ECON 303 Money & Banking

You would be less willing to purchase U.S. Treasury bonds, other things equal, if

gold becomes more liquid

) Three factors explain the risk structure of interest rates:

liquidity, default risk, and the income tax treatment of a security.

When yield curves are steeply upward sloping

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

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

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.

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

yield to maturity

The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is

default risk.

For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is

$13,310.

A movement along the bond demand or supply curve occurs when ________ changes

) bond price

During a recession, the supply of bonds ________ and the supply curve shifts to the ________, everything else held constant

) decreases; left

Everything else held constant, if the expected return on ABC stock rises from 5 to 10 percent and the expected return on CBS stock is unchanged, then the expected return of holding CBS stock ________ relative to ABC stock and the demand for CBS stock ________.

) falls; falls

) If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is

12 percent.

Which of the following statements are true?

A liquid asset is one that can be quickly and cheaply converted into cash

In which of the following situations would you prefer to be the lender?

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

) The demand for Picasso paintings rises (holding everything else equal) when

Treasury securities become riskier

Of the four factors that influence asset demand, which factor will cause the demand for all assets to increase when it increases, everything else held constant?

Wealth

A key assumption in the segmented markets theory is that bonds of different maturities

are not substitutes at all.

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

decreases

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.

present value

Economists believe that countries recently suffering hyperinflation have experienced

reduced growth

) Everything else held constant, a decrease in wealth

reduces the demand for silver.

) The spread between the interest rates on bonds with default risk and default-free bonds is called the

risk premium.