ECON 340

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Property taxes in a particular district are 2% of the purchase price every year. If you just purchased a $250,000 home, what is the present value of all the future property tax payments? Assume that the house remains worth $250,000 forever, property tax rates never change, and that a 4% interest rate is used for discounting. The present value of all the future property tax payments is $

PV = (250,000 x 0.02)/0.04 =125,000

Calculate the present value of a $900 discount bond with 5 years to maturity if the yield to maturity is 3%.

PV = 900 / (1+0.03)^5 = 776.35

If the interest rate is 15%, what is the present value of a security that pays you $1,125 next year, $1,220 the year after, and $1,340 the year after that?

PV = [1125/(1.15)] +[1220/(1.15^2)] + [1340/(1.15)^3] =2781.83

The ▼ Sarbanes-Oxley Act SEC Global Legal Settlement made it a mandate for the credit rating agencies to disclose the method of research they used to rate the various products.

SEC

Foreign Exchange Rate

See Exchange Rate

Money Supply

See money.

Suppose the interest rates on one-, five-, and ten-year U.S. Treasury bonds are currently 3%, 6%, and 6%, respectively. Investor A chooses to hold only one-year bonds, and Investor B is indifferent with regard to holding five- and ten-year bonds. Which theories best explain the behavior of Investors A and B? Investor A's preferences are best explained by the ▼ liquidity premium segmented markets expectations theory, while InvestorB's are best explained by the ▼ expectations segmented markets preferred habitat theory.

Segmented markets expectations

▼ Collateralized Debt Financial liberalization Credit boom Subprime mortgage is a loan to someone withless-than-excellent credit.

Subprime mortgage

Federal Reserve System (the Fed)

The central banking authority responsible for monetary policy in the United States.

Use the figure and supply and demand analysis of the market for reserves to answer the following question. What would happen to the federal funds rate if it were initially at i1ff and households started transferring money from savings to checking, leading to an increase in the amount of checkable deposits(holding everything else constant)? A. The federal funds rate would stay at i1ff . B. The federal funds rate would increase to i2ff . C. The federal funds rate would fall to i3ff . D. The federal funds rate would fall to i4ff .

The rise in deposits also leads to higher required reserves and hence a shift in the demand curve to the right. The demand for reserves will increaase and the equilibrium federal funds rate will increase. B. The federal funds rate would increase to i2ff .

are savings and loans, mutual savings banks, and credit unions.

Thrifts

'The independence of the Fed has meant that it takes the long view and not the short view.' Assume this statement is correct and answer the following questions. 1. The Fed's personnel are not directly affected by the outcome of the next election; therefore, it has some level of independence: 2. The Fed can still be influenced by political pressure: 3. The Fed's lack of accountability may make the Fed more irresponsible: 4. The members of the board generally cannot be reappointed to their position; they do not need to do favours in order to keep their job in the future.

True false false true

Eurodollars

U.S. dollars that are deposited in foreign banks outside of the United States or in foreign branches of U.S. banks

bond

a debt security that promises to make payments periodically for a specified period of time

A increase in the tax rate causes ▼ a decrease an increase no changes in the interest rate on tax exempt bonds, such as municipal bonds.

a decrease

financial crisis

a major disruption in financial markets, characterised by sharp declines in asset prices and the failures of many financial and non financial firms.

Inflation targeters typically use an exact percentage a percentage range for an inflation-rate target.

a percentage range

Brokers

agents for investors who match buyers with sellers

The elimination of a riskless profit opportunity in a market is called

arbitrage

The types of problems that occur when ▼ agency theory asymmetric information financial intermediation arises are Moral Hazard and Adverse Selection.

asymmetric information

both these problems are caused due to ___ Due to these problems ___

asymmetric information lenders may decide not to make any loans

he largest source of external finance for U.S. businesses is

bank and nonbank loans

In practice, inflation targeters may create additional be able to reduce output fluctuations since inflation targeting allows monetary policymakers to respond to declines in demand without facing a sharp rise in inflation expectations.

be able to reduce

The evidence on whether the stock prices reflect publicly available information, ▼ confirms contradicts the efficient market hypothesis.

confirms

The evidence on whether the stock prices reflect publicly available information, ▼ contradicts confirms the efficient market hypothesis.

confirms

Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is

consistent with the efficient market hypothesis if the earnings were not as high as anticipated.

▼ bubbles can be far more devastating to the economy if a crash occurs than if policymakers acted to reduce the size of the bubble preemptively. On the otherhand, ▼ credit-driven noncredit-driven bubbles can be dealt with more easily after a crash.Therefore, it would be better to ▼ clean after lean against credit-driven bubbles and ▼ lean against clean after other types of asset bubbles crash.

credit-driven noncredit-driven lean against clean after

Using the formula given below: Rbonds = (F-P) / P if the market price of a $1,200-face-value discount bond changes from $900 to $925, the yield to maturity:

decreases by 3.6%

Suppose you observe a change in the relationship between short-term and long-term bonds. Specifically, you note that although interest rates on both short-term and long-term bond are rising together, as expected, the rate on long-term bonds is not rising by as much as has been observed in the past. Assuming the liquidity premium theory of term structure, you conclude that the liquidity premium is ▼ decreasingunchangedincreasing. As a result, the yield curve becomes ▼

decreasing flatter

With higher losses on loans, financial institutions undergo ▼ debt deflation credit risking credit boom deleveraging , the process of cutting back their lending to borrower-spenders.

deleveraging

Establishing a divide in research and underwriting services for investment banks and a separation of audit andnon-audit services for the public accounting firm are measures to ▼ prevent conflicts of interest directly reduce conflicts of interest improve quality of information in financial markets .

directly reduce conflicts of interest

Inflation targeting does not does ignore traditional stabilization goals.

does not

"Because inflation targeting focuses on achieving the inflation target, it will lead to excessive output fluctuations." Is this statement true, false, or uncertain? Explain your answer. A common fear of inflation targeting is that it will lead to excessive output fluctuations. This fear is overstated because inflation targeting ▼ requires does not require a sole focus on inflation.

does not require

One solution to the problem of high transaction costs is to bundle the funds of many investors to take advantage of ▼ economies of scale restrictive covenants agency theory

economies of scale - bundle the funds of many investors together

If financial liberalizations are not managed properly, it can lead to ▼ excessive reduced risk taking and expansions of credit at a rapid pace. Losses from these lending activities will reduce balance sheet values for financial institutions. The reduction in capital will result in ▼ more fewer loans, thus creating ▼ no change an increase a decrease in investment and economic activity.

excessive fewer a decrease

Suppose there is an increase in the growth rate of the money supply. If the liquidity effect is smaller than the income, price-level, and expected inflation effects, and if inflationary expectations adjust slowly, then in the short run, interest rates A. fall. B. rise. C. become unpredictable. D. remain unchanged.

fall

Continuing on the same train of thought, when the Fed decreases the growth rate of the money supply, the price level effect drives the interest rate ▼ remain the same rise fall while the expected inflation rate pushes the interest rate to ▼ rise remain the same fall .

fall fall The price-level and expected inflation effects pressure the interest rate to increase when the Fed raises the growth rate of the money supply. The opposite is true when the growth rate is lowered.

When the Federal Reserve decreases the growth rate of the money supply, the income effect causes the interest rate to ▼ remain the same fall rise while the liquidity effect drives the interest rate ▼ up down .

fall up

The seeds of a financial crisis are often sown when an economy introduces new types of financial products, an event known as ▼ credit boom financial innovation financial liberalization financial frictions

financial innovation

The efficient market hypothesis suggests that stock prices will generally ▼ not follow follow a random walk. The evidence on the behavior of stock prices revealed that future changes in stock prices are ▼ mostly unpredictable mostly predictable rarely unpredictable /rarely predictable

follow mostly unpredictable

Results because it takes time for workers and firms to find suitable matchups:

frictional unemployment

Because most open market operations are typically repurchase agreements, it is likely that the volume of defensive open market operations is ▼ less than the same as greater than the volume of dynamic open market operations.

greater than

Because most open market operations are typically repurchase agreements, it is likely that the volume of defensive open market operations is ▼ the same as less than greater than the volume of dynamic open market operations.

greater than

When the real interest rate is ▼ high low , there are lower incentives to borrow and more incentives to lend. 2. ▼ Coupon bond Discount bond Indexed bond Consol is a bond where the principal and interest payments are adjusted for changes in the price level over time.

high 2. indexed bond

What might the yield curve indicate about themarket's predictions for the inflation rate in thefuture? The market's predictions indicate that inflation will be ▼ unchangedhigherlower in the future.

higher

Suppose you go to a bank, intending to buy a certificate of deposit with your savings. Assume that the bank offers to pay you 2% interest on this certificate of deposit. A customer who comes into the same bank for a car loan is likely to be charged an interest rate ▼ lower than the same as higher than the2% that you will receive.

higher than

The most extreme example of unstable prices:

hyperinflation

If a yield curve looks like the one shown in the figure to the right, what is the market predicting about the movement of future short-term interest rates? The market is predicting that future short-term interest rates will ▼ remain unchanged decrease increase.

increase

If the nominal interest rate was originally 13% while the expected inflation rate was 11%, and then both changed to 7% and 1%, respectively, then the real interest rate ▼ remained unchanged decreased increased 2. The interest rate that is adjusted for actual changes in the price level is called the ▼ real term ex-post real interest rate ex-ante real interest rate nominal interest rate .

increased ex-post real interest rate

The unifying analytical framework will provide you with the tools needed to understand trends in the financial marketplace and in variables such as___and___

interest rates exchange rates

The figure depicts the market for short-term bonds. Suppose uncertainty about the future will lead investors to move to the short end of the market. (Assume this shock only affects the demand for short-term bonds) Using the line drawing tool, show the effect of this shock on theshort-term bond market. Properly label your line. As a result, the difference between short-term and long-term bond yields will ▼ decrease not change increase .

investors are buying: Bd shifts right increase

Raj Rajaratnam, a successful investor in the 2000s who consistently beat the market, was able to outperform the market on a consistent basis, indicating that

investors can outperform the market with inside information.

Pricing behavior in an efficient market indicates that current prices will be set so that the optimal forecast of a security's return using all available information ▼ is greater than is equal to is less than the security's equilibrium return.

is equal to

The ▼ marginal lending rate target financing rate fixed interest rate the federal funds rate provides a ceiling for the overnight market interest rate in the European Monetary Union.

marginal lending rate

According to the strong view of the efficient markets hypothesis, security prices reflect ________ and so financial markets are efficient.

market fundamentals

Items that have a direct impact on future income streams of the securities are also known as ___.

market fundamentals

The principal-agent problem causes ▼ adverse selection moral hazard the collateral problem the lemons problem .

moral hazard

The principal-agent problem causes ▼ moral hazard adverse selection the lemons problem the collateral problem .

moral hazard

Compared to bonds with shorter maturity, bonds with longer maturity respond ▼ less more dramatically to changes in interest rates. 2. Bonds with a maturity that is as short as the holding period have ___ interest-rate risk.

more no

Explain why you would be more or less willing to buy a house under the following circumstances: You would be more less willing to buy a house if you just inherited $100,000 because .You would be less more willing to buy a house if you expect Microsoft stock to double in value next year because You would be more less willing to buy a house if prices in the stock market become more volatile because You would be less more willing to buy a house if you expect housing prices to fall because

more, you now have more wealth to spend on all assets less, the stock will earn you a very large return more, stocks have become relatively more risky less, the return on your house will actually be negative

Because it buys large blocks of stocks or bonds, a ▼ moral hazard restrictive covenant mutual fund secured debt can take advantage of lower transaction costs.

mutual fund

Level of output produced at the natural rate of unemployment, at which there is no tendency for prices or wages to change:

natural rate of output

The rate of unemployment consistent with full employment at which the demand for labor equals the supply of labor:

natural rate of unemployment

Nominal variable such as the inflation rate, exchange rate, or money supply that policymakers use to tie down the price level:

nominal anchor

A situation in which monetary policy is expansionary prior to an election and contractionary after an election is known as the ▼

political business cycle

Level of output synonymous with the natural rate of output:

potential output

A condition of low and stable inflation:

price stability

Continuing on the same train of thought, when the Fed increases the growth rate of the money supply, the price level effect drives the interest rate ▼ rise remain the same fall while the expected inflation rate pushes the interest rate to ▼ fall rise remain the same .

rise rise The price-level and expected inflation effects pressure the interest rate to increase when the Fed raises the growth rate of the money supply. The opposite is true when the growth rate is lowered.

When Google stock has a lower expected return, relative to alternative assets, due to poor business choices, the demand for the alternative assets (substitutes) ▼ rises remains the same declines .

rises: An increase in an asset's expected return relative to that of an alternative asset, holding everything else unchanged, raises the quantity demanded of the asset. The demand for the substitutes then decreases as a result.

A financial intermediary borrows funds from the ____ and then uses these funds to make loans to ____ It is ____ way of finance

savers spenders an indirect

An open market sale by the Fed will lead to an increase in the ▼ loans securities reserves on the assets side of the bankingsystem's balance sheet. 2. Such an open market sale will lead to ▼ a decrease an increase no changes in the reserves on the liabilities on the Fed's balance sheet.

securities a decrease

Severe government fiscal imbalances may cause a financial crisis because the fiscal imbalance may cause the government to ▼ restrict financial innovations increase taxes decrease spending sell high-risk government securities .

sell high-risk government securities

An investor gains from short selling by ________ and then later ________.

selling a stock; buying it back at a lower price

The top finance executive of a public listed company prefers investment bank A compared to investment bank B for its future business because of the previous personal equity gains from an IPO through investment bank A. This could be a result of ▼ low underwriting fees a favorable research report spinning .

spinning

The asset market approach emphasizes ▼ interest rates stocks flows returns of assets to determine asset prices.

stocks

Results because of mismatch between job requirements and the skills or availability of local workers:

structural unemployment

An increase in adverse selection and moral hazard in credit markets ▼ tends to increase tends to decrease does not affect bank lending.

tends to decrease

Monetary policy

the management of the money supply and interest rates.

Foreign Exchange Market

the market in which exchange rates are determined.

Results when discretionary monetary policies are pursued that are expansionary or beneficial in the short run but that have poor outcomes in the long run:

time-inconsistency problem

A fall in the value of the pound will cause American businesses to be

worse off

The relationship among interest rates on bonds with identical default risk but different maturities is called the

yield curve

According to the liquidity premium theory of the term structure of interest rates, if the one-year bond rate is expected to be 4%, 7%, and 9% over each of the next three years, and if the liquidity premium on athree-year bond is 1%, then the interest rate on a three-year bond is

(4+7+9)/3] +1 = 8%

You are given the following series of one-year interest rates: 4%, 6%, 11%, 15% Assuming that the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to four years, and plot the resulting yield curve. 1. Using the point drawing tool, plot the interest rate (calculated using the data above) for each of the four terms to maturity. Properly label each point according to its corresponding term. 2. Using the 4-point curved line drawing tool, connect these points. Label your curve 'yield curve'. 3. How would your yield curve change if people preferred shorter-term bonds over longer-term bonds? The yield curve would become ▼ flatterinvertedsteeper.

1 year. = 4% 2 year = 5% 3 year = 7 % 4 year = 9% steeper

The market for government securities (Treasury bills, Treasury notes, and Treasurybonds) is shown in the graph. Show the effect of a large, and growing, federal deficit on this market. 1.) Using the line drawingtool, show the effect of large deficits on the market for government securities. Properly label your line. 2.) Using the point drawing tool, indicate the new equilibrium in the bond market. Label the point '2'. Part 3 Carefully follow the instructions above, and only draw the required objects. 3) The growing deficits will cause interest rates to ▼ decrease remain the same increase .

1) Bs shifts right 2) Label new equilibrium 3) increase (bonds price on graph decreases meaning interested rates increase)

Now identify the policy tools that have the least: 1. flexibility 2. reversibility 3. speed of implementation 4. speed of implementation

1, 2, 3,: changes in reserve requirements 4. loans to financial institutions

Compare the use of open market operations, loans to financial institutions, and changes in reserve requirements to control the money supply on the basis of the following criteria: flexibility, reversibility, effectiveness, and speed of implementation. Identify the policy tools that have the greatest: 1. flexibility 2. reversibility 3. speed of implementation

1, 2, 3,: open market operations

The demand curve and supply curve for one-year discount bonds with a face value of $1,020 are represented by the following equations: Bd: Price = −0.8Quantity+1,140 Bs: Price = Quantity+710 The expected equilibrium quantity of bonds is he expected equilibrium price of bonds is $ The expected interest rate in this market is

1. Bd = Bs -0.8Q+1140=Q+710 430=1.8Q =238.89 2. sub Q in price P = 239+710 = 949 3. i = (1020 - 949)/949 =7.48 %

1. Assume that the liquidity effect is larger than the aggregate of theincome, price level, and expected inflation effects. Select the graph which shows the change in interest rates when the growth rate of money supply increases. A. Graph A B. Graph B 2. if there is a decrease in the growth rate of the money supply, the resulting liquidity effect is larger than the combined income, price-level, and expected inflation effects, and inflationary expectations adjust quickly, then the interest rate will A. fall gradually but continuously until it reaches its long-run level. B. rise gradually but continuously until it reaches its long-run level. C. immediately rise and then fall over time, but will remain higher than its original level. D. immediately fall and then rise over time, but will remain lower than its original level.

1. Graph A: When the liquidity effect dominates the rest of the effects, the interest rates are negatively related to the changes in the growth rate of the money supply. 2. C. immediately rise and then fall over time, but will remain higher than its original level.

A bond has a face value of $1,200 and an 8% coupon rate, its current price is $1,140, and it is expected to increase to $1,170 next year. 1. The current yield is % 2. The expected rate of capital gain is % 3. The expected rate of return is

1. ic = (coupon payment) / (purchase price) = (1200 x 0.08)/1200 = 8.4 % 2. g = (future price - current price) / current price = (1170-1140)/1140 = 2.6 % 3. R = ic + g = 8.4 + 2.6 =11%

In 2015, the Right Bank had total deposits of $6,000, its reserves with the Fed amounted to $1,200, and $300 was the amount of physical currency in its own vault. Suppose the reserve requirement with the Fed is 12 cents for every dollar deposited. 1. The amount of reserves the Right Bank is required to hold with the Fed equal $ 2. The banks's excess reserves with the Fed along with the bank's vault cash amount to $ 3. Suppose the required reserves of the Right Bank in 2016 amounted to $1,000. Then $1,000 will ▼ be a liability be an asset on the Fed's balance sheet and it will ▼ be an asset be a liablility on the Right Bank's balance sheet.

