econ 3303 final crowder
According to the liquidity premium theory of the term structure, a flat yield curve indicates that short-term interest rates are expected to
decline moderately in the future.
Fear of a major recession causes stock prices to fall, everything else held constant, which in turn causes consumer spending to
decrease.
A lower level of income causes the demand for money to ________ and the interest rate to ________, everything else held constant.
decrease; decrease
Everything else held constant, when households save less, wealth and the demand for bonds ________ and the bond demand curve shifts ________.
decrease; left
An increase in an assetʹs expected return relative to that of an alternative asset, holding everything else constant, ________ the quantity demanded of the asset.
decreases
When the economy slips into a recession, normally the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant.
decreases; decreases; falls
If brokerage commissions on stocks fall, everything else held constant, the demand for bonds ________, the price of bonds ________, and the interest rate ________.
decreases; decreases; increases
Holding everything else constant, if interest rates are expected to increase, the demand for bonds ________ and the demand curve shifts ________.
decreases; left
U.S. Treasury bills are considered the safest of all money market instruments because there is no risk of ________.
default
If people expect real estate prices to increase significantly, the ________ curve for bonds will shift to the ________, everything else held constant.
demand; left
If the interest rate on a bond is above the equilibrium interest rate, there is an excess ________ for bonds and the bond price will ________.
demand; rise
In the United States, loans from ________ are far ________ important for corporate finance than are securities markets.
financial intermediaries; more
According to the efficient markets hypothesis, purchasing the reports of financial analysts
is not likely to be an effective strategy for increasing financial returns.
People have a strong incentive to form rational expectations because
it is costly not to do so.
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
Everything else held constant, when bonds become less widely traded, and as a consequence the market becomes less liquid, the demand curve for bonds shifts to the ________ and the interest rate ________.
left; rises
Everything else held constant, when stock prices become less volatile, the demand curve for bonds shifts to the ________ and the interest rate ________.
left; rises
Of the four effects on interest rates from an increase in the money supply, the initial effect is, generally, the
liquidity effect.
The advantage of a ʺbuy-and-hold strategyʺ is that
net profits will tend to be higher because there will be fewer brokerage commissions.
If the expected path of 1-year interest rates over the next five years is 2 percent, 4 percent, 1 percent, 4 percent, and 3 percent, the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of
one year.
Currency includes
paper money and coins.
Poorly performing financial markets can be the cause of
poverty
A corporation acquires new funds only when its securities are sold in the
primary market by an investment bank.
Well-functioning financial markets
produce an efficient allocation of capital.
Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. Financial intermediaries
provide a channel for linking those who want to save with those who want to invest.
GDP measured with constant prices is referred to as
real GDP.
An expectation may fail to be rational if
relevant information is available but ignored at the time the forecast is made.
Everything else held constant, a decline in interest rates will cause spending on housing to
rise.
The spread between the interest rates on bonds with default risk and default-free bonds is called the
risk premium.
The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as
risk sharing.
Everything else held constant, if the tax-exempt status of municipal bonds were eliminated, then
the interest rate on municipal bonds would exceed the rate on Treasury bonds.
The opportunity cost of holding money is
the interest rate.
The bond markets are important because they are
the markets where interest rates are determined.
In the generalized dividend model, a future sales price far in the future does not affect the current stock price because
the present value is almost zero.
The currency component includes paper money and coins held in
the hands of the nonbank public
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
$20.
The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is
0 percent.
If there are five goods in a barter economy, one needs to know ten prices in order to exchange one good for another. If, however, there are ten goods in a barter economy, then one needs to know ________ prices in order to exchange one good for another.
45
An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of
5 percent.
Assuming the same coupon rate and maturity length, when the interest rate on a Treasury Inflation Protected Security is 3 percent, and the yield on a nonindexed Treasury bond is 8 percent, the expected rate of inflation is
5 percent.
If 1-year interest rates for the next five years are expected to be 4, 2, 5, 4, and 5 percent, and the 5-year term premium is 1 percent, than the 5-year bond rate will be
5 percent.
Which of the following $1,000 face-value securities has the highest yield to maturity?
A 12 percent coupon bond selling for $1,000
________ in the money supply creates excess demand for ________, causing interest rates to ________, everything else held constant.
An increase; bonds; fall
Which of the following instruments are traded in a capital market?
Corporate bonds.
Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as
Eurobonds.
Which of the following statements uses the economistsʹ definition of money?
I hope that I have enough money to buy my lunch today.
________ means people are more unhappy when they suffer losses than they are happy when they achieve gains.
Loss aversion
If an individual moves money from a money market deposit account to currency,
M1 increases and M2 stays the same.
Which of the following statements best explains how the use of money in an economy increases economic efficiency?
Money increases economic efficiency because it decreases transactions costs.
ich of the following instruments is not traded in a money market?
