Econ 3229 Final
Following relationships are true for any type of coupon bonds
If P<FV, then YTM>CY>CR If P>FV, then YTM<CY<CR If P=FV, then YTM=CY=CR
Under what conditions would the previous Treasury bill ($5000 face value maturing in one year) have a negative yield? A) If coupon payments were less than 4% B) If the selling price was less than $4800 C) If coupon payments were greater than 4% D) If selling price was more than $5000
If selling price was more than $5000
The riskiness of an asset's returns due to changes in interest is A) exchange-rate risk B) price risk C) asset risk D) interest-rate risk
Interest-rate risk
Consider $1000 face value, 8% coupon rate, 10 year bond that's selling for $1040. Which of the following must be true? A) Its yield to maturity is 8.4% B) its current yield is 8% C) Its yield to maturity is 7.9% D) Its current yield is 7.7%
Its current yield is 7.7%
Amortized loans
Loans with payments that include both interest and principal
The money aggregate of M2 includes: A) savings deposits but not money market deposit accounts B) stock and bond mutual fund shares C) M1 D) large denomination time deposits
M1
Suppose John deposits $100 bill to his savings account. A) Both M1 and M2 increase B) M1 decrease and M2 increases C)M1 decreases and M2 stays unchanged D) M1 and M2 stays unchanged
M1 decreases and M2 stays unchanged
If an individual moves money from a small-denomination time deposit to a checking deposit account A) M1 increases and M2 stays the same B) M1 stays the same and M2 increases C) M1 stays the same and M2 stays the same D) M1 increases and M2 decreases
M1 increases and M2 stays the same
Consol Bond
Makes fixed coupon payments forever. Has no face value. P=C/i OR i=C/P
Which of the following is not of an example of bartering? A) Mrs. Smith treating the neighbor children to pizza after they helped clean up her yard B) John cutting his neighbor's grass in return for his neighbor washing John's car C) Sue trading candles with Tom for his bread D) Mary paying for her new shoes with her new credit card
Mary paying for her new shoes with her new credit card
Three functions of money
Medium of exchange, Unit of account, Store Value
______ is used to make purchases while_______ is the total collection of assets that serve to store value A) Money; income B) Wealth; income C) Income; money D) Money; wealth
Money; wealth
Present value of any future cash flows is:
PV=CF/(1+i)^n
A discount bond A) pays the bondholder a fixed amount every period and the face value at maturity B) pays the bondholder the face value at maturity C) pays all interest and the face value at maturity D) pays the face value at maturity plus any capital gain
Pays the bondholder the face value at maturity
A collection of assets is known as a(n): A) asset-backed security B) derivative C) futures contract D) portfolio
Portfolio
Financial system provides what three services?
Risk sharing, Liquidity, and Information
In which of the following situations would you prefer to be the lender? A) The interest rate is 9 percent and the expected inflation is 7 percent B) The interest rate is 4 percent and the expected inflation rate is 1 percent C) The interest rate is 13 percent and the expected inflation rate is 15 percent D) The interest rate is 25 percent and the expected inflation rate is 50 percent
The interest rate is 4 percent and the expected inflation rate is 1 percent
Financial arbitrage
The process of buying and selling securities to profit from prices changes over a brief period of time
Other than savings deposits, small CD's and money market mutual funds shares (MMMFs), broader money supply M2 also includes money market deposit accounts (MMDAs). Which of the following about MMDAs is correct? A) They are just as liquid as checking or savings account deposits B) They pay lower interest rate than savings deposits C) They focus exclusively on stocks and long-term bonds D) They are very similar to MMMFs, expect the fact that MMDAs are federally insured
They are very similar to MMMFs, expect the fact that MMDAs are federally insured
Store of value
ability to accumulate wealth over time
Unit of account
ability to compare value of things; a measuring stick
Medium exchange
ability to obtain goods and services
Financial intermediaries handle a larger flow of funds than do primary markets primarily because financial intermediaries: A) have a government-provided monopoly B) have government-regulated prices, so there is little competition C) can lower transaction costs and increase liquidity for savers D) do not have to worry about information asymmetry
can lower transaction costs and increase liquidity for savers
