Exam 1 FIN 218
What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 one year later? A. 5 percent B. 10 percent C. -5 percent D. 25 percent E. None of these
25 percent
Which of the following $1,000 face value securities has the highest yield to maturity? A. A 5 percent coupon bond selling for $1,000 B. A 10 percent coupon bond selling for $1,000 C. A 12 percent coupon bond selling for $1,000 D. A 12 percent coupon bond selling for $1,100
A 12 percent coupon bond selling for $1,000
Holding everything else constant, an increase in wealth lowers the quantity demanded of an asset. True or False
False
Holding everything else constant, as the dollar strengthens foreigners will buy more U.S. exports. True or False
False
In a recession, when income and wealth are falling, the demand for bonds falls, and the demand curve shifts to the right. True or False
False
In recent years, financial markets have become more risky. However, only a limited number of tools (such as derivatives) are available to assist in managing this risk. True or False
False
It is probably a good use of an investor's time to watch as many shows featuring technical analysts as possible. True or False
False
The Internet stock market bubble of the late 1990s led to one of the worst financial crises in U.S. history. Banks lost billions of dollars as Internet companies went bankrupt. True or False
False
The New York Stock Exchange is an example of a primary market. True or False
False
The capital market is a financial market in which only short-term debt instruments (generally those with an original maturity of less than one year) are traded. True or False
False
The concept of present value tells you that a dollar in the future is not as valuable to you as a dollar today because you can earn interest on this dollar. Therefore, nominal interest rates can never be negative. True or False
False
The difference between the ex ante interest rate and the ex post interest rate is known as the Fisher effect. True or False
False
The failure of Ohio Life Insurance and Trust in 1857 did not signal the start of a recession due to prompt actions by the Fed. True or False
False
The government agency that insures each depositor at a commercial bank, savings and loan association, or mutual savings bank up to a loss of $100,000 per account ($250,000 for individual retirement accounts) is the Securities and Exchange Commission (SEC). True or False
False
The problem of adverse selection helps to explain why direct finance is more important than indirect finance as a source of business finance. True or False
False
The process of financial intermediation is also known as direct finance. True or False
False
The risk premium on corporate bonds becomes smaller as the liquidity of the bonds falls. True or False
False
The term structure of interest rates describes how interest rates move over time. True or False
False
Unlike regulations in other countries, there are very few federal regulations governing who is allowed to set up a financial intermediary. True or False
False
When yield curves are downward-sloping, long-term interest rates are above short-term interest rates. True or False
False
An increase in the marginal tax rate would likely increase the demand for municipal bonds, and decrease the demand for U.S. government bonds. True or False
True
An indexed bond is a bonds whose interest and/or principal payments are adjusted for changes in the price level. True or False
True
Asset pricing bubbles, where the prices of assets rise well above their fundamental values, casts serious doubt on the stronger view that financial markets are efficient. True or False
True
Bank failures have been a feature of all U.S. financial crises from 1800 to 1944. True or False
True
Collateralized debt is also called secured debt. True or False
True
Different interest rates have a tendency to move in unison. True or False
True
Diversification is almost always beneficial to the risk-averse investor, since it reduces risk unless returns on securities move perfectly together. True or False
True
During a bank panic, many banks fail in a very short time period. True or False
True
During the budget negotiations in Congress in 1995-1996, and then again in 2011-2013, the Republicans threatened to let Treasury bonds default, and this had an impact on the bond market. True or False
True
Equity contracts are subject to a particular type of moral hazard called the principal-agent problem. True or False
True
Equity represents an ownership interest in a firm and entitles the holder to the residual cash flows. True or False
True
Factors that can lead to worsening conditions in financial markets include increasing interest rates and asset price booms. True or False
True
Financial innovation has provided more options to both investors and borrowers. True or False
True
Financial institutions are among the largest employers in the country and frequently pay very high salaries. True or False
True
From 2001 to 2008, the dollar depreciation substantially True or False
True
From 2007 to 2009, the U.S. economy was hit by the worst financial crisis since the Great Depression. True or False
True
