Exam 1: Chapters 1-7

Using the Gordon growth formula, D/(k-g), if D1 is $2.00, ke is 12% and g is 10%, then the current stock price is 1) $100. 2) $150. 3) $20. 4) $50.

1) $100.

Which of the following is a depository institution? 1) A commercial bank 2) A life insurance company 3) A mutual fund 4) A pension fund

1) A commercial bank

Which of the following are not traded in a capital market? 1) Commercial Paper 2) Corporate Bonds 3) State and local government bonds 4) U.S. government agency securities

1) Commercial Paper

U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are called 1) Eurodollars. 2) foreign dollars. 3) outside dollars. 4) Atlantic dollars.

1) Eurodollars.

Which of the following can be described as indirect finance? 1) You deposit money in a savings account at a bank. 2) You make a loan to your neighbor. 3) You buy a U.S. Treasury bill from the U.S. Treasury. 4) A corporation buys a short-term security issued by another corporation in the primary market.

1) You deposit money in a savings account at a bank.

According to rational expectations theory, forecast errors 1) are unpredictable. 2) tend to be persistently high or low. 3) are more likely to be positive than negative. 4) are more likely to be negative than positive.

1) are unpredictable.

Of the following assets, the least liquid is 1) checking deposits. 2) traveler's checks. 3) stocks. 4) a house.

4) a house.

When the yield to maturity on a bond is ________ the equilibrium yield to maturity, there is excess ________ in the bond market and the yield to maturity will ________. 1) greater than; demand; increase 2) less than; supply; decrease 3) greater than; supply; increase 4) greater than; demand; decrease

4) greater than; demand; decrease

The yield to maturity is ________ than the _________ rate when the bond price is _________ its face value. 1) greater; perpetuity; above 2) greater; coupon; above 3) less; perpetuity; below 4) greater; coupon; below

4) greater; coupon; below

All else equal, 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 ________. 1) decrease; decrease 2) decrease; increase 3) increase; increase 4) increase; decrease

4) increase; decrease

The collapse of the subprime mortgage market during the financial crisis in 2008 scared investors away from privately issued debt securities. As a result, the collapse of the subprime mortgage market 1) did not affect the corporate bond market. 2) increased the perceived riskiness of Treasury securities. 3) decreased the difference between the yields to maturity of Baa-rated and U.S. Treasury bonds. 4) increased the difference between the yields to maturity of Baa-rated and U.S. Treasury bonds.

4) increased the difference between the yields to maturity of Baa-rated and U.S. Treasury bonds.

Which of the following securities offers the lowest yield to maturity? 1) investment-grade bonds 2) junk bonds 3) corporate Baa bonds 4) U.S. Treasury bonds

4) U.S. Treasury bonds

When I purchase a corporation's ________, I am lending the corporation funds for a specific time. When I purchase a corporation's ________, I become an owner in the corporation. 1) bond; stock 2) stock; debt security 3) bond; debt security 4) stock; bond

1) bond; stock

The present value of an expected future payment ________ as the time until the expected future payment is received rises. 1) falls 2) rises 3) is unaffected

1) falls

An equal decrease in the yields to maturity on five- and ten-year bonds 1) increases the price of a ten-year bond more than it increases the price of a five-year bond. 2) decreases the price of a five-year bond more than it decreases the price of a ten-year bond. 3) increases the price of a five-year bond more than it increases the price of a ten-year bond. 4) decreases the price of a ten-year bond more than it decreases the price of a five-year bond.

1) increases the price of a ten-year bond more than it increases the price of a five-year bond.

Kevin purchasing concert tickets with his debit card is an example of the ________ function of money. 1) medium of exchange 2) unit of account 3) store of value 4) specialization

1) medium of exchange

The management of the money supply and interest rates is called ________ policy and it is conducted by a nation's ________ bank. 1) monetary; central 2) fiscal; central 3) fiscal; superior 4) monetary; superior

1) monetary; central

Financial intermediaries 1) provide a channel for linking those who want to save with those who want to raise funds. 2) hold very little of the average American's wealth. 3) produce nothing of value and are therefore a drain on society's resources. 4) necessarily hurt the performance of the economy.

1) provide a channel for linking those who want to save with those who want to raise funds.

Increased uncertainty resulting from the global financial crisis ________ the required return on investments in equity securities. 1) raised 2) lowered 3) had no impact on 4) decreased

1) raised

When yield curves are downward sloping, 1) short-term interest rates are above long-term interest rates. 2) long-term interest rates are above short-term interest rates. 3) short-term interest rates are about the same as long-term interest rates. 4) medium-term interest rates are above both short-term and long-term interst rates.

1) short-term interest rates are above long-term interest rates.

