FIN FINAL

Gross Domestic Product

all the above

Which of the following could reduce negative externalities?

all the above

Deposit runs

are dangerous because they tend to impair the liquidity and profitability of a financial institution and, thus, threaten its solvency.

Certificates of deposit (CDs)

are issued by commercial banks.

the forward rate implied in the yield of a two-year security is equal to today's one year spot rate when the yield curve is

flat

Holding everything else constant, a bank may improve its liquidity by

increasing its legal reserves.

Currently,

inflation rates are below the 2 percentage mark.

A risk associated with restrictive monetary policy is that

it may put the economy into a recession.

Currently, the Federal Reserve is considering

leaving the federal funds target rate unchanged.

The big three credit rating agencies (Moody's, Standard and Poor's and Fitch) are paid by

the companies that ask these firms to rate their securities.

In response to reports that the coronavirus is spreading, exacerbating fears of a global economic slowdown, holding everything constant,

the demand for U.S. Treasury securities increases

When a company's debt is upgraded from "junk" to "investment grade," holding everything else constant,

the demand for the company's debt securities tends to increase.

Which of the following are classified as bank off-balance sheet activities?

Standby letters of credit

Which of the following may be reasonable choices when forecasting future spot interest rates?

forwards rates implied in the spot interest rates that are plotted in the yield curve

A loan commitment

generates fee revenue for the issuing bank.

The Federal Reserve's monetary policy is most likely to conflict with the wishes of the Administration, if the Fed tries to

head off inflationary pressures by raising interest rates during a Presidential election campaign.

The Federal Reserve is said to conduct "open-mouth policy" when

Federal Reserve officials make public statements in an attempt to influence market participants to act in ways that help the Fed achieve its policy goals.

When the economy goes into a recession,

GDP declines

Kirsten McGowan must decide whether to invest in a 5-year bond issued by New York City yielding 4.2%, or a similar maturity corporate bond issued by Greater Comforts Inc. that offers a yield of 6.8%. Give that Ellen's tax rate is 30%, which investment?

Greater Comforts

In order to reduce interest rates in an inflationary environment, the Federal Reserve has to

create expectations that inflation rates will come down. b) initially raise interest rates further by selling bonds and reducing growth of the money supply and economic activity.

If the treasury increases its issuance of long-term securities and decreases its issuance of short securities,

short-term interest rates would fall while long-term interest rates would rise, the yield curve would rotate upward causing the slope to become steep and upward sloping

Holding everything else constant, if the Fe increases its holdings of short-term Treasury Bills,

short-term interest rates fall to relative to longer-term interest rates

a bond's price sensitivity to changes in interest rates may be measured with

the bond price elasticity and bond's duration

when a coupon bond trades at a premium above par

the bond's current yield is less than its coupon rate

An analyst considers a bond undervalued when

the bond's yield to maturity exceeds the analyst's required return

Using the Treynor Ratio to measure the performance of a portfolio of stocks implies the assumption that

the portfolio is fully diversified so that firm-specific risk is irrelevant.

A commercial bank's ability to increase the money supply by making additional loans is limited by

the required reserve ratio in combination with the likelihood that borrowers of newly created deposits will write checks on them that will be deposited in other banks.

Which of the following markets provides access to liquidity for lenders?

the secondary market

When the value of the dollar on foreign currency markets is expected to decrease against the peso, holding everything else constant,

the stock prices of U.S. companies that export to Mexico are likely to increase.

When a bond's yield to maturity is greater than the bond's coupon rate, the bond:

trades below par

Suppose that a bank has no cash, $10 in Federal Reserve account balances and Treasury securities worth $10. The bank has calculated a reserve requirement equal to $10. The bank has excess reserves equal to

$20

When there is a large decrease in interest rates from 6% to 4%, the duration measure is likely to

understate the bond price increase.

Deposit insurance by the FDIC

was established to reduce the risk of runs on bank deposits.

The yield curve defines the relationship between

yields at a point in time and term to maturity

Including a conversion feature in a bond contract would

make the bond more attractive to investors (bondholders)

Holding everything else constant, a bond's discount from par is greater

the higher its yield to maturity and the longer time remaining before maturity

When foreign central banks buy U.S. Treasury securities, holding everything else constant,

the supply of funds to the U.S. Treasury shifts to the right

In the 1970s

market interest rates rose above the rates paid by banks on deposit accounts.