Housing prices boomed from 2002 to 2006, fueling the market for subprime mortgages and forming an asset-price bubble. Housing prices began declining in 2006, falling by more than 30%, which led to defaults by subprime mortgage holders. True or False
True
If the markets are efficient, the optimal investment strategy will be to buy and hold so as to minimize transaction costs. True or False
True
Increasing duration implies that interest-rate risk has increased. True or False
True
Interest rates are determined in the bond markets. True or False
True
Investors make their choices of which assets to hold by comparing the expected return, liquidity, and risk of alternative assets. True or False
True
Loss aversion means the unhappiness a person feels when he or she suffers a monetary loss exceeds the happiness the same person experiences from receiving a monetary gain of the same amount. True or False
True
Most legal work in the U.S. involves the writing and enforcement of contracts, not ambulance chasing, criminal law, and frivolous lawsuits. True or False
True
State-owned banks in developing countries have little incentive to allocate their capital to the most productive uses. True or False
True
The Sarbanes-Oxley Act of 2002 established a Public Company Accounting Oversight Board (PCAOB), overseen by the SEC, to supervise accounting firms and ensure that audits are independent and controlled for quality. True or False
True
The concept of adverse selection helps explain why collateral is an important feature of many debt contracts. True or False
True
The duration of a portfolio of securities is the weighted average of the durations of the individual securities, with the weights reflecting the proportion of the portfolio invested in each. True or False
True
The efficient market hypothesis does not have to imply that financial markets are efficient. True or False
True
The evidence suggests technical analysts are not superior stock pickers. True or False
True
The interest rates on bonds of different maturities tend to move together over time. True or False
True
The real interest rate is equal to the nominal rate minus inflation. True or False
True
The risk of a well diversified portfolio depends only on the systematic risk of the assets in the portfolio. True or False
True
When a bond defaults, the issuer of the bond is unable or unwilling to make interest payments when promised or to pay off the face value when the bond matures. True or False
True
When income and wealth are rising, the demand for bonds rises and the demand curve shifts to the right. True or False
True
he price of gold should be positively related to the expected inflation rate. True or False
True
if the seIf security markets are truly efficient, there is no need to pay for help selecting securities. True or False
True
A situation in which the price of an asset differs from its fundamental market value
need not indicate that unexploited profit opportunities exist.
A moderately upward-sloping yield curve indicates that short-term interest rates are expected to
neither rise nor fall in the near future.
Tests used to rate the performance of rules developed in technical analysis conclude that
technical analysis does not outperform the overall market.
Evidence against market efficiency does not include
technical analysis.
A debt contract is said to be incentive compatible if
the borrower's net worth reduces the probability of moral hazard.
Net worth
the difference between assets and liabilities
Monetary policy is chiefly concerned with
the level of interest rates and the nation's money supply
When the growth rate of the money supply increases, interest rates end up being permanently lower if
the liquidity effect is larger than the other effects
The risk structure of interest rates is
the relationship among interest rates of different bonds with the same maturity
The bond markets are important because
they are the markets where interest rates are determined
Compared to interest rates on long-term U.S. government bonds, interest rates on ________ fluctuate more and are lower on average.
three month treasury bonds
Another way to state the efficient market condition is that in an efficient market,
unexploited profit opportunities will be quickly eliminated.
The spread between interest rates on low-quality corporate bonds and U.S. government bonds ________ during the Great Depression.
widened significantly
The principal-agent problem
would not arise if the owners of the firm had complete information about the activities of the managers
Economies of scale
can be used to an advantage by reducing transaction cost.
Wealth, either financial or physical, that is employed to produce more wealth is referred to as
capital
Based on the expectations hypothesis, the steep upward sloping yield curve in June of 2013 indicted that short-term rates would ________ in the future.
climb
Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment is called
collateral
The largest depository institution (value of assets) at the end of 2012 was
commercial banks
A ________ is when one party in a financial contract has incentives to act in its own interest rather than in the interests of the other party.
conflict of interest
Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is
consistent with the efficient market hypothesis if the earnings were not as high as anticipated.