1. $6,000 x 0.12 = $720 2. 1,200 - 720 = 480 480 + 300 = $780 3. be a liability be an asset

A company has just announced a 3-for-1 stock split, effective immediately. Prior to the split, the company had a market value of $9 billion with 100 million shares outstanding. Assuming that the split conveys no new information about the company, what is the value of the company, the number of shares outstanding, and price per share after the split? 1. The market value of the company is $enter your response here billion. 2. The number of shares after the split is enter your response here million. 3. The new price per share is $enter your response here per share. 4. If the actual market price immediately following the split is $31.00 per share, what does this tell us about marketefficiency? A. Market efficiency is uncertain. The price could indicate both market efficiency or failure depending on whether or not the stock split actually conveyed information about the company. B. The market is efficient. The company is actively developing, and the stock return is expected to increase.Therefore, the price fully reflects available information. C. The market is inefficient. Some type of anomaly may have occurred and the stock price should be higher. D. No market failure is present. The market value of the securities is underestimated; therefore, the price per share is rising until Rof=R*.

1. $9 2. 100 x 3 = 300 3. 9 billion / 300 million = $30 per share 4. A. Market efficiency is uncertain. The price could indicate both market efficiency or failure depending on whether or not the stock split actually conveyed information about the company.

Match each of the following theories with its description. 1. Expectations Theory 2. Preferred Habitat 3. Segmented Markets

1. (2.) The interest rate on a long-term bond will equal an average of theshort-term interest rates that people expect to occur over the life of the long-term bond. 2. (4.) The interest rate on a long-term bond will equal an average ofshort-term interest rates expected to occur over the life of the long-term bond plus a liquidity premium (also referred to as a term premium) that responds to supply and demand conditions for that bond. 3. (1.) The interest rate for each bond with a different maturity is determined by the supply of and demand for that bond, with no effects from expected returns on other bonds with other maturities.

Consider a bond with a 4% annual coupon and a face value of $1,200. Complete the following table 1. Years = 2, YTM = 2% 2. Years = 2, YTM = 4% 3. Years = 3, YTM = 4% 4. Years = 5, YTM = 2% 5. years = 5, YTM = 6% When the yield to maturity is ___ the coupon rate, the bond's current price is below its face value. For a given maturity, the bond's current price ___ as the yield to maturity rises. For a given yield to maturity, a bond's value ___ as its maturity increases. When the yield to maturity is ___ the couponrate, a bond's current price equals its face value regardless of the number of years to maturity.

1. 1246.60 2. 1200 3. 1200 4. 1313.13 5. 1098.90 greater than Falls rises equal to

1. Given the nominal interest rate of 18% and the expected inflation of 17%, then the value of the real interest rate is % 2. With the real interest rate equal to 5% and the expected inflation equal to 3%, then the value of the nominal interest rate is 3. A lender prefers a ___ real interest rate while a borrower prefers a ___ real interest rate

1. 18% - 17% = 1 % 2. 5% + 3% = 8% 3. higher lower

1. Suppose the interest rate (and therefore the yield to maturity) decreases by the same amount on Treasury bills and bonds. Between a one-year Treasury bill, and a twenty-year Treasury bond, an investor would prefer a 2. The following are reasons why the yield to maturity can be less than than the return of a bond except that A. the price of the bond experiences sizable fluctuations that produce substantial capital gains or losses. B. the time to maturity and the holding period are not the same. C. interest rates fluctuate over time. D. the coupon payment over the purchase price remains the same. 3. A drop in interest rates can mean that a bond has been a/an ___ investment

1. 20-year Treasury bond When interest rates rise, the prices of existing instruments fall, but the prices oflong-term instruments fall more, causing a greater capital loss on the bond. 2. D. the coupon payment over the purchase price remains the same. 3. excellent

As a real estate speculator, you are planning and able to buy a house that costs $200,000, borrowing the full amount with no money down with the goal of selling this same property in exactly one year. Mortgage interest rates are 5%, and the expected increase in housing prices is 2%. What is your expected capital gain/loss when you flip the house in one year? 1. The expected capital gain (or loss) is 2. The real rate of return is 3. How will an increase in mortgage rates to 10% and an expected increase in housing prices of 9% affect your decision? You will be ___

1. 200,000 x 1.02 = 204,000 204,000 - 200,000 = $4,000 2. RRT = [(capital gain or loss) - interest expense] / purchase price (4,000 - 10,000)/200,000 = -3% 3. more likely to buy

How much would you pay for a perpetual bond that pays an annual coupon of $200 per year and yields on competing instruments are 5%? 1. You would pay $ if competing yields are expected to change to 8%, what is the current yield on this same bond assuming that you paid $4,000? 2. the current yield is % If you sell this bond in exactly one year, having paid $4,000, and received exactly one coupon payment, what is your total return if competing yields are 8%?

1. 200/0.05 = $4000 2. 5% 3. R = [C + (Psold - Ppaid)] /Ppaid = [200 + 2500 - 4000]/4000 = -32.5% Psold = coupon payment / competing yield = 200/0.08 = 2500

Yields for the following 10-year corporate bonds are listed in the table below: 1. If the yield on a 10-year T-not is 4.00%, what is the risk premium on bond #4? 2. What is a likely range of yields for a 10-year corporate bond with a Ba rating? The minimum yield is___ and the maximum yield is ___. (Round your responses to two decimal places.)

1. 4.00%-4.60% = 0.6% 2. 7.45 - 7.75% (the yields from Baa and Ca)

1. If a lender makes a simple loan of $400 for 3 years and charges 5%, then the amount that the lender receive at maturity is $ 2. If a lender makes a simple loan of $1500 for one year and charges $130 interest, then the simple interest rate on that loan is 3. If a borrower must repay $106.50 one year from today in order to receive a simple loan of $100 today, the simple interest on this loan is A. 65% B. 6.0% C. 6.5% D. 5.0%

1. 400 x (1+0.05)^3 = 463.05 2. 130 / 1500 = 9% ish 3. 106.50 -100 = 6.50 6.5/100 = 6.5%

How much would you pay for a perpetual bond that pays an annual coupon of $50 per year and yields on competing instruments are 20% 1. You would pay $ 2.if competing yields are expected to change to 15%, what is your expected capital gain (or loss)?

1. 50 / 0.2 = $250 2. 50 / 0.15 = 333.33 - 250 = $83.33 3.

What is the price of a perpetuity that has a coupon of $60 per year and a yield to maturity of 1%? 2. If the yield to maturity triples, what will happen to its price?

1. 6000 2. 2000

1. How much would you pay for a perpetual bond that pays an annual coupon of $80 per year and yields on competing instruments are 10%? 2. If competing yields are expected to change to 10%, what is the current yield on this same bond assuming that you paid $800?

1. 80/0.10 = 800 2. 10% 800

Using the information given in the text, match the following descriptions of risk to the corresponding Standard and Poor's rating (i.e., AAA, AA, A, BBB, ... D). 1. High grade high quality 2. High speculative 3. Upper medium grade 4. Prime maximum safety (no default risk) 5. Speculative

1. AA 2. D 3. A 4. AAA 5. B

1. Use the graph and the supply and demand for bonds to show what will happen to interest rates if there is a rise in the riskiness of bonds. (Remember that bond prices are inversely related to interest rates.) 1. Using the line drawing tool, show the effect of this shock on money demand and/or money supply. Properly label your line or lines. 2. Using the point drawing tool, indicate the new equilibrium in the market for money. Label this point '2'. 2. Using the liquidity preference framework, an increase in the riskiness of bonds will cause: Part 4 A. an increase in the demand for money, no change in the quantity of money, and a higher interest rate. B. a decrease in the demand for money, no change in the quantity of money, and a lower interest rate. C. an increase in the demand for money, no change in the quantity of money, and a lower interest rate. D. a decrease in the demand for money, no change in the quantity of money, and a higher interest rate. 3. From the graph, we see that a rise in the riskiness of bonds will cause the interest rate in the liquidity preference framework to ▼ remain the same increase decrease and cause the interest rate in the bond market to ▼ increase decrease remain the same .

1. Bd: shift left 2. A. an increase in the demand for money, no change in the quantity of money, and a higher interest rate. 3. increase increase

1. The market for government securities (Treasury bills, Treasury notes, and Treasury bonds) is shown in the graph. Show the effect of a large, and growing, federal deficit on this market. 1.) Using the line drawing tool, show the effect of large deficits on the market for government securities. Properly label your line. 2.) Using the point drawing tool, indicate the new equilibrium in the bond market. Label the point '2'. 2. The growing deficits will cause interest rates to ▼ remain the same increase decrease .

1. Deficit: Bs shifts right 2. increase

Assume you just deposited $1,000 into a bank account. The current real interest rate is 3%, and inflation is expected to be 5% over the next year. What nominal rate would you require from the bank over the next year? 1. the required nominal rate would be % 2. How much money will you have at the end of one year? 3. If you are saving to buy a fancy bicycle that currently sells for $1,250, will you have enough to buy it? A. No. Because of expected inflation, the bicycle will cost $1,050; therefore, you will not have enough to buy it. B. Yes. Since the nominal rate is higher than the real interest rate, you will have enough money for the bicycle. C. No. With such a low real interest rate, you will not earn enough to purchase the bicycle. D. Uncertain. It depends on whether the price of the bicycle increases with inflation.

1. Fisher method 3+5 = 8% 2. PV = 1000 n = 1 I = 8% CF = ? CF = PV(1+i)^n = 1000(1.08) = 1080 3. D. Uncertain. It depends on whether the price of the bicycle increases with inflation.

You have just won $20,000 in the state lottery, which promises to pay you $1,000 (tax free) every year for the next twenty years. The interest rate is 5%. (Round your response to the nearest penny.) 1. n reality, you receive the first payment of $1,000 today, which is worth $____ enter your response here today. 2. The value of the second $1,000 payment is worth $___ today. 3.Your total lottery winnings are actually worth ▼ less than the same amount as more than $20,000 to you today.

1. PV = $1000 / [(1 + 0.05)^0] = $1000 2. PV = $1000 / [(1.05)^1] = $952.38 3. less than

1. If the interest rate is 6%,the present value of $800 to be received 4 years from today is $ 2. You are in a car accident, and you receive an insurance settlement of $6500 per year for the next three years. The first payment is to be received today. The second payment is to be received one year from today, and the third payment two years from today. If the interest rate is 4%, the present value of the insurance settlement is $ 3. The most accurate measure of interest rates is A. current yield. B. yield to maturity. C. discounted present value. D. the coupon rate.

1. PV= F/(1+i)^n =633.67 2. PV = 6500 + [6500/(1+0,04)] + [6500/(1+0.04)^2] =18759.62 3. B. yield to maturity.

1. ___ is based on the notion that a dollar paid in the future is less valuable than a dollar paid today. 2. The present value of a loan in which $3000 is to be paid out a year from today with the interest rate equal to 5% is $___ (cent) 3. If a loan is paid after two years, and the amount $1000 is to be paid then with a corresponding 2% interest rate, the present value of the loan is $___(cent)

1. Present Value or Present Discounted Value 2. PV = $3000 / [(1 + 0.05)^0] = 2857.14 3. =961.17

Other things being the same, the financial instrument that is the 1.least 2.most risky to own is the

1. Short-term 2. equity Equity holders are residual claimants, so in the event of a bankruptcy, they receive funds only after all of the debt holders have been paid. Short-term debt securities have smaller fluctuations in prices than long-term securities do. Therefore, short-term bonds have the least risk.

Consider a coupon bond that has a par value of $800 and a coupon rate of 8%. The bond is currently selling for $814.46 and has 2 years to maturity. What is the bond's yield to maturity (YTM)?

1. Solve for Coupon payment (Face value x coupon rate) 2. Solve for YTM (I) in Coupon Bond... = 7%

Identify the phenomenon based on the given information about stock price. 1. Fluctuations in stock prices may be much greater than is warranted by fluctuations in their fundamental value. 2. It can be predicted that stocks that have done poorly in the past are more likely to do well in the future, suggesting that stock prices are not a random walk. 3. The small firms have earned abnormally high returns over long periods, even when the greater risk for these firms is considered. 4. When a corporation announces a large decline in earnings, its stock price may overshoot, and, after an initial large decline, it may rise back to more normal levels. 5. Over long periods of time, stock prices have tended to experience an abnormal price rise from December to January.

1. excessive volatility 2. mean reversion 3. small-firm effect 4. market overration 5. January effect

Calculate the yield to maturity (YTM) for a one-year coupon bond with a purchase price of $8,000, a face value of $10,000 and a current yield of 10%. 1. the yield to maturity is ___% 2. The yield to maturity on the bond given above is___the YTM of a similar $10,000 20-year bond with a current yield of 20% selling for $8,000.

1. i = (F+C-P)/P = [10,000+(8,000x0.10)-8,000]/8,000 =35% 2. greater than

1. If you lend money at a 11% nominal interest rate, but you expect inflation to be 5% over the life of the loan, then you expect your purchasing power to grow at a rate of 2. The real interest rate is negative when the nominal interest rate is ___ the inflation rate 3. If the nominal interest rate is 3% and the expected rate of inflation is 3%, then the real interest rate is A. 0%. B. 3%. C. 2%. D. −1%. E. 1%.

1. ir = i - (pie)e = 11% - 5% =6% 2. less than 3. A. 0%.

Explain why you would be more or less willing to buy a share of Microsoft stock in the following situations: 1. You would be ▼ more less willing to buy a share of Microsoft stock if your wealth falls because ▼ you believe holding stocks is not a good option with less wealth you have less money to spend on all of your potential assets bonds are a better investment 2. You would be ▼ more less willing to buy a share of Microsoft stock if you expect the stock to appreciate in value because ▼ you believe the amount of the return on your investment will be positive you think fewer people will want to buy the stock in future years you feel bonds are a much better return on your investment 3. You would be ▼ more less willing to buy a share of Microsoft stock if the bond market becomes more liquid because ▼ you can now sell bonds easier than stocks you can now sell stocks easier than bonds it is easier to turn your stocks into spending money now 4. You would be ▼ more less willing to buy a share of Microsoft stock if you expect gold to appreciate in value because ▼ you feel gold is not as secure of an investment stocks are still a better investment the return on gold relative to stocks has improved 5. You would be ▼ less more willing to buy a share of Microsoft stock if prices in the bond market become more volatile because ▼ bonds have become relatively safer than stocks stocks have become relatively safer than bonds the returns on bonds have improved in value .

1. less you have less money to spend on all of your potential assets 2. more you believe the amount of the return on your investment will be positive 3. less you can now sell bonds easier than stocks 4. less the return on gold relative to stocks has improved 5. more stocks have become relatively safer than bonds

Would you be more or less willing to buy long-term AT&T bonds under the following circumstances: 1. Trading in these bonds increases, making them easier to sell. 2. You expect a bear market in stocks (stock prices are expected todecline). 3. Brokerage commissions on stocks fall. 4. You expect interest rates to rise. 5. Brokerage commissions on bonds fall.

1. more willing 2. more willing 3. less willing 4. less willing 5. more willing

The selling of shares that ▼ is called a short sale. An investor engages in short sale when he is anticipating ▼ in a company's share price. The potential loss from a short-sale is ▼ The investors must be willing to accept the chance of losses to short sale a stock to push its ▼ to the equilibrium value.

1. one does not own 2. a decrease 3. infinite 4. overvalued price down

There are ▼ five seven twelve ten regional Federal Reserve banks in the Federal Reserve system.

Consider a coupon bond with a face value of $1350, one year to maturity, and a coupon rate of 8%. Given a yield to maturity of 7%, the price the bond will sell for is $

1362.61

How much is $225 to be received in exactly one year worth to you today if the interest rate is 12%? The value today is $ This same $225 received in one year would be worth ▼ more the same amount less to you today if the interest rate rose to 17%.

200.90 less

Suppose people expect the interest rate on one-year bonds for each of the next four years to be 3%, 4%, 6%, and 8%. If the expectations theory of the term structure of interest rates is correct, then the implied interest rate on bonds with a maturity of four years is

3+4+6+8 / 4 5.25

Suppose that an Exxon Mobil bond has a return of 20% half the time and 14% the other half. The expected return on this bond is

= (.5x.2)+(.0x.14) = 17%

Suppose that your marginal tax rate is 35%. Your after-tax return from holding (to maturity) a one-year corporate bond with a yield to maturity of 5% is

= (1 - 0.35) x 5 = 3.25

Currently a share of stock is paying a dividend (cash payout C) of $4.00 to be paid in exactly one year and has a known selling price in one year (P) of $25.00. The expected return (R) of similar assets is 8.0%, and the current market price is $24.00. What is the total rate of return (R*) on this asset? 1. The total rate of return is enter your response here%. 2. Based on this information, you would expect the price of this stock to ▼ increase remain unchanged decrease .

= (25-24 + 4) / 24 = 20.8% 2. increase

If a coupon bond has two years to maturity, a coupon rate of 7%, a par value of $1100, and a yield to maturity of 12%, then the coupon bond will sell for $ The price of a bond and its yield to maturity are: Which of the following statements is not true? A. Bond prices vary inversely with the interest rate for both coupon bonds and discount bonds. B. Current yield is a worse approximation of yield to maturity for long-term bonds when compared to short-term bonds. C. The longer to maturity, the greater is the change in the price of a bond from the same size change in the interest rate. D. The coupon rate on a coupon bond is fixed once the bond is issued.

= 1007.04 negatively related B. Current yield is a worse approximation of yield to maturity for long-term bonds when compared to short-term bonds.

Suppose that a bond has one year to maturity. The yield to maturity on the bond if it was bought for $1120.00 and has a $1200 face value with a coupon rate of 11% is

= 18%

The estimated current purchasing price of a discount bond with a face value of $2000 and a yield to maturity of 11% is $

= 1801.80

Suppose your marginal income tax rate is 35%. If a corporate bond pays 20%, then the interest rate that an otherwise identical municipal bond have to pay in order for you to be indifferent between holding the corporate bond and the municipal bond is

= 20 - (35x25/100) = 20 - 7 =13%

What is the yield to maturity (YTM) on a simple loan for $1,500 that requires a repayment of $7,500 in five years' time?

= 38%

Why should one study financial institutions? (Check all that apply.) A. It may help to get a better deal when borrowing or lending in the financial market. B. This knowledge helps while interacting with these institutions. C. They are the only employers in the country. D. It may help in getting a good job in the financial sector.

A B D

Refer to the figure on your right. Suppose that the top marginal tax bracket decreases. 1.) Use the line drawing tool to plot the shifts in the supply and the demand curve for municipal bonds. Properly label this line. 2.) Use the point drawing tool to show the change in the price of municipal bonds. Label this point 'P2'

A decrease in the marginal tax rate reduces the demand for municipal bonds. The opposite is true for the reverse condition. demand shift left P decreases

asset

A financial Claim or piece of property that is a store of value.

e-finance

A new means of delivering financial services electronically.

