eco 029

1) 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. A) present value B) future value C) interest D) deflation

A

10) Which of the following can be described as involving direct finance? A) A corporation issues new shares of stock. B) People buy shares in a mutual fund. C) A pension fund manager buys a short-term corporate security in the secondary market. D) An insurance company buys shares of common stock in the over-the-counter markets.

A

11) Risk sharing is profitable for financial institutions due to A) low transactions costs. B) asymmetric information. C) adverse selection. D) moral hazard.

A

12) Which of the following are generally TRUE of bonds? A) A bond's return equals the yield to maturity when the time to maturity is the same as the holding period. B) A rise in interest rates is associated with a fall in bond prices, resulting in capital gains on bonds whose terms to maturity are longer than the holding periods. C) The longer a bond's maturity, the smaller is the size of the price change associated with an interest rate change. D) Prices and returns for short-term bonds are more volatile than those for longer-term bonds.

A

14) Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them. A) assets; liabilities B) liabilities; assets C) negotiable; nonnegotiable D) nonnegotiable; negotiable

A

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

A

Why are financial markets important to the health of the​ economy? A. They channel funds from savers to investors B. They identify and shut down inefficient firms C. They allow consumers to time their purchases better D. They eliminate the need for financial intermediaries

A

15) Adverse selection is a problem associated with equity and debt contracts arising from A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. B) the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults. C) the borrower's lack of incentive to seek a loan for highly risky investments. D) the borrower's lack of good options for obtaining funds.

A

15) When talking about a coupon bond, face value and ________ mean the same thing. A) par value B) coupon value C) amortized value D) discount value

A

16) The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's A) coupon rate. B) maturity rate. C) face value rate. D) payment rate.

A

16) With direct finance, funds are channeled through the financial market from the ________ directly to the ________. A) savers, spenders B) spenders, investors C) borrowers, savers D) investors, savers

A

18) All bonds that will not be held to maturity have interest rate risk which occurs because of the change in the price of the bond as a result of A) interest-rate changes. B) changes in the coupon rate. C) default of the borrower. D) changes in the asset's maturity date.

A

2) Financial markets have the basic function of A) getting people with funds to lend together with people who want to borrow funds. B) assuring that the swings in the business cycle are less pronounced. C) assuring that governments need never resort to printing money. D) providing a risk-free repository of spending power.

A

2) Increasing the amount of information available to investors helps to reduce the problems of ________ and ________ in the financial markets. A) adverse selection; moral hazard B) adverse selection; risk sharing C) moral hazard; transactions costs D) adverse selection; economies of scale

A

2) The present value of an expected future payment ________ as the interest rate increases. A) falls B) rises C) is constant D) is unaffected

A

2) Which of the following are TRUE concerning the distinction between interest rates and returns? A) The rate of return on a bond will not necessarily equal the interest rate on that bond. B) The return can be expressed as the difference between the current yield and the rate of capital gains. C) The rate of return will be greater than the interest rate when the price of the bond falls during the holding period. D) The return can be expressed as the sum of the discount yield and the rate of capital gains.

A

3) An increase in the time to the promised future payment ________ the present value of the payment. A) decreases B) increases C) has no effect on D) is irrelevant to

A

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

A

3) The sum of the current yield and the rate of capital gain is called the A) rate of return. B) discount yield. C) perpetuity yield. D) par value.

A

35) The present value of a fixed-payment loan is calculated as the ________ of the present value of all cash flow payments. A) sum B) difference C) multiple D) log

A

1) The process of indirect finance using financial intermediaries is called A) direct lending. B) financial intermediation. C) resource allocation. D) financial liquidation.

B

10) An equal decrease in all bond interest rates A) increases the price of a five-year bond more than the price of a ten-year bond. B) increases the price of a ten-year bond more than the price of a five-year bond. C) decreases the price of a five-year bond more than the price of a ten-year bond. D) decreases the price of a ten-year bond more than the price of a five-year bond.

B

10) Which of the following are TRUE of fixed payment loans? A) The borrower repays both the principal and interest at the maturity date. B) Installment loans and mortgages are frequently of the fixed payment type. C) The borrower pays interest periodically and the principal at the maturity date. D) Commercial loans to businesses are often of this type.

B

11) A fully amortized loan is another name for A) a simple loan. B) a fixed-payment loan. C) a commercial loan. D) an unsecured loan.

B

13) If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of A) moral hazard. B) adverse selection. C) free-riding. D) costly state verification.