Leading up to the 2007-2009 Financial Crisis, companies like AIG developed financial products divisions which wrote billions of dollars worth of financial insurance contracts, called ________, which later bankrupted the company.
credit default swaps
The process of deleveraging refers to
cutbacks in lending by financial institutions.
What is the model whose equations are estimated using statistical procedures used in forecasting interest rates called?
econometric model
The reduction in transaction costs per dollar of transactions as the size (scale) of transactions increases is known as
economies of scale
The risk premium on corporate bonds becomes smaller if
either the liquidity of corporate bonds increases or the riskiness of corporate bonds decreases occur.
The interest rate that is adjusted for actual changes in the price level is called the
ex post real interest rate
Banks, savings and loan associations, mutual savings banks, and credit unions
have been adept at innovating in response to changes in the regulatory environment
Economists' attempts to explain the term structure of interest rates
illustrate how economists modify theories to improve them when they are inconsistent with the empirical evidence.
Stock market declines preceded a full-blown financial crisis
in the United States in 1929.
When bond prices become less volatile, the demand for bonds ________ and the interest rate ________. A. increases; rises B. increases; falls C. decreases; falls D. decreases; rises
increases ; falls
Interest rates are important to financial institutions since an interest rate increase ________ the cost of acquiring funds and ________ the income from assets.
increases ; increases
When the economy enters into a boom, normally the demand for bonds ________, the supply of bonds ________, and the interest rate A. increases; increases; rises B. decreases; decreases; falls C. increases; decreases; rises D. decreases; increases; rises
increases; increases; rises
The SEC restricts trading by the largest stockholders (known as ________) in corporations issuing securities.
insiders
The riskiness of an asset's return that results from interest rate changes is called
interest rate risk
During the 1800s, many U.S. financial crises were precipitated by an increase in ________, often originating in London.
interest rates
According to the expectations theory of the term structure,
interest rates on bonds of different maturities move together over time.
Holding everything else constant, a decrease in the money supply causes
interest rates to increase initially
The Global Legal Settlement of 2002 dealt with conflicts of interest in
investment banks
The efficient market hypothesis suggests that
investors should purchase no-load mutual funds, which have low management fees.
A security
is a claim on the issuers future income
The efficient market hypothesis suggests that allocating your funds in the financial markets on the advice of a financial analyst
is not likely to prove superior to a strategy of making selections by throwing darts at the financial page.
If a bond has a favorable tax treatment, its required interest rate (all else equal)
it will be lower
Bonds with relatively high risk of default are called
junk bonds
The pecking order hypothesis predicts that the ________ a corporation is, the more likely it will be to ________.
larger and more well known; issue securities
When the growth rate of the money supply is decreased, interest rates will rise immediately if the liquidity effect is ________ than the other effects and if there is ________ adjustment of expected inflation. A. larger; rapid B. larger; slow C. smaller; slow D. smaller; rapid
larger;slow
Dollars received in the future are worth ________ than dollars received today. The process of calculating what dollars received in the future are worth today is called ________.
less ; discounting
A $10,000, 8 percent coupon bond that sells for $10,100 has a yield to maturity A. equal to 8 percent. B. greater than 8 percent. C. less than 8 perfect. D. that cannot be calculated.
less than 8 perfect
Keynes's liquidity preference framework, individuals are assumed to hold their wealth in two forms:
money and bonds
Compared to interest rates on long-term U.S. government bonds, interest rates on three-month Treasury bills fluctuate ________ and are ________ on average.
more; lower
When the yield curve is inverted, the yield curve is
downward-sloping.
Discounting the future is the procedure used to find the future value of a dollar received today. True or False
False
If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is A. $650. B. $1,300. C. $130. D. $13. E. None of these.
$650
With an interest rate of 6 percent, the present value of $100 received one year from now is approximately A. $106. B. $100. C. $94. D. $92.
$94
(I) The total cost of carrying out a transaction in financial markets increases proportionally with the size of the transaction. (II) Financial intermediaries facilitate diversification when an investor has only a small sum to invest. A. (I) is true; (II) false. B. (I) is false; (II) true. C. Both (I) and (II) are true. D. Both (I) and (II) are false.