What effect would reducing income tax rates have on the interest rates of municipal bonds? A. Interest rates would rise because the reduction in income tax rates would make the tax-exempt privilege for municipal bonds less valuable and reduce the demand for municipal bonds. B. Interest rates would rise because Treasury securities are now less valuable and more people will want to hold municipal bonds. C. Interest rates would fall because the reduction in income tax rates would make the tax-exempt privilege for municipal bonds less valuable and reduce the demand for municipal bonds. D. Interest rates would fall because Treasury securities are now less valuable and more people will want to hold municipal bonds.

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 one year later? A. 25 percent B. 10 percent C. −5 percent D. 5 percent E. None of the above

A. 25 percent

What is the approximate yield to maturity on a discount bond that matures one year from today with a maturity value of $10,000, and the price today is $9183.67? A. 8.9% B. 9% C. 8.3% D. 7% E. 83%

A. 8.9%

Which of the following best illustrates the time-inconsistency problem? A. A parent says that he or she will punish a child whenever the child breaks a rule. Afterward, when the childmisbehaves, the parent forgives the misbehavior because punishment is unpleasant for both the parent and child. B. Your professor says that this course will end with a final exam. After you have studied and learned all thematerial, you are surprised to find the exam easier than you expected. C. A nation states that they will not negotiate over hostages. Once hostages are taken, policymakers do not make any concessions to obtain the hostages' release. D. Both A and B are correct. E. All of the above are correct.

A. A parent says that he or she will punish a child whenever the child breaks a rule. Afterward, when the childmisbehaves, the parent forgives the misbehavior because punishment is unpleasant for both the parent and child.

Gustavo is a young doctor who lives in a country with a relatively inefficient legal and financial system. When Gustavo applied for a mortgage, he found that banks usually required collateral for up to 300% of the amount of the loan. Why might banks require that much collateral in a financial system like Gustavo's country? A. An inefficient legal system implies weak property rights, and collateral helps banks recoup some of their loan if the borrower defaults. B. An inefficient legal system implies strong property rights, and collateral helps banks recoup some of their loan if the borrower defaults. C. An inefficient legal system implies strong property rights, and under such a strong system, collateral is more highly valued and hence more desirable. D. An inefficient legal system implies weak property rights but also high property values, making collateral more highly valued and hence more desirable.

A. An inefficient legal system implies weak property rights, and collateral helps banks recoup some of their loan if the borrower defaults.

Which of the following is not a reason why bank failures worsen financial crises? A. Bank panics reduce the amount of asymmetric information, which makes it more difficult to lend funds. B. A reduction in the number of banks operating reduces the amount of lending that can take place, which creates less economic activity and in turn makes borrowing more difficult. C. The closing of many banks worsen adverse selection and moral hazard problems. D. As bank panics occur, banks begin to sell so many assets that it can lower asset prices so much that even good banks become insolvent.

A. Bank panics reduce the amount of asymmetric information, which makes it more difficult to lend funds.

If float decreases below its normal level, why might the manager of domestic operations consider it more desirable to use repurchase agreements to affect the monetary base rather than an outright purchase of bonds? A. Changes in float tend to be temporary. B. Changes in float tend to be longer term. C. The Fed only uses repurchase agreements. D. None of the above are correct.

A. Changes in float tend to be temporary.

Which of the following correctly lists a procedure used to reduce asymmetric information problems as well as the type of asymmetric information problem it reduces? A. Covenants are used to reduce moral hazard. B. Monitoring is used to reduce adverse selection. C. Screening is used to reduce moral hazard. D. All of the above correctly list a procedure and the type of problem it reduces.

A. Covenants are used to reduce moral hazard.

Which of the following statements regarding direct finance is true? A. Direct finance occurs when borrowers sell securities directly to lenders. B. Direct finance requires the use of financial intermediaries. C. In the United States, more funds flow through the direct financial channels than through indirect financial channels. D. Securities are assets for the firm that issues them and liabilities for the individual that buys them.

A. Direct finance occurs when borrowers sell securities directly to lenders.

In which of the following ways could a financial intermediary promote risk sharing? (Check all that apply.) A. Diversification of portfolio B. All-eggs-in-one-basket approach C. Asset transformation D. Liquidity services

A. Diversification of portfolio C. Asset transformation

The financial institutions providing multiple services develop a long-term relationship with their clients. Which of the following could not be a result of the same? A. Increase in the cost of producing information. B. Increase in asymmetric information problems C. The economy becomes less efficient D. Benefits to the financial institution

A. Increase in the cost of producing information.

How might it be possible for this episode to still adhere to the efficient market hypothesis? A. Investors were acting on the best information available at that time in valuing their stocks. B. Investor expectations that overvalue assets and then expect them to be sold at higher prices are representative of rational expectations, a key factor of the efficient market hypothesis. C. New and more effective ways to invest were a result of this stock market bubble. D. Due to the increased value of assets, investors were able to produce a positive environment for their businesses and thus increase market efficiency.

A. Investors were acting on the best information available at that time in valuing their stocks.

What is the main advantage of an unconditional policy commitment? A. It provides a significant amount of transparency and certainty for markets and households. B. It does not really have any advantages over a conditional policy commitment. C. It represents a tacit commitment by the central bank, which determines the policy's stability and effectiveness. D. Such a commitment is expected to be abandoned and so it will have a large effect on long-term interest rates

A. It provides a significant amount of transparency and certainty for markets and households.

What is the advantage of quantitative easing as an alternative to conventional monetary policy when short-term interest rates are at the zero lower-bound? A. Purchases of longer−term securities could reduce longer−term interest rates and hence lead to an expansion. B. Purchases of intermediate securities could further decrease the money supply and hence lead to an increase in borrowing. C. Banks hold the extra liquidity received from quantitative easing as excess reserves and hence decrease their risks. D. quantitative easing always causes an increase in economic activity through greater loans and monetary expansion

A. Purchases of longer−term securities could reduce longer−term interest rates and hence lead to an expansion.

What is the advantage of quantitative easing as an alternative to conventional monetary policy when short-term interest rates are at the zero lower-bound? A. Purchases of longer−term securities could reduce longer−term interest rates and hence lead to an expansion. B. Quantitative easing always causes an increase in economic activity through greater loans and monetary expansion. C. Purchases of intermediate securities could further decrease the money supply and hence lead to an increase in borrowing. D. Banks hold the extra liquidity received from quantitive easing as excess reserves and hence decrease their risk

A. Purchases of longer−term securities could reduce longer−term interest rates and hence lead to an expansion.

Which of the following is true about techniques used to reduce asymmetric information problems? A. Screening is used before the transaction; monitoring is used after the transaction. B. Monitoring is used before the transaction; screening is used after the transaction. C. Both screening and monitoring are used after the transaction. D. Both screening and monitoring are used before the transaction.

A. Screening is used before the transaction; monitoring is used after the transaction.

A. Stock market prices were overvalued and rose well above their fundamental values.

Which is more independent, the Federal Reserve or the European Central Bank? Why? A. The European Central Bank—Its charter cannot be changed through legislation, making it more independent than the Federal Reserve. B. The Federal Reserve System—Its charter can be changed through legislation, making it more independent than the European Central Bank. C. The Federal Reserve System—It must be more independent since the European Central Bank was patterned after it. D. Because the structures of the Federal Reserve and the European Central Bank are similar, it can be argued that the two systems have the same level of independence.

A. The European Central Bank—Its charter cannot be changed through legislation, making it more independent than the Federal Reserve.

The central bank of the United States is A. The Fed. B. Bank of America. C. Citicorp. D. The Treasury. E. none of the above.

A. The Fed.

In recent years, the dominance of U.S. markets has been disappearing because of _____ (Check all that apply.) A. The deregulation of foreign financial markets. B. The significant decrease in the pool of savings in foreign financial markets. C. The strict regulation of foreign financial markets. D. The large increase in the pool of savings in foreign financial markets.

A. The deregulation of foreign financial markets. D. The large increase in the pool of savings in foreign financial markets.

What is a credit spread? A. The difference between interest rates on loans to households and businesses and interest rates on completely safe assets such as U.S. Treasury bonds. B. The difference between the interest rate on corporate bonds with different maturities. C. The difference between a borrower's credit score and the score of the most credit-worthy borrower. D. The difference between the net worth of a borrower and the amount of the loan the borrower would like to secure.

A. The difference between interest rates on loans to households and businesses and interest rates on completely safe assets such as U.S. Treasury bonds.

The U.S. Treasury offers some of its debt as Treasury Inflation Protected Securities, or TIPS, in which the price of bonds is adjusted for inflation over the life of the debt instrument. TIPS bonds are traded on a much smaller scale than nominal U.S. Treasury bonds of equivalent maturity. What can you conclude about the liquidity premium between TIPS and nominal U.S. bonds? A. The liquidity premium for a TIPS bond is usually smaller than inflation compensation in nominal U.S. bond yields of equal maturity. B. The liquidity premium for a TIPS bond is high, so it is more profitable than a nominal U.S. bond of equal maturity. C. Both TIPS and nominal U.S. bonds are equally liquid, so there is no liquidity premium. D. The difference in the liquidity premium between TIPS and nominal U.S. bonds usually results in a higher yield on nominal U.S. bonds.

A. The liquidity premium for a TIPS bond is usually smaller than inflation compensation in nominal U.S. bond yields of equal maturity.

What are the main form of open market operations for the European Central Bank? A. The main refinancing operations B. The main longer term refinancing operations C. Longer term refinancing operations D. The marginal lending rate

A. The main refinancing operations`

Which of the following is true regarding efficient markets? A. The prices of securities reflect all available information. B. Hot tips in the stock market are likely to bring exceptional returns. C. Everyone in the market must be well informed. D. Smart money promotes unexploited profit opportunities. According to the Efficient Market Hypothesis, the expected return is determined by several components, except the A. average price in the previous period B. price of the security today C. cash payment the following period D. expected price of the security for next period

A. The prices of securities reflect all available information. A. average price in the previous period

Which of the following is a disadvantage of inflation targeting? A. There is a long lag between monetary policy actions and inflation. B. It is more transparent and more readily understood by the public. C. Inflation targeting leads to increased exchange rate fluctuations. D. Inflation targeting is less transparent than monetary targeting. 2. But there is ▼ no much little conflicting evidence to support the four claimed disadvantages of inflation targeting.

A. There is a long lag between monetary policy actions and inflation. 2. little

Would it be problematic for a central bank to have a primary goal of maximizing economic growth? A. Yes, because monetary policy has limited ability to encourage long-run economic growth other than through its ability to maintain low and stable long-run inflation and interest rates. B. No, by maximizing economic growth, a central bank can effectively achieve its goal of high employment and price stability. C. No, because this could balance the economy and prevent bubbles and financial crises from occurring. D. Yes, because this may result in structural changes in the economy that could lead to an increase in inflation.

A. Yes, because monetary policy has limited ability to encourage long-run economic growth other than through its ability to maintain low and stable long-run inflation and interest rates.

A financial crisis occurs when: A. a particularly large disruption to information flows occurs in financial markets. B. there are predictable market disruptions. C. capital is allocated to its most productive uses. D. financial frictions decrease sharply.

A. a particularly large disruption to information flows occurs in financial markets.

The many regional Federal Reserve banks resulted from a compromise between parties favoring: A. a private central bank and those favoring a government institution. B. the establishment of a central bank and those who opposed its establishment. C. a Board of Governors in Washington, D.C., and those who favored its establishment in New York City. D. None of the above are correct.

A. a private central bank and those favoring a government institution.

Which of the following does not cause a reduction in the net worth of the borrowing firm in a loan market? A. a rise in the stock market that raises the value of the firm B. asset write-downs on the firm's balance sheet C. an unanticipated decline in the value of the domestic currency when the firm's debt is denominated in terms of a foreign currency D. an unanticipated decrease in the price level that raises the value of the firm's liabilities

A. a rise in the stock market that raises the value of the firm

A plot of the yields on bonds with different terms to maturity but the same risk, liquidity, and tax considerations is known as A. a yield curve. B. a term-structure curve. C. an interest-rate curve. D. a risk-structure curve.

A. a yield curve.

Flexible inflation targeting is best described as A. allowing short-run deviations in inflation from target to better promote output stability. B. an intermediate target which is rarely used by central banks. C. changing the desired inflation target as economic conditions change. D. the monetary policy strategy employed by the Federal Reserve.

A. allowing short-run deviations in inflation from target to better promote output stability.

The inequality of information between borrowers and lenders in financial markets is broadly known as: A. asymmetric information. B. noncollateralized risk. C. adverse selection. D. moral hazard.

A. asymmetric information.

Which of the following instruments pays the holder of the instrument a fixed interest payment every year untilmaturity, and then at maturity pays the holder the face value (principle) of the instrument? A. coupon bond B. simple loan C. discount bond D. fixed-payment loan

A. coupon bond

A discount bond will have a negative nominal interest rate when the: A. current bond price is greater than its face value. B. sum of the annual coupon payments and the face value of the bond is higher than its current price. C. current bond yield is smaller than its yield to maturity. D. bond is sold long before its maturity date.

A. current bond price is greater than its face value.

Legislation defining the mission of the Federal Reserve states: "The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long-run growth of the monetary and credit aggregates commensurate with the economy's long-run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." This is an example of a: A. dual mandate. B. hierarchical mandate. C. single mandate. D. multiple mandate.

A. dual mandate.

Corporate bonds are not as liquid as government bonds because

A. fewer bonds for any one corporation are traded, making them more costly to sell.

The main sources of financing for businesses, in order of importance, are A. financial intermediaries, issuing bonds, issuing stocks. B. issuing stocks, issuing bonds, financial intermediaries. C. issuing stocks, financial intermediaries, issuing bonds. D. issuing bonds, issuing stocks, financial intermediaries.

A. financial intermediaries, issuing bonds, issuing stocks.

According to the liquidity premium and preferred habitat theories of the term structure of interest rates, a flat yield curve indicates that A. future short-term interest rates are expected to fall. B. bondholders no longer prefer short-term bonds to long-term bonds. C. future short-term interest rates are expected to rise. D. future short-term interest rates are expected to stay the same.

A. future short-term interest rates are expected to fall.

The Maastricht Treaty A. gives the ECB more independence than the Federal Reserve. B. enhances the ability of Eurozone countries to influence the ECB. C. established the unique structure of central banking in the United States. D. subjects Federal Reserve monetary policy actions to audits by the GAO.

A. gives the ECB more independence than the Federal Reserve.

If a central bank pursues a time-inconsistent policy, it will eventually lead to A. higher inflation and no gain in output. B. higher inflation and higher output. C. lower inflation and higher output. D. lower inflation and no gain in output.

A. higher inflation and no gain in output.

The two major policy measures of Sarbanes-Oxley Act and Global Legal Settlement of increased criminal charges on accounting firms and fines on investment banks were meant to A. incentivize the investment banks not to derive benefits from conflicts of interest. B. improve supervision of the securities market. C. improve quality of information in financial markets. D. reduce the cost of producing information.

A. incentivize the investment banks not to derive benefits from conflicts of interest.

An independent Federal Reserve A. is less likely to produce higher inflation and less likely to produce a political business cycle. B. is more likely to produce higher inflation and more likely to produce a political business cycle. C. is more likely to produce higher inflation and less likely to produce a political business cycle. D. is less likely to produce higher inflation and more likely to produce a political business cycle.

A. is less likely to produce higher inflation and less likely to produce a political business cycle.

A central bank will have better inflation performance in the long run if A. it does not try to surprise people with an unexpectedly expansionary policy. B. it surprises people with an unexpectedly expansionary policy. C. it has a "do not give in" expansionary policy. D. it surprises people with an expectedly expansionary policy.

A. it does not try to surprise people with an unexpectedly expansionary policy.

The European System of Central Banks (ESCB) is similar to the Federal Reserve System in that: A. it is structured such that the central banks for each country have a similar role to that of the Federal Reserve banks. B. the ECB is involved in supervision and regulation of financial institutions. C. monetary operations are centralized. D. it is structured such that the central banks for each country control their own budgets as Federal Reserve banks do.

A. it is structured such that the central banks for each country have a similar role to that of the Federal Reserve banks.

The graph shows an equilibrium in the market for reserves. An open market sale would shift the supply curve to the__________ and cause the federal funds rate to________. Part 2 A. left, rise B. right, rise C. left, fall D. right, fall

A. left, rise

In Canada, the Bank of Canada and the government jointly set the goal of monetary policy, a target for inflation. Thus, when compared to the Fed, the Bank of Canada has: Part 2 A. less goal independence B. less instrument independence C. more goal independence D. more instrument independence

A. less goal independence

Banks providing depositors with checking accounts that enable them to pay their bills easily is known as A. liquidity services. Your answer is correct. B. asset transformation. C. risk sharing. D. transaction costs.

A. liquidity services.

Greater central bank independence is associated with A. lower inflation and no change in unemployment. B. no change in either unemployment or inflation. C. higher inflation and no change in unemployment. D. lower inflation and lower unemployment.

A. lower inflation and no change in unemployment.

In the presence of a credit-driven asset price bubble, the appropriate policy is A. macroprudential regulation. B. nothing; it is best to let the bubble run its course. C. monetary policy tightening. D. monetary policy easing.

A. macroprudential regulation.

Restrictive covenants A. make debt contracts more incentive compatible. B. reduce adverse selection. C. are most common in equity contracts. D. solve the lemons problem.

A. make debt contracts more incentive compatible.

The European Central Bank (ECB) has complete control over monetary policy in eleven euro countries and has a charter that cannot be changed by legislation. In comparison to the Federal Reserve System, the ECBis: A. more independent. B. less independent. C. equally independent.

A. more independent.

The following statements are true except the one that indicates that A. over 90% of American households own securities. B. although banks are the most important source of external funds to businesses worldwide, their role is shrinking slightly over time. C. in the United States, bonds are a more important source of external funds than stocks. D. stocks are not the most important source of external funds for businesses in the United States.

A. over 90% of American households own securities.

Mutual funds A. sell shares and use the proceeds to buy diversified portfolios of stocks and bonds. B. collect deposits and lend for mortgages. C. are organized around some common link, usually employment. D. receive premiums from policies and purchase corporate bonds and stock.

A. sell shares and use the proceeds to buy diversified portfolios of stocks and bonds. Mutual funds allow shareholders to pool their resources so that they can take advantage of lower transaction costs when buying large blocks of stocks or bonds.

To say that stock prices follow a "random walk" is to argue that Question content area bottom Part 1 A. stock prices cannot be predicted based on past trends. B. stock prices rise, then fall in a predictable fashion. C. stock prices rise, then fall, then rise again. D. stock prices tend to follow trends.

A. stock prices cannot be predicted based on past trends.

The country whose banks are the most restricted in the range of assets they may hold is A. the United States. Your answer is correct. B. Germany. C. Japan. D. Canada.

A. the United States.

The "lemons problem" applies to financial markets for many reasons except that A. the market is large and efficient. B. borrowers know more about the probability of default than lenders. C. lenders cannot distinugish good firms from bad. D. only risky borrowers sell securities.