B

13) Which of the following are generally TRUE of all bonds? A) The longer a bond's maturity, the greater is the rate of return that occurs as a result of the increase in the interest rate. B) Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise. C) Prices and returns for short-term bonds are more volatile than those for longer term bonds. D) A fall in interest rates results in capital losses for bonds whose terms to maturity are longer than the holding period.

B

13) Which of the following can be described as involving indirect finance? A) You make a loan to your neighbor. B) You buy shares in a mutual fund. C) You buy a U.S. Treasury bill from the U.S. Treasury at Treasury Direct.gov. D) You purchase shares in an initial public offering by a corporation in the primary market.

B

16) An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families. A) adverse selection B) moral hazard C) risk sharing D) credit risk

B

16) Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant. A) long-term; long-term B) long-term; short-term C) short-term; long-term D) short-term; short-term

B

2) The ________ interest rate more accurately reflects the true cost of borrowing. A) nominal B) real C) discount D) market

B

25) A discount bond A) pays the bondholder a fixed amount every period and the face value at maturity. B) pays the bondholder the face value at maturity. C) pays all interest and the face value at maturity. D) pays the face value at maturity plus any capital gain.

B

36) Which of the following are TRUE for a coupon bond? A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. B) The price of a coupon bond and the yield to maturity are positively related. C) The yield to maturity is greater than the coupon rate when the bond price is above the par value. D) The yield is less than the coupon rate when the bond price is below the par value.

A

37) The ________ of a coupon bond and the yield to maturity are inversely related. A) price B) par value C) maturity date D) term

A

4) Economies of scale enable financial institutions to A) reduce transactions costs. B) avoid the asymmetric information problem. C) avoid adverse selection problems. D) reduce moral hazard.

A

40) The ________ is below the coupon rate when the bond price is ________ its par value. A) yield to maturity; above B) yield to maturity; below C) discount rate; above D) discount rate; below

A

47) A coupon bond that has no maturity date and no repayment of principal is called a A) consol. B) cabinet. C) Treasury bill. D) Treasury note.

A

52) The yield to maturity for a perpetuity is a useful approximation for the yield to maturity on long-term coupon bonds. It is called the ________ when approximating the yield for a coupon bond. A) current yield B) discount yield C) future yield D) star yield

A

53) The yield to maturity for a one-year discount bond equals the increase in price over the year, divided by the A) initial price. B) face value. C) interest rate. D) coupon rate.

A

57) The yield to maturity for a discount bond is ________ related to the current bond price. A) negatively B) positively C) not D) directly

A

58) A discount bond is also called a ________ because the owner does not receive periodic payments. A) zero-coupon bond B) municipal bond C) corporate bond D) consol

A

59) Another name for a consol is a ________ because it is a bond with no maturity date. The owner receives fixed coupon payments forever. A) perpetuity B) discount bond C) municipality D) high-yield bond

A

6) Financial intermediaries provide customers with liquidity services. Liquidity services A) make it easier for customers to conduct transactions. B) allow customers to have a cup of coffee while waiting in the lobby. C) are a result of the asymmetric information problem. D) are another term for asset transformation.

A

6) The ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation. A) Fisher equation B) Keynesian equation C) Monetarist equation D) Marshall equation

A

7) The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as A) risk sharing. B) risk aversion. C) risk neutrality. D) risk selling.

A

7) There is ________ for any bond whose time to maturity matches the holding period. A) no interest-rate risk B) a large interest-rate risk C) rate-of-return risk D) yield-to-maturity risk

A

8) A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond.

A

9) If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding? A) a bond with one year to maturity B) a bond with five years to maturity C) a bond with ten years to maturity D) a bond with twenty years to maturity

A

9) Reducing risk through the purchase of assets whose returns do not always move together is A) diversification. B) intermediation. C) intervention. D) discounting.

A

27) Which of the following are TRUE for discount bonds? A) A discount bond is bought at par. B) The purchaser receives the face value of the bond at the maturity date. C) U.S. Treasury bonds and notes are examples of discount bonds. D) The purchaser receives the par value at maturity plus any capital gains.

B

3) Financial markets improve economic welfare because A) they channel funds from investors to savers. B) they allow consumers to time their purchase better. C) they weed out inefficient firms. D) they eliminate the need for indirect finance.