In order to be successful when conducting an expansionary monetary policy to stimulate economic growth, the Fed requires

) price level stability. b) a stable financial system. c) credibility as an inflation-fighting, independent central bank. d) all of the above.

Suppose that, as of today, the annualized interest rate on a three year security is 3% , while the annualized interest rate in a two year security is 4%. Based on this information, the implied one year forward rate is estimated to be:

1%

Suppose you consider buying a corporate bond with four years remaining to maturity that pays a 6% coupon rate and is currently selling for $1,073. Assume that you would be selling this bond after two years, and that market interest rates on similar bonds after the end of the two years are predicted to be about 6% per year. The bond offers approximately the following expected return for the next two years:

2%

Suppose a coupon bond with 10 years remaining to maturity is reported to have a duration equal to 8.5 years. Assuming a current interest rate of 3% and an estimated decrease in the interest rate to 2.7% calculate the estimated percentage increase in the bond's price.

2.5%

Currently, deposits in banks are insured up to

250,000

Suppose an investor purchased a newly issued 90-day Treasury bills with a $100,000 face value for $99,100. Estimate the yield assuming the investor holds the T-bills to maturity. (Use a 365-day year.)

3.7%

If the Federal Reserve were to raise interest rates, holding everything else constant, which of the following would be a likely consequence?

Companies' cost of financing would decline.

Expansionary monetary policy by the Federal Reserve may fail to be effective under which of the following conditions:

Concerns about higher credit and default risks prevent banks and other lenders from using the increased availability of funds for loans to businesses and consumers. b) A lack of profitable projects reduces businesses' demand for funds even as interest rates are falling. c) Inflationary pressures in the economy may prevent nominal interest rates from falling.

Which of the following financial institutions do not issue deposits?

Life Insurance companies

Which of the following term structure theories focuses on investors' preference for lending in the short-term funds market?

The Liquidity Preference Theory

Holding everything else constant, under which of the following conditions are Treasury yields most likely to decrease?

The U.S. economy appears to be slowing along with other economies in Europe and Asia

Holding everything else constant, which of the following would likely cause stock prices to increase?

The announcement that an effective vaccine against the coronavirus is ready for distribution.

When a bank raises the interest rate it pays on its deposits in an attempt to reverse large unexpected deposit withdrawals, holding everything else constant, which of the following is most likely:

The bank's interest expense will increase.

Which of the following measures a bond's price sensitivity to changes in interest rates?

The bond's duration.

Which of the following instruments are considered "least risky"?

Treasury bills

When interest rates in Europe are lower than interest rates in the U.S., holding everything else constant,

U.S. companies their demand for funds in the Europe

Suppose you purchased a coupon bond with a duration of 6.7 years and 8 years to maturity at par. Shortly after you purchased the bond, interest rates on similar bonds decreased from 7% to 5% and stayed at that lower level. If you decide to sell your bond 2 years after you purchased it, which of the following is most likely?

Your actual annual return on the bond for the two years you held it will exceed the yield-to-maturity the bond promised at the time of purchase.

The financial return to investors in money market securities comes in the form of

a capital gain.

When market participants have experienced rising inflation rates for some time, as they did during the 1970s, open-market purchases of Treasury securities by the Federal Reserve will likely trigger market reactions that lead to

a) falling prices of Treasury securities and rising interest rates.

The cost of excess reserves that commercial banks lend to each other is represented by the

a) federal funds rate.

Actual output

a) may exceed potential output, because potential output assumes some non-inflationary level of unemployment and capacity utilization.

As one of its monetary policy goals, the Federal Reserve tries to maintain a stable price level. Some of the problems associated with high inflation rates include:

a) upward pressure on interest rates and firms' cost of funds. b) the likelihood that the Federal Reserve loses control over financial markets and the money supply. c) greater difficulties of forecasting future prices and wages with accuracy.

Treasury Inflation-Protected Securities (TIPS) are more attractive than nominal Treasury securities with similar maturities when

actual inflation turns out to be greater than the inflation the market had expected.

Holding everything else constant, the demand for funds from the business sector tens to increase when,

all of the above.

