money and banking exam 1

How do conflicts of interest make the asymmetric information problem​ worse? A. Competing interests may lead a financial institution to conceal information or disseminate misleading​ information, which prevents financial markets from channeling funds into the most productive investment opportunities. Your answer is correct. B. Competing interests may limit a financial​ institution's economies of​ scope, which lowers overall economy efficiency and profits. C. Conflicts of interest tend to lead financial institutions to lend money to the most risky​ borrowers, deepening the asymmetric information problem. D. Conflicts of interest create an adverse selection​ problem, which prevents financial markets from channeling funds into the most productive investment opportunities.

a

If the next chair of the Federal Reserve Board has a reputation for advocating an even slower rate of money growth than the current​ chair, what will happen to interest​ rates? A. Slower money growth will lead to a liquidity​ effect, which will raise interest​ rates; however, the lower​ income, price​ level, and inflation will tend to lower interest rates. Your answer is correct. B. Slower money growth will lead to