Residential mortgages.
In which of the following situations would you prefer to be the borrower?
The interest rate is 25 percent and the expected inflation rate is 50 percent.
Which of the following statements about the characteristics of debt and equities is true?
They can both be long-term financial instruments.
Which of the following can be described as direct finance?
You borrow $2500 from a friend.
Which of the following can be described as involving indirect finance?
You make a deposit at a bank.
In the figure above, a factor that could cause the demand for bonds to decrease (shift to the left) is:
a decrease in the expected return on bonds relative to other assets.
In Keynesʹs liquidity preference framework, if there is excess demand for money, there is
an excess supply of bonds.
Factors that can cause the supply curve for bonds to shift to the right include
an expansion in overall economic activity.
New information that might lead to a decrease in a stockʹs price might be
an expected decrease in the level of future dividends.
A sharp increase in the growth of the money supply is likely followed by
an increase in the inflation rate.
Federal funds are
ans made by banks to each other.
A key assumption in the segmented markets theory is that bonds of different maturities
are not substitutes at all.
The efficient markets hypothesis implies that prices in the stock market
are unpredictable.
securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.
assets; liabilities
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 ________, and it creates the ________ problem.
asymmetric information; adverse selection
The upward and downward movement of aggregate output produced in the economy is referred to as the
business cycle
equity instruments are traded in the ________ market.
capital
Financial markets promote economic efficiency by
channeling funds from savers to investors.
A disadvantage of ________ is that it is very heavy and hard to transport from one place to another.
commodity money
Periodic payments of net earnings to shareholders are known as
dividends
The present value of an expected future payment ________ as the interest rate increases.
falls
Everything else held constant, if the expected return on U.S. Treasury bonds falls from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected return of corporate bonds ________ relative to U.S. Treasury bonds and the demand for corporate bonds ________.
falls; falls
Bonds issued by state and local governments are called ________ bonds.
municipal
According to the liquidity premium theory of the term structure
if yield curves are downward sloping, then short-term interest rates are expected to fall by so much that, even when the positive term premium is added, long-term rates fall below short-term rates.
If gold becomes acceptable as a medium of exchange, the demand for gold will ________ and the demand for bonds will ________, everything else held constant.
increase; decrease
As default risk decreases, the expected return on corporate bonds ________, and the return becomes ________ uncertain, everything else held constant.
increases; less
The evolution of the payments system from barter to precious metals, then to fiat money, then to checks can best be understood as a consequence of
innovations that reduced the costs of exchanging goods and services.
If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is slow, then the
interest rate will initially fall but eventually climb above the initial level in response to an increase in money growth.
bonds with relatively low risk of default are called ________ securities and have a rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and are called ________.
investment grade; junk bonds
The expectations theory and the segmented markets theory do not explain the facts very well, but they provide the groundwork for the most widely accepted theory of the term structure of interest rates,
liquidity premium theory.
When yield curves are steeply upward sloping,
long-term interest rates are above short-term interest rates.
An important function of secondary markets is to
make it easier to sell financial instruments to raise funds.
If peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts are
money.
A professional baseball player may be contractually restricted from skiing. The team owner includes this clause in the playerʹs contract to protect against
moral hazard.
The higher a securityʹs price in the secondary market the _________ funds a firm can raise by selling securities in the _________ market.
more; primary
A financial market in which previously issued securities can be resold is called a _________ market.
secondary
If the maturity of a debt instrument is less than one year, the debt is called ________.
short-term
The steeply upward sloping yield curve in the figure above indicates that ________ interest rates are expected to ________ in the future.
short-term; rise
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
When the price of a bond is above the equilibrium price, there is an excess ________ bonds and price will ________.
supply of; fall
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
Municipal bonds have default risk, yet their interest rates are lower than the rates on default-free Treasury bonds. This suggests that
the benefit from the tax-exempt status of municipal bonds exceeds their default risk.
When the interest rate changes,
the demand curve for bonds shifts to the right.
Using the Gordon growth model, a stockʹs price will increase if
the dividend growth rate increases.
All but the most primitive societies use money as a medium of exchange, implying that
the use of money is economically efficient.
Economists find no completely satisfactory way to measure money because
the ʺmoneynessʺ or liquidity of an asset is a matter of degree.
In the figure above, the price of bonds would fall from P2 to P1 if
there is a business cycle expansion.
Evidence from the United States and other foreign countries indicates that
there is a strong positive association between inflation and growth rate of money over long periods of time.
Budgets deficits can be a concern because they might
ultimately lead to higher inflation.
Another way to state the efficient markets condition is: in an efficient market,
unexploited profit opportunities will be quickly eliminated.
When money prices are used to facilitate comparisons of value, money is said to function as a
unit of account.