(I) is false; (II) true.
(I) In the United States, nonbank loans are the most important source of external funds for nonfinancial businesses. (II) In Germany and Japan, issuing stocks and bonds is the most important source of external for nonfinancial businesses. A. (I) is true, (II) false. B. (I) is false, (II) true. C. Both are true. D. Both are false.
(I) is true, (II) false.
(I) Debt markets are often referred to generically as the bond market. (II) A bond is a security that is a claim on the earnings and assets of a corporation.
(I) is true, (II) is false
(I) Banks are financial intermediaries that accept deposits and make loans. (II) The term "banks" includes firms such as commercial banks, savings and loan associations, mutual savings banks, credit unions, insurance companies, and pension funds.
(I) is true, (II), false
What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 one year later? A. 5 percent B. 10 percent C. -5 percent D. -10 percent E. None of these
-5 percent
(I) Prices of longer-maturity bonds respond more dramatically to changes in interest rates. (II) Prices and returns for long-term bonds are less volatile than those for short-term bonds. A. (I) is true, (II) false. B. (I) is false, (II) true. C. Both are true. D. Both are false.
. (I) is true, (II) false.
Approximately how large was the U.S. subprime mortgage market in 2007?
1 trillion
Of the sources of external funds for nonfinancial businesses in the United States, stocks account for approximately ________ of the total.
10%
From the peak of the housing bubble in Q2 of 2006, to the trough in Q1 of 2009, the Case-Shiller housing price index fell by just over A. 15%. B. 20%. C. 25%. D. 30%.
30%
Despite austerity measures to dramatically cut government spending and raise taxes, interest rates on Greek debt soared, eventually rising to nearly ________, and the debt-to-GDP ratio climbed to ________ of GDP in 2012. A. 40%; 125% B. 40%; 160% C. 15%; 120% D. 25%; 100%
40%; 160%
U.S. Stock prices (as proxied by the DJIA) fell by ________ from October 2007 to March 2009. A. 45% B. 50% C. 55% D. 60%
50%
During the Financial Crisis of 2007-2009, the Dow Jones Industrial Average fell to a low near
6,600
The Baa-U.S. Treasury spread was about 2% at the beginning of 1929. By December 1932, the Dow Jones Industrial Average reached a low, and the spread had increased to how much? A. 4% B. 6% C. 8% D. 10%
8%
From its peak in 1929 to the trough in December 1932, the Dow Jones Industrial Average fell how much?
90%
Evidence that a mutual fund has performed extraordinarily well in the past contradicts the efficient market hypothesis. True or False
False
Which of the following can be described as involving direct finance? A. A corporation's stock is traded in an over-the-counter market. B. A corporation buys commercial paper issued by another corporation. C. A pension fund manager buys commercial paper from the issuing corporation. D. Both A corporation's stock is traded in an over-the-counter market and A corporation buys commercial paper issued by another corporation. E. Both A corporation buys commercial paper issued by another corporation and A pension fund manager buys commercial paper from the issuing corporation.
A corporation buys commercial paper issued by another corporation.
What is a collateralized debt obligation?
A tranche of an SPV that has been setup based on default risk
Which of the following are true for a coupon bond? A. When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. B. The price of a coupon bond and the yield to maturity are positively related. C. The yield to maturity is greater than the coupon rate when the bond price is above the par value. D. All of these are true. E. Only When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate and The price of a coupon bond and the yield to maturity are positively related are true.
A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.
Factors that cause the demand curve for bonds to shift to the left include A. an increase in the inflation rate. B. an increase in the liquidity of stocks. C. a decrease in the volatility of stock prices. D. All of these. E. None of these.
All of these
How expectations are formed is important because expectations influence A. the demand for assets. B. bond prices. C. the risk structure of interest rates. D. the term structure of interest rates. E. All of these.
