ECO 360 Practice Test

Using the Gordon growth formula, if D1 is $2.00, ke is 12% or 0.12, and g is 10% or 0.10, then the current stock price is

$100

With an interest rate of 6 percent, the present value of $100 next year is approximately

$94

When the price of a bond is above the equilibrium price, there is an excess ________ bonds and price will ________.

supply of; fall

Municipal bonds have default risk, yet their interest rates are lower than the rates on default-free Treasury bonds. This suggests that

the benefit from the tax-exempt status of municipal bonds exceeds their default risk.

U.S. government bonds have no default risk because

the federal government can increase taxes or print money to pay its obligations.

Using the Gordon growth model, a stock's current price decreases when

the growth rate of dividends decreases.

Chapter 6 The risk structure of interest rates is

the relationship among interest rates of different bonds with the same maturity.

When compared to exchange systems that rely on money, disadvantages of the barter system include

the requirement of a double coincidence of wants.

The bond supply curve is ________ sloping, indicating a(n) ________ relationship between the price and quantity supplied of bonds, everything else equal.

upward; direct

Chapter 7 A stockholder's ownership of a company's stock gives her the right to

vote and be the residual claimant of all cash flows.

The total collection of pieces of property that serve to store value is a person's

wealth

An inverted yield curve predicts that short-term interest rates

will fall in the future.

The interest rate that equates the present value of payments received from a debt instrument with its value today is the

yield to maturity

Which of the following can be described as involving direct finance?

A corporation issues new shares of stock.

The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is

0 percent

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?

25 percent

A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of

33.3 percent

You can borrow $5000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is

5%

If the expected path of one-year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's interest rate on the five-year bond is

6 percent

Which of the following can be described as involving direct finance?

People buy shares of common stock in the primary markets.

Which of the following statements accurately describes the two measures of the money supply?

The two measures do not move together, so they cannot be used interchangeably by policymakers.

Which of the following statements about the characteristics of debt and equities is TRUE?

They can both be long-term financial instruments.

All of the following are examples of coupon bonds EXCEPT

U.S. Treasury bills.

Examples of discount bonds include

U.S. Treasury bills.

Which of the following can be described as involving indirect finance?

You make a deposit at a bank.

One of the assumptions of the Gordon Growth Model is that dividends will continue growing at ________ rate.

a constant

Which of the following is a depository institution?

a credit union

Which of the following is an example of an intermediate-term debt?

a sixty-month car loan

A plot of the interest rates on default-free government bonds with different terms to maturity is called

a yield curve.

Well-functioning financial markets

allow the economy to operate more efficiently.

Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.

assets; liabilities

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

investment bank.

When the price of a bond is ________ the equilibrium price, there is an excess demand for bonds and price will ________.

below; rise

Equity instruments are traded in the ________ market.

capital

Which of the following instruments are traded in a money market?

commercial paper

During the Great Depression years 1930-1933 there was a very high rate of business failures and defaults, we would expect the risk premium for ________ bonds to be very high.

corporate Baa

Which of the following long-term bonds has the highest interest rate?

corporate Baa bonds

Which of the following instruments are traded in a capital market?

corporate bonds

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

coupon bond

The components of the U.S. M1 money supply are demand and checkable deposits plus

currency plus travelers checks.

An increase in the time to the promised future payment ________ the present value of the payment.

decreases

An equal increase in all bond interest rates

decreases long-term bond returns more than short-term bond returns.

If brokerage commissions on stocks fall, everything else held constant, the demand for bonds ________, the price of bonds ________, and the interest rate ________.

decreases; decreases; increases

The ________ is the final amount that will be paid to the holder of a coupon bond.

face value

Chapter 4 The present value of an expected future payment ________ as the interest rate increases.

falls

Chapter 2 Financial markets have the basic function of

getting people with funds to lend together with people who want to borrow funds.

________ is a flow of earnings per unit of time.

income

A decrease in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant.

increase; reduce

The interest rate falls when either the demand for bonds ________ or the supply of bonds ________.

increases; decreases

According to the segmented markets theory of the term structure

interest rates on bonds of different maturities do not move together over time.

According to the expectations theory of the term structure

interest rates on bonds of different maturities move together over time.

Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds to the ________.

left; right

In the bond market, the bond demanders are the ________ and the bond suppliers are the ________.

lenders; borrowers

In the Gordon Growth Model, the growth rate is assumed to be ________ the required return on equity.

less than

When yield curves are steeply upward sloping

long-term interest rates are above short-term interest rates.

Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant.

long-term; short-term

The demand curve for bonds has the usual downward slope, indicating that at ________ prices of the bond, everything else equal, the ________ is higher.

lower; quantity demanded

Monetary aggregates are

measures of the money supply reported by the Federal Reserve

Chapter 3 To an economist, ________ is anything that is generally accepted in payment for goods and services or in the repayment of debt.

money

A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium.

positive; raise

Holding all other factors constant, the quantity demanded of an asset is

positively related to wealth.

The value of any investment is found by computing the

present value of all future cash flows.

The ________ of a coupon bond and the yield to maturity are inversely related.

price

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

primary market by an investment bank.

Chapter 5 Everything else held constant, a decrease in wealth

reduces the demand for silver.

Equity holders are a corporation's ________. That means the corporation must pay all of its debt holders before it pays its equity holders.

residual claimants

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

rise in the future.

During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________, everything else held constant.

rises; right

Which of the following is NOT included in the measure of M1?

savings deposits

A financial market in which previously issued securities can be resold is called a ________ market.

secondary

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

simple loan

When I purchase ________, I own a portion of a firm and have the right to vote on issues important to the firm and to elect its directors.

stock