B

39) The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value. A) greater; coupon; above B) greater; coupon; below C) greater; perpetuity; above D) less; perpetuity; below

B

7) Which of the following can be described as direct finance? A) You take out a mortgage from your local bank. B) You borrow $2500 from a friend. C) You buy shares of common stock in the secondary market. D) You buy shares in a mutual fund.

B

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

B

9) A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond.

B

Before a loan is made, banks screen their loan applicants to avoid the problem of A. moral hazard. B. adverse selection C. risk sharing. D. asset transformation

B

When the​ ________ interest rate is​ low, there are greater incentives to​ ________ and fewer incentives to​ ________. A. ​nominal; lend; borrow B. ​real; borrow; lend C. ​market; lend; borrow D. ​real; lend; borrow

B

1) The ________ is defined as the payments to the owner plus the change in a security's value expressed as a fraction of the security's purchase price. A) yield to maturity B) current yield C) rate of return D) yield rate

C

12) A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond.

C

12) Typically, borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project. The difference in information is called A) moral selection. B) risk sharing. C) asymmetric information. D) adverse hazard.

C

13) A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid. A) coupon bond; discount B) discount bond; discount C) coupon bond; face D) discount bond; face

C

14) The ________ is the final amount that will be paid to the holder of a coupon bond. A) discount value B) coupon value C) face value D) present value

C

17) The ________ is calculated by multiplying the coupon rate times the par value of the bond. A) present value B) face value C) coupon payment D) maturity payment

C

28) The interest rate that equates the present value of payments received from a debt instrument with its value today is the A) simple interest rate. B) current yield. C) yield to maturity. D) real interest rate.

C

29) Economists consider the ________ to be the most accurate measure of interest rates. A) simple interest rate. B) current yield. C) yield to maturity. D) real interest rate.

C

30) For simple loans, the simple interest rate is ________ the yield to maturity. A) greater than B) less than C) equal to D) not comparable to

C

4) When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________. A) nominal; lend; borrow B) real; lend; borrow C) real; borrow; lend D) market; lend; borrow

C

5) A breakdown of financial markets can result in A) financial stability. B) rapid economic growth. C) political instability. D) stable prices.

C

6) The principal lender-savers are A) governments. B) businesses. C) households. D) foreigners.

C

8) The process of asset transformation refers to the conversion of A) safer assets into risky assets. B) safer assets into safer liabilities. C) risky assets into safer assets. D) risky assets into risky liabilities.

C

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 bond maturity and a decrease in potential capital losses. B. ​decreases, since this represents an increase in the coupon payment and an increase in potential capital gains. C. ​decreases, since this represents an increase in the price of the bond and a decrease in potential capital losses. D ​increases, since this represents a decrease in the price of the bond and an increase in potential capital gains.

C

The interest rate on a consol equals the A. price divided by the coupon payment. B. price times the coupon payment. C. coupon payment divided by the price. D. coupon payment plus the price

C

True or​ False: With a discount​ bond, the return on a bond is equal to the rate of capital gain. A. ​True: A discount bond pays fixed interest payments every year so the return is equal to the rate of capital gain. B. ​False: Bond returns can never equal the rate of capital​ gain; there must be a capital loss or gain indicated. C. ​True: A discount bond has no coupon payments so the return on the bond 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.

C

1) Every financial market has the following characteristic. A) It determines the level of interest rates. B) It allows common stock to be traded. C) It allows loans to be made. D) It channels funds from lenders-savers to borrowers-spenders.

D

1) Which of the following is NOT a goal of financial regulation? A) ensuring the soundness of the financial system B) reducing moral hazard C) reducing adverse selection D) ensuring that investors never suffer losses

D

11) An equal increase in all bond interest rates A) increases the return to all bond maturities by an equal amount. B) decreases the return to all bond maturities by an equal amount. C) has no effect on the returns to bonds. D) decreases long-term bond returns more than short-term bond returns.

D

11) Which of the following can be described as involving direct finance? A) A corporation takes out loans from a bank. B) People buy shares in a mutual fund. C) A corporation buys a short-term corporate security in a secondary market. D) People buy shares of common stock in the primary markets.

D

12) Which of the following can be described as involving indirect finance? A) You make a loan to your neighbor. B) A corporation buys a share of common stock issued by another corporation in the primary market. C) You buy a U.S. Treasury bill from the U.S. Treasury at TreasuryDirect.gov. D) You make a deposit at a bank.