An important source of short-term funds for commercial banks are _____ which can be resold on the secondary market A) negotiable CD's B) commercial paper C) mortgage-backed securities D) municipal bonds
commercial paper
Which of the following instruments are traded in a money market? A) bank commercial loans B) commercial paper C) state and local government bonds D) residential mortgages
commercial paper
Non-depository institutions would include all of the following except: A) finance companies B) pension funds C) insurance companies D) credit unions
credit unions
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
getting people with funds to lend together with people who want to borrow funds
M2
includes M1 and savings deposits, small denomination time deposits, money market mutual funds shares
M1
includes currency at non-bank public, checking account deposits
Money
is anything that's accepted for payment for good and debts
Price of a coupon bond
is the sum of present values of all the future payments
Rank the following assets from most liquid to least liquid: A) money, stocks, US government bonds, real estate, gold B) money, US government bonds, stocks, gold, real estate C) US government bonds, money, stocks, gold, real estate D) gold, money, US government bonds, stocks, real estate
money, Us government bonds, stocks, gold, real estate
The price of a coupon bond and the yield to maturity are______ related; that is, as the yield to maturity _______, the price of the bond _______. A) positively; rises; rises B) negatively; falls; falls C) positively; rises; falls D) negatively; rises; falls
negatively; rises; falls
In a(n) ________ market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices A) exchange B) over-the-counter C) common D) barter
over-the-counter
Currency includes A) paper money and coins B) paper money, coins, and checks C) paper money and checks D) paper money, coins, checks, and savings deposits
paper money and coins
Financial instruments are used to channel funds from: A) savers to borrowers in financial markets but not through financial institutions B) savers to borrowers in financial markets via financial institutions C) borrowers to savers in financial markets but not through financial institutions D) borrowers to savers through financial institutions, but not in financial markets
savers to borrowers in financial markets via financial institutions
Four basic categories of debt instruments:
simple loans, discount bonds, coupon bonds, fixed payment loans
Discount Bond (zero coupon bond)
sold at discount (below face value), no coupons, pay face value at maturity
Economists define liquidity as A) the fraction the assets make up of an investor's portfolio B) the difference between the total demand for assets and total supply of the asset C) the ease with which an asset can exchanged for money D) the difference between the return on the asset and the return on a long-term U.S. treasury bond
the ease with which an asset can exchanged for money
Dennis notices that jackets are on sale for $99. In case money is functioning as a A) medium of exchange B) unit of account C) store of value D) payments-system ruler
unit of account
Suppose in 2014 you buy 4% coupon rate, $100 face value bond for $100 that has 2 year left till maturity. If in 2015 interest rates increase to 6%, what will be the price of your bond and what will be your rate of return if you decide to sell it? A) $98.1 and 2.1% B) $99.4 and 3.4% C) $101.6 and 7.6% D) $102 and 8%
$98.1 and 2.1%
An advantage money have over other assets is that it: A) increases in value over time B) has lower transaction costs to use as a means of payments than other assets C) provides higher return to the owner D) is a safer asset to hold during times of inflation
Has lower transaction costs to use as a means of payments than other assets
Which of the following is true about ten year $1000 face-value 6% coupon bond that's selling for $1050? A) Its yield to maturity and coupon rate equal to 5.7% B) Its current yield and coupon rate equal to 6% C) Its yield to maturity is 8% D) Its current yield is 5.7%
Its current yield is 5.7%
Which of the following benefits directly from any increase in the corporation's profitability? A) a bond holder B) a commercial paper holder C) a shareholder D) a T-bill holder
a shareholder
Equity instruments are traded in the ________ market A) money B) bond C) capital D) commodities
capital
The M1 measure of money includes A) small denomination time deposits B) checking account deposits C) money market deposit accounts D) money market mutual fund shares
checking account deposits
A financial market in which previously issued securities can be resold is called a _______ market A) primary B) secondary C) tertiary D) used securities
