Econ 3229 Lab Questions Ch 2-6.1

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During business cycle expansions when income and wealth are rising, the demand for bonds _____ and the demand curve shifts to the _____, everything else held constant

Rises, right

A financial market in which previously issued securities can be resold is called a _________ market

Secondary

An example of economies of scale in the provision of financial services is

Spreading the cost of writing a standardized contract over many borrowers

An increase in the riskiness of corporate bonds will _____ the price of corporate bonds and _____ the price of Treasury bonds, everything else held constant

Reduce, increase

Suppose John deposits $100 bill to his savings account

M1 decreases and M2 stays unchanged

NASDAQ is an example of

Over the counter market (OTC)

If more money is good, why doesn't government just print and throw dollar bills from helicopters?

With more dollars around, value of dollar would decrease

Suppose in 2012 you buy 3% coupon rate, $100 face value bond for $100 that has 2 years left until maturity. If in 2013 interest rates decrease to 1%, what will be the price of your bond and what will be your rate of return if you decide to sell it then?

$102 and 5%

If a $1000 face value coupon bond has a coupon rate of 3.75%, then the coupon payment every year is

$37.50

What is the present value of $500 to be paid in two years if the interest rate is 5%?

$453.51

What is the future value of $50 five years from now at 2%?

$55.20

Which of the following is a common characteristic of mutual funds and hedge funds?

Investor's money typically is not insured in these institutions

In which of the following situations would you prefer to be the lender?

The interest rate is 4% and the expected inflation rate is 1%

Of the following assets, the least liquid is

A house

Which of the following benefits directly from any increase in the corporation's profitability?

A shareholder

A console paying $20 annually when the interest rate is 5% has a price of

$400

Suppose you are planning to take a vacation in two years. How much would you need to save now in order to have $1000 in two years at interest rate of 5%?

$907

What is the price of $100 face value one year discount bond with a yield of maturity of 8%?

$92.60

What is the price of $100 face value, two year, 5% coupon bond with a yield of 8%?

$94.60

Suppose in 2014 you buy 4% coupon rate, $100 face value bond for $100 that has 2 years left until maturity. If in 2015 interest rates increase to 6%, what will be the price of your bond and what will your rate of return be if you decide to sell it?

$98.10 and 2.1%

What is the price of $1000 face-value one year zero coupon discount bond that offers 1.5% yield?

$985.20

What yield does one year 4% coupon rate $1000 face value bond offer if it currently sells for $1050?

-1%

Which of the following bonds are considered to be default-risk free?

US Treasury bonds

Suppose you buy a 30 year, $50 coupon payment Treasury bond with a face value of $1000 for a price of $1200. Assume the price of this bond decreases to $1100 over the next year and you decide to sell it. The one year holding period return is equal to

-4.17%

Currently, a three month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%. What is the risk premium of the typical A-rated ten-year corporate bond with a yield of 5.5%?

.8%

If 2 year and 10 year Treasury bonds pay 1.5% and 2.5% respectively and 10 year corporate bond pays 3.4%, what's the risk spread on corporate bond?

.9%

If the nominal rate of interest is 2%, and the expected inflation rate is -10%, the real rate of interest is

12%

What is the yield to maturity of $100 face value one year discount bond selling for $98?

2.04%

What is the return on a 5% coupon $1000 face value bond that initially sells for $1000 and sells for $1200 next year?

25%

A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of

33.3%

Suppose in 2015 you lend $100 to a friend who promises to repay $110 in 2016. You expect 5% inflation rate during that year. However, when your friend repays debt, you discover that actual inflation was 7% that year. Given this information, your expected real interest rate was _____, but actual real interest rate turned out to be _____

5%, 3%

What is the yield to maturity of the same $100 face value one year discount bond, now selling for $95?

5.26%

Which of the following $1000 face value securities has the highest yield to maturity?

A 12% coupon bond selling for $1000

Which of the following $1000 face value securities has the lowest yield to maturity?

