ECON 303 UNITS 1+2
A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of A) 8 percent. B) 10 percent. C) 12 percent. D) 14 percent.
A
A feature of Bitcoin, a new type of electronic money, that make it attractive as a medium of exchange is A) anonymous transactions. B) volatility of value. C) heavy regulations by the central bank. D) wide acceptance by businesses.
A
A liquid asset is A) an asset that can easily and quickly be sold to raise cash. B) a share of an ocean resort. C) difficult to resell. D) always sold in an over-the-counter market.
A
According to the liquidity premium theory of the term structure, a steeply upward sloping yield curve indicates that short-term interest rates are expected to A) rise in the future. B) remain unchanged in the future. C) decline moderately in the future. D) decline sharply in the future.`
A
Everything else held constant, if the expected return on U.S. Treasury bonds falls from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return of holding GE stock ________ relative to U.S. Treasury bonds and the demand for GE stock ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls
A
FIRREA increased the core-capital leverage requirement for thrift institutions from 3% to A) 8%. B) 5%. C) 10%. D) 25%
A
If a $5,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is A) 0 percent. B) 5 percent. C) 10 percent. D) 20 percent.
A
If a bank has $10 million of checkable deposits, a required reserve ratio of 10 percent, and it holds $2 million in reserves, then it will not have enough reserves to support a deposit outflow of A) $1.2 million. B) $1.1 million. C) $1 million. D) $900,000.
A
If an individual moves money from a demand deposit account to a money market deposit account A) M1 decreases and M2 stays the same. B) M1 stays the same and M2 increases. C) M1 stays the same and M2 stays the same. D) M1 increases and M2 decreases.
A
If future changes in stock prices are unpredictable, then we say that the stock prices follow a A) random walk. B) straight and narrow path. C) meandering path. D) generalized walk.
A
If in an efficient market all prices are correct and reflect market fundamentals, which of the following is a FALSE statement? A) A stock that has done poorly in the past is more likely to do well in the future. B) One investment is as good as any other because the securities' prices are correct. C) A security's price reflects all available information about the intrinsic value of the security. D) Security prices can be used by managers to assess their cost of capital accurately.
A
If the yield curve has a mild upward slope, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting A) constant short-term interest rates in the near future and further out in the future. B) a rise in short-term interest rates in the near future and a decline further out in the future. C) a decline in short-term interest rates in the near future and an even steeper decline further out in the future. D) a decline in short-term interest rates in the near future and a rise further out in the future.
A
In Keynes's liquidity preference framework A) an excess supply of bonds implies an excess demand for money. B) the demand for bonds must equal the supply of money. C) the demand for money must equal the supply of bonds. D) an excess demand of bonds implies an excess demand for money.
A
In a barter economy the number of prices in an economy with N goods is A) [N(N - 1)]/2. B) N(N/2). C) 2N. D) N(N/2) - 1.
A
In the figure above, one factor NOT responsible for the decline in the demand for money is A) an increase in income. B) a decline in income. C) a decline the price level. D) a decline in the expected inflation rate.
A
Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks. A) reduce; screen B) increase; screen C) reduce; increase D) increase; increase
A
Money ________ transaction costs, allowing people to specialize in what they do best. A) reduces B) increases C) enhances D) eliminates
A
Net profit after taxes per dollar of assets is a basic measure of bank profitability called A) return on assets. B) return on capital. C) return on equity. D) return on investment.
A
The advantage of a "buy-and-hold strategy" is that A) net profits will tend to be higher because there will be fewer brokerage commissions. B) losses will eventually be eliminated. C) the longer a stock is held, the higher will be its price. D) profits are guaranteed.
A
The duration of a portfolio of securities is the weighted ________ of the durations of the individual securities, with the weights reflecting the proportion of the portfolio invested in each security. A) average B) minimum C) median D) maximum
A
The efficient markets hypothesis implies that future changes in exchange rates should for all practical purposes be A) unpredictable. B) set by each country. C) increasing. D) pegged to a standard such as the U.S. dollar or the Euro.
A
When an investment bank ________ securities, it guarantees a price for a corporation's securities and then sells them to the public. A) underwrites B) undertakes C) overwrites D) overtakes
A
When comparing the banking crisis in the United States to the crises in Latin America, cost to the taxpayers of the government bailouts was A) higher in Latin American than in the United States. B) higher in the United States than in Latin America. C) about the same in both Latin America and the United States. D) positive in Latin America but negative in the United States.
A
When we describe stock prices as following a random walk, we mean that future changes in stock prices are A) unpredictable. B) increasing. C) decreasing. D) constant.
A
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
Which of the following statements accurately describes the two measures of the money supply? A) The two measures do not move together, so they cannot be used interchangeably by policymakers. B) The two measures' movements closely parallel each other, even on a month-to-month basis. C) Short-run movements in the money supply are extremely reliable. D) M2 is the narrowest measure the Fed reports.