According to the expectations theory, an upward sloping yield curve indicates that ________ interest rates are expected to ________ in the future. 1) short-term; rise 2) short-term; remain unchanged 3) long-term; fall moderately 4) short-term; fall moderately

1) short-term; rise

Prices of money market instruments do not change much over time because of 1) the short-term to maturity for the securities. 2) the lack of competition in the market. 3) the heavy regulations in the industry. 4) the price ceiling imposed by government regulators.

1) the short-term to maturity for the securities.

What is the one-year holding-period return of a 10-percent coupon bond that you buy for its face value of $1,000 and sell for $900 next year? Assume that, during the time that you hold the bond, you collect one annual coupon payment. 1) 25 percent 2) 0 percent 3) 5 percent 4) 10 percent

2) 0 percent

If the market expects the path of one-year yields to maturity over the next five years is 4 percent (this yield is known today), 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's yield to maturity on the five-year bond is 1) 4 percent. 2) 6 percent. 3) 5 percent. 4) 7 percent.

2) 6 percent.

Which of the following statements about the characteristics of debt and equity is false? 1) They can both be long-term financial instruments. 2) They can both be short-term financial instruments. 3) They both enable a corporation to raise funds. 4) They both involve a claim on the issuer's income.

2) They can both be short-term financial instruments.

In the 1990s, Japan had the lowest interest rates in the world due to a combination of 1) inflation and a recession (that decreased firms' investment opportunities). 2) deflation and a recession (that decreased firms' investment opportunities). 3) inflation and an expansion (that increased firms' investment opportunities). 4) deflation and an expansion (that increased firms' investment opportunities).

2) deflation and a recession (that decreased firms' investment opportunities).

All else equal, if people expect real-estate prices to increase significantly, the _________ curve for bonds will shift to the ________. 1) demand; right 2) demand; left 3) supply; left 4) supply; right

2) demand; left

With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets. 1) determined 2) direct 3) active 4) indirect

2) direct

Well-functioning financial markets promote 1) unemployment. 2) economic growth. 3) deflation. 4) inflation.

2) economic growth.

The present value of an expected future payment ________ as the interest rate increases. 1) is unaffected 2) falls 3) rises

2) falls

Bonds that are sold in a foreign country and denominated in that country's currency are known as 1) Eurobonds. 2) foreign bonds. 3) equity bonds. 4) country bonds.

2) foreign bonds.

A corporation acquires new funds when its securities are sold in the 1) primary market by an insurance company. 2) primary market by an investment bank. 3) secondary market by a commercial bank. 4) secondary market by a securities dealer.

2) primary market by an investment bank.

The risk-structure of interest rates is 1) the relationship among the terms to maturity of different bonds. 2) the relationship among yields to maturity of different bonds with the same maturity. 3) the term structure of interest rates. 4) the relationship among yields to maturity on bonds with different maturities.

2) the relationship among yields to maturity of different bonds with the same maturity.

All else equal, when the government's budget deficit increases 1) the supply curve for bonds shifts to the right and the yield to maturity falls. 2) the supply curve for bonds shifts to the right and the yield to maturity rises. 3) the demand curve for bonds shifts to the left and the yield to maturity rises. 4) the demand curve for bonds shifts to the left and the yield to maturity falls.

2) the supply curve for bonds shifts to the right and the yield to maturity rises.

The value of a person's house is a part of her 1) income. 2) wealth. 3) liabilities. 4) money.

2) wealth.

Which of the following $1,000 face-value securities has the lowest yield to maturity? 1) A 10 percent coupon bond selling for $1,000 2) A 15 percent coupon bond selling for $900 3) A 5 percent coupon bond selling for $1,000 4) A 15 percent coupon bond selling for $1,000

3) A 5 percent coupon bond selling for $1,000

Which of the following is included in both M1 and M2? 1) Savings deposits 2) Small-denomination time deposits 3) Currency 4) Money market deposit accounts

3) Currency

________ is a flow of earnings per unit of time. 1) Money 2) Wealth 3) Income 4) Currency

3) Income

Of the following examples of money, the largest is 1) M1. 2) demand deposits. 3) M2. 4) money market deposit accounts.

3) M2.

All of the following are examples of coupon bonds except 1) U.S. Treasury bonds. 2) U.S. Treasury notes. 3) U.S. Treasury bills. 4) corporate bonds

3) U.S. Treasury bills.

Which of the following is true for a coupon bond? 1) The yield to maturity is greater than the coupon rate when the bond price is above the par value. 2) The yield to maturity is less than the coupon rate when the bond price is below the par value. 3) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. 4) The price of a coupon bond and the yield to maturity are positively related.

3) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.

