ECON 311 TAMU EXAM 1
the yield to maturity on a one year discount bond equals
(F-P)/P
$1 received n years from now has a value today of
1/(1+i)^n
equation for the yield of maturity of a three year fixed payment loan of $1400 which has payments of $500 a year?
1400=$500/(1+i) + 500/(1+i)^2 + 500/(1+i)^3
if the real interest rate is 2% and expected inflation is 2%, the nominal interest rate is
4%
which of the following bonds are considered to be default-risk free?
U.S. Treasury Bonds
which of the following 1000 face value securities has the highest yield to maturity?
a 5 percent coupon bond with a price of $600 (cheapest/lowest price)
Which of the following is an example of a debt instrument?
a BOND issued by general motors
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 bond with one year maturity
which of the following can be described as involving direct finance
a corporation issues new shares of stock
Discount Bond
a credit market instrument that is bought at a price below its face value and whose face value is repaid at the maturity date; it does not make any interest payments (also called zero-coupon bond)
Simple Loan
a credit market instrument that provides the borrower with an amount of funds that must be repaid to the lender at the maturity date, along with an additional payment (interest).
Fixed-Payment Loan
a credit market instrument that provides the borrower with an amount of money that is repaid through fixed monthly payments made over a set number of years (includes both principal and interest)
the supply curve for bonds would be shifted to the left by
a decrease in government spending
factors that decrease the demand for bonds include
a decrease in the riskiness of stocks
which of the following is an example of an intermediate term debt
a five year car loan
which of the following is an example of an intermediate term debt
a sixty-month car loan
Which of the following is NOT a financial intermediary?
a stock exchange
the problem created by asymmetric information before the transaction occurs is __________, while the problem created after the transaction occurs is called __________?
adverse selection; moral hazard
a liquid asset is
an asset that can easily and quickly be sold to raise cash
The demand curve for bonds would be shifted to the left by
an increase in expected return on other assets
the main role of financial intermediaries is to
borrow funds from savers and lend them to borrowers
Coupon Bond
borrower initially receives the face value of the bond, then make regular interest payments over the life of the bond and at maturity repay face value and final interest payments.
which of the following best describes a repurchase agreement?
borrowers agree to sell assets for cash, and simultaneously to buy those assets back at an agreed upon price
Equity securities are traded in the
capital
equity securities are traded in what market?
capital
financial markets
channel funds directly from lenders to borrowers
a ______ pays the owner a fixed coupon payment every year until the maturity date, when the _______ value is repaid
coupon bond; face
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 would _____ and the interest rate on Treasury Securities would _______.
decrease; increase
a lower level of income causes the demand for money to _______ and the interest rate to ________ everything else held constant
decrease;decrease
a decrease in marginal tax rates would likely have the effect of ________ the demand for municipal bonds, and _______ the demand for U.S. government bonds
decreasing; increasing
the risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is called
default risk
the nominal interest rate minus the expected inflation rate
defines the real interest rate
with ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets
direct
for simple loans, the simple interest rate is ______ the yield to maturity
equal to
On a coupon bond, the yield to maturity
equates the present value of all the bonds payments to its price today
when secondary market buyers and sellers of securities meet in one central location to conduct trades the market is called
exchange
an increase in the riskiness of bonds relative to alternative assets causes the demand for bonds to _______ and the demand curve to shift to the ________.
fall; left
a credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a
fixed payment loan
the financial system has a basic function of
getting people with funds to lend together with people who want to borrow funds
the demand curve for bonds would be shifted to the left by an
increase in expected inflation
an ________ in the liquidity of corporate bonds will ________ the price of corporate bonds and ______ the yield of corporate bonds, all else equal.
increase; increase; decrease
higher government deficits ________ the supply of bonds and shift the supply curve to the ________.
increase; right
a rise in the price level causes the demand for money to ______ and the interest rate to _____, everything else held constant
increase;increase
an increase in the expected inflation rate causes the supply of bonds to _______ and the supply curve to shift to the ______, everything else held constant.