A. the market is large and efficient.

When the charter of the Second Bank of the United States expired in 1836: Part 2 A. there was no lender of last resort to provide reserves to the banking system. B. it created a central bank to help prevent future bank panics. C. the Treasury assumed the role as lender of last resort. D. bank panics and losses to depositors declined.

A. there was no lender of last resort to provide reserves to the banking system.

The government regulates financial markets for two main reasons: A. to ensure soundness of the financial system and to increase the information available to investors. Your answer is correct. B. to improve control of monetary policy and to increase the information available to investors. C. to ensure that financial intermediaries do not earn more than the normal rate of return and to improve control of monetary policy. D. to ensure soundness of financial intermediaries and to prevent financial intermediaries from earning less than the normal rate of return.

A. to ensure soundness of the financial system and to increase the information available to investors.

The primary reason for the creation of the Federal Reserve System was: A. to reduce or eliminate future bank panics. B. to stabilize short-term interest rates. C. to create a single central bank similar to the Bank of England. D. to eliminate state-chartered banks.

A. to reduce or eliminate future bank panics.

An institution in our financial structure that helps reduce the moral hazard arising from the principal-agent problem isthe: Part 2 A. venture capital firm. B. savings and loan association. C. pawn broker. D. money market mutual fund.

A. venture capital firm.

With an interest rate of 5 percent, the present value of $100 received one year from now is approximately A. $95. B. $90. C. $105. D. $100.

A. $95.

(I) Debt markets are often referred to generically as the bond market. (II) A bond is a security that is a claim on the earnings and assets of a corporation. Question content area bottom Part 1 A. (I) is true, (II) false. B. (I) is false, (II) true. C. Both are true. D. Both are false.

A. (I) is true, (II) false.

(I) Banks are financial intermediaries that accept deposits and make loans. (II) The term "banks" includes firms such as commercial banks, savings and loan associations, mutual savings banks, credit unions, insurance companies, and pension funds. A. (I) is true, (II) false. B. (I) is false, (II) true. C. Both are true. D. Both are false.

A. (I) is true, (II) false.

If interest rates decline, which would you rather be holding, long-term bonds or short-term bonds? A. Long-term bonds because their price would increase more than the price of short-term bonds B. Short-term bonds because their price is less sensitive to interest-rate volatility C. Long-term bonds because their price is likely to fall D. Short-term bonds because their price would increase more than the price of long-term bonds

A. Long-term bonds because their price would increase more than the price of short-term bonds

High employment is a worthy goal. A. True, unemployment results in under-utilized resources and lower output B. True, unemployment results in over-utilized resources and higher output C. False, high employment results in much human misery D. False, high employment results in over-utilized resources and lower output

A. True, unemployment results in under-utilized resources and lower output

Holding everything else constant, if a corporation begins to suffer large losses, then the default risk on its bonds will________ and the expected return on those bonds will ________

A. increase; decrease

Which of the following is an insight from behavioral finance? A. Investor overconfidence leads to high trading volumes. B. The price of securities fully reflects all available information. C. The optimal forecast of a security's return equals the security's equilibrium return. D. Investment advisers cannot consistently beat the market.

A. Investor overconfidence leads to high trading volumes.

Why should one study financial institutions? (check all that apply)

A. It may help to get a better deal when borrowing or lending in the financial market. B. It may help in getting a good job in the financial sector. C. This knowledge helps while interacting with these institutions.

The scatter plot on the right shows combinations of nominal interest rates and inflation rates for 10 mythical countries. According to the Fisher equation, you would expect that all points should be ▼ exactly on below above the 45-degree line. The real rate of interest for Atlantis is:

Above 5.5 -1.4

▼ Agency theory Adverse Selection Moral Hazard is an asymmetric information problem that occurs before the transaction.

Adverse Selection

What would happen to the federal funds rate if there was an increase in the amount of checkable deposits (holding everything elseconstant) and the federal funds rate was initially at the discount rate (i1ff = id)? A. The federal funds rate would stay at i1ff . B. The outcome cannot be determined. C. The federal funds rate would fall. D. The federal funds rate would rise.

An increase in deposits would cause a shift in the demand curve for reserves to the right. However, because the federal funds rate is already equal to the discount rate, the increase in demand for reserves will not change the federal funds rate. A. The federal funds rate would stay at i1ff .

An open market sale will cause A. nonborrowed reserves to fall and the federal funds rate to rise. B. nonborrowed reserves to rise and the federal funds rate to fall. C. borrowed reserves to fall and the federal funds rate to rise. D. borrowed reserves to rise and the federal funds rate to fall.

An open market purchase of securities increases NBR and shifts the vertical part of Rs to the right, reducing the equilibrium federal funds rate. An open market sale of securities reduces NBR, shifting the vertical part of Rs to the left, and raising the equilibrium federal funds rate. A. nonborrowed reserves to fall and the federal funds rate to rise.

A bank repays its discount loan of $250m to the Fed. Identify the effects of this on the balance sheet of the banking system. Assets ▼ Reserves Securities Discount Loans Loans ▼ Decrease of $250m Increase of $250m No effect Liabilities ▼ Securities Reserves Loans Discount Loans ▼ No effect Increase of $250m Decrease of $250m This will lead to ▼ an expansiona contraction of liquidity in the banking system.

Assets; Reserves, Decrease 250m Liabilities: loans, decrease 250m a contradiction

The primary dealers purchase securities worth $500m from the Fed. Identify the effects of this on the balance sheet of the Fed. Assets ▼ Securities Loans Discount Loans Reserves ▼ Decrease of $500m Increase of $500m No effect Liabilities ▼ Reserves Securities Discount Loans Loans ▼ Increase of $500m Decrease of $500m No effect This will lead to ▼ an expansion a contraction of liquidity in the banking system.

Assets; securities, decrease 500m Liabilities; reserves, decrease 500m a contraction

Which of the following demonstrates adverse selection? A. A scientist applies for a loan but decides to scratch the original idea and proceeds to research a possible cure for cancer with a low probability of success but a high payoff if successful. B. A builder obtained a loan to build a neighborhood comprised of houses that may sell for much lower than the originally posted price. C. A borrower takes the funds from a loan to a casino and gambles. D. A corporate officer uses the funds from the sale of securities to buy art for his office.

B. A builder obtained a loan to build a neighborhood comprised of houses that may sell for much lower than the originally posted price.

Which of the following correctly lists a procedure used to reduce asymmetric information problems as well as the type of asymmetric information problem it reduces? A. Monitoring is used to reduce adverse selection. B. Covenants are used to reduce moral hazard. C. Screening is used to reduce moral hazard. D. All of the above correctly list a procedure and the type of problem it reduces.

B. Covenants are used to reduce moral hazard.

__________ occurs when a substantial unanticipated decline in the price level sets in, leading to a further deterioration in a firm's net worth because of the increased burden of indebtedness. A. Deleveraging B. Debt deflation C. Moral hazard D. Adverse selection

B. Debt deflation

____________ are intended to change the level of reserves and the monetary base. A. Defensive open market operations B. Dynamic open market operations C. Open market purchases D. Open market sales

B. Dynamic open market operations

Prior to 2008, mortgage lenders required a house inspection to assess its value, and often used the same one or two inspection companies in the same geographical market. Following the collapse of the housing market in 2008, mortgage lenders required a house inspection, but this was arranged through a third party. How does this illustrate a conflict of interest similar to the role that credit-rating agencies played in the global financial crisis? A. Mortgage lenders may have wanted to increase home sales without assuming the additional costs to add more inspection companies. B. Inspection companies may have provided overly optimistic assessments of home values to ensure continued work in the future. C. Fees for home inspections may have been unreasonably high to ensure high profits for the inspection company. D. This situation does not illustrate any conflict of interest, as the services provided by credit-ratings agencies and home inspection companies are unrelated.

B. Inspection companies may have provided overly optimistic assessments of home values to ensure continued work in the future.

What role does weak financial regulation and supervision play in causing financial crises? A. It helps establish tighter rules and regulations for lending activities. B. It allows financial institutions a better opportunity to engage in excessive risk-taking behavior. C. It creates higher interest rates, as government expenditures will tend to increase. D. It reduces the risk that financial institutions will make bad loans.

B. It allows financial institutions a better opportunity to engage in excessive risk-taking behavior.

If junk bonds are "junk," then why would investors buy them? A. Junk bonds have lower default risk. B. Junk bonds can provide high yields. C. The theory of portfolio choice predicts that portfolios with junk bonds are more diversified. D. Some junk bonds may have a rating of AA- by the credit-rating agencies.

B. Junk bonds can provide high yields.

Which of the following factors explain why trading volume is so high and speculative bubbles occur? A. Loss aversion B. Overconfidence and social contagion C. Overconfidence D. Social contagion

B. Overconfidence and social contagion

Which of the following is true about techniques used to reduce asymmetric informationproblems? A. Monitoring is used before the transaction; screening is used after the transaction. B. Screening is used before the transaction; monitoring is used after the transaction. C. Both screening and monitoring are used after the transaction. D. Both screening and monitoring are used before the transaction.

B. Screening is used before the transaction; monitoring is used after the transaction.

In the late 1990s, as information technology rapidly advanced and the Internet widelydeveloped, U.S. stock markets soared, peaking in early 2001. Later that year, these markets began to unwind, and then crash, with many commentators identifying the previous few years as a "stock market bubble." Why was this episode considered a bubble? A. A higher number of risky but potentially profitable investments appeared. B. Stock market prices were overvalued and rose well above their fundamental values. C. The growth rate of stock market prices increased by more than 25% during this time. D. Investors were able to exploit profit opportunities but only in the short term. How might it be possible for this episode to still adhere to the efficient market hypothesis? A. New and more effective ways to invest were a result of this stock market bubble. B. Investors were acting on the best information available at that time in valuing their stocks. C. Investor expectations that overvalue assets and then expect them to be sold at higher prices are representative of rational expectations, a key factor of the efficient market hypothesis. D. Due to the increased value of assets, investors were able to produce a positive environment for their businesses and thus increase market efficiency.

B. Stock market prices were overvalued and rose well above their fundamental values. B. Investors were acting on the best information available at that time in valuing their stocks.

If the Federal Reserve has a specific mandate from Congress to achieve "maximum employment and low, stable prices," then how does the Fed have goal independence? A. The Fed can choose any method it wants in order to achieve the assigned goal. B. The Fed is free to interpret exactly what these objectives mean. C. The Fed is free to discuss the assigned goals with Congress. D. The Fed is able to change its goals frequently.

B. The Fed is free to interpret exactly what these objectives mean.

How does the Federal Reserve have a high degree of instrument independence? A. The Federal Reserve can contract with independent experts to choose the appropriate fiscal instruments. B. The Federal Reserve can choose any method it wants in order to achieve a given set of policy objectives. C. The Federal Reserve is not subject to the influence of Congress. D. The Federal Reserve is able to set the goals of monetary policy.

B. The Federal Reserve can choose any method it wants in order to achieve a given set of policy objectives.

Use the figure and supply and demand analysis of the market for reserves to answer the following question. What would happen to the federal funds rate if it were initially at i1ff and households started transferring money from savings to checking, leading to an increase in the amount of checkable deposits (holding everything elseconstant)? Part 2 A. The federal funds rate would stay at i1ff . B. The federal funds rate would increase to i2ff . C. The federal funds rate would fall to i3ff . D. The federal funds rate would fall to i4ff .

B. The federal funds rate would increase to i2ff .

Use the figure and supply and demand analysis of the market for reserves to answer the following question. What would happen to the federal funds rate if it were initially at i1ff and there was a switch from deposits into currency (holding everything elseconstant)? A. The federal funds rate would stay at i1ff . B. The federal funds rate would increase to i2ff . C. The federal funds rate would fall to i3ff . D. The federal funds rate would increase to i4ff

B. The federal funds rate would increase to i2ff . Turing reserves deposits into currency decreases the supply of reserves: Supply (vertical) shifts left. increasing FFR

Which of the following is a tool used to reduce the principal-agent problem? A. Firms issue equity instead of debt because the principal-agent problem is smaller with equity. B. Venture capital firms provide funds to new firms in exchange for equity and membership on the board of directors. C. Stockholders reject plans for costly state verification. D. Governments avoid regulating firms.

B. Venture capital firms provide funds to new firms in exchange for equity and membership on the board of directors.

The principal-agent problem arises because of many reasons except the statement that indicates that A. principals have incentives to free ride off the monitoring expenditures of other principals. B. agents' incentives are always compatible with those of the principals. C. principals find it difficult and costly to monitor agents' activities. D. agents have information not readily available to the principal.

B. agents' incentives are always compatible with those of the principals.

In the theory of portfolio choice, which of the following will increase the quantity demanded of an asset? A. a decrease in the expected return on the asset relative to alternative assets B. an increase in the liquidity of the asset relative to alternative assets C. a decrease in the wealth of the buyer D. an increase in the risk of the asset relative to alternative assets

B. an increase in the liquidity of the asset relative to alternative assets

Financial intermediaries A. would be better if they offered liquidity services. B. are better able to provide expertise in lowering transaction costs. C. do not take advantage of expertise in computer technology. D. do not make it easier for customers to conduct transactions.

B. are better able to provide expertise in lowering transaction costs.

Debt contracts: A. are informal agreements between borrowers and lenders B. are used more frequently to raise capital than are equity contracts C. have a higher cost of state verification than equity contract D. never result in a loss for the lender

B. are used more frequently to raise capital than are equity contracts

Relatively smaller companies are more likely than large, well-known to acquire funds through A. issuing collateral B. banks C. direct finance D. nonbank financial intermediaries

B. banks

The major differences between financial regulation in the United States and abroad relate to bank regulation. Specifically, in the past, the U.S. was the only industrialized country to subject banks to restrictions on ________. A. the size they could grow to B. branching C. lending D. assets they may hold

B. branching

Wealth, either financial or physical, that is employed to produce more wealth is referred to as ____. A. the market B. capital Your answer is correct. C. assets D. funding

B. capital

In the long run, if the output, price-level, and expected inflation effects outweigh the liquidity effect, to reduce interest rates the Federal Reserve should A. maintain the growth rate of the money supply. B. decrease the growth rate of the money supply. C. increase the growth rate of the money supply. D. become unpredictable by varying the growth rate of the money supply without releasing the information to the public.

B. decrease the growth rate of the money supply.

Rising defaults from subprime mortgages led to a weakening of balance sheets of banks and other financial institutions. With less capital available, these financial institutions sold off assets and limited the availability of credit to households and businesses. This process is referred to as: A. financial engineering. B. deleveraging. C. a credit boom. D. securitization.

B. deleveraging.

A U.S. Treasury bill is an example of a A. coupon bond. B. discount bond. C. fixed-payment loan. D. simple loan.

B. discount bond.

Debt contracts are A. meant to guide relatively small businesses obtain some additional investment. B. extremely complicated legal documents that place restrictions on the borrower. C. established by borrowers to differentiate themselves from other individuals or firms. D. short legal documents with minimal provisions

B. extremely complicated legal documents that place restrictions on the borrower.

The DAX (Germany) and the FTSE 100 (London) are examples of ________. A. foreign stock exchanges B. foreign stock price indexes C. foreign currencies D. foreign mutual funds

B. foreign stock price indexes

The two major policy measures of Sarbanes-Oxley Act and Global Legal Settlement of increased criminal charges on accounting firms and fines on investment banks were meant to A. improve supervision of the securities market. B. incentivize the investment banks not to derive benefits from conflicts of interest. C. reduce the cost of producing information. D. improve quality of information in financial markets.

B. incentivize the investment banks not to derive benefits from conflicts of interest.

Municipal bonds tend to pay lower interest rates than U.S. Treasury bonds because A. municipal bonds are default-free. B. interest payments received from holding municipal bonds are exempt from federal income tax. Your answer is correct. C. municipal bonds are more liquid than U.S. Treasury bonds. D. all of the above are true.

B. interest payments received from holding municipal bonds are exempt from federal income tax. Your answer is correct.

The tool to solve adverse selection problems are the following except A. financial intermediation B. monitoring of activities of the risky party after the transaction C. private production and sale of information D. government regulation to increase information

B. monitoring of activities of the risky party after the transaction

The tool to solve adverse selection problems are the following except A. private production and sale of information B. monitoring of activities of the risky party after the transaction C. financial intermediation D. government regulation to increase information

B. monitoring of activities of the risky party after the transaction

The European Central Bank (ECB) has complete control over monetary policy in eleven euro countries and has a charter that cannot be changed by legislation. In comparison to the Federal Reserve SystemLOADING..., the ECB is: Part 2 A. less independent. B. more independent. C. equally independent.

B. more independent.

The European system of central banks' primary tool for conducting monetary policy is open market operations. It uses this tool to set the interest rate for very short-term interbank loans, which is known as the: A. discount rate B. overnight cash rate C. marginal lending rate D. target financing rate

B. overnight cash rate

Assuming the terms of issuance to be the same for different types of loans, a government would choose to issue a: A. fixed payment loan. B. perpetuity. C. coupon bond. D. discount bond.

B. perpetuity.

The president of the United States can exert influence over the Federal Reserve in all of the following ways except: A. influencing congressional decisions that might reduce the independence of the Fed. B. reducing the Fed's net earnings. C. appointing a new chairman to the Board of Governors. D. appointing new members to the Board of Governors.

B. reducing the Fed's net earnings.

Which of the following is an example of a restrictive covenant in a debt contract? A. encouraging borrowers to keep their collateral valuable B. requiring borrowers to have life insurance C. allowing firms to opt out of periodic accounting reports D. requiring borrowers to pay a high interest rate

B. requiring borrowers to have life insurance Note: Requiring risky borrowers to pay a high interest rate is not a restrictive covenant but an agreement between the lender and borrower.

Suppose there is a/an increase in the growth rate of the money supply. If the liquidity effect is smaller than the output, price-level, and expected inflation effects, then in the long run, interest rates A. become unpredictable. B. rise when compared to their initial value. C. fall compared to their initial value. D. remain unchanged when compared to their initial value.

B. rise when compared to their initial value.

Banks reduce the free-rider problem in information production by A. charging others for information about the financial condition of potential borrowers. B. serving as an intermediary that holds mostly nontraded loans. C. buying tradable securities with their depositors' funds. D. making public, traded loans so other lenders can benefit from the information they have collected about the borrower

B. serving as an intermediary that holds mostly nontraded loans.

A well-functioning financial system: A. causes financial frictions to increase in an economy. B. solves asymmetric information problems. C. creates unpredictable market disruptions. D. acts as a barrier to efficient allocation of capital.

B. solves asymmetric information problems.

According to the liquidity premium theory of the term structure,

B. the interest rate on long−term bonds will equal an average of short−term interest rates that people expect to occur over the life of the long−term bonds plus a term premium.