A
________ money could be used for some other purpose other than as a medium of exchange, for example, gold coins could be melted down and turned into gold jewelry. A) Commodity B) Fiat C) Paper D) Electronic
A
If the interest rate is 5%, what is the present value of a security that pays you $1, 050 next year and $1,102.50 two years from now? If this security sold for $2200, is the yield to maturity greater or less than 5%? Why?
Answer: PV = $1,050/(1+.05) + $1,102.50/(1 + 0.5)2 PV = $2,000 If this security sold for $2200, the yield to maturity is less than 5%. The lower the interest rate the higher the present value.
Distinguish between a foreign bond and a Eurobond.
Answer: A foreign bond is sold in a foreign country and priced in that country's currency. A Eurobond is sold in a foreign country and priced in a currency that is not that country's currency.
Describe the two methods of organizing a secondary market.
Answer: A secondary market can be organized as an exchange where buyers and sellers meet in one central location to conduct trades. An example of an exchange is the New York Stock Exchange. A secondary market can also be organized as an over-the-counter market. In this type of market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices. An example of an over-the-counter market is the federal funds market.
Assets Reserves $50m Securities 50m Loans 150m Liabilities Checkable Deposits $200m Bank Capital 50m If the required reserve ratio is 10%, what actions should the bank manager take if there is an unexpected deposit outflow of $50 million?
Answer: After the deposit outflow, the bank will have a reserve shortfall of $15 million. The bank manager could try to borrow in the Federal Funds market, take out a discount loan from the Federal Reserve, sell $15 million of the securities the bank owns, sell off $15 million of the loans the bank owns, or lastly call-in $15 million of loans. All of the actions will be costly to the bank. The bank manager should try to acquire the funds with the least costly method.
From 1980-1985, the dollar strengthened in value against other currencies. Who was helped and who was hurt by this strong dollar?
Answer: American consumers benefitted because imports were cheaper and consumers could purchase more. American businesses and workers in those businesses were hurt as domestic and foreign sales of American products fell.
What is the impact on interest rates when the Federal Reserve decreases the money supply by selling bonds to the public?
Answer: Bond supply increases and the bond supply curve shifts to the right. The new equilibrium bond price is lower and thus interest rates will increase.
Would it make sense to buy a house when mortgage rates are 14% and expected inflation is 15%? Explain your answer.
Answer: Even though the nominal rate for the mortgage appears high, the real cost of borrowing the funds is -1%. Yes, under this circumstance it would be reasonable to make this purchase.
Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not?
Answer: No, if this information is readily available, it will already be reflected in the stock price.
Why is it important to understand the bond market?
Answer: The bond market supports economic activity by enabling the government and corporations to borrow to undertake their projects and it is the market where interest rates are determined.
Explain how cigarettes could be called "money" in prisoner-of-war camps of World War II.
Answer: The cigarettes performed the three functions of money. They served as the medium of exchange because individuals did exchange items for cigarettes. They served as a unit of account because prices were quoted in terms of the number of cigarettes required for the exchange. They served as a store of value because an individual would be willing to save their cigarettes even if they did not smoke because they believed that they could exchange the cigarettes for something that they did want at some time in the future.
What factors have slowed down the movement to a system where all payments are made electronically?
Answer: The equipment necessary to set up the system is expensive, security of the information, and privacy concerns are issues that need to be addressed before an electronic payments system will be widely accepted.
Use demand and supply analysis to explain why an expectation of Fed rate hikes would cause Treasury prices to fall.
Answer: The expected return on bonds would decrease relative to other assets resulting in a decrease in the demand for bonds. The leftward shift of the bond demand curve results in a new lower equilibrium price for bonds.
If a corporation announces that it expects quarterly earnings to increase by 25% and it actually sees an increase of 22%, what should happen to the price of the corporation's stock if the efficient markets hypothesis holds, everything else held constant?
Answer: The stock's price should fall. The price had adjusted based on the statement of expected earnings. When the actual number turned out to be lower than expected, the stock price changes to reflect the additional information.
If a higher inflation is expected, what would you expect to happen to the shape of the yield curve? Why?
Answer: The yield curve should have a steep upward slope. Nominal interest rates will increase if the inflation rate increases, therefore, bond purchasers will require a higher term premium to hold the riskier long-term bond.
If the federal government where to raise the income tax rates, would this have any impact on a state's cost of borrowing funds? Explain.
Answer: Yes, if the federal government raises income tax rates, demand for municipal bonds which are federal income tax exempt would increase. This would lower the interest rate on the municipal bonds thus lowering the cost to the state of borrowing funds.
Using T-accounts show what happens to reserves at Security National Bank if one individual deposits $1,000 in cash into her checking account and another individual withdraws $750 in cash from her checking account.