D

15) With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets. A) active B) determined C) indirect D) direct

D

18) Conflicts of interest are a type of ________ problem that can happen when an institution provides multiple services. A) adverse selection B) free-riding C) discounting D) moral hazard

D

23) A bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond.

D

24) A ________ is bought at a price below its face value, and the ________ value is repaid at the maturity date. A) coupon bond; discount B) discount bond; discount C) coupon bond; face D) discount bond; face

D

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. 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. B. Yes. The higher the annual interest​ rate, the higher the annual income on bonds. C. No. When making an investment​ decision, you should take the yield to maturity into​ account, not the interest rate. D. Yes. If the interest rate remains unchanged until​ maturity, the price of the bond will be more than its face value

A

Financial intermediaries have a role to play in matching savers and borrowers for all of the following reasons except​: A. information symmetries B. risk sharing C. minimizing transaction costs D. economies of scale

A

One of the factors contributing to the financial crisis of​ 2007-2009 was the widespread issuance of subprime mortgages. How does this demonstrate adverse​ selection? A. Lenders loaned money to a pool of potential homeowners with the highest credit risk and lowest net wealth. B. Potential homeowners borrowed funds for​ high-yield, high-risk investments instead of mortgages. C. Lenders consciously loaned money to the riskiest homeowners with the highest interest rates to increase their profits. D. Financial intermediaries provided funds to potential homeowners under strict conditions.

A

When lenders have inferior knowledge relative to borrowers about the potential returns and risks associated with an investment​ project, it gives rise to the problem known as A. asymmetric information B. asset transformation C. transaction costs D. financial intermediation

A

3) The time and money spent in carrying out financial transactions are called A) economies of scale. B) financial intermediation. C) liquidity services. D) transaction costs.

D

38) The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________. A) positively; rises; rises B) negatively; falls; falls C) positively; rises; falls D) negatively; rises; falls

D

4) Well-functioning financial markets A) cause inflation. B) eliminate the need for indirect finance. C) cause financial crises. D) allow the economy to operate more efficiently.

D

48) The price of a consol equals the coupon payment A) times the interest rate. B) plus the interest rate. C) minus the interest rate. D) divided by the interest rate.

D

49) The interest rate on a consol equals the A) price times the coupon payment. B) price divided by the coupon payment. C) coupon payment plus the price. D) coupon payment divided by the price.

D

5) An example of economies of scale in the provision of financial services is A) investing in a diversified collection of assets. B) providing depositors with a variety of savings certificates. C) hiring more support staff so that customers don't have to wait so long for assistance. D) spreading the cost of writing a standardized contract over many borrowers.

D

7) To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of A) face value. B) par value. C) deflation. D) discounting the future.

D

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

D

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

How do financial intermediaries benefit by providing​ risk-sharing services? A. A collection of riskier assets is always more profitable for a bank or intermediary B. Customers pay a fee to financial intermediaries for being able to invest in safer assets C. They are able to turn safe assets into​ high-risk, high-return investments D. They are able to earn a profit on the spread between the returns they earn on risky assets and the payments they make on the assets they have sold

D

If the interest rates on all bonds rise from 5 to 6 percent over the course of the​ year, which bond would you prefer to have been​ holding? A. A bond with ten years to maturity B. A bond with twenty years to maturity C. A bond with five years to maturity D. A bond with one year to maturity

D

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. Expected inflation is falling at the same rate as nominal interest rates. C. There has not been significant growth of nominal interest rates for the last 5 years. D. Expected inflation is falling at a slower rate than nominal interest rates

D

The​ ________ interest rate more accurately reflects the true cost of borrowing. A. discount B. nominal C. market D. real

D

When lenders have inferior knowledge relative to borrowers about the potential returns and risks associated with an investment​ project, it gives rise to the problem known as A. transaction costs B. asset transformation C. financial crisis. D. asymmetric information

D

Occurs when the potential borrowers who are the most likely to produce an undesirable​ (adverse) outcome --- the bad credit risks --- the ones who most actively seek out a loan and are thus most likely to be selected.

adverse selection

A situation where one party often does not know enough about the other party to make accurate decisions

asymmetric information

A situation where the borrower might engage in activities that are undesirable from the​ lender's point of​ view, because they make it less likely that the loan will be paid back

moral hazard

As a​ bank, you make a loan to an individual seeking funds to open a coffee shop. When the loan is​ made, the borrower uses the funds to take a vacation to Greenland. This is an example of...

moral hazard