You go into an electronics store to buy a big-screen television. A salesperson rudely tells you that he's too busy to help you now. He says you'll just have to wait. Then you watch him get a cup of coffee and take his break. You've just seen a demonstration of A. adverse selection. B. the principal-agent problem. C. the lemons problem. D. how collateral reduces moral hazard.

B. the principal-agent problem.

Another way to state the efficient market hypothesis is that in an efficient market, A. unexploited profit opportunities will never exist as market participants, such as arbitrageurs, ensure that they are instantaneously dissipated. B. unexploited profit opportunities will not exist for long, as market participants will act quickly to eliminate them. C. every financial market participant must be well informed about securities. D. only A and C of the above.

B. unexploited profit opportunities will not exist for long, as market participants will act quickly to eliminate them.

(I) If a corporation suffers big losses, the demand for its bonds will rise because of the higher interest rates the firm must pay. (II) The spread between the interest rates on bonds with default risk and default−free bonds is called the risk premium. A. (I) is true, (II) false. B. (I) is false, (II) true. C. Both are true. D. Both are false.

B. (I) is false, (II) true.

The Baa−U.S. Treasury spread was about 2% at the beginning of 1929. By December 1932, the Dow Jones Industrial Average reached a low, and the spread had increased to how much? A. 10% B. 8% C. 6% D. 4%

B. 8%

What might lead to poor management when control and ownership are separate, like in many American corporations? A. Adverse selection. B. Principal-agent problem. C. Sarbanes-Oxley problem. D. Free-rider problem.

B. Principal-agent problem.

What might lead to poor management when control and ownership are separate, like in many Americancorporations? A. Free-rider problem. B. Principal-agent problem. C. Adverse selection. D. Sarbanes-Oxley problem.

B. Principal-agent problem.

True or False: With a discount bond, the return on a bond is equal to the rate of capital gain. A. False: Bond returns can never equal the rate of capital gain; there must be a capital loss or gain indicated. B. True: A discount bond has no coupon payments so the return on the bond is equal to the rate of capital gain. C. True: A discount bond pays fixed interest payments every year so the return is equal to the rate of capital gain. D. There is no way to determine this without the knowing the coupon amount and interest rate.

B. True: A discount bond has no coupon payments so the return on the bond is equal to the rate of capital gain.

is it better for bondholders when the yield to maturity increases or decreases? Bondholders are better off when the yield to maturity: A. increases, since this represents a decrease in the price of the bond and an increase in potential capital gains. B. decreases, since this represents an increase in the price of the bond and a decrease in potential capital losses. C. decreases, since this represents an increase in the coupon payment and an increase in potential capital gains. D. increases, since this represents a decrease in the bond maturity and a decrease in potential capital losses.

B. decreases, since this represents an increase in the price of the bond and a decrease in potential capital losses.

If you expect the inflation rate to be 15 percent next year and a one−year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A. 22 percent. B. −8 percent. C. −15 percent. D. 7 percent. E. none of the above.

B. −8 percent.

The demand curve and supply curve for one-year discount bonds with a face value of $1,040 are represented by the following equations: Bd: P = -0.8Q+1140 Bs: P = Q+680

Bd = Bs Q = 256 Sub Q in Bs P = 936 I = 1040-936 / 936 = 11.11

▼ Behavioral finance Experimental finance Financial economics is the use ofpsychological, sociological, and anthropological concepts to study stock price movement.

Behavioral finance

An important way in which the Federal Reserve decreases the money supply is by selling bonds to the public. Using a supply and demand analysis for bonds, show what effect this action has on interest rates. 1.) Using the line drawing tool, show the effect of the Fed's action on the bond market. Properly label your line. 2.) Using the point drawing tool, indicate the new equilibrium in the bond market. Label the point '2'. With this policy action, bond prices ▼ are unchanged increase decrease and interest rates (bond yields) ▼ decrease increase are unchanged .

Bs shifts right: Decrease increase

Why is a financial crisis likely to lead to a contraction in economic activity? A. Those that borrow funds to finance productive investment opportunities will have a greater opportunity to obtain financing. B. Disruptions in the financial system decreases asymmetric information, thereby decreasing the associated problems of adverse selection and moral hazard. C. A disruption in the financial system diminishes the flow of funds from savers to borrowers. D. None of the above are correct.

C. A disruption in the financial system diminishes the flow of funds from savers to borrowers.

What is the reason for this problem? A. A manager does not have access to sufficient resources to run the corporation efficiently. B. Stockholder meetings are infrequent, and the manager has to wait for these results to get anything done. C. A manager does not have sufficient incentive to maximize the company's profits. D. Owners limit the manager's ability to run the corporation efficiently.

C. A manager does not have sufficient incentive to maximize the company's profits.

Which of the following effects of the Sarbanes-Oxley Act discourages the foreign firms to list their companies in U.S. capital markets? A. An increase in severity of legal actions B. The separation in audit and non-audit services C. A rise in compliance cost D. Improved accounting standards

C. A rise in compliance cost

A weaker dollar benefits ________ and hurts ________. A. American consumers; American businesses B. American businesses; foreign consumers C. American businesses; American consumers D. foreign businesses; American consumers

C. American businesses; American consumers

Risk premiums on corporate bonds are usually anticyclical; that is, they decrease during business cycle expansions and increase during recessions. Why is this so? A. During an economic expansion, there is greater inflationary pressure driving interest rates upward. B. In anticipation of a recession, the Federal Reserve will begin to lower interest rates. C. As the economy enters an expansion, there is greater likelihood that borrowers will be able to service their debt. D. As an economy enters a recession, business firms are less likely to default on their debt.

C. As the economy enters an expansion, there is greater likelihood that borrowers will be able to service their debt.

Which of the following statements about market bubbles is accurate? A. Bubbles represent irrational behavior because asset prices are higher than their fundamental value, but investors continue to hold these assets anyway. B. Loss aversion, investor overconfidence, and social contagion often lead to decreases in market bubbles. C. Bubbles can occur when investors buy an asset above its fundamental price in the belief that someone else will buy the asset for a higher price in the future. D. With market bubbles, unexploited profit opportunities may exist, adding further proof to the stronger view of market efficiency.

C. Bubbles can occur when investors buy an asset above its fundamental price in the belief that someone else will buy the asset for a higher price in the future.

If float decreases below its normal level, why might the manager of domestic operations consider it more desirable to use repurchase agreements to affect the monetary base rather than an outright purchase of bonds? A. Changes in float tend to be longer term. B. The Fed only uses repurchase agreements. C. Changes in float tend to be temporary. D. None of the above are correct.

C. Changes in float tend to be temporary.

Which of the following statements about the two types of mandates for monetary policy is false? Part 2 A. Dual mandates and hierarchical mandates are not very different if maximum employment is defined as the natural rate of employment because there is no inconsistency between achieving price stability in the long run and the natural rate of employment. B. Hierarchical mandates are a problem if they lead to a central bank that focuses solely on inflation control, even in the short run, and so undertakes policies that lead to large output fluctuations. C. Concerns that a dual mandate might lead to overly contractionary policy is a key reason why central bankers often favor hierarchical mandates. D. Both dual mandates and hierarchical mandates are sufficient as long as they operate to make price stability the primary goal in the long run, but not the short run.

C. Concerns that a dual mandate might lead to overly contractionary policy is a key reason why central bankers often favor hierarchical mandates.

Fire and casualty insurance companies are what type of intermediary? A. Depository institutions B. Investment intermediaries C. Contractual savings institution D. None of the above

C. Contractual savings institution

Why do credit spreads rise during financial crises? A. Credit spreads rise because the government becomes the only institution that is able to lend money to borrowers. B. Credit spreads rise because depositors with productive investment opportunities withdraw their funds frombanks, which creates an incentive to lend to borrowers with riskier investment opportunities. C. Credit spreads rise because asymmetric information problems increase, making it more difficult to judge the risk of potential borrowers. D. None of the above are correct.

C. Credit spreads rise because asymmetric information problems increase, making it more difficult to judge the risk of potential borrowers.

____________ are intended to offset movements in other factors that affect reserves and the monetary base. A. Dynamic open market operations B. Open market sales C. Defensive open market operations D. Open market purchases

C. Defensive open market operations

Which of the following is not true regarding efficient markets? A. Smart money eliminates unexploited profit opportunities. B. The prices of securities reflect all available information. C. Everyone in the market must be well informed. D. Hot tips in the stock market are unlikely to bring exceptional returns. According to the Efficient Market Hypothesis, the expected return is determined by several components, including the A. cash payment the following period B. interest rate of Treasury bonds C. required rate of return of investment D. Pricing behavior in an efficient market indicates that current prices will be set so that the optimal forecast of asecurity's return using all available information ▼ is equal to is less than is greater than the security's equilibrium return.

C. Everyone in the market must be well informed. A. cash payment the following period is equal to

Which of the following statements is true? A. Direct finance is much more important than indirect finance as a source of external funds to businesses. B. Firms raise more funds with bonds than with bank loans. C. Firms raise more funds with bonds than with stocks. D. Stocks and bonds are the largest source of external funds to businesses.

C. Firms raise more funds with bonds than with stocks.

Which of the following statements about central bank structure and independence is true? A. In recent years, greater independence has been granted to many central banks with the exception of the Bank of England and the Bank of Japan, which are still subject to strict governmental control. B. In theory, central banks subject to government control produce better monetary policy, but experience suggests that more independent central banks have produced superior monetary policy results. C. In recent years, there has been a remarkable trend toward increasing independence. D. Only A and C are correct. E. All of the above are correct.

C. In recent years, there has been a remarkable trend toward increasing independence.

The financial institutions providing multiple services develop a long-term relationship with their clients. Which of the following could not be a result of the same? A. The economy becomes less efficient B. Increase in asymmetric information problems C. Increase in the cost of producing information. D. Benefits to the financial institution

C. Increase in the cost of producing information.

Why is a public announcement of numerical inflation rate objectives important to the success of an inflation-targeting central bank? A. It reduces the costs of high inflation to society. B. It allows market participants to influence the inflation rate. C. It reduces uncertainty in inflation expectations of market participants. D. It imposes a rigid rule on monetary policymakers and thus limits any change in policy actions.

C. It reduces uncertainty in inflation expectations of market participants.

Which of the following statements regarding technical analysis is not true? A. It favors the efficient market hypothesis. B. It does not outperform the overall market. C. It successfully predicts the changes in stock prices. D. It cannot give flawless rules for when to buy and sell stocks.

C. It successfully predicts the changes in stock prices.

What would happen to the risk premium on corporate bonds if brokerage commissions were lowered in the corporate bond market? A. Lower brokerage commissions for corporate bonds would only reduce the cost of buying and selling thebonds, which would have no impact on the risk premium B. Lower brokerage commissions for corporate bonds would make them more desirable to hold and thus increase demand; consequently, this would raise interest rates and thus raise the risk premium C. Lower brokerage commissions for corporate bonds would make them more liquid and thus increasedemand, which would lower the risk premium D. None of the above

C. Lower brokerage commissions for corporate bonds would make them more liquid and thus increasedemand, which would lower the risk premium

The presidents of each of the district Federal Reserve banks (including the New York Federal Reserve bank) are currently not required to undergo a formal political appointment and approval process. Do you think this isappropriate? A. No. Because private banks can influence the appointment of their district Federal Reservepresident, the benefits of eliminating this potential conflict of interest far outweigh the costs of the approval process. B. Yes. Since only five of the Federal Reserve bank presidents have a vote, they are not able to influence policy matters, thus a formal political appointment and approval process is unnecessary. C. Maybe. A formal approval process is lengthy, which might leave some Federal Reserve districts without leadership, possibly creating more problems than it solves.

C. Maybe. A formal approval process is lengthy, which might leave some Federal Reserve districts without leadership, possibly creating more problems than it solves.

Why might the efficient market hypothesis be less likely to hold when fundamentals suggest stocks should be at a lower level? A. Today, short selling is constrained by rules and regulations to restrict or limit its practice. B. Behavioral finance suggests that most investors enjoy some level of risk-taking, which may keep stocks higher than their fundamental value. C. Most investors are subject to loss aversion, so not enough short selling takes place in the market. D. People tend to be overconfident in their own judgments and trade on their beliefs rather than pure facts.

C. Most investors are subject to loss aversion, so not enough short selling takes place in the market.

Which of the following is an investment intermediary? A. Life insurance companies B. Pension funds C. Mutual funds D. A credit union

C. Mutual funds

A financial adviser has just given you the following advice: "Long-term bonds are a great investment because their interest rate is over 20%." Is the financial adviser necessarily right? A. Yes. The higher the annual interest rate, the higher the annual income on bonds. B. No. When making an investment decision, you should take the yield to maturity into account, not the interest rate. C. No. If interest rates rise sharply in the future, long-term bonds may suffer a sharp fall in price, causing their return to be quite low. D. Yes. If the interest rate remains unchanged until maturity, the price of the bond will be more than its face value.

C. No. If interest rates rise sharply in the future, long-term bonds may suffer a sharp fall in price, causing their return to be quite low.

Following the global financial crisis in 2008, assets on the Federal Reserve's balance sheet increaseddramatically, from approximately $800 billion at the end of 2007 to $3 trillion in 2011. Many of the assets held arelonger-term securities acquired through various loan programs instituted as a result of the crisis. In this situation, how could reverse repos (matched sale-purchase transactions) help the Fed reduce its assets held in an orderlyfashion, while reducing potential inflationary problems in the future? A. Reverse repos serve as a temporary open market sale in which the Federal Reserve temporarily sells assets to further increase its balance sheet, thus increasing the money supply and lowering short-term interest rates. B. Reverse repos serve as dynamic open market operations that are intended to permanently reduce the Federal Reserve's balance sheet, thus limiting fluctuations in the money supply. C. Reverse repos serve as a temporary open market sale in which the Federal Reserve temporarily sells assets to reduce its balance sheet, thus decreasing the money supply and raising short-term interest rates. D. In this situation, the Fed should engage in repurchase agreements (a repo) rather than reverse repos, as this would further expand reserves and the monetary base.

C. Reverse repos serve as a temporary open market sale in which the Federal Reserve temporarily sells assets to reduce its balance sheet, thus decreasing the money supply and raising short-term interest rates.

Which of the following functions is not performed by the twelve Federal Reserve Banks? A. Clearing checks. B. Acting as liaisons with the business community. C. Setting the reserve requirement. D. Withdrawing damaged currency and issuing new currency.

C. Setting the reserve requirement.

Which of the following entities in the Federal Reserve System sets reserve requirements? A. The FDIC B. The Federal Advisory Council C. The Board of Governors D. Member commercial banks

C. The Board of Governors

Which of the following entities in the Federal Reserve SystemLOADING... controls the discount rateLOADING...? A. The FDIC B. The Federal Advisory Council C. The Board of Governors D. Member commercial banks

C. The Board of Governors

Which of the following entities in the Federal Reserve SystemLOADING... controls the discount rateLOADING...? A. The Federal Advisory Council B. The FDIC C. The Board of Governors D. Member commercial banks

C. The Board of Governors

Which is more independent, the Federal Reserve or the European Central Bank? Why? A. The Federal Reserve System—It must be more independent since the European Central Bank was patterned after it. B. The Federal Reserve System—Its charter can be changed through legislation, making it more independent than the European Central Bank. C. The European Central Bank—Its charter cannot be changed through legislation, making it more independent than the Federal Reserve. D. Because the structures of the Federal Reserve and the European Central Bank are similar, it can be argued that the two systems have the same level of independence.

C. The European Central Bank—Its charter cannot be changed through legislation, making it more independent than the Federal Reserve.

Which of the following entities in the Federal Reserve System directs open market operations? A. Member commercial banks B. The Board of Governors C. The FOMC D. The Federal Advisory Council

C. The FOMC

Which of the following is not an important financial intermediary in the economy? A. Commercial banks. B. Credit unions. C. The central bank. D. Finance companies.

C. The central bank.

Why do bank panics worsen asymmetric information problems? A. Bank regulators purposely impede the exchange of information between banks. B. Would-be borrowers withhold information about themselves from banks. C. The collection of information about the creditworthiness of borrower-spenders is inhibited. D. All of the above.

C. The collection of information about the creditworthiness of borrower-spenders is inhibited.`

The figure is drawn such that the discount rate id is above the federal funds rate i1ff . What would happen to the federal funds rate if there was a switch from deposits into currency (holding everything elseconstant) and the federal funds rate was initially at the discount rate (i1ff = id)? Part 4 A. The federal funds rate would fall. B. The federal funds rate would rise. C. The federal funds rate would stay at i1ff . D. The outcome cannot be determined.

C. The federal funds rate would stay at i1ff .

Which of the following actions will lead to an increase in liquidity in the banking system? A. The primary dealers purchase bonds from the Fed. B. The banks repay their loans to the Fed. C. The government securities dealers sell bonds to the Fed. D. All of the above

C. The government securities dealers sell bonds to the Fed.

Why does a financial crisis ultimately cause a substantial reduction in economic activity? A. Only corrupt bankers survive the crisis. B. The government responds to the crisis with excessive regulation. C. The resulting credit crash severely reduces investment for productive activities. D. The financial crisis causes a fiscal deficit.

C. The resulting credit crash severely reduces investment for productive activities.

Why do stock market events like October 1987 or the technology crash of 2000-2001 cast doubt on the efficient market hypothesis A. Large swings in share prices are not possible in efficient markets B. Asset prices do reflect the true fundamental (intrinsic) value of securities C. There may be unexploited profit opportunities in these events D. Stock market crashes are predictable

C. There may be unexploited profit opportunities in these events

Describe two ways in which financial intermediaries help lower transaction costs in the economy. A. They accept only large-denomination deposits and make only a small number of large loans. B. They attract funds from many depositors and only make loans available to large-scale borrowers. C. They pool many small deposits together and specialize in loan risk assessment and other forms of expertise. D. They offer safety-deposit box services to depositors and make only a few loans per year.

C. They pool many small deposits together and specialize in loan risk assessment and other forms of expertise.

Which of the following statements regarding Federal Reserve independence is incorrect? A. The Board of Governors knows that their bureaucratic power can be reined in by congressional legislation and so must still curry favour with both Congress and the president B. In order to gain additional power to regulate the financial system, the governors need the support of Congress and the president to pass favourable legislation C. The 14-year non-renewable terms for governors effectively insulate the Board of Governors from political pressure D. The Fed may feel pressure to support the president's policies since the president can veto legislation that might limit the Fed's discretionary power and authority

C. The 14-year non-renewable terms for governors effectively insulate the Board of Governors from political pressure

To pay for college, you have just taken out a $1,000 government loan that makes you pay $126 per year for 25 years. However, you don't have to start making these payments until you graduate from college two years from now. Why is the yield to maturity necessarily less than 12% (this is the yield to maturity on a normal $1,000 fixed-payment loan in which you pay $126 per year for 25 years)? A. This is the case because market interest rates are less than 12%. B. This is the case because the loan has a government guarantee. C. This is the case because the first payment due begins at a future date. D. This is the case because of the known effects of inflation.

