MCB Practice Exam 1

Part ownership of a corporation, such as General Electric, is represented by ownership of ____.

a share of General Electric stock

Suppose that the return on assets other than bonds falls. In the bond market this will result in ____.

an increase in the price of bonds

The present value and the interest rate have ____. [PV = FV/(1+i) n]

an inverse relationship; as i increases, PV decreases

The value of $100 left in a certificate of deposit for four years that earns 4.5% annually will be ____.

$119.25

Consider a share of stock in a company that will pay a dividend of $25 one year from today and immediately liquidate its assets. Your expected share of the liquidated assets is $5. Your time value of money is such that you consider $1.05 a year from today is equivalent to $1.00 today. What is the maximum you would be willing to pay for a share of stock in this company? [Recall that PV t = [(DIV t+1)/(1+r) 1] + [(LIQ t+1)/(1+r) 1]

$28.57

If a bond has a face value of $1000 and a coupon rate of 4.25%, the bond owner will receive annual coupon payments of ____.

$42.50

Shonda says that she would need to earn 3% interest in order to lend you money which you will pay back in two years. This implies that for Shonda the present value of $100 to be received two years from today is ____. [Recall that PV=FV/(1+i) n]

$94.26

Emmel is the CFO for ABC Corporation. Ten years ago, under Emmel's instructions, the company invested in 10-year US Treasury bonds that paid 3% interest. At the time, Emmel's projection was that inflation over the 10-year period would be 0.5% per year. As it turns out, the annual rate of inflation over the 10-year period was 1.5%. As a result, the ex-post rate of return on ABC Corporation's investment was ____, instead of the ____ return that Emmel expected ex-ante.

1.5%; 2.5%

How many prices would a trader of a particular good need to know in a barter economy with 5 goods?

10

Daniella is considering the purchase of a 10-year, $10,000 bond being issued by Disreputable, Inc. The bond offers an interest rate of 5.5%. The rate on a similar US Treasury bond is 2.5%. All else equal, Daniella will be getting a default risk premium of ____, if she purchases the Disreputable, Inc. bond.

3%

Saladin is willing to lend her friend Astro $500 to buy a new smart phone. Saladin wants a 3% real rate of return on the loan when it is paid back at the end of the year. She believes that during the year the general level of prices will rise by 2%, so she should charge her friend Astro a nominal interest rate of ____. [Recall that the real interest rate = the nominal interest rate - inflation]

5%

Which of the following would lead to an increase in bond supply? a. An increase in corporate taxes. b. A decrease in government spending relative to revenue. c. A decrease in expected inflation. d. An improvement in general business conditions.

An improvement in general business conditions.

As general business conditions improve, we would witness the following in the bond market: ____

Bond prices decreasing.

Today, in the United States, several assets function as money. Which of the following would NOT be considered money?

Credit cards

A type of stock that entitles the owner to a claim on the corporation's assets at liquidation and gives the owner voting rights for the board of directors and corporate policy is known as ____ stock.

common

The money aggregate M1 includes each of the following, except ____. Currency in the vaults of commercial banks. Currency in the hands of the public. travelers checks that have been issued. Demand deposits at commercial banks.

currency in the vaults of commercial banks

The supply of bonds is best described as a(n) ____ relationship between the price of bonds and the quantity of bonds supplied, all else equal.

direct

One of the most important prices determined in financial markets is the ____ rate.

interest

Most of the buying and selling in primary markets ____.

involve an investment bank

The Standard & Poor's 500 Index differs from the Dow Jones Industrial Index because ____.

it takes into account the prices of more stocks and it uses a different weighting scheme

Mandy goes to the grocery store to buy groceries, and at the checkout counter she pays cash. This is an example of money being used as ____.

medium of exchange

Paul is an economist who believes the efficient market hypothesis. Thus, Paul believes that the stock market is a good approximation of a(n) ____ market.

perfectly competitive

The secondary market is where ____ is/are sold.

previously owned stocks

In the autumn of 2008, a flight to ____ occurred as investors pulled their money out of markets with various levels of uncertainty and put it into "safe" markets such as Treasury securities.

quality

At any fixed interest rate, an increase in time, n, until a payment is made ____. [PV = FV/(1+i) n]]

reduces the present value

The dividend-discount model predicts that stock prices ____. [Recall that Price t = PV t = DIV t/(r-g)]

should be high when dividends are high

The consumer price index (CPI) ____.

tends to overstate the impact of price changes due to substitution bias

If a bond's rating improves it should cause ____.

the bond's price to increase and its yield to decrease, all other factors constant

A major advantage that municipal bonds have over corporate bonds for investors is that ____.

the income earned on municipal bonds is not subject to federal income tax

The bond rating of a security reflects ____.

the likelihood the lender will be repaid by the borrower/issuer

An advantage that money has over other assets is that it ____.

Has lower transaction costs to use as a means of payment than other assets.

Harold would be equally happy with receiving $95 today or $100 one year from today. Harold's friend Maud would be just as happy receiving $90 today or $100 one year from today. Based on this information, what best describes the difference between Harold and Maud?

Maud has a higher rate of time preference than Harold.

When a coffee shop lists a tall coffee on its menu at $2.95, the coffee shop is using money as a ____.

unit of account

To say an asset is liquid implies that ____.

we are considering assets that may be readily converted into a means of payment

All other factors held constant, an investment ____.

with more risk should sell for a lower price and offer a higher return

In comparing money to a U.S. Treasury bond held by an individual, we can say that ____.

both are stores of value

When expected inflation decreases for any given nominal interest rate, all of the following occur except ____. a. the price of bonds increases b. the bond supply curve shifts to the left c. the cost of borrowing increases and the desire to borrow decreases d. the real interest rate decreases

the real interest rate decreases