secondary
Hyperinflation
very high rates of inflation (50% or more)
What yield does one year 4% coupon rate $1000 face value bond offer if it currently sell for $1050? A) 4% B) 2% C) 1% D) -1%
-1%
Which of the following can be described as involving direct finance? A) A corporation issues new shares of stock B) People buy shares in a mutual fund C) A pension fund manager buys a short-term corporate security in the secondary market D) An insurance company buys shares of common stock in the over-the-counter markets
A corporation issues new shares of stock
Which of the following coupon bonds has the lowest yield? A) $1000 face value, 4% coupon bond selling for $1020 B) $100 face value, 4% coupon bond selling for $100 C) $ 100 face value, 5% coupon bond selling for $98 D) $ 1000 face value, 4% coupon bond selling for $980
$1000 face value, 4% coupon bond selling for $1020
What is the price of a coupon bond that has annual coupon payments of $75, a face value of $1000, interest rate of 5%, and maturity of two years? A) $1000 B) $1043.08 C) $1046.49 D) $1150
$1046.49
What is the price of $100 face-value 5.5% coupon bond with 3 years to maturity with yield of 3%? A) $107.06 B) $105.5 C) $103 D) $108.8
$107.06
If a $1000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon payment every year is A)$37.50 B) $3.75 C) $375 D) $13.75
$37.50
A consol paying $20 annually when the interest rate is 5 percent has a price of A) $100 B) $200 C) $400 D) $800
$400
What is the present value of $500 to be paid in two years if the interest rate is 5 percent? A) $453.51 B) $500 C) $476.25 D) $550
$453.51
What is the future value of $50 five years from now at 2%? A) $48.5 B) $51.3 C) $55.2 D) $58.4
$55.2
If a consol is offering an annual coupon of $50 and the annual interest rate is 6%, the price of the consol is: A) $8333.33 B) $833.33 C) $47.17 D) $813
$833.33
If annual interest rate is 5% (.05), the price of a one-year Treasury bill per $100 of face value would be: A) $97.50 B) $95 C) $95.24 D) $96.10
$95.24
Consider one-year, $1000 face value US treasury bill with an interest rate of 3.4%. What is its price? A) $986.12 B) $967.12 C) $1034 D) $966
$967.12
What is the price of $1000 face-value one year zero coupon discount bond that offers 1.5% yield? A) $992.3 B) $1001.5 C) $998.5 D) $985.2
$985.2
A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of A) 3 percent B) 20 percent C) 25 percent D) 33.3 percent
33.3 percent
What is the yield to maturity on a $5000 face value discount bond maturing in one year that sells for $4800? A) 4.2% B) 4.0% C) 4.8% D) -.5%
4.2%
According to the quantity theory of money, if the long-run economic growth rate is 2.5%, by how much should the Fed increase the money supply if it wants inflation to be 2%? A) .5% B) 1.25% C) 4.5% D) 5%
4.5%
What is the yield on a consol bond with $5 coupon and the selling price $102? A) 27.5% B) 4.9% C) 3.6% D) 2.75%
4.9%
What is yield to maturity of $100 face value 2.5% coupon bond with a selling price of $105 that has 1 year left to maturity? A) 2.5% B) 5% C) 7.5% D) -2.4%
-2.4%
Suppose you buy a 10-year, 2.5% rate Treasury bond with a face value of $100 for a price of $108. Assume the price of this bond decreases to $102 over the next year and you decide to sell it. The one-year holding period return is equal to: A) 8% B) -2.5% C) -3.2% D) -3.5%
-3.2%
If nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent the real rate of interest is A) 2 percent B) 8 percent C) 10 percent D) 12 percent
12 percent
Assuming constant velocity of money, if the inflation rate averages 2% and money supply grows at 4% annually, what must be change in real GDP? A) 2% increase B) 4% increase C) 2% decrease D) no change
2% increase
What is the return on a 5 percent coupon $1000 face value bond that initially sells for $1000 and sells for $1200 next year? A) 5 percent B) 10 percent C) -5 percent D) 25 percent
25 percent
A one-year discount bond with a par value of $5000 sold today, at issuance, for $4,750 has a yield to maturity of A) 5.26% B) 2.50% C) 5% D) 9.75%
5.26%
What is yield to maturity of $100 face value 2.5% coupon bond with a selling price of $95 that has 1 year left to maturity? A) -2.5% B) 4.9% C) 7.5% D) 7.9%
7.9%
Which of the following $1000 face-value securities has the lowest yield to maturity? A) a 5 percent coupon bond selling for $1000 B) a 5 percent coupon bond selling for $900 C) a 12 percent coupon bond selling for $900 D) a 5 percent coupon bond selling for $1200
A 5 percent coupon bond selling for $1200
Financial instruments used primarily as stores of value do not include: A) asset backed securities B) U.S. Treasury bonds C) a car insurance policy D) a bank loan
A car insurance policy