C. This is the case because the first payment due begins at a future date.

Why do U.S. Treasury bills have lower interest rates than large-denomination negotiable bank CDs? A. Bank CDs are affected by inflation differently than are Treasury bills. B. Treasury rates are set by the Federal Reserve at a greater rate than the market-determined CD rate. C. Treasuries are considered to be risk-free debt instruments. D. Treasury bills are short-term debt instruments, whereas CDs are medium-term debt instruments.

C. Treasuries are considered to be risk-free debt instruments.

In which country among the United States, Germany, Japan, and Canada do firms use bonds to the greatest degree when compared to the firms of the other countries? A. Japan B. Germany C. United States D. Canada

C. United States

When bad credit risks have the most to gain from a loan so they most actively seek a loan, we have a demonstration of A. the free-rider problem. B. financial intermediation. C. adverse selection. D. moral hazard.

C. adverse selection.

The principal-agent problem arises because of many reasons except the statement that indicates that A. principals find it difficult and costly to monitor agents' activities. B. principals have incentives to free ride off the monitoring expenditures of other principals. C. agents' incentives are always compatible with those of the principals. D. agents have information not readily available to the principal.

C. agents' incentives are always compatible with those of the principals.

Debt contracts: A. have a higher cost of state verification than equity contract B. are informal agreements between borrowers and lenders C. are used more frequently to raise capital than are equity contracts D. never result in a loss for the lender

C. are used more frequently to raise capital than are equity contracts

According to the Efficient Market Hypothesis, the expected return is determined by several components, except the A. expected price of the security for next period B. cash payment the following period C. average price in the previous period D. price of the security today

C. average price in the previous period According to the Efficient Market Hypothesis, the expected return depends on the expected price of the security for next period, the current price of the security, and the cash payment made up to the following period.

Reinvestment risk is the risk that A. a bond's issuer may fail to make the future coupon payments and the investor will have no cash to reinvest. B. a bond's value may fall in the future. C. a bond's future coupon payments may have to be invested at a rate lower than the bond's yield to maturity. D. an investor's holding period will be short and equal in length to the maturity of the bonds he or she holds.

C. a bond's future coupon payments may have to be invested at a rate lower than the bond's yield to maturity.

The efficient market hypothesis A. is based on the assumption that prices of securities fully reflect all available information. B. holds that the expected return on a security equals the equilibrium return. C. both A and B. D. neither A nor B.

C. both A and B.

Along the supply curve for bonds, an increase in the price of bonds A. increases the interest rate and decreases the quantity of bonds supplied. B. decreases the interest rate and decreases the quantity of bonds supplied. C. decreases the interest rate and increases the quantity of bonds supplied. D. increases the interest rate and increases the quantity of bonds supplied

C. decreases the interest rate and increases the quantity of bonds supplied.

The nominal interest rate minus the expected rate of inflation A. defines the discount rate. B. is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate. C. defines the real interest rate. D. is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate.

C. defines the real interest rate.

In England, the Chancellor of the Exchequer (the equivalent of the US Secretary of Treasury) sets the goal of monetary policy, a target for inflation. Thus, when compared to the Fed, the Bank of England has: Part 2 A. less instrument independence B. more instrument independence C. less goal independence D. more goal independence

C. less goal independence

As a result, when compared to other countries, we would expect Gustavo's nation to have: A. more investment and slower economic growth. B. less investment and faster economic growth. C. less investment and slower economic growth. D. more investment and faster economic growth.

C. less investment and slower economic growth.

Your parents loan you money to pay your tuition, and you use the money to play online poker instead. This is an example of A. financial intermediation B. the free-rider problem C. moral hazard D. adverse selection

C. moral hazard

Defaults: A. arise when banks borrow money from the Federal Reserve. B. are loans made to credit-worthy borrowers. C. occur when a borrower cannot make his loan payments. D. are prevented by government insurance available to all banks.

C. occur when a borrower cannot make his loan payments.

Financial crises A. occur when financial frictions decrease sharply. B. often begin with financial liberalization or innovation C. occur when information flows in financial markets experience a particularly large disruption. D. is followed by an economic boom.

C. occur when information flows in financial markets experience a particularly large disruption.

What monetary policy tool does the Fed use to control the amount of nonborrowedreserves? A. discount lending B. interest on reserves C. open market operations D. reserve requirements

C. open market operations

When a market bubble occurs, ________. Question content area bottom Part 1 A. a "thin layer" of trading masks true market movements B. market fundamentals and actual security prices converge C. prices of assets rise well above their fundamental values D. prices of assets fluctuate rapidly above and below market fundamentals

C. prices of assets rise well above their fundamental values

There was no central bank in the United States between 1836 and 1913 because of the following except: A. distrust of moneyed interests. B. expiration of the charter of the Second Bank of the United States. C. prominent support for centralized power. D. open hostility by the American public to the existence of central banks.

C. prominent support for centralized power.

Which of the following reduces both adverse selection and moral hazard in a loan arrangement? A. asking for the borrower's credit history B. asking the minimum wage worker to work harder to increase the profits of a store. C. requiring that the borrower have high net worth D. monitoring the borrower closely after the loan is made.

C. requiring that the borrower have high net worth

Which of the following has not been a source of past financial crises in the United States? A. a spike in interest rates B. the bursting of an asset-price bubble C. severe government fiscal imbalances D. mismanagement of financial liberalization or innovation

C. severe government fiscal imbalances

Which of the following is an example of a nominal variable: A. output B. consumption C. the money supply D. the labor supply

C. the money supply

The financial intermediary that helps reduce the moral hazard arising from the principal-agent problem is known as A. costly state verification B. the primary market C. venture capital firm D. lemons

C. venture capital firm

With an interest rate of 10 percent, the present value of a security that pays $1,100 next year and $1,460 four years from now is approximately A. $2,560. B. $3,000. C. $2,000. D. $1,000.

C. $2,000.

Which of the following is not a reason why most central banks aren't more proactive at trying to use monetary policy to eliminate asset-price bubbles? A. Raising interest rates may be very ineffective in restraining bubbles. B. Monetary policy actions to prick bubbles can have harmful effects on the aggregate economy. C. Asset-price bubbles are a normal part of any economy and therefore require no further policy response. D. Asset-price bubbles are nearly impossible to identify.

C. Asset-price bubbles are a normal part of any economy and therefore require no further policy response.

"If most participants in the stock market do not follow what is happening to monetary aggregates, prices of common stocks will not fully reflect information about them." Is this statement true or false? Part 2 A. True, as the market will not have used all of the available information in determining prices. B. True, as everyone in a market has to be knowledgeable for the market to be efficient. C. False, as full information can be gained with only some participants eliminating unexploited profit opportunities. D. False, as everyone that participates in the stock market will follow what happens to monetary aggregates.

C. False, as full information can be gained with only some participants eliminating unexploited profit opportunities.

Since the customer will be paying more than you are receiving, would it make sense for you to offer a loan to that individual at a higher rate than you will receive on your certificate of funds (but still competitively lower than the rate currently offered to the car loan borrower)? A. No, the law restricts such lending activities to licensed financial intermediaries. B. Yes, you are better able to monitor the borrower's activities than the bank. C. No, the bank is more efficient than you at dealing with asymmetric information problems. D. Yes, you will make more money and the borrower will pay less.

C. No, the bank is more efficient than you at dealing with asymmetric information problems.

Will there be an effect on interest rates if brokerage commissions on stocks fall? A. Yes, interest rates would rise because people would want to hold more stocks and fewer bonds, which would increase the demand for bonds B. No, interest rates would remain the same because the brokerage commissions would only affect the stock market C. Yes, interest rates would rise because stocks become more liquid than before, which would reduce the demand for bonds D. Yes, interest rates would fall because stocks would have a relatively higher rate of return than bonds, which would reduce the demand for bonds

C. Yes, interest rates would rise because stocks become more liquid than before, which would reduce the demand for bonds The lower commission on stocks makes them more liquid than before, and the demand for bonds will fall. The demand curve will therefore shift to the left, and the equilibrium interest rate will rise.

Credit-driven bubbles are ____ to identify and pose a ____threat to the financial system compared to bubbles driven solely by irrational exuberance. A. easier; smaller B. harder; larger C. easier; larger D. harder; smaller

C. easier; larger

The Bush tax cut passed in 2001 reduces the top income tax bracket from 39 percent to 35 percent over the next ten years. As a result of this tax cut, the demand for municipal bonds should shift to the ________ and the interest rate on municipal bonds should ________.

C. left; increase

Suppose you visit with a financial adviser, and you are considering investing some of your wealth in one of three investment portfolios: stocks, bonds, or commodities. Your financial adviser provides you with the following table, which gives the probabilities of possible returns from each investment: If you are risk-averse and had to choose between the stock or the bond investments, you would choose: A. the stock portfolio because there is less uncertainty over the outcome. B. the bond portfolio because there is less uncertainty over the outcome. C. the stock portfolio because of greater expected return. D. the bond portfolio because of greater expected return.

Calculate each expected return to make decision: Re = (p1R1)+(p2R2)... highest % value is best option Answer: commodities here Pt 2. B. (standard deviation)

▼ Unsecured debt Bond Venture capital Collateral is property that is pledged to a lender to guarantee payment in the event that the borrower is unable to make debt payments.

Collateral

▼ Venture capital Unsecured debt Bond Collateral is property that is pledged to a lender to guarantee payment in the event that the borrower is unable to make debt payments.

Collateral

in which of the following situations would you choose to hold the corporate bond over the municipal bond, assuming that corporate and municipal bonds have the same maturity, liquidity, and default risk? A. The corporate bond pays 10%, the municipal bond pays 9%, and your marginal income tax rate is20%. B. The corporate bond pays 10%, the municipal bond pays 8%, and your marginal income tax rate is25%. C. The corporate bond pays 10%, the municipal bond pays 7%, and your marginal income tax rate is35%. D. The corporate bond pays 10%, the municipal bond pays 7%, and your marginal income tax rate is25%.

"Since financial crises can impart severe damage to the economy, a central bank's primary goal should be to ensure stability in financial markets." Is this statement true, false, or uncertain? Explain your answer. A. True. If financial market stability is maintained, then funds are channeled to the most productive investmentopportunities, thus leading to an expansion in economic activity. B. False. Price stability should always be the primary goal of any central bank. C. True. If financial market stability had been pursued, the 2007-2009 recession would have been prevented. D. Uncertain. Although stability in financial markets is an important goal, focusing on other goals such as stabilizing employment, output, or even short-term movements in the business cycle may be more important to the economy.

Would interest rates of Treasury securities be affected by the tax rate change? Part 4 A. Yes, because the increase in interest rates would increase the desire to hold more municipal bonds and less Treasury securities. B. No, there would be no impact on the market for Treasury securities. C. Yes, because municipal bonds are less risky than Treasury securities, the demand for Treasury securities will decrease. D. Yes, because the reduction in the tax-exempt privilege in municipal bonds would raise the relative value of Treasury securities, making Treasury securities more desirable.

What is the reason for this problem? A. A manager does not have access to sufficient resources to run the corporation efficiently. B. Owners limit the manager's ability to run the corporation efficiently. C. Stockholder meetings are infrequent, and the manager has to wait for these results to get anything done. D. A manager does not have sufficient incentive to maximize the company's profits.

D. A manager does not have sufficient incentive to maximize the company's profits.

How can a bursting of an asset-price bubble in the stock market trigger a financial crisis A. A reduction in asset prices causes borrowing firms to have less to lose so they are willing to take on additional risk B. A reduction in asset prices causes a serious deterioration in borrowing firms' balance sheets C. A reduction in asset prices causes lenders to become more cautious and reduce the amount of loans they make D. All of the above are correct

D. All of the above are correct

In what ways can the regional Federal Reserve Banks influence the conduct of monetary policy? A. By having five of their presidents sit on the FOMC. B. Through their administration of the discount facilities at each bank. C. By having members serve on the Federal Advisory Council. D. All of the above are correct.

D. All of the above are correct.

Which of the following is associated with asymmetric information in a financial crisis? A. There is a lack of information about one or more of the parties involved in a transaction. B. Moral hazard could occur when only borrowers know if the funds will be used to finance high-risk activities. C. Adverse selection can occur if lenders must select from a pool of bad credit risks. D. All of the above are correct.

D. All of the above are correct.

Why, considering most float changes are temporary, do repurchase agreements fit better than outright purchases? A. Repurchase agreements are used more often for defensive operations. B. Repurchase agreements are temporary in their time frame. C. Repurchase agreements can be easily counteracted if the float changes again. D. All of the above are correct.

D. All of the above are correct.

Why, considering most float changes are temporary, do repurchase agreements fit better than outright purchases? A. Repurchase agreements can be easily counteracted if the float changes again. B. Repurchase agreements are used more often for defensive operations. C. Repurchase agreements are temporary in their time frame. D. All of the above are correct.

D. All of the above are correct.

Which of the following are generally true of all bonds? A. Prices and returns for long−term bonds are more volatile than those for shorter−term bonds. B. Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise. C. The longer a bond's maturity, the lower is the rate of return that occurs as a result of the increase in the interest rate. D. All of the above are true. E. Only A and B of the above are true

D. All of the above are true.

Factors contributing to the occurrence of bank panics include A. widespread uncertainty about the health of the banking system. B. the absence of any lender of last resort to supply funds to stressed banks. C. the lack of some form of deposit insurance to reassure worried depositors. D. All of the above. E. A and C only.

D. All of the above.

Which of the following are true of coupon bonds? A. The owner of a coupon bond receives a fixed interest payment every year until the maturity date, when the face or par value is repaid. B. Corporate bonds are examples of coupon bonds. C. U.S. Treasury bonds and notes are examples of coupon bonds. D. All of the above. E. Only A and B of the above.

D. All of the above.

Which of the following statements about the characteristics of debt and equity are true? A. They both enable a corporation to raise funds. B. They both involve a claim on the issuer's income. C. They both can be long−term financial instruments. D. All of the above. E. Only A and B of the above.

D. All of the above.

The goals of monetary policy for most central banks include: Part 2 A. high employment B. stability in foreign exchange markets C. output stability D. Both A and B are correct E. All of the above are correct

D. Both A and B are correct

When an economy is at its natural rate of unemployment: A. the rate of unemployment is zero. B. the economy is at a full-employment level. C. the demand for labor is equal to the supply of labor. D. Both B and C are correct. E. All of the above are correct.

D. Both B and C are correct.

Which of the following statements about market bubblesLOADING... is accurate? Part 2 A. Loss aversion, investor overconfidence, and social contagion often lead to decreases in market bubbles. B. With market bubbles, unexploited profit opportunities may exist, adding further proof to the stronger view of market efficiency. C. Bubbles represent irrational behavior because asset prices are higher than their fundamental value, but investors continue to hold these assets anyway. D. Bubbles can occur when investors buy an asset above its fundamental price in the belief that someone else will buy the asset for a higher price in the future.

D. Bubbles can occur when investors buy an asset above its fundamental price in the belief that someone else will buy the asset for a higher price in the future.

____________ are intended to change the level of reserves and the monetary base. A. Defensive open market operations B. Open market sales C. Open market purchases D. Dynamic open market operations

D. Dynamic open market operations

Retired persons often have much of their wealth placed in savings accounts and other interest-bearing investments, and complain whenever interest rates are low. Which of the following, if true, would be a valid complaint? A. Nominal interest rates decrease, while there is a slight increase in real interest rates. B. There has not been significant growth of nominal interest rates for the last 5 years. C. Expected inflation is falling at the same rate as nominal interest rates. D. Expected inflation is falling at a slower rate than nominal interest rates.

D. Expected inflation is falling at a slower rate than nominal interest rates.

How can economies of scale help explain the existence of financial intermediaries A. Financial intermediaries are relatively large institutions. B. Financial intermediaries have exclusive access to communications technology in the financial sector. C. Financial intermediaries with their vault technology can specialize in keeping deposits safe. D. Financial intermediaries are able to operate with lower transaction costs relative to individual lenders or borrowers.

D. Financial intermediaries are able to operate with lower transaction costs relative to individual lenders or borrowers.

Which of the following is not an important reason for the regional Federal Reserve bank presidents to attend the FOMC meetings, even if they are nonvoting members? A. It provides an opportunity for bank presidents to contribute information about economic conditions in their district. B. By attending meetings, nonvoting members can participate in deliberations and discussions of the FOMC. C. By attending meetings, bank presidents may have an opportunity to influence the committee's decisions. D. It provides a greater opportunity for nonvoting members to become voting members in the future

D. It provides a greater opportunity for nonvoting members to become voting members in the future

Which of the following is not an important reason for the regional Federal Reserve bank presidents to attend the FOMCmeetings, even if they are nonvoting members? A. By attending meetings, nonvoting members can participate in deliberations and discussions of the FOMC. B. By attending meetings, bank presidents may have an opportunity to influence the committee's decisions. C. It provides an opportunity for bank presidents to contribute information about economic conditions in their district. D. It provides a greater opportunity for nonvoting members to become voting members in the future.

D. It provides a greater opportunity for nonvoting members to become voting members in the future.

Which of the following facts could be the reason behind failure of efficient market hypothesis in real life? A. Stock prices follow a random-walk. B. The investment analysts and mutual funds cannot beat the market. C. Technical analysis is a waste of time. D. New information does not immediately get incorporated into stock prices.

D. New information does not immediately get incorporated into stock prices.

Which of the following findings is consistent with the evidence on efficient market hypothesis? A. Mutual funds outperformed the market and investment analysts on average. B. The group of advisers that didn't do well in the first period could not beat the market in the second period. C. Investment analysts who had been successful in the past at predicting the stock market could beat the market. D. None of the above.

D. None of the above.

Which of the following findings is consistent with the evidence on efficient markethypothesis? A. The group of advisers that didn't do well in the first period could not beat the market in the second period. B. Mutual funds outperformed the market and investment analysts on average. C. Investment analysts who had been successful in the past at predicting the stock market could beat the market. D. None of the above.

D. None of the above.

Advocates of Fed independence fear that subjecting the Fed to direct presidential or congressional control would: A. impart an inflationary bias to monetary policy. B. force monetary authorities to sacrifice the long-run objective of price stability. C. make the so-called political business cycle less pronounced. D. Only A and B are correct. E. All of the above are correct.

D. Only A and B are correct.

Advocates of Fed independence fear that subjecting the Fed to direct presidential or congressional control would: Part 2 A. impart an inflationary bias to monetary policy. B. force monetary authorities to sacrifice the long-run objective of price stability. C. make the so-called political business cycle less pronounced. D. Only A and B are correct. E. All of the above are correct.

D. Only A and B are correct.

Which of the following statements is true? A. Both a coupon bond and a perpetuity can have a negative nominal interest rate. B. Only a perpetuity can have a negative nominal interest rate. C. Neither a coupon bond nor a perpetuity can have a negative nominal interest rate. D. Only a coupon bond can have a negative nominal interest rate.