Assets $250 reserves Liabilities $250 deposits
A bank with insufficient reserves can increase its reserves by A) lending federal funds. B) calling in loans. C) buying short-term Treasury securities. D) buying municipal bonds.
B
A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and at maturity pays back the original purchase price is called A) commercial paper. B) a certificate of deposit. C) a municipal bond. D) federal funds.
B
A key factor in producing high economic growth is A) eliminating foreign trade. B) well-functioning financial markets. C) high interest rates. D) stock market volatility.
B
An inverted yield curve predicts that short-term interest rates A) are expected to rise in the future. B) will fall in the future. C) will remain unchanged in the future. D) will rise and then fall in the future.
B
Because it is a unit of account, money A) increases transaction costs. B) reduces the number of prices that need to be calculated. C) does not earn interest. D) discourages specialization.
B
If bonds with different maturities are perfect substitutes, then the ________ on these bonds must be equal. A) surprise return B) expected return C) excess return D) surplus return
B
If the probability of a bond default increases because corporations begin to suffer large losses, then the default risk on corporate bonds will ________ and the expected return on these bonds will ________, everything else held constant. A) decrease; increase B) increase; increase C) increase; decrease D) decrease; decrease
B
If the yield curve slope is flat for short maturities and then slopes steeply upward for longer maturities, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting: A) a rise in short-term interest rates in the near future and a decline further out in the future. B) a decline in short-term interest rates in the near future and a rise further out in the future. C) constant short-term interest rates in the near future and further out in the future. D) constant short-term interest rates in the near future and a decline further out in the future.
B
If wealth increases, the demand for stocks ________ and that of long-term bonds ________, everything else held constant. A) decreases; increases B) increases; increases C) increases; decreases D) decreases; decreases
B
In a(n) ________ market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices. A) exchange B) over-the-counter C) common D) barter
B
In the figure above, the decrease in the interest rate from i 1 to i 2 can be explained by A) an increase in income. B) a decline in the expected price level. C) a decrease in money growth. D) an increase in the expected price level.
B
Information plays an important role in asset pricing because it allows the buyer to more accurately judge A) liquidity. B) risk. C) capital. D) policy.
B
Mean reversion refers to the fact that A) small firms have higher than average returns. B) stocks that have had low returns in the past are more likely to do well in the future. C) stock returns are high during the month of January. D) stock prices fluctuate more than is justified by fundamentals.
B
Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called ________ money. A) commodity B) fiat C) electronic D) funny
B
The demand for gold increases, other things equal, when A) the market for silver becomes more liquid. B) interest rates are expected to rise. C) interest rates are expected to fall. D) real estate prices are expected to increase.
B
The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is A) that the FDIC guarantees all deposits when it uses the "payoff" method. B) that the FDIC guarantees all deposits when it uses the "purchase and assumption" method. C) that the FDIC is more likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. D) that the FDIC is more likely to use the purchase and assumption method for small institutions because it will be easier to find a purchaser for them compared to large institutions.
B
Using the Gordon growth formula, if D1 is $1.00, ke is 10% or 0.10, and g is 5% or 0.05, then the current stock price is A) $10. B) $20. C) $30. D) $40.
B
When prices are measured in terms of fixed (base-year) prices they are called ________ prices. A) nominal B) real C) inflated D) aggregate
B
When the economy slips into a recession, normally the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises
B
Which of the following $1,000 face-value securities has the highest yield to maturity? A) a 5 percent coupon bond with a price of $800 B) a 5 percent coupon bond with a price of $600 C) a 5 percent coupon bond with a price of $1,000 D) a 5 percent coupon bond with a price of $1,200
B
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
Which of the following are reported as assets on a bank's balance sheet? A) borrowings B) reserves C) savings deposits D) bank capital
B
Which of the following do NOT provide charters? A) the Office of the Comptroller of the Currency B) the Federal Reserve System C) the National Credit Union Administration D) state banking and insurance commissions
B
________ policy involves decisions about government spending and taxation. A) Monetary B) Fiscal C) Financial D) Systemic
B
As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________. A) decrease; increase B) increase; decrease C) increase; increase D) decrease; not be affected
C
Everything else held constant, if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future, the interest rate on corporate bonds will ________ and the interest rate on Treasury securities will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease
C
Examples of discount bonds include A) municipal bonds. B) U.S. Treasury notes. C) U.S. Treasury bills. D) corporate bonds.
C
High interest rates might cause a corporation to ________ building a new plant that would provide more jobs. A) complete B) consider C) postpone D) contemplate
C
If peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts are A) bank deposits. B) reserves. C) money. D) loanable funds.