All of these
Important implications of the efficient market hypothesis include which of the following? A. Future changes in stock prices should, for all practical purposes, be unpredictable. B. Stock prices will respond to announcements only when the information in these announcements is new. C. Sometimes a stock price declines when good news is announced. D. All of these. E. Only Future changes in stock prices should, for all practical purposes, be unpredictable and Stock prices will respond to announcements only when the information in these announcements is new.
All of these
In an advanced economy, a financial crisis can begin in several ways, including A. mismanagement of financial liberalization or innovation. B. asset pricing booms and busts. C. an increase in uncertainty caused by failure of financial institutions. D. All of these.
All of these
Evidence that stock prices sometimes fall when a firm announces good news contradicts the efficient market hypothesis. True or False
False
Which of the following are generally true of all bonds? A. The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period. B. A rise in interest rates is associated with a fall in bond prices, resulting in capital losses on bonds whose term to maturities are longer than the holding period. C. The longer a bond's maturity, the greater is the price change associated with a given interest rate change. D. All of these are true. E. Only The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period and A rise in interest rates is associated with a fall in bond prices, resulting in capital losses on bonds whose term to maturities are longer than the holding period are true.
All of these are true
A weaker dollar benefits ________ and hurts ________.
American businesses ; American consumers
________ was the stock market's worst one-day drop in history in the 1980s.
Black Monday
(I) A bond is a debt security that promises to make payments periodically for a specified period of time. (II) A stock is a security that is a claim on the earnings and assets of a corporation.
Both are true
(I) A simple loan requires the borrower to repay the principal at the maturity date along with an interest payment. (II) A discount bond is bought at a price below its face value, and the face value is repaid at the maturity date. A. (I) is true, (II) false. B. (I) is false, (II) true. C. Both are true. D. Both are false.
Both are true
(I) The risk premium widens as the default risk on corporate bonds increases. (II) The risk premium widens as corporate bonds become less liquid. A. (I) is true, (II) false. B. (I) is false, (II) true. C. Both are true. D. Both are false.
Both are true.
Debt deflation refers to the decline in debt values as creditors agree to lower interest rates as an alternative to defaults. True or False
False
________ are investment advisory firms that rate the quality of corporate and municipal bonds in terms of probability of default.
Credit-rating agencies
What is a credit boom? A. An explosion in a credit cycle, which can increase or decrease lending in the short-run B. Essentially a lending spree on the part of banks and other financial institutions C. When credit card receivables rise due to low initial interest rates D. The signal of the end of a credit spree, with credit contracting rapidly
Essentially a lending spree on the part of banks and other financial institutions
Foreign currencies that are deposited in banks outside the home country are known as
Eurocurrencies
A bonds with a 5% coupon as has a yield to maturity of 5%. True or False
False
Although the internet has changed many aspects of our lives, it hasn't proven very useful for collecting and/or analyzing financial and economic data. True or False
False
American investors pay attention to only the Dow Jones Industrial Average. True or False
False
An asset should be priced so that is has a higher expected return when it has a greater risk in isolation. True or False
False
An increase in the inflation rate will cause the demand curve for bonds to shift to the right. True or False
False
An unusual feature of the "Great Recession" in the U.S. from 2007-2009 was that the crisis did not spread to European nations. True or False
False
Bonds with a maturity that is longer than the holding period have no interest-rate risk. True or False
False
The central bank of the United States is
Federal Reserve
The organization responsible for the conduct of monetary policy in the United States is the
Federal Reserve System
After 2002, the ________ handle(s) a larger share of initial public offerings (IPOs) of stock than do/does the ________.
London and Hong Kong stock exchanges; New York Stock Exchange
Which of the following long-term bonds should have the lowest interest rate?
Municipal bonds
If the expected path of one-year interest rates over the next four years is 5 percent, 4 percent, 2 percent, and 1 percent, then the pure expectations theory predicts that today's interest rate on the four-year bond is A. 1 percent. B. 2 percent. C. 4 percent. D. None of these.