If the price of a euro (the European currency) increases from $1.00 to $1.10, then, everything else held constant, 1) foreign travel becomes impossible. 2) a European vacation becomes less expensive. 3) a European vacation becomes more expensive. 4) the cost of a European vacation is not affected.

3) a European vacation becomes more expensive.

If expectations of the future inflation rate are formed solely on the basis of a weighted average of past inflation rates, then economists would say that expectation formation is 1) reasonable. 2) irrational. 3) adaptive. 4) rational.

3) adaptive.

Inflation is a 1) continuous increase in the money supply. 2) continuous fall in prices. 3) continually rising price level. 4) decline in interest rates.

3) continually rising price level.

All else equal, an increase in the expected return on common stock would ________ the demand for bonds and shift the demand curve for bonds to the ________. 1) increase; right 2) decrease; right 3) decrease; left 4) increase; left

3) decrease; left

Paper currency that has been declared legal tender and is not convertible into an asset with intrinsic value is called ________ money. 1) commodity 2) funny 3) fiat 4) electronic

3) fiat

The prices of bonds would fall if 1) the riskiness of bonds falls relative to other assets. 2) the expected return on bonds relative to other assets is expected to increase in the future. 3) inflation is expected to increase in the future. 4) interest rates are expected to fall in the future.

3) inflation is expected to increase in the future.

The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market 1) financial analysts are your best source of this information. 2) all profits will be eliminated through taxation. 3) it will be quickly eliminated. 4) it will tend to go unnoticed for some time.

3) it will be quickly eliminated.

All else equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the _________ and shifts the demand curve for Treasury bonds to the _________. 1) right; left 2) left; left 3) left; right 4) right; right

3) left; right

Patrick places his pocket change into a jar on his desk each evening. So, Patrick believes that money is a 1) unit of specialization. 2) medium of exchange. 3) store of value. 4) unit of account.

3) store of value.

According to the liquidity-premium theory of the term structure, 1) because of the positive term premium, the yield curve will never be downward sloping. 2) because buyers of bonds may prefer bonds of one maturity over another, yields to maturity on bonds on different maturities do not move together over time. 3) the yield to maturity on long-term bonds will equal an average fo short-term yields to maturity that people expect to occur over the life of the long-term plus a term premium. 4) yield to maturity for bonds of different maturities are unrelated.

3) the yield to maturity on long-term bonds will equal an average fo short-term yields to maturity that people expect to occur over the life of the long-term plus a term premium.

Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected year-end sale price of $110, and a required rate of return of 10%, the current price of the stock would be 1) $121.12. 2) $100.11. 3) $110.11. 4) $100.10.

4) $100.10.

In which of the following situations would you prefer to be the borrower? 1) The interest rate is 4 percent and the expected inflation rate is 1 percent. 2) The interest rate is 13 percent and the expected inflation rate is 15 percent. 3) The interest rate is 9 percent and the expected inflation rate is 7 percent. 4) The interest rate is 25 percent and the expected inflation rate is 30 percent.

4) The interest rate is 25 percent and the expected inflation rate is 30 percent.

All else equal, if wealth increases, the demand for stocks ________ and the demand for long-term bonds ________. 1) decreases; increases 2) increases; decreases 3) decreases; decreases 4) increases; increases

4) increases; increases

All else equal, when Treasury bonds become more widely traded, and as a consequence the market becomes more liquid, the demand curve for corporate bonds shifts to the _________ and the yield to maturity on corporate bonds ________. 1) right; falls 2) left; falls 3) right; rises 4) left; rises

4) left; rises

Evidence from business cycle fluctuations in the United States indicates that 1) recessions are usually preceded by declines in bond prices. 2) recessions are usually preceded by dollar depreciation. 3) a negative relationship between money growth and general economic activity exists. 4) recessions are usually preceded by a decline in the growth rate of money.

4) recessions are usually preceded by a decline in the growth rate of money.

All else equal, an increase in the expected rate of inflation will ________ the expected return on bonds relative to the that on ________ assets. 1) raise; nonfinancial 2) raise; financial 3) reduce; financial 4) reduce; nonfinancial

4) reduce; nonfinancial

Evidence from the United States and other countries indicates that 1) high inflation is harmless. 2) countries with low money-growth rates tend to experience higher rates of inflation, all else being constant. 3) money growth is clearly unrelated to inflation. 4) there is a strong positive association between inflation and growth rate of money over long periods of time.

4) there is a strong positive association between inflation and growth rate of money over long periods of time.

Dennis notices that jackets are on sale for $99. In this case money is functioning as a 1) medium of exchange. 2) store of value. 3) payments-system ruler. 4) unit of account.

4) unit of account.