Money as a means of payments refers to: A) anything that is generally accepted as payments for goods and services B) only actual currency C) only coins, currency, and credit cards D) only coins and currency
Anything that is generally accepted as payments for goods and services
Simple loans
Borrowers receives from the lender an amount of funds called the principal and agrees to repay the lender the principal plus interest on when the loan matures
A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the the face value is called a A) simple loan B) fixed-payment loan C) coupon bond D) discount bond
Coupon bond
The purchasing power of money: A) rises when inflation rises B) decreases as the price level decreases C) decreases with inflation D) is not impacted by inflation, only by monetary policy
Decreases with inflation
Coupon Bond
Face value, coupon (annual payments) or coupon rate, maturity, issuing institution
Which of the following would not be considered a characteristic of money? A) It must have intrinsic value B) It is a means of payment C) It is a unit of account D) It is a store of value
It must have intrinsic value
Equation of exchange
M x V = P x Y
The store of value characteristic of money refers to the fact that: A) people save most of their money B) money allows people to shift purchasing power into the future C) money is not valuable unless it is stored D) money is the only way people have to store value
Money allows people to shift power into the future
The yield to maturity for a discount bond is ______ related to the current bond price A) negatively B) positively C) not D) directly
Negatively
Fiat money
No intrinsic value, valuable only because of government
One year holding period rate of return:
R=Coupon/initial price + change in price/ initial price or R= Current yield + rate of capital gain/loss
The_______ interest rate more accurately reflects the true cots of borrowing A) nominal B) real C) discount D) market
Real
Fixed payments loans
Requires the borrower to make regular periodic payments of principal and interest to the lender
_____ are the time and resources spent trying to exchange goods and services A) Bargaining costs B) Transaction costs C) Contracting costs D) Barter costs
Transaction costs
A vacation to Mexico costs $500 less than a vacation to Europe. When you make this comparison, which of the following functions of money did you use? A) medium of exchange B) Unit of account C) Store of Value D) Barter trade
Unit of account
Price of a bond is equal to its face value
When the price of a bond is equal to its face value, the bond's yield maturity will be equal to its coupon rate
When the price of a bond is below the face value, the yield to maturity: A) will equal the coupon rate B) is below the coupon rate C) will equal the current yield D) will be above the coupon rate
Will be above the coupon rate
A society without any money: A) would have to rely on barter B) could never exchange goods and/or services C) would be more efficient since people would be more self-sufficient D) would find people doing everything for themselves
Would have to rely on barter
Which of the following $5,000 face-value securities has the highest yield to maturity? A) a 6 percent coupon bond selling for $5,500 B) a 10 percent coupon bond selling for $5,000 C) a 6 percent coupon bond selling for $5,000 D) a 12 percent coupon bond selling for $4,500
a 12 percent coupon bond selling for $4,500
If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding? A) a bond with one year to maturity B) a bond with five years to maturity C) a bond with ten years to maturity D) a bond with twenty years to maturity
a bond with one year to maturity
A $1,000 face value bond purchased for $965, with an annual coupon of $60, and 20 years to maturity has a: A) a current yield equal to 6% B) a yield to maturity and current yield equal to 6% C) a coupon rate equal to 6.22% D) a current yield equal to 6.22%
a current yield equal to 6.22%
Of the following assets, the least liquid is A) stocks B) traveler's checks C) checking deposits D) a house
a house
Price of a one year discount bond
is the present value of its single payment
Federal funds are A) funds raised by the federal government in the bond market B) loans made by the Federal Reserve System to banks C) loans made by banks to the Federal Reserve System D) loans made by banks to each other
loans made by banks to each other
According to the equation of exchange, the money supply times the velocity of money equals the A) growth rate of the money supply B) price level C) real GDP D) nominal GDP
nominal GDP
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
spreading the cost of writing a standardized contract over many borrowers