None of these
Which of the following types of information will most likely enable the exploitation of a profit opportunity? A. Financial analysts' published recommendations B. Technical analysis C. Hot tips from a stockbroker D. None of these
None of these
Which of the following are true for a coupon bond? A. When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. B. The price of a coupon bond and the yield to maturity are negatively related. C. The yield to maturity is greater than the coupon rate when the bond price is above the par value. D. All of these are true. E. Only When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate and The price of a coupon bond and the yield to maturity are negatively related are true.
Only When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate and The price of a coupon bond and the yield to maturity are negatively related are true.
In which of the following situations would you prefer to be borrowing? A. The interest rate is 9 percent and the expected inflation rate is 7 percent. B. The interest rate is 4 percent and the expected inflation rate is 1 percent. C. The interest rate is 13 percent and the expected inflation rate is 15 percent. D. The interest rate is 25 percent and the expected inflation rate is 50 percent.
The interest rate is 25 percent and the expected inflation rate is 50 percent.
A bond with default risk will always have a positive risk premium, and an increase in its default risk will raise its risk premium. True or False
True
A credit spread is the difference between the interest rate on loans to businesses and the interest rate on completely safe assets that are sure to be paid back. True or False
True
A critical function of financial markets is an efficient allocation of capital. True or False
True
Adverse selection refers to those with high credit risks, being most aggressive in their search for funds. True or False
True
American businesses use stock to finance about 11 percent of their external financing. True or False
True
An increase in income tax rates will cause the interest rates on tax-exempt municipal bonds to fall relative to the interest rate on taxable corporate securities. True or False
True
Although the verdict is not yet in, the available evidence indicates that, for many purposes, the efficient market hypothesis is
a good starting point for analyzing expectations.
A clause in a mortgage loan contract requiring the borrower to purchase homeowner's insurance is an example of
a restrictive covenant
Adverse selection and moral hazard problems increased in magnitude during the early years of the Great Depression as A. stock prices declined to 10 percent of their levels in 1929. B. banks failed. C. the aggregate price level declined. D. a result of all of these. E. a result of stock prices declined to 10 percent of their levels in 1929 and banks failed.
a result of all of these
Rules used to predict movements in stock prices based on past patterns are, according to the efficient markets theory,
a waste if time
The average lifetime of a debt security's stream of payments is calculated as the debt's
duration
When the interest rate on a bond is ________ the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________. A. above; demand; fall B. above; demand; rise C. below; supply; fall D. above; supply; rise
above;demand;fall
When the price of a bond is ________ the equilibrium price, there is an excess supply of bonds and the price will ________. A. above; rise B. above; fall C. below; fall D. below; rise
above;fall
The Sarbanes-Oxley Act of 2002 dealt with conflicts of interest in
accounting firms
If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of
adverse selection
When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, ________ is said to exist.
adverse selection
The impact of the 2007-2009 financial crisis was widespread, including A. the first major bank failure in the UK in over 100 years. B. the failure of Bear Stearns, the fifth-largest U.S. investment bank. C. the bailout of Fannie Mae and Freddie Mac by the U.S. Treasury. D. All of these. E. only the failure of Bear Stearns, the fifth-largest U.S. investment bank and the bailout of Fannie Mae and Freddie Mac by the U.S. Treasury.
all of these
The problem of adverse selection helps to explain A. why banks prefer to make loans secured by collateral. B. why banks have a comparative advantage in raising funds for American businesses. C. why borrowers are willing to offer collateral to secure their promises to repay loans. D. All of these. E. only why banks prefer to make loans secured by collateral and why banks have a comparative advantage in raising funds for American businesses.
all of these
Which of the following are accurate statements concerning the role that restrictive covenants play in reducing moral hazard in financial markets? A. Covenants reduce moral hazard by restricting borrowers' undesirable behavior. B. Covenants require that borrowers keep collateral in good condition. C. Covenants require periodic accounting statements and income reports. D. All of these. E. Only Covenants reduce moral hazard by restricting borrowers' undesirable behavior and Covenants require that borrowers keep collateral in good condition.
all of these
Which of the following is not a regulator of part of the U.S. financial system? A. National Credit Union Administration B. Securities and Exchange Commission C. Federal Reserve System D. Federal Deposit Insurance Corporation
all of these are regulators
Factors that cause the demand curve for bonds to shift to the left include A. a decrease in the inflation rate. B. an increase in the volatility of stock prices. C. an increase in the liquidity of stocks. D. All of these. E. only a decrease in the inflation rate and an increase in the volatility of stock prices.
an increase in the liquidity of stocks
That most used cars are sold by intermediaries (i.e., used car dealers) provides evidence that these intermediaries
are able to prevent potential competitors from free-riding off the information that they provide.