increase;right
which of the following is NOT a likely impact on the bond market if corporations become convinced that a robust economic recovery is underway?
increased demand for bonds
If the expected return on bonds increases, all else equal, the demand for bonds increases, the price of bonds ______, and the interest rate_______.
increases; decreases
the interest rate falls when either the demand for bonds______ or supply of bonds _______?
increases;decreases
Funds flow from lenders to borrowers
indirectly through financial intermediaries
simple loans and discount bonds differ from coupon bonds and fixed-payment loans in that
interest on simple loans and discount bonds is paid in a single payment, while issuers of coupon bonds and fixed-payment loans make multiple payments of interest and principal.
which of the following bonds would have the highest default risk?
junk bond
of the four effects on interest rates from an increase in the money supply, the one that works in the opposite direction of the other three is
liquidity effect
three factors explain the risk structure of interest rates
liquidity, default risk, and the income tax treatment of a security
the demand curve for bonds has the usual downward slope, indicating that at _______ prices of the bond, everything else equal, the ______ is higher
lower; quantity demanded
issuers of coupon bonds
make a single payment of principal when the bond matures, but multiple payments of interest over the life of the bond
a financial market in which only short term debt instruments are traded is what kind of market
money market
an example of the problem of _________ is when a corporation uses the funds raised from selling bonds to fund to pay for Caribbean cruise for their employees and families
moral hazard
The yield to maturity of a discount bond is ________ related to the current bond price.
negatively
a simple loan involves
payment of interest by the borrower to the lender only at the time the loan matures
a discount bond
pays the bondholder the face value at maturity
this is defined as the payments to the owner plus the change in a securities value expressed as a fraction of the security's purchase price
rate of return
which interest rate more accurately reflects the true cost of borrowing
real interest rate
real interest rate formula
real interest rate = nominal interest rate - expected inflation rate
if interest rates are expected to fall in the future, the demand for long term bonds today ______ and the demand curve shifts to the _______.
rises; right
when the price level _____, the demand curve for money shifts to the _______ and the interest rate _______, everything else held constant.
rises;right;rises
a financial market in which previously issued securities can be resold is called a
secondary market
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
simple loan
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
stock
financial securities that represent partial ownership of a corporation are known as
stocks
in a business cycle expansion, the _____ of bonds increases and the ______ curve shifts to the _______ as business investments are expected to be more profitable.
supply; supply; right
long term debt has a maturity of
ten years or longer
long term debt maturity has a maturity that is
ten years or longer
during an economic recession
the bond demand and supply curves both shift to the left and the equilibrium interest rate usually falls
the total rate of return on bonds is equal to
the current yield plus the rate of capital gain
the rate of return on a bond is equal to
the current yield plus the rate of capital gains
if the expected returns on stocks rise, while the expected returns on bonds do not change, then
the equilibrium interest rate will rise
the yield to maturity is equal to
the interest rate at which the present value of an asset's future payments is equal to it's price today
the bond demand curve slopes down because
the lender is willing and able to purchase more bonds when the price of bonds is low
for a specific change in the yield to maturity
the longer the time until a bond matures, the greater will be the change in its price
if, while you are holding a coupon bond, the interest rates on other similar bonds fall, you can be sure that
the market price of your bond will rise
holding everything else constant
the more liquid is asset A, relative to alternative assets, the greater the demand will be for asset A
the ex ante real interest rate equals
the nominal interest rate minus the expected inflation rate
which of the following statement about the total rate of return on bonds is NOT correct
the total rate of return may never be negative
of the four factors that influence asset demand, which factor will cause the demand for all assets to increase when it increases, everything else held constant
wealth
Fisher Effect
when expected inflation rises, interest rates will rise
the interest rate that equates the present value of future payments received from a debt instrument with its price today is the
yield to maturity
which of the following would NOT be an example of a financial market transaction?
you deposit $100 in your bank checking account
which of the following can be described as involving indirect finance?
you make a deposit at a bank