D. Only a coupon bond can have a negative nominal interest rate.

Which of the following entities in the Federal Reserve System sets reserve requirements? A. The Federal Advisory Council B. Member commercial banks C. The FDIC D. The Board of Governors

D. The Board of Governors

Which of the following entities in the Federal Reserve System directs open market operationsLOADING...? A. The Board of Governors B. The Federal Advisory Council C. Member commercial banks D. The FOMC

D. The FOMC

Why is the composition of the Fed's balance sheet a potentially important aspect of monetary policy during acrisis? A. Providing liquidity to financial organizations adds reserves to the general banking system and reduces risk. B. A consistent composition of the Fed's balance sheet provides transparency and certainty for markets and households in making decisions about the future. C. When the Fed provides liquidity to a particular segment of the credit market, it can freeze the market and hence decrease inflation. D. The Fed can influence interest rates and provide more targeted liquidity.

D. The Fed can influence interest rates and provide more targeted liquidity.

What would happen to the federal funds rate if there was an increase in the amount of checkable deposits (holding everything else constant) and the federal funds rate was initially at the discount rate (i1ff = id)? Part 4 A. The federal funds rate would fall. B. The outcome cannot be determined. C. The federal funds rate would rise. D. The federal funds rate would stay at i1ff .

D. The federal funds rate would stay at i1ff .

In which of the following situations would you prefer to be making a loan? A. The interest rate is 25 percent and the expected inflation rate is 50 percent. B. The interest rate is 9 percent and the expected inflation rate is 7 percent. C. The interest rate is 13 percent and the expected inflation rate is 15 percent. D. The interest rate is 4 percent and the expected inflation rate is 1 percent.

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

Why was the Term Auction Facility (TAF) more widely used by financial institutions than the discount window during the global financial crisis? A. The banks that were accessing these funds were well−known, which helped them to maintain good reputation. B. Using the TAF provided more tax deductions than using the discount window. C. The interest rate on such loans was set by the Fed, so future changes were more predictable. D. The interest rate on TAF loans was less than the discount rate.

D. The interest rate on TAF loans was less than the discount rate.

What could be the fundamental reason for the downgrade of the reputation of the credit rating agencies in the2007-2009 financial crisis? A. The issuers of bonds were paying fees to the credit rating agencies to rate their products. B. There were higher consultancy fees compared to rating fees. C. The credit rating agencies were providing consultancy services and rating services to the same client. D. The products rated least risky by the credit rating agencies defaulted.

D. The products rated least risky by the credit rating agencies defaulted.

What is the purpose of a nominal anchor? A. To allow discretionary monetary policy B. To have a time-inconsistency problem C. To provide an unexpected constraint on discretionary policy D. To prevent the time-inconsistency problem

D. To prevent the time-inconsistency problem

Why did the Bank of England up until 1997 have a low degree of independence? A. The Bank of England was formally independent of the government until 1997. B. Until 1997, the inflation target was determined solely by the Bank of England. C. The Bank of England was not a member of the European Monetary Union until 1997. D. Until 1997, the power to set interest rates was determined exclusively by Her Majesty's Treasury.

D. Until 1997, the power to set interest rates was determined exclusively by Her Majesty's Treasury.

Why was the Term Auction Facility (TAF) more widely used by financial institutions than the discount window during the global financial crisis? A. The interest rate on such loans was set by the Fed, so future changes were more predictable. B. Using the TAF provided more tax deductions than using the discount window. C. The interest rate on TAF loans was close to the federal funds rate. D. Using the TAF funds provided some anonymity, which helped to avoid the stigma associated with discount window lending

D. Using the TAF funds provided some anonymity, which helped to avoid the stigma associated with discount window lending

When the risk that some banks might fail increases, depositors may not have enough information to determine whether their bank is a good one or one of the banks at greater risk to fail. Depositors have an incentive to withdraw their deposits before the bank runs out of funds. If this becomes a widespread occurrence, it is known as: A. moral hazard. B. adverse selection. C. debt deflation. D. a bank panic.

D. a bank panic.

Which of the following is not an essential element of inflation targeting? A. public announcement of a numerical target for inflation B. an institutional commitment to price stability as the primary, long-run goal of monetary policy C. increased transparency of monetary policy D. a mechanism for firing the head of the central bank if the inflation target is not achieved

D. a mechanism for firing the head of the central bank if the inflation target is not achieved

The Greenspan Doctrine A. applies only to credit-driven bubbles. B. summarizes the "leaning" against asset-price bubbles view. C. suggests monetary policy can play a role in eliminating asset-price bubbles. D. advocates that monetary policymakers respond to asset-price bubbles only insofar as it affects its price stability and output objectives.

D. advocates that monetary policymakers respond to asset-price bubbles only insofar as it affects its price stability and output objectives.

The efficient market hypothesis suggests that investors should not try to outguess the market by constantly buying and selling securities. B. investors do better on average if they adopt a "buy and hold" strategy. C. buying into a mutual fund is a sensible strategy for a small investor. D. all of the above are sensible strategies. E. only A and B of the above are sensible strategies.

D. all of the above are sensible strategies.

Yield curves can be classified as A. upward−sloping. B. downward−sloping. C. flat. D. all of the above.. E. only A and B of the above.

D. all of the above..

The risk-channel of monetary policy A. is propagated by low interest rates from overly easy monetary policy. B. suggests that monetary policy should be used to lean against credit bubbles. C. is caused by the incentives for asset managers to search for yield. D. all options are correct.

D. all options are correct.

Regardless of the original source of the financial crisis, all credit booms end in a credit crash because of A. massive government deficits. B. corruption in the mortgage industry. C. collateralized debt obligations. D. an increase in adverse selection and moral hazard in the loan market.

D. an increase in adverse selection and moral hazard in the loan market.

Which of the following is not a goal of monetary policy? A. low interest rates B. high employment C. economic growth D. an unemployment rate as close to zero as possible

D. an unemployment rate as close to zero as possible

When a fire sale occurs, A. uncertainty is reduced. B. adverse selection and moral hazard are reduced. C. financial frictions are low. D. banks may become insolvent.

D. banks may become insolvent.

If the price of bonds is below the equilibrium price, there occurs an excess A. supply of bonds, the price of bonds will fall, and the interest rate will rise. B. supply of bonds, the price of bonds will rise, and the interest rate will fall. C. demand for bonds, the price of bonds will fall, and the interest rate will rise. D. demand for bonds, the price of bonds will rise, and the interest rate will fall

D. demand for bonds, the price of bonds will rise, and the interest rate will fall

When the yield curve is inverted, the yield curve is ____.

D. downward−sloping

Asymmetric information can lead to widespread collapse of financial intermediaries, referred to as a A. financial disintermediation. B. financial collapse. C. bank holiday. D. financial panic.

D. financial panic.

Proponents of a Fed under greater control of the president or Congress argue that A. the Fed has always used its independence successfully. B. some sacrifices in unemployment is necessary to lower inflation. C. it is undemocratic to have monetary policy controlled by an elite group. D. greater control would help coordinate fiscal and monetary policies.

D. greater control would help coordinate fiscal and monetary policies.

While legislation enacted in 1998 granted the Bank of Japan new powers and greater autonomy, its critics contend that: A. its independence is limited since the Ministry of Finance can dismiss senior bank officials B. its independence is too great because it need not pursue a policy of price stability even if that is the popular will of the people C. its independence is too great since the Ministry of Finance no longer has veto power over the Bank's budget. D. its independence is limited by the Ministry of Finance's veto power over part of the Bank's budget E. None of the above are correct

D. its independence is limited by the Ministry of Finance's veto power over part of the Bank's budget

Debt contracts are A. established by borrowers to differentiate themselves from other individuals or firms. B. very simple legal documents that place restrictions on the borrower. C. meant to guide relatively small businesses obtain some additional investment. D. long legal documents with substantial provisions

D. long legal documents with substantial provisions

Banks reduce the free-rider problem in information production by A. buying tradable securities with their depositors' funds. B. charging others for information about the financial condition of potential borrowers. C. serving as an intermediary that holds scarcely any nontraded loans. D. making private, nontraded loans so other lenders cannot benefit from the information they have collected about the borrower

D. making private, nontraded loans so other lenders cannot benefit from the information they have collected about the borrower

Problems created by asymmetric information after the transaction occurs is called ________, while the problem created before a transaction occurs is called ________. A. adverse selection; moral hazard B. costly state verification; free riding C. free riding; costly state verification D. moral hazard; adverse selection

D. moral hazard; adverse selection

An open market purchase will cause A. borrowed reserves to fall and the federal funds rate to rise. B. nonborrowed reserves to fall and the federal funds rate to rise. C. borrowed reserves to rise and the federal funds rate to fall. D. non borrowed reserves to rise and the federal funds rate to fall

D. non borrowed reserves to rise and the federal funds rate to fall

What monetary policy tool does the Fed use to control the amount of nonborrowed reserves? A. discount lending B. interest on reserves C. reserve requirements D. open market operations

D. open market operations

An open market operation by the European Central Bank aimed at maintaining the level of reserves is called a A. longer-term refinancing operation. B. defensive open market operation. C. dynamic open market operation. D. reverse transaction. In contrast to the Federal Reserve, the European Central Bank A. accepts the most attractively priced bids. B. does not purchase securities. C. decentralizes its open market operations. D. does no repo transactions.

D. reverse transaction. C. decentralizes its open market operations.

The "lemons problem" applies to financial markets for many reasons except that A. only risky borrowers sell securities. B. borrowers know more about the probability of default than lenders. C. lenders cannot distinugish good firms from bad. D. the market is large and efficient.

D. the market is large and efficient.

The risk structure of interest rates is A. the relationship among the terms to maturity of different bonds. B. the structure of how interest rates move over time. C. the relationship among interest rates on bonds with different maturities. D. the relationship among interest rates of different bonds with the same maturity.

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

When the charter of the Second Bank of the United States expired in 1836: A. it created a central bank to help prevent future bank panics. B. bank panics and losses to depositors declined. C. the Treasury assumed the role as lender of last resort. D. there was no lender of last resort to provide reserves to the banking system.

D. there was no lender of last resort to provide reserves to the banking system.

The primary reason for the creation of the Federal Reserve System was: A. to stabilize short-term interest rates. B. to eliminate state-chartered banks. C. to create a single central bank similar to the Bank of England. D. to reduce or eliminate future bank panics.

D. to reduce or eliminate future bank panics.

Interest rates were lower in the mid-1980s than in the late 1970s, yet many economists have commented that real interest rates were actually much higher in the mid- 1980s than in the late 1970s. Consider the diagram to the right that shows the nominal interest rate and the inflation rate. The real interest rate: A. was negative from the early 1980s until about 2002 and then it became positive. B. was higher in 2005 than 1985, when the real interest rate was negative. C. tends to fall when the inflation rate falls. D. was higher in 1985 than 2005, when the real interest rate was zero.

D. was higher in 1985 than 2005, when the real interest rate was zero. in 1985 blue line was much higher than red 2005- they crossed

New information reveals that a stock's price will be $150 in one year. If the stock pays no dividends, and the required return is 10%, what does the efficient market hypothesis indicate the price will be today? Question content area bottom Part 1 A. $142.59 B. $130.33 C. $145.00 D. $136.36

D. $136.36

"If most participants in the stock market do not follow what is happening to monetary aggregates, prices of common stocks will not fully reflect information about them." Is this statement true or false? A. True, as everyone in a market has to be knowledgeable for the market to be efficient. B. False, as everyone that participates in the stock market will follow what happens to monetary aggregates. C. True, as the market will not have used all of the available information in determining prices. D. False, as full information can be gained with only some participants eliminating unexploited profit opportunities.

D. False, as full information can be gained with only some participants eliminating unexploited profit opportunities.

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 one year later? A. −10 percent B. 5 percent C. 10 percent D. −5 percent E. None of the above

D. −5 percent

Which of the following is not true regarding efficient markets? A. Smart money eliminates unexploited profit opportunities. B. Hot tips in the stock market are unlikely to bring exceptional returns. C. The prices of securities reflect all available information. D. everyone in the market must be well informed

D. everyone in the market must be well informed The prices of securities reflect all available information. Not everyone, however, needs to be informed about such information.

Which of the following is unlikely to cause a reduction in lending? A. a increase in interest rates B. an unanticipated decline in the price level C. a bank panic D. a boom in the stock market

D. a boom in the stock market

Relatively smaller companies are more likely than large, well-known to acquire funds through A. nonbank financial intermediaries B. direct finance C. issuing collateral D. banks

D. banks

Because of transaction costs in financial markets, we can say that A. investors choose to invest a smaller amount on stocks. B. more investors will find it profitable to keep their money in the financial markets. C. investors are more inclined to invest in different stocks. D. some investors may find it more profitable to invest in something else other than financial markets

D. some investors may find it more profitable to invest in something else other than financial markets

The European system of central banks uses similar monetary policy tools to that of the Federal reserve. These toolsinvolve: A. open market operations B. lending to banks C. reserve requirements D. Both A and C are correct E. All of the above are correct

E. All of the above are correct

Question content area Part 1 Why is the New York Federal Reserve always a voting member on the FOMC? A. It is the only Federal Reserve bank that is a member of the Bank for International Settlements (BIS). B. The New York Federal Reserve is actively involved in the bond and foreign exchange markets. C. The New York Federal Reserve district contains many of the largest commercial banks in the United States. D. Only A and C are correct. E. All of the above are correct.

E. All of the above are correct.

Which of the following are investment intermediaries? A. Mutual funds B. Finance companies C. Pension funds D. All of the above E. Only A and B of the above

E. Only A and B of the above

Question content area top Part 1 How expectations are formed is important because expectations influence Question content area bottom Part 1 A. the demand for assets. B. the risk structure of interest rates. C. bond prices. D. the term structure of interest rates. E. all of the above.

E. all of the above.

Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. Financial intermediaries A. act as middlemen, borrowing funds from those who have saved and lending these funds to others. B. produce nothing of value and are therefore a drain on society's resources. C. help promote a more efficient and dynamic economy. D. do all of the above. E. do only A and C of the above.

E. do only A and C of the above.

According to the expectations theory of the term structure, A. when the yield curve is steeply upward−sloping, short−term interest rates are expected to rise in the future. B. when the yield curve is downward−sloping, short−term interest rates are expected to decline in the future. C. buyers of bonds prefer short−term to long−term bonds. D. all of the above. E. only A and B of the above.

E. only A and B of the above.

Calculate the expected returns for the following two assets: Asset A pays a return of $3,000 30% of the time and $1000 70% of the time. Asset B pays a return of $2,400 60% of the time and $800 40% of the time.

ER Asset A: $1600 ER Asset B: $1760

Suppose there is an increase in the growth rate of the money supply. If the liquidity effect is smaller than the income, price-level, and expected inflation effects, and if inflationary expectations adjust slowly, then in the short run, interest rates A. become unpredictable. B. remain unchanged. C. rise. D. fall.

Fall When the liquidity effects are smaller than the other effects but the expectations about future inflation adjust slowly, lower interest rates result from increased money growth in the short run. Eventually, they end up climbing above the initial level.

When the Federal Reserve decreases the growth rate of the money supply, the income effect causes the interest rate to ▼ rise remain the same fall while the liquidity effect drives the interest rate ▼ down up .

Fall up The income effect of an increase in the growth rate of the money supply is a rise in interest rates in response to the higher level of income. The liquidity effect, on the other hand, pressures the interest rate to go down. The opposite is true for a decrease in the growth rate.

Identify whether the following statements are true or false. Publishing the analysts' recommendation for bonds and other products to the general public and investor as per the Global Legal Settlement will cause a decline in U.S. capital markets: ▼ TrueFalse According to the Sarbanes-Oxley Act, an accounting firm cannot provide consultancy on business strategy and advice on accounting to the same firm: ▼ FalseTrue

False False

True or False: Publishing the analysts' recommendation for bonds and other products to the general public and investor as per the Global Legal Settlement will cause a decline in U.S. capital markets: According to the Sarbanes-Oxley Act, an accounting firm cannot provide consultancy on business strategy and advice on accounting to the same firm:

False False

___are the most important source of external funds to finance businesses.

Financial Intermediaries

▼ Bonds Financial intermediaries Venture capital firms Stocks are the most important source of external funds to finance businesses.

Financial intermediaries

▼ Free rider problem Moral hazard Adverse selection is an issue that occurs when people who do not pay for information take advantage of the information that other people have paid for.

Free rider problem

▼ Moral hazard Free rider problem Adverse selection is an issue that occurs when people who do not pay for information take advantage of the information that other people have paid for.

Free rider problem

If a one-year discount bond that pays $1,000 at maturity, is held for the entire year, and the purchase price is $940, then the interest rate is

I = 6 %

▼ Loss aversion Overconfidence leads to very little short selling which explains why the stock prices sometimes get overvalued

Loss aversion

For every $1,000 of annual income, households maintain average cash balances (their demand for money) of $200. How will growth in GDP affect interest rates, holding the money supply constant? Use the liquidity preference framework. 1.) Using the line drawing tool, show the effect of growth in GDP using the liquidity preference framework. Properly label your line. 2.) Using the point drawing tool, indicate the new equilibrium interest rate and quantity of money. Label the point '2'.

Md shifts right

When borrowers engage in activities that reduce the probability of loans being paid back to lenders, it is the problem of ___ It occurs ___the transaction.

Moral hazard after

The budget of the ECB is controlled by the ▼ National Central Banks Governing Council ECB president .

National Central Banks

Which of the following is an example of financial intermediation? A. IBM issues common stock that is sold to a college student. B. IBM issues a bond that is sold to a retired person. C. U.S. Treasury sells bonds to fund government spending. D. A saver makes a deposit in a credit union, and the credit union makes a loan to a member for a new car.

D. A saver makes a deposit in a credit union, and the credit union makes a loan to a member for a new car.

Foreign bonds have been an important instrument in the international capital market for centuries. In fact, a large percentage of U.S. railroads built in the nineteenth century were financed by sales of foreign bonds in _____. Canada B. Germany C. Japan D. Britain

D. Britain

How does a fall in the value of the pound sterling affect British consumers? Domestic interest rates increase; British consumers find it more expensive to borrow B. Foreign goods are now relatively cheaper; British consumers will benefit C. Domestic goods are now relatively more expensive; British consumers are hurt D. Foreign goods are now relatively more expensive; British consumers are hurt

D. Foreign goods are now relatively more expensive; British consumers are hurt

Which of the following questions fall beyond the scope of the applied managerial perspective? A. How does the manager of a financial institution manage risk? B. Should the manager hire experts to develop new profitable financial products? C. How does the manager come up with new ideas for his institution? D. Should the manager increase interest rates in the presence of economic fluctuations?

D. Should the manager increase interest rates in the presence of economic fluctuations? Applied managerial perspective introduces and answers the real-world problems that managers of financial institutions commonly face and need to solve in their day to-day jobs. For example, how does the manager of a financial institution come up with a new financial product that will be profitable? How does a manager of a financial institution manage the risk that the institution faces from fluctuations in interest rates, stock prices, or foreign exchange rates? Should a manager hire an expert on Federal Reserve policy making to help the institution discern where monetary policy might be going in the future? Etc. He does not have authority to manage the interest rate in the economy in response to economic fluctuations.

Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. What function do financial intermediaries perform? A. They produce nothing of value and are therefore a drain on society's resources. B. These institutions can hurt the performance of the economy. C. They are a source of slow and resistant financial innovation. D. They provide a channel for linking those who want to save with those who want to invest.

D. They provide a channel for linking those who want to save with those who want to invest.

What is the typical relationship between interest rates on 6-month Treasury bills, 10-year Treasury notes, and Baa corporatebonds? A. They tend to move together over time with the 6-month Treasury bill having the highest rate of interest B. They tend to move randomly and independent of each other C. All three rates are virtually exact representations of the rate of inflation D. They tend to move together over time with the corporate bond having the highest rate of interest

D. They tend to move together over time with the corporate bond having the highest rate of interest

Changes in stock prices A. affect people's wealth and their willingness to spend. B. affect firms' decisions to sell stock to finance investment spending. C. are characterized by considerable fluctuations. D. all of the above. E. only A and B of the above.

D. all of the above.

The government employs the following types of regulations in an attempt to ensure the soundness of our financial intermediaries except A. disclosure. B. restrictions on entry. C. restrictions on interest rates. D. bolstering competition.

D. bolstering competition. To protect the public and the economy from financial panics, the government has implemented six types of regulations: restrictions on entry, disclosure, restrictions on assets and activities, deposit insurance, limits on competition, and restrictions on interest rates.

Fill in the following blanks. 1) Bonds issued by Volkswagen in the United States that are denominated in U.S. dollars are ▼ equity bond scurrency bonds Euro bonds foreign bonds. 2) Bonds issued by Axis bank in Germany that are denominated in U.S. dollars are ▼ currency bondsequity bondsEurobondsforeign bonds.

Foreign bonds Eurobonds Foreign bonds are sold in a foreign country and are denominated in that country's currency. A more recent innovation in the international bond market is the Eurobond, a Bond denominated in a currency other than that of the country in which it is sold.

Special case applications from "The Practicing Manager" will provide you with some special analytic tools that you will need if you make your career at a

Financial Institution "ThePracticing Manager" cases introduce you to thereal-world problems that managers of financial institutions commonly face and need to solve in their day-to-day jobs, and provide you with some special analytic tools that you will need if you make your career at a financial institution. They also give you a feel for what a job as the manager of a financial institution is all about.

Banks

Financial institutions that accept deposits and make loans (such as commercial banks, savings and loan associations, and credit unions).

State whether the following statements are true or false. 1. Eurodollars are U.S. dollars deposited in U.S. banks. 2. All the bonds denominated in euros are called Eurobonds. 3. Eurocurrencies are similar to short-term Eurobonds.

false false true

The stock market is important because

it is the most widely followed financial market in the United States.

are debts or financial obligations that must be repaid.

liabilities

This textbook emphasises an applied_____ perspective in teaching you about financial markets and institutions.

managerial

This textbook emphasizes an applied ▼ managerial employee perspective in teaching you about financial markets and institutions.

managerial This book emphasizes an applied managerial perspective in teaching you about financial markets and institutions. Special case applications headed "The Practicing Manager" introduce you to the real-world problems that managers of financial institutions commonly face and need to solve in their day-to-day jobs.

financial markets

markets in which funds are transferred from people who have a surplus of available funds to people who have a shortage of available funds.

Interest rate

the cost of borrowing or the price paid for the rental of funds (usually expressed as a percentage per year).

financial innovation

the development of new financial products and services.

Who benefits and who is hurt when interest rates rise? Corporations with immediate capital construction needs are Households with little debt, saving a significant fraction of annual income for retirement, are The federal government running persistent budget deficits is Black-market entrepreneurs operating on a 'cash-only' basis are

worse off better off worse off worse off

Match (by number) each financial intermediary with its description: Credit Union

1. These financial institutions are very small cooperative lending institutions organized around a particular group: unionmembers, employees of a firm, and so forth. They acquire funds from deposits called shares and primarily make consumer loans.

Match (by number) each financial market with its description: 1. Primary Market 2. Capital Market 3. Money Market 4. Secondary Market 5. Debt Market

1. A financial market in which new issues of a security, such as a bond or a stock, are sold to initial buyers by the corporation or government agency borrowing the funds. 2. A market in which longer-term debt (generally those with original maturity of one year or greater) and equity instruments are traded. 3. A financial market in which only short-term debt instruments (generally those with original maturity of less than one year) are traded. 4. A financial market in which securities that have been previously issued can be resold. 5. A market where bonds or mortgages, which are contractual agreements by the borrower to pay the holder of the instrument fixed dollar amounts at regular intervals until a specified date when a final payment is made, are traded.

Match (by number) each regulatory agency with its description: 1. Federal Reserve 2. FDIC 3. Office of Thrift Supervision 4. Comptroller of the Currency 5. SEC

1. Examines the books of commercial banks that are members of the Federal Reserve System and sets reserve requirements for all banks. 2. Provides insurance of at $250,000 for each depositor at a bank, examines the books of insuredbanks, and imposes restrictions on assets they can hold. 3. Examines the books of savings and loan associations and imposes restrictions on assets they can hold. 4. Charters and examines the books of federally chartered commercial banks and imposes restrictions on assets they can hold. 5. Requires disclosure of information of financial instruments traded in organized exchanges.

Match (by number) each regulated institution with its regulatory agency: 1. Commodities Futures Trading Commission 2. Office of Thrift Supervision 3. Comptroller of the Currency 4. SEC

1. Futures market exchanges 2. Savings and loan associations 3. Federally chartered commercial banks 4. Organized exchanges and financial markets

Identify each type of financial institution 1. Finance Companies 2. Commercial Banks 3. Life Insurance Companies 4. Savings and Loan Associations 5. Credit Unions 6. Mutual Funds 7. Investment Banks 8. Pension Funds

1. Investment Intermediary 2. Depository Institution 3. Contractual Savings Institution 4. Depository Institution 5. Depository Institution 6. Investment Intermediary 7. Investment Intermediary 8. Contractual Savings Institution

Question content area The maturity of a debt instrument is the number of years (term) until that instrument's expiration date. Identify the term to maturityLOADING... of the following financial instruments: Part 2 1. A 30-year corporate bond. ▼ Short-termIntermediate-termLong-term 2. A money-market instrument with a maturity of 6 months. 3. A Treasury note with a maturity of 5 or 10 years. 4. A 90-day Treasury bill.

1. long-term 2. short-term 3. intermediate-term 4. short-term

Let's assume that a carpenter borrowed $2,000 to be paid off in a year to finance a machine that would make him work faster. As a result, he is able to take on more projects and collect $400 more earnings in the first year, after paying off the principal of $2,000. However, there is a 14% rental fee (interest) on his loan that he also has to pay off. The carpenter earned an extra $enter your response here in the first year. (Round your response to the nearest dollar)

120

Match (by number) each financial intermediary with its description: Commercial Bank

3. These financial intermediaries raise funds primarily by issuing checkable deposits, savingsdeposits, and time deposits. They then use these funds to make commercial, consumer, and mortgage loans and to buy U.S. government securities and municipal bonds.

Match (by number) each financial intermediary with its description: Savings and Loan

4. These depository institutions obtain funds primarily through savings deposits (often calledshares) and time and checkable deposits. In the past, these institutions were constrained in their activities and mostly made mortgage loans for residential housing.

Match (by number) each financial intermediary with its description: Mutual Fund

5. These financial intermediaries acquire funds by selling shares to many individuals and use the proceeds to purchase diversified portfolios of stocks and bonds

Security

A claim on the borrower's future income that is sold by the borrower to the lender. Also called a financial instrument

Common Stock

A security that gives the holder an ownership interest in the issuing firm. This ownership interest includes the right to any residual cash flows and the right to vote on major corporate issues.

Stock

A security that is a claim on the earnings and assets of a corporation.

Why do small savers find it beneficial to lend their funds to a financial intermediary? (Check all that apply.) A. A financial intermediary is competent in monitoring its lenders. B. A financial intermediary never faces any problems. C. A financial intermediary operates on a no profit-no loss principle. D. A financial intermediary is better equipped to filter bad credit risks from good ones.

A. A financial intermediary is competent in monitoring its lenders. D. A financial intermediary is better equipped to filter bad credit risks from good ones.

How does a fall in the value of the pound sterling affect British consumers? Part 2 A. Foreign goods are now relatively more expensive; British consumers are hurt B. Domestic interest rates increase; British consumers find it more expensive to borrow C. Foreign goods are now relatively cheaper; British consumers will benefit D. Domestic goods are now relatively more expensive; British consumers are hurt A fall in the value of the pound will cause American businesses to be ▼ better off worse off unaffected .

A. Foreign goods are now relatively more expensive; British consumers are hurt A weaker currency makes foreign goods (US) more expensive to domestic (British) consumers. With the price of domestic goods unchanged, these imports are now relatively more expensive and British exports are relatively cheaper to foreign consumers. worse off

The unifying analytical framework used in this textbook can help you organize your thinking about all of the following except: A. The structure of labor markets B. Bank management C. The determination of asset prices D. The role of monetary policy in the economy

A. The structure of labor markets This textbook emphasizes a unifying, analytic framework for studying financial markets and institutions. This framework uses a few basic concepts to help organize your thinking about the determination of asset prices, the structure of financial markets, bank management, and the role of monetary policy in the economy.

What is the basic activity of banks? A. To facilitate the transfer of money from savers to borrowers B. To sell shares of corporations to the general public C. To equate future consumption with current consumption D. To ensure that everyone who wants a loan gets one E. To represent the interest of insurance companies

A. To facilitate the transfer of money from savers to borrowers

Money is defined as A. anything that is generally accepted in payment for goods and services or in the repayment of debt. B. bills of exchange. C. a riskless repository of spending power. D. all of the above. E. only A and B of the above.

A. anything that is generally accepted in payment for goods and services or in the repayment of debt.

When the dollar is worth less in relation to currencies of other countries, are you more likely to buy American-made or foreign-made electronics? You are more likely to purchase__ Are US companies that manufacture semi-conductors happier when the dollar is strong or when it is weak? Semi-conductor manufacturers are happier when the dollar is__ What about an American company that is in the business of importing electronic consumer goods into the United States? Importers of electronic goods into the United States are happier when the dollar is__

American-made products weaker stronger

Money

Anything that is generally accepted in payment for goods or services or in the repayment of debts (also called money supply).

Which of the following is not one of the basic concepts emphasized in the analytical framework for studying financial markets used in this textbook? A. The search for profits B. Basic supply and demand analysis to explain behavior in goods and services markets C. Equilibrium D. An approach to financial structure based on transaction costs and asymmetric information

B. Basic supply and demand analysis to explain behavior in goods and services markets This textbook emphasizes a unifying, analytic framework for studying financial markets and institutions. This framework uses a few basic concepts to help organize your thinking. These basic concepts are equilibrium, basic supply and demand analysis to explain behavior in financial markets, the search for profits, and an approach to financial structure based on transaction costs and asymmetric information.

Which of the following can be considered as an impact of the internationalization of financial markets? (Check all that apply.) A. It leads to a less integrated world economy. B. Foreigners provide funds to corporations in the United States and also help to finance the federal government. C. American investors often seek investment opportunities abroad. D. Foreign corporations and banks never raise funds from Americans.

B. Foreigners provide funds to corporations in the United States and also help to finance the federal government. C. American investors often seek investment opportunities abroad.

Which of the following is not true regarding primary and secondary markets? A. Secondary markets sell old issues of securities. B. Primary and Secondary markets both sell assets directly from the institution that offers the bonds. C. Primary markets and secondary markets are different markets. D. Primary markets sell new issues of securities

B. Primary and Secondary markets both sell assets directly from the institution that offers the bonds. The primary markets for securities are not well known to the public because the selling of securities to initial buyers often takes place behind closed doors. On the other hand, the secondary markets, such as the New York Stock Exchange andNASDAQ, are well-known.

The government heavily regulates the financial system by A. encouraging financial intermediaries to implement new financial tools without supervision. B. insuring the soundness of the financial system. C. decreasing information available to investors. D. allowing the financial intermediaries to determine the amount and type of assets they want to hold.

B. insuring the soundness of the financial system.

The Federal Deposit Insurance Corporation (FDIC) A. examines the books of insured banks. B. is characterized by all of these statements. C. regulates agencies such as mutual savings banks and savings and loan associations. D. protects depositors from bank failures by guaranteeing repayment of deposits up to $250,000 per depositor at a bank.

B. is characterized by all of these statements.

Which of the following plays the primary role in moving funds from lenders to borrowers? A. Securities market B. Debt market C. Financial intermediaries D. Stock market

C. Financial intermediaries

The largest financial intermediaries are A. insurance companies. B. finance companies. C. banks. D. all of the above.

C. banks.

Intermediaries who are agents of investors and match buyers with sellers of securities are called A. dealers. B. traders. C. brokers. Your answer is correct. D. investment bankers. E. none of the above.

C. brokers.

Prior to 1986, Regulation Q gave the Federal Reserve the power to A. increase competition among banks by expanding entry into the banking industry. B. increase competition among banks by imposing stringent reporting requirement for disclosure of information to the public. C. limit competition between banks by placing a ceiling on the interest rates banks could pay on savings deposits. D. limit competition between banks by restricting interstate branching.

C. limit competition between banks by placing a ceiling on the interest rates banks could pay on savings deposits. Later evidence does not support the view that unrestricted interest-rate competition had a significant effect on bank failures during the Great Depression. Therefore, Regulation Q has been abolished.

From 1980 to early 1985 the dollar ________ in value, thereby benefiting American ________. A. depreciated; consumers B. appreciated; businesses C. appreciated; consumers D. depreciated; businesses

C. appreciated; consumers

Securities are ____ for the person who buys them, but ____ for the individual/firm that sells them. liabilities; expenses B. liabilities; assets C. assets; liabilities Your answer is correct. D. income; liabilities

C. assets; liabilities

Financial markets improve economic welfare because: A. they channel funds from savers to investors B. they allow consumers to time their purchases better C. they eliminate the need for financial intermediaries D. both A and B are correct E. all of the above are correct

D. both A and B are correct Financial markets allow funds to move from people who lack productive investment opportunities to people who have such opportunities. These markets are critical for producing an efficient allocation of capital, which contributes to higher production and efficiency for the overall economy. Well-functioning financial markets also directly improve the well-being of consumers by allowing them to time their purchases better. They provide funds to young people to buy what they need and can eventually afford without forcing them to wait until they have saved up the entire purchase price. Financial markets that are operating efficiently improve the economic welfare of everyone in the society.

Equities often make periodic payments, called ______, to their holders and are considered long principal B. payouts C. interest D. dividends

D. dividends

The term bank generally includes all of the following institutions except: A. savings and loan associations. B. commercial banks. C. credit unions. D. finance companies.

D. finance companies.

An important financial institution that assists in the initial sale of securities in the primary market is the A. brokerage house. B. commercial bank. C. stock exchange. D. investment bank.

D. investment bank.

Financial markets perform the basic function of: A. providing a risk-free means of storing wealth B. mitigating the business cycle C. assuring that governments need never resort to printing money to finance their expenditure D. matching savers with funds to lend to people who want to borrow funds

D. matching savers with funds to lend to people who want to borrow funds

A corporation acquires new funds only when its securities are sold in the secondary market by a commercial bank. B. secondary market by a stock exchange broker. C. secondary market by an investment bank. D. primary market by an investment bank.

D. primary market by an investment bank.

is wealth that is used to produce more wealth.

capital

Identify whether the following statements correctly describe the steps the textbook follows to help you understand and apply the unifying, analytic framework for studying financial markets and institutions. Simple models are constructed in which the variables held constant are omitted. Each step in the derivation of the model is clearly and carefully laid out. The models are then used to explain various phenomena by focusing on changes in all variables at once.

False True False To help you understand and apply the unifying analytic framework, simple models are constructed throughout the text in which the variables held constant are carefully delineated, each step in the derivation of the model is clearly and carefully laid out, and the models are then used to explain various phenomena by focusing on changes in one variable at a time, holding all other variables constant.

Complete the following table related to the structure of financial markets: In direct finance: Savers: ___ Borrowers: ___ In Indirect Finance: Savers: ___ Borrowers: ___

In direct finance: Savers: Buy securities Borrowers: sell securities In Indirect Finance: Savers: Make Deposits Borrowers: Take out loans

financial intermediaries

Institutions (such as banks, insurance companies, mutual funds, pension funds, and finance companies) that borrow funds from people who have saved and then make loans to others.

Every Financial market performs the following function: A. It allows loans to be made. B. It channels funds from lenders−savers to borrowers−spenders. Your answer is correct. C. It determines the level of interest rates. D. It allows common stock to be traded.

It channels funds from lenders−savers to borrowers−spenders. Your answer is correct.

Central Bank

The government agency that oversees the banking system and is responsible for the amount of money and credit supplied in the economy; in the United States, the Federal Reserve System.

Identify whether the following statements are true or false regarding foreign stock market growth. 1) It has led to the development of mutual funds in the U.S. that specialize in foreign stocks: 2) American investors would pay attention exclusively to the Dow Jones Industrial Average:

True False

Identify whether the following statements are true or false. The large size of financial intermediaries allows them to take advantage of economies of scale: Financial intermediaries can increase transaction costs because they have developed expertise in it: For a financial intermediary, there is a direct relationship between the transaction costs and the size (scale) of transactions: Low transaction costs enable a financial intermediary to provide its customers with liquidity services.

True False False True

Identify whether the following statements are true or false regarding foreign stock market growth. 1) It has led to the development of mutual funds in the U.S. that specialize in foreign stocks: ▼ TrueFalse 2) American investors would pay attention exclusively to the Dow Jones Industrial Average: ▼ FalseTrue

True False Until recently, the U.S. Stock Market was by far the largest in the world, but foreign stock markets have been growing in importance, with the United States not always the market leader. The increased interest in foreign stocks has prompted the development in the United States of mutual funds that specialize in trading in foreign stock markets. American investors now pay attention not only to the Dow Jones Industrial Average but also to stock price indexes for foreign stock markets such as the Nikkei 300 Average (Tokyo) and the Financial Times Stock Exchange (FTSE) 100-Share Index (London).

When the funds are lent to those among potential borrowers who are actually the bad credit risks, it is the problem of___ It occurs___ the transaction.

ECON 340

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