ECON360

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year?

-5%

what is the return on a 5% coupon bond that initially bought at face value of $1,000 and sells for $1,2000 next year?

25%

A discount bond selling for $15,00 with a face value of $20,000 in one year has a YTM of

33.3%

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

M1 increases and M2 stays the same

if an individual moves money from a savings deposit account to a money market deposit account

M1 stays the same 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 bc it decreases transaction costs

When the Treasury bond market becomes more liquid, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.

left, right

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

left, rises

When yield curves are steeply upward sloping

long-term interest rates are above short-term interest rates

Because these securities are more liquid and generally have smaller price fluctuations, corporations and banks use the ________ securities to earn interest on temporary surplus funds.

money market

the price of a coupon bond and the ytm are ____ related; that is, as the ytm ___, the price of the bond ___

negatively, rises, falls

According to the liquidity premium theory of the term structure, a slightly upward sloping yield curve indicates that short-term interest rates are expected to

remain unchanged in the future

which of the following are not traded in a capital market?

repurchase agreements

Equity holders are a corporation's ________. That means the corporation must pay all of its debt holders before it pays its equity holders.

residual claimants

everything else held constant, 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 real income ________, the demand curve for money shifts to the ________ and the interest rate ________, everything else held constant.

rises, right, rises

when the price level ___, the demand curve for money shifts to the ____ and the interest rate ____, everything else held constant

rises, right, rises

Which of the following bonds would you prefer to be buying?

$10,000 face-value security w/ 10% coupon selling for $9000

If the expected path of one-year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's interest rate on the five-year bond is:

6 percent

a $1000 face value coupon bond with a $60 coupon payment every year has a coupon rate of

6%

If Microsoft sells a bond in London and it is denominated in dollars, the bond

Eurobond

which of the following securities has the lowest interest rates?

U.S. Treasury Bonds

Which of the following are TRUE for a coupon bond?

When the coupon bond is priced at its face values, the YTM equals coupon rate

which of the following $1,000 face value securities has the highest YTM?

a 5% coupon bond with a price of $600

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 to maturity

The present value of an expected future payment ________ as the interest rate increases.

falls

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 our in the future

A short-term debt instrument issued by well-known corporations is called

commercial paper

If brokerage commissions on stocks fall, everything else held constant, the demand for bonds ____, the price of bonds ___, and the interest rate ___.

decrease, decrease, increase

When the expected inflation rate increases, the real cost of borrowing ___ and bond supply ____, everything else held constant

decreases, increases

If investors expect interest rates to fall significantly in the future, the yield curve will be inverted. This means that the yield curve has a ________ slope.

downward

everything else held constant, if the expected return on ABC stock rises from 5 to 10 percent and the expected return on CBS stock is unchanged, then the expected return of holding CBS stock ___ relative to ABC stock and the demand for CBS stock ___

falls, falls

If brokerage commissions on bond sales decrease, then, other things equal, the demand for bonds will ________ and the demand for real estate will ________.

increase, decrease

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

increase, decrease

the conversion of a barter economy to one that uses money

increases efficiency by reducing transaction costs

An equal decrease in all market interest rates on bonds

increases the price of ten-year bond more than the price of a five-year bond

If wealth increases, the demand for stocks ________ and that of long-term bonds ________, everything else held constant.

increases; increases

Everything else held constant, an increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds, and ________ the demand for U.S. government bond

increasing, decreasing

if there is an excess supply of money

individuals buy bonds, causing interest rates to fall.

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

According to the segmented markets theory of the term structure

the interest rate for each maturity bond is determined by supply and demand for that maturity bond

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

the interest rate is 4 percent and the expected inflation rate is 1 percent

adverse selection is a problem associated with equity and debt contracts arising from

the lender's relative lack of information about the borrower's potential returns and risks of his investment activities

sara notices that bags are on sale of $59. in this case money is functioning as a

unit of account