is an example of a financial intermediary EXCEPT a

bond market.

Financial intermediaries, such as commercial banks, provide benefits to:

both savers and borrowers.

Stockholders receive returns on their financial investment in the form of ________ and ________.

capital gains; dividends

When the Chinese government buys U.S. government bonds, from the perspective of China, this is a(n)

capital inflow

Purchases of foreign assets by domestic firms or households is called a:

capital inflow.

When an American buys stock in a French company, from the perspective of France, this is a(n):

capital inflow.

When the Chinese government buys U.S. government bonds, from the perspective of the United States, this is a(n):

capital inflow.

When a Peruvian buys a U.S. government bond, from the perspective of Peru, this is a(n):

capital outflow.

Shares of stock are:

claims to partial ownership of a firm.

The interest rate promised when a bond is issued is called the:

coupon rate.

Your financial investments consist of U.S. government bonds maturing in twenty years and shares in a start-up internet company. If interest rates on newly-issued government bonds increase, then the price of your bonds will ________ and the price of the shares you own will ________.

decrease; decrease

In an open economy, if domestic citizens decide to save more, then the domestic real interest rate will ________ and the level of capital investment in the country will ________, holding other factors constant.

decrease; increase

Holding constant risk and the real returns available abroad, lower domestic real interest rates ________ capital inflows, ________ capital outflows, and ________ net capital inflows

decrease; increase; decrease

A decrease in the perceived riskiness of Company A stock ________ the risk premium investors require to purchase Company A stock and ________ the price of Company A stock.

decreases; increases

In an open economy, an increase in capital inflows ________ the equilibrium domestic real interest rate and ________ the quantity of domestic investment.

decreases; increases`

The practice of spreading one's wealth over a variety of different financial investments in order to reduce overall risk is called:

diversification.

Two reasons savers keep deposits at banks are to

earn a return on their savings and to facilitate making payments.

A trade surplus occurs when:

exports exceed imports.

Firms that extend credit to borrowers using funds raised from savers are called:

financial intermediaries.

Banks help savers find productive uses for their funds because banks are specialized in:

gathering information about and evaluating potential borrowers.

A trade deficit occurs when:

imports exceed exports.

In an open economy with a given level of real interest rates and risk, a decrease in real interest rates abroad will ________ capital inflows and ________ the equilibrium domestic real interest rate.

increase; decrease

An increase in interest rates results in a(n) ________ in the required rate of return to hold stocks and ________ current stock prices.

increase; reduces

The current price of a stock increases when:

interest rates decrease.

A financial intermediary that sells shares in itself to the public, and then uses the funds to buy a wide variety of financial assets is called a:

mutual fund.

If the United States has a $300 billion trade deficit, then there must be:

net capital inflows of $300 billion.

An economy with a trade deficit must also have:

positive net capital inflows.

The rate of return that financial investors require to hold a risky asset minus the rate of return on a safe asset is called the:

risk premium.

If the United States has a $300 billion net capital inflow, then there must be a:

trade deficit of $300 billion.

If domestic saving is greater than domestic investment, then a country will have a ________ and positive net capital ________.

trade surplus; outflows