FINC 3310 Leavell - All Possible Exams 1, 2, 3, & 4 - Final Exam Preparation

The regional Federal Reserve Banks

"establish" the discount rate, ration discount loans to banks, clear checks.

About what is the price of a 6% coupon, $1000 par bond, 15 years to maturity if the yield to maturity is 5%?

$1,103.80

You have purchased a house for $190,000. A bank will make you a loan at 4% interest for 30 years with annual payments. About what is your annual payment?

$10,988

A $5,000 coupon bond with a coupon rate of 5% has a coupon payment of _____.

$250.

You need $275,000 to start a business. A bank will loan you the money at 7.63% for 20 years with annual payments. About how much is the annual payment?

$27,243

You will receive an annuity that will pay $16,400 per year for 25 years with the first payment today. If the interest rate is 3.75% about how much is the annuity worth?

$272,975

Which of the following is a long-term financial instrument?

A U.S. treasury bond.

The Federal Reserve System was set up with twelve regional Federal Reserve banks to

Because of traditional American hostility to a central bank and centralized authority, the system of 12 regional banks was set up to diffuse power along regional lines.

Companies raise long-term funds or capital for new projects through which of the following markets?

Bond markets and stock markets.

If you suspect a company will go bankrupt next year, would you prefer to hold the firm's bonds or equity?

Bonds because they are paid first.

(I) A simple loan requires the borrower to repay the principal at the maturity date along with an interest payment. (II) A discount bond is bought at a price below its face value, and the face value is repaid at the maturity date.

Both are true.

______ are agents of investors who match buyers with sellers of securities.

Brokers

While the Fed enjoys a relatively high degree of independence for a government agency, it feels political pressure from the President and Congress because

Congress could limit Fed power through legislation.

A bond denominated in a currency other than that of the country in which it is sold is a _____.

Eurobond.

Foreign currencies that are deposited in banks outside the home country are known as _____.

Eurocurrencies.

Which of the following is not a claim on the assets or future of a company?

Interest rate

________ is a central bank strategy of achieving a certain value of the annual growth rate of a monetary aggregate and ________ is, among several elements, an institutional commitment to price stability as the primary, long-term goal of monetary policy.

Monetary targeting; inflation targeting

A Moody's Baa corporate bond will have a higher risk premium than a C rated corporate bond.

NO, because it will have a lower default risk.

Criteria for the Fed choosing a policy instrument includes

Observability & measurability, Controllability and Predicable effects on goal

What is the feature of a corporate bond that protects the purchaser from moral hazard on the part of the borrower?

Restrictive covenants

_____ is the uncertainty about the returns an investor will earn on assets.

Risk

Which of the following statements is true about the yield to maturity on a bond and the bond price?

The YTM is greater than the coupon rate when the bond is selling at a discount.

Which of the following is NOT a reason that the government regulates financial markets?

To guarantee consumers that they will not put their money in an unsafe investment.

________ costs can hinder the flow of funds to people with productive investment opportunities.

Transaction

Power within the Federal Reserve is essentially located in

Washington D.C.

Which of the following cannot be described as indirect finance?

You borrow $1,000 from your best friend.

Reinvestment risk is the risk that _____.

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

A coupon bond pays the owner of the bond _____.

a fixed interest payment every period and repays the face value at the maturity date.

Money is defined as _____.

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

The case where all parties to a transaction or contract do not have the same information is a world of ______ information.

asymmetric

Defensive open market operations are used to

balance changes in other factors that impact reserves.

Banks are an important part of the study of financial markets since _____.

banks are the largest financial intermediary and banks have been important in the rapid pace of financial innovation.

A cost of using Fed discount operations to prevent bank panics would be

banks that should have failed would survive.

Long term debt and equity instruments are traded in the _____ market.

capital

A change in interest rates can affect the profitability of financial institutions by _____.

changing the price of assets, changing the cost of acquiring funds and changing the income on loans.

Financial markets are important to the health of the economy because they _____.

channel funds from those who do not have a productive use to those who do.

A prevalent feature of debt contracts for both households and businesses is

collateral.

The Fed can affect the volume of loans at the discount window by

controlling the amount of reserves a bank must hold and the discount rate.

Upward movements in interest rates

creates hostility toward the Fed and leads to demands that the Fed's power be curtailed and makes it more difficult for construction firms to plan how many houses to build.

The design of the Federal Reserve system was to

diffuse power across several needs and interests.

Typically, increasing interest rates _____.

discourages corporate investments.

The development of financial intermediaries is largely due to practice of the concept known as

economies of scale.

A country whose financial markets function poorly is likely to _____.

experience economic hardships and financial crisis.

An increase in the value of the dollar relative to all foreign currencies means the price of foreign goods purchased by the dollar _____.

falls.

A loan that requires the borrower to make the same payment every period until the maturity date is called a _____.

fixed payment loan.

The price of one country's currency in terms of another country's currency is the _____.

foreign exchange rate.