Financial crises A. are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms. B. occur when adverse selection and moral hazard problems in financial markets become more significant. C. frequently lead to sharp contractions in economic activity. D. are all of these. E. are only are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms and occur when adverse selection and moral hazard problems in financial markets become more significant.
are all of these
A borrower who takes out a loan usually has better information about the potential returns and risks of the investment projects he plans to undertake than the lender does. This inequality of information is called
asymmetric information
When the lender and the borrower have different amounts of information regarding a transaction, ________ is said to exist.
asymmetric information
In the good old days, when you took cash out of the bank or wanted to check your account balance, you got to say hello to a friendly human. Nowadays, you are more likely to interact with a(n) ________ when withdrawing cash.
automatic teller machine (ATM)
The major differences between financial regulation in the United States and abroad relate to bank regulation. Specifically, in the past, the U.S. was the only industrialized country to subject banks to restrictions on
branching
Stage Two of a financial crisis in an advanced economy usually involves a ________ crisis.
banking
The largest financial intermediaries are
banks
(I) The average lifetime of a debt security's stream of payments is called duration. (II) The duration of a portfolio is the weighted average of the durations of the individual securities, with the weights reflecting the proportion of the portfolio invested in each. A. (I) is true, (II) false. B. (I) is false, (II) true. C. Both are true. D. Both are false.
both are true
A rising stock market index due to higher share prices
both increases people's wealth as a result may increase their willingness to spend and increases the amount of funds that business firms can raise by selling issued stocks
An advantage of providing multiple financial services within one financial institution is that it
both lowers information costs and develops broader long-term relationships with customers.
A declining stock market index due to lower share prices
both reduces peoples wealth and as a result may reduce their willingness to spend and decrease the amount of funds that business firms can raise by selling newly issued stocks
Intermediaries who are agents of investors and match buyers with sellers of securities are called
brokers
Stage Three of a financial crisis in an advanced economy features
debt inflation
A higher level of income causes the demand for money to ________ and the interest rate to ________. A. decrease; decrease B. decrease; increase C. increase; decrease D. increase; increase
decrease; decrease
As a result of the subprime collapse, the demand for low -quality corporate bonds ________, the demand for high-quality Treasury bonds ________, and the risk spread ________. A. increased; decreased; was unchanged B. decreased; increased; increased C. increased; decreased; decreased D. decreased; increased; was unchanged
decreased; increased; increased
When the demand for bonds ________ or the supply of bonds ________, interest rates rise. A. increases; increases B. increases; decreases C. decreases; decreases D. decreases; increases
decreases ; increases
If Moody's or Standard and Poor's downgrades its rating on a corporate bond, the demand for the bond ________ and its yield ________. A. increases; decreases B. decreases; increases C. increases; increases D. decreases; decreases
decreases;increases
The nominal interest rate minus the expected rate of inflation
defines the real interest rate
Governments in developing countries sometimes adopt policies that retard the efficient operation of their financial systems. These actions include policies that A. prevent lenders from foreclosing on borrowers with political clout. B. nationalize banks and direct credit to politically favored borrowers. C. make it costly to collect payments and collateral from defaulting debtors. D. do all of these. E. do only prevent lenders from foreclosing on borrowers with political clout and nationalize banks and direct credit to politically favored borrowers.
do all of these
In 1928 and the first half of 1929, prices ________ in the U.S. stock market.
doubled
The loanable funds framework is easier to use when analyzing the effects of changes in ________, while the liquidity preference framework provides a simpler analysis of the effects from changes in income, the price level, and the supply of ________. A. expected inflation; bonds B. expected inflation; money C. government budget deficits; bonds D. the supply of money; bonds
expected inflation; money
According to the January effect, stock prices
experience an abnormal price rise from December to January.