C
In the United States, loans from ________ are far ________ important for corporate finance than are securities markets. A) government agencies; more B) government agencies; less C) financial intermediaries; more D) financial intermediaries; less
C
Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds to the ________. A) left; left B) right; left C) left; right D) right; right
C
Risk premiums on corporate bonds tend to ________ during business cycle expansions and ________ during recessions, everything else held constant. A) decrease; decrease B) increase; increase C) decrease; increase D) increase; decrease
C
Secondary markets make financial instruments more A) solid. B) vapid. C) liquid. D) risky.
C
Stock prices are A) relatively stable trending upward at a steady pace. B) relatively stable trending downward at a moderate rate. C) extremely volatile. D) unstable trending downward at a moderate rate.
C
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) interest B) deflation C) present value D) future value
C
The measure of the aggregate price level that is most frequently reported in the media is the A) GDP deflator. B) producer price index. C) consumer price index. D) household price index.
C
The primary liabilities of a commercial bank are A) bonds. B) mortgages. C) deposits. D) commercial paper.
C
When banks involved in trading activities attempt to outguess markets, they are A) forecasting. B) diversifying. C) speculating. D) engaging in riskless arbitrage.
C
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) fixed-payment loan. B) simple loan. C) discount bond. D) coupon bond.
D
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 remain relatively stable in the future. B) when the yield curve is downward sloping, short-term interest rates are expected to remain relatively stable in the future. C) investors have strong preferences for short-term relative to long-term bonds, explaining why yield curves typically slope upward. D) yield curves should be equally likely to slope downward as slope upward.
D
Assume a bank has $200 million of assets with a duration of 2.5, and $190 million of liabilities with a duration of 1.05. If interest rates increase from 5 percent to 6 percent, the net worth of the bank falls by A) $1 million. B) $2.4 million. C) $3.6 million. D) $4.8 million.
D
Because checking accounts are ________ liquid for the depositor than savings accounts, they earn ________ interest rates. A) less; higher B) less; lower C) more; higher D) more; lower
D
During the German hyperinflation after World War I, transactions costs skyrocketed. As a result, not surprisingly, output: A) increased dramatically. B) grew at a much smaller pace than prior to the war. C) did not change. D) declined sharply.
D
Everything else held constant, a decline in interest rates will cause spending on housing to A) fall. B) remain unchanged. C) either rise, fall, or remain the same. D) rise.
D
Everything else held constant, when prices in the art market become more uncertain A) the demand curve for bonds shifts to the left and the interest rate falls. B) the supply curve for bonds shifts to the right and the interest rate falls. C) the demand curve for bonds shifts to the left and the interest rate rises. D) the demand curve for bonds shifts to the right and the interest rate falls.
D
From the standpoint of ________, specialization in lending is surprising but makes perfect sense when one considers the ________ problem. A) moral hazard; diversification B) diversification; moral hazard C) adverse selection; diversification D) diversification; adverse selection
D
If the CPI in 2004 is 200, and in 2005 the CPI is 180, the rate of inflation from 2004 to 2005 is A) 20%. B) 10%. C) 0%. D) -10%.
D
If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses. A) payoff; large B) payoff; no C) purchase and assumption; large D) purchase and assumption; no
D
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) 7 percent. B) 22 percent. C) -15 percent. D) -8 percent.
D
The management of money and interest rates is called ________ policy and is conducted by a nation's ________ bank. A) monetary; superior B) fiscal; superior C) fiscal; central D) monetary; central
D
When I purchase ________, I own a portion of a firm and have the right to vote on issues important to the firm and to elect its directors. A) bonds B) bills C) notes D) stock
D
When stock prices fall A) an individual's wealth is not affected nor is their willingness to spend. B) a business firm will be more likely to sell stock to finance investment spending. C) an individual's wealth may decrease but their willingness to spend is not affected. D) an individual's wealth may decrease and their willingness to spend may decrease.
D
When the price level ________, the demand curve for money shifts to the ________ and the interest rate ________, everything else held constant. A) falls; right; rises B) rises; right; falls C) falls; left; rises D) rises; right; rises
D
When the prices of rare coins become volatile, the ________ curve for bonds shifts to the ________, everything else held constant. A) demand; left B) supply; right C) supply; left D) demand; right
D
Which of the following is NOT a secondary market? A) foreign exchange market B) futures market C) options market D) IPO market
D
Which of the following types of information most likely allows the exploitation of a profit opportunity? A) financial analysts' published recommendations B) technical analysis C) hot tips from a stockbroker D) insider information
D
You read a story in the newspaper announcing the proposed merger of Dell Computer and Gateway. The merger is expected to greatly increase Gateway's profitability. If you decide to invest in Gateway stock, you can expect to earn A) above average returns since you will share in the higher profits. B) above average returns since your stock price will definitely appreciate as higher profits are earned. C) below average returns since computer makers have low profit rates. D) a normal return since stock prices adjust to reflect expected changes in profitability almost immediately.
D