A 5% coupon bond selling for $1200

If the interest rates on all bonds rise from 5 to 6% over the course of the year, which bond would you prefer to have been holding?

A bond with one year to maturity

Which of the following can be described as involving direct finance?

A corporation issues new shares of stock

Factors that decrease the demand for bonds include

A decrease in the riskiness of stocks

The collapse of the subprime mortgage market increased the spread between Baa and default-free US Treasury bonds. This is due to

A flight to quality

Equity instruments are traded in the ______ market

Capital

The M1 measure of money includes

Checking account deposits

Which of the following instruments are traded in a money market?

Commercial paper

Which of the following long-term bonds has the highest interest rate?

Corporate Baa bonds

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

Coupon bond

Which of the following are NOT contractual savings institutions?

Credit unions

The riskiness of an asset's returns due to changes in interest rates is

Interest-rate risk

Bonds with relatively low risk of default are called _____ securities and have a rating of Baa (or BBB) and above; bonds with rating below Baa (or BBB) have a higher default risk and are called _____

Investment grade, junk bonds

Holding the expected return on bonds constant, an increase in the expected return on common stocks would _____ the demand for bonds, shifting the demand curve to the ______

Decrease, left

When the expected inflation rate increases, the demand for bonds _____, the supply of bonds _____, and the interest rate _____, everything else held constant

Decreases, increases, rises

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

Default risk

Credit union is an example of

Depository institution

Financial markets have the basic function of

Getting people with funds to lend together with people who want to borrow funds

Which of the following is true about ten year $1000 face value 6% coupon bond that's selling for $1050?

Its current yield is 5.7%

What is another name for non-investment grade bonds?

Junk

If the federal government decreases its spending and doesn't decrease taxes, the bond supply shifts to the

Left and the equilibrium interest rate falls

Suppose investors anticipate that long-term bond yields will increase in the future, possibly due to the Fed increasing interest rates. Then the current demand for long-term bonds shifts

Left and the equilibrium interest rate rises

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 _____

Left, right

In the bond market, the bond demanders are the _____ and the bond suppliers are the _____

Lenders, borrowers

Federal funds are

Loans made by banks to each other

If an individual moves money from a small-denomination time deposit to a checking deposit account

M1 increases and M2 stays the same

_____ is used to make purchases while _____ is the total collection of assets that serve to store value

Money; wealth

Everything else held constant, when stock prices become _____ volatile, the demand curve for bonds shifts to the _____ and the interest rate _____

More, right, falls

The yield to maturity for a discount bond is _____ related to the current bond price

Negatively

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 _____

Negatively, rises, falls

An important source of short-term funds for commercial banks are ______ which can be resold on the secondary market

Negotiable CDs

In an _______ market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices

Over-the-counter

Currency includes

Paper money and coins

A discount bond

Pays the bondholder the face value at maturity

A bond with default risk will always have a _____ risk premium and an increase in its default risk will _____ the risk premium

Positive, raise

The _____ interest rate more accurately reflects the true cost of borrowing

Real

The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates _____ as the expected rate of inflation _____, everything else held constant

Rise, increases

Everything else held constant, when the government has higher budget deficits

The supply curve for bonds shifts to the right and the interest rate rises

Both Treasury bills and commercial paper share the following characteristic

They are both debt instruments

Other than savings deposits, small CDs and money market mutual funds, broader money supply M2 also includes money market deposit accounts. Which of the following about MMDAs is correct?

They are very similar to MMMFs, except the fact that MMDAs are federally insured

_____ are the time and resources spent trying to exchange goods and services

Transaction costs

A vacation to Mexico costs $500 less than a vacation to Europe. When you make this comparison, which of the following functions of money do you use?

Unit of account

Dennis notices that jackets are on sale for $99. In this case, money is functioning as a

Unit of account

When would you be indifferent between receiving $100 now and $100 next year?

When interest rate=0%


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