Macro Midterm Module 7

Fred purchases a bond, newly issued by the Big Time Corporation, for $10,000. The bond pays $400 to its holder at the end of the first, second, and third years and pays $10,400 upon its maturity at the end of four years. The principal amount of this bond is __________, the coupon rate is __________, and the term of this bond is __________.

$10,000; 4 percent; four years

Sydney purchases a newly-issued, two-year government bond with a principal amount of $10,000 and a coupon rate of 6% paid annually. One year before the bonds matures (and after receiving the coupon payment for the first year), Sydney sells the bond in the bond market. What price (rounded to the nearest dollar) will Sydney receive for his bond if the prevailing interest rate is 5%?

$10,095

You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $62.73 for one share of the stock today, and you expect a dividend payment of $4, what rate of return do you require?

10 percent

One year before maturity, the price of a bond with a principal amount of $1,000 and a coupon rate of 5 percent paid annually fell to $981. The one-year interest rate must be:

7 percent

You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $61.06 for one share of the stock today, you expect a dividend payment of $4, and the rate of return on safe assets is 5 percent, how much is your risk premium?

8.0 percent

In the United States saving is allocated to its most productive use by:

A decentralized, market-oriented financial system

During the 1960s and 1970s, the U.S. trade balance was close to zero, but during the 1980s, the trade deficit ballooned to unprecedented levels due to:

A decline in national saving caused largely by rapidly rising government budget deficits.

When a U.S. oil company purchases oil from Saudi Arabia and the Saudi Arabian firm uses the proceeds from the sale to buy transportation services from the U.S., U.S. net exports __________ and the capital inflow to the United States __________.

Are unchanged; is unchanged

Financial intermediaries, such as commercial banks, provide benefits to:

Both savers and borrowers

Each of the following is an example of a financial intermediary EXCEPT a: A) commercial bank B) credit union C) bond market D) savings and loan associations

C) bond market

When a Peruvian buys a U.S. government bond, from the perspective of US, this is a(n):

Capital inflow

When the Chinese government buys U.S. government bonds, from the perspective of China, this is a(n):

Capital outflow

You own shares in a start-up internet company. If large swings in the stock market increase financial investors' concerns about market risk, then the price of your shares will __________, holding other factors constant.

Decrease

In an open economy with a given level of real interest rates and risk, an increase in real interest rates abroad will __________ capital inflows and __________ the equilibrium domestic real interest rate.

Decrease; increase

In an open economy, a decrease in the government's budget deficit will __________ the domestic real interest rate and __________ the level of capital investment in the country, holding other factors constant.

Decrease; increase

When the interest rate on newly issued bonds increases, the price of existing bonds:

Decreases

The sum of national saving and capital inflows from abroad must equal:

Domestic inflows in new capital goods

Two reasons savers keep deposits at banks are to:

Earn a return on their savings and to facilitate making payments

A trade deficit occurs when:

Imports exceed exports

When Federal Reserve actions cause interest rates on newly issued bonds to decrease from 6% to 5%, the prices of existing bonds:

Increase

You originally required a risk premium of 6 percent in addition to the rate of return on safe assets before you would purchase shares of Techno Company stock. If you and other investors reduce the risk premium you require to 4 percent, the price of Techno Company stock will:

Increase

You own shares in a well-managed and diversified company. If a booming economy decreases investors' concerns about market risk, then the price of your shares will __________, holding other factors constant.

Increase

Holding constant risk and the real returns available abroad, higher domestic real interest rates __________ capital inflows, __________ capital outflows, and __________ net capital inflows.

Increase; decrease; decrease

In an open economy, a decrease in capital inflows __________ the equilibrium domestic real interest rate and __________ the quantity of domestic investment.

Increases; decreases

The benefits of net capital inflows to a country include all of the following except:

Interest and dividend payments owed to foreign investors

The coupon rate is:

Interest rate promised when a bond is issued.

The current price of a stock increases when:

Interest rates decrease

The financial system consists of financial __________, such as commercial banks, and financial markets, such as the stock market.

Intermediares

The coupon rate on newly issued bonds is usually higher for bonds with __________ terms and __________ risk that the borrower will go bankrupt.

Longer; greater

A financial intermediary that sells shares in itself to the public, and then uses the funds to buy a wide variety of financial assets is called a:

Mutual fund

If the United States has a $300 billion trade deficit, then there must be:

Net capital inflows of $300 billion

An economy with a trade surplus must also have:

Positive net capital outflows

The specialized information-gathering activities that banks use to evaluate borrowers are an example of the:

Principle of comparative advantage

Decentralized market-based financial systems improve the allocation of saving by:

Providing information and risk-sharing services

International capital flows are:

Purchases or sales of real and financial assets across international borders.

The rate of return that financial investors require to hold a risky asset minus the rate of return on a safe asset is called the:

Risk premium

If domestic saving is less than domestic investment, then a country will have a __________ and positive net capital __________.

Trade deficit; inflows

If domestic saving is greater than domestic investment, then a country will have a __________ and positive net capital __________.

Trade surplus; outflows