A country whose financial markets function poorly is likely to
experience economic hardship and financial crises
Stock prices since the 1980s have been
extremely volatile
An important lesson from the Black Monday Crash of 1987 and the tech crash of 2000 is that
factors other than market fundamentals affect stock prices.
As the price of a bond ________ and the expected return ________, bonds become more attractive to investors and the quantity demanded rises. A. falls; rises B. falls; falls C. rises; rises D. rises; falls
falls ; rises
The Sarbanes-Oxley Act of 2002 provides for oversight of accounting firms but makes no provisions for increasing the flow of information to financial markets. True or False
false
Corporate bonds are not as liquid as government bonds because
fewer bonds for any one corporation are traded, making them more costly to sell.
The main sources of financing for businesses, in order of importance, are
financial intermediaries, issuing bonds, issuing stocks.
A ________ is a type of loan that has the same cash flow payment every year throughout the life of the loan.
fixed payment loan
Which of the following led to the U.S. financial crisis of 2007-2009? A. Financial innovation in mortgage markets B. Agency problems in mortgage markets C. An increase in moral hazard at credit rating agencies D. All of these E. only Financial innovation in mortgage markets and Agency problems in mortgage markets
only Financial innovation in mortgage markets and Agency problems in mortgage markets
According to the efficient market hypothesis
only one cannot expect to earn an abnormally high return by purchasing a security and information in newspapers and in the published reports of financial analysts is already reflected in market prices are true.
If the optimal forecast of the return on a security exceeds the equilibrium return, then
only the market is inefficient and an unexploited profit opportunity exists are true.
The concept of adverse selection helps to explain A. which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets. B. why indirect finance is more important than direct finance as a source of business finance. C. why direct finance is more important than indirect finance as a source of business finance. D. only which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets and why indirect finance is more important than direct finance as a source of business finance. E. only which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets and why direct finance is more important than indirect finance as a source of business finance. Feedback
only which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets and why indirect finance is more important than direct finance as a source of business finance
The concept of ________ is based on the notion that a dollar paid to you in the future is less valuable to you than a dollar today.
present value
When a market bubble occurs,
prices of assets rise well above their fundamental values
The purpose of diversification is to
reduce the volatility of a portfolio's return.
Bonds whose term to maturity is shorter than the holding period are also subject to
reinvestment risk
When the corporate 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 ________. A. right; right B. right; left C. left; left D. left; right
right;left
A steep upward-sloping yield curve indicates that short-term interest rates are expected to
rise moderately in the near future.
During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________. A. falls; right B. falls; left C. rises; right D. rises; left
rises;right
Leading up to the 2007-2009 Financial Crisis, the ________ process, along with computer technology, enabled the bundling of smaller loans (like mortgages) into standard debt securities.
securitization
The conflict of interest in credit-rating agencies arises because ________ pay to have securities rated and, as a result, the agencies' ratings may be biased ________. A. security issuers; downward B. security issuers; upward C. investors; downward D. regulators; upward
security issuers; upward
An arrangement with a broker to borrow stocks from them and then sell it in the market, with the hope that they earn a profit by buying the stock back again after it has fallen in price is called
short sales.
A debt instrument is called ________ if its maturity is less than a year.
short term
The money market is the market in which ________ are traded.
short-term debt instruments
Which of the following markets is sometimes organized as an over-the-counter market?
stock market, bond market, foreign exchange market, federal funds market
The efficient markets hypothesis is weakened by evidence that
stock prices are more volatile than fluctuations in their fundamental values can explain.
Of the following sources of external finance for American nonfinancial businesses, the least important is
stocks
When the inflation rate is expected to increase, the real cost of borrowing declines at any given interest rate; as a result, the ________ bonds increases and the ________ curve shifts to the right. A. demand for; demand B. demand for; supply C. supply of; demand D. supply of; supply
supply of;supply