Which of the following may contribute to cost-push inflation?

bad weather and the spread of a virus killing animals have led to higher prices for food; war in the middle east is raising prices for crude oil on world markets

When interest rates rise

bond investors reinvestment income increases and bond prices tend to decline

If the Pure Expectations Theory holds and interest rates are expected fall,

borrowers choose short maturities now

suppose you purchased at par a 6% coupon bond with a duration of 7.3 years. Shortly after you purchased the bond, the bond's market interest rate decreased from 6% to 5% and stayed at the lower level. If you decide to sell your bond three years after you purchased it, which of the following is most likely?

both a and c

When real interest in the U.S. are higher than real interest rates in other countries, holding everything constant, foreign investors tend to

buy U.S. securities this increasing the prices of these securities; increase their supply of funds in U.S. financial markets thus putting downward pressure on U.S. interest rates

The prices and yields of U.S. Treasury bills in the primary market are set by

competitive bidders in single-price auctions.

Changes in the yield differentials between TIPS and nominal Treasury securities of the same maturity may be used as the market measure of

changes in inflation expectations.

Expansionary monetary policy may fail because

commercial banks choose not to lend their excess reserves. b) businesses and households choose not to borrow. c) investors fear an increase in inflation and sell large amounts of Treasury securities driving up yields.

For financing, small and mid-sized businesses depend most heavily on

commercial banks.

Holding everything else constant, a bond's duration

decreases as the bond approaches its maturity date.

Holding everything else constant, households' demand for funds tends to shift to the right when

economic growth is expected to increase

The charging of flat (uniform) deposit insurance premiums during the 1980s

encouraged risk-taking at banks and thrifts because depository institutions were not charged for the risk they imposed on the FDIC.

When a bond trades at par, its current yield

equals its coupon rate

The federal government budget deficit is defined as

federal tax revenues minus federal government expenditures over a given period of time

The U.S. treasury,

finances the U.S. federal debt by issuing Treasury Securities

Holding everything constant except for the passage of time, which of the following will occur as a bond approaches its maturity date?

if the bond trades at a premium, the premium will decline

Holding everything else constant, rising demand-pull inflation tends to

increase business profits and production

In order to increase the federal funds rate, the Fed could

increase the required reserve ratio. c) sell Treasury securities on the open market. d) increase the rate the Fed pays on banks' deposit accounts at the Fed.

Tier II capital

is part of a bank's capital requirement and increases a bank's ability to absorb losses before the FDIC has to compensate insured depositors.

Suppose the nominal interest rate on one-year Treasury security is 2% with an expected inflation rate of 1.5%. If actual inflation turns out to be 2.5%,

lenders will have earned a real interest rate that is lower than expected

When the default risk premium that is part of the corporate interest rate increases significantly, which of the following is likely to increase at the same time?

liquidity risk premium

a zero coupon bond

may trade above par only when its interest rate is negative

Currently in the U.S.

none of the above(look at yellow sheet)

Stripped Treasury securities (STRIPS)

offer only a one-time cash flow at maturity.

Strict protective covenants in a bond issue

protect the bondholders and lower a firm's cost of borrowing.

If the forward rates implied in the yield curve are to be used as market forecasts of future spot interest rates, which of the following theories should dominate explanations of the yield curve slope?

pure expectations theory

Suppose you manage the assets and liabilities of a commercial bank. The bank's asset duration is longer than its liability duration. When interest rates fall, the bank's equity market value will likely

rise

Most of the 1970s were characterized by

rising inflation expectations fueled by oil price shocks b) rising interest rates c) expansionary monetary policy

Suppose inflation rates have increased from 2% to 3% and are expected to go up from there. Market participants are likely to

shift the demand for funds to the right

To help the stock market efficiently allocate resources to their most productive uses,

stock prices should reflect all available public information.

Municipal general obligation bonds are

supported by the municipal government's ability to tax.

Holding everything else constant, the demand for funds from the federal government tends to increase when,

tax revenues are falling; the unemployment rate goes up

Milani inc. is planning to issue a 10-year corporate bond and must estimate the interest rate investors are likely to require. The firm estimates that it is likely to pay 3 % above the appropriate Treasury rate. The appropriate treasury rate is

the 10-year Treasury bond rate

The required return on a stock may be determined by

the Capital Asset Pricing Model (CAPM).

During a recession with significant deflation

the Federal Reserve may have trouble lowering the real interest rate when it is cutting the nominal interest rate.

Holding everything constant, the U.S. Treasury's demand for funds is more likely to crowd out the demand for funds by businesses and households when

the Treasury's demand for funds keeps rising as interest rates are going up

a bond analyst considers a bond overvalued when

the analyst's required return exceeds the market's required return for this bond

When demand for funds shifts to the right, Holding everything else constant,

the supply of securities shifts to the right