The theory of bureaucratic behavior indicates that

government agencies attempt to increase their power and prestige and government agencies attempt to maximize their welfare.

Ways the regions Federal Reserve banks influence the conduct of monetary policy include

having 5 presidents sit on the FOMC.

The nominal anchor

helps promote price stability.

The Fed generally likes to keep its actions

hidden.

Buying bonds in a firm that has a high net worth is beneficial to the investor because

if the firm defaults, the investors can take title to the net worth, sell it off, and use the proceeds to recoup some of the loan losses.

Changes in the money supply appear to have a major influence on _____.

inflation, the business cycle, and interest rates.

An advantage of monetary targeting as a strategy for the conduct of monetary policy includes

information on whether the central bank is achieving its target is known almost immediate.

The Federal Funds rate is the

interest rate on overnight loans of reserves from one bank to another.

The Fed goal of price stability often conflicts with the goal of

interest rate stability.

The price paid for the rental of borrowed funds is commonly referred to as the _____.

interest rate.

The riskiness of an asset's return that results from interest rate changes is called _____.

interest-rate risk.

Bonds with relatively low risk of default are called _____.

investment grade bonds

Primary credit

is discount lending offered to bank at the discount rate.

Board of governors

is the entity in the Federal Reserve System that controls the reserve requirements.

Every financial market performs the following function:

it channels the funds from lenders-savers to borrowers-spenders.

Bonds with relatively high risk of default are called _____.

junk bonds.

Support for the case against Fed independence includes

lack of accountability.

Because of the adverse selection problem,

lenders are reluctant to make loans that are not secured by collateral and lenders may choose to lend only to those who "do not need the money."

Dollars received in the future are worth _____ than dollars received today. The process of calculating what dollars received in the future are worth today is called ______.

less; discounting

The primary motivation behind the creation of the Federal Reserve was the desire to

lessen the occurrence of bank panics.

Economies of scale explains the existence of financial intermediaries because of

lower transaction costs.

Financial institutions exist to _____.

lower transactions costs AND efficiently move money between savers and users of money.

A basic activity of banks is

make loans and accept deposits.

The Fed can increase the money supply by

making discount loans.

Standard accounting principles help financial markets work more efficiently by

making profit verification easier and reducing moral hazard.

The Federal Reserve is the governmental organization responsible for _____.

monetary policy and controlling interest rates.

The ______ is the financial market in which only short-term debt instruments are traded.

money market

The most important asset underlying the financial system is _____.

money.

The lender of last resort function provided by the Fed creates a _______ problem by limiting financial institutions risk of failure from liquidity issues even in the presence of increased risk exposure by institutions.

moral hazard

If income taxes were substantially increased to cover the costs of a new national health care program, the interest rate spread between tax-exempt municipal bonds and corporate bonds would _____.

move toward each other

Banks that are required to join the Federal Reserve system are ______ banks and those banks that may elect to join are _____ banks.

national; state

The Federal Reserve System was set up with 12 regional Federal Reserve banks because

of the traditional American hostility to a central bank and centralized authority.

When interest rates rise, the following are not worse off _____.

people on retirement with savings accounts because they will have more money to spend.

The concept of _____ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.

present value

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

primary market.

The principal-agent problem arises because

principals find it difficult and costly to monitor agent's activities, agent's incentives aren't always compatible with those of the principal, and principals have incentives to free-ride off the monitoring expenditures of other principals.

Benefits of using a nominal anchor for the conduct of monetary policy includes

promoting price stability.

A corporation suffering big losses might be more likely to suspend interest payments on its bonds, thereby _____.

raising the default risk and causing the demand for its bonds to fall.

The _____ interest rate more accurately reflects the total cost of borrowing.

real

Financial intermediaries provide their customers with

reduced transaction costs, increased diversification, and reduced risk.

A declining stock market index due to lower share prices _____.

reduces people's wealth and as a result may reduce willingness to spend AND decreases the amount of funds that business firms can raise by selling newly issued stock.

The monetary liabilities of the Fed include

reserves.

A credit market instrument that provides the borrower with an amount that must be paid at the maturity date along with an interest payment is known as a _____.

simple interest loan

Interest rates that are observed today are called _____.

spot rates.

The Fed's beige books researches

the 12 districts "state of economy"

The most important monetary policy tool is used by

the Federal Open Market Committee.

Each Federal Reserve district bank is owned by

the banks from that district that are members of the Federal Reserve.

Critics of the current system of Fed independence contend that

the current system is undemocratic.

The term structure of interest rates is _____.

the relationship among interest rates on bonds with different maturities.

The Federal Reserve System was set up with twelve regional banks rather than one central bank because of

the traditional American hostility toward centralized authority.

Governments regulate financial systems because

they need to ensure stability and protect consumers.

Poor people have difficulty getting loans because

they typically have little collateral.

Because timely information on the price level and economic growth is frequently unavailable, the Fed has adopted a strategy of

using an intermediate target such as monetary aggregate.

A plot of the interest rates on U.S. government bonds with different terms to maturity is called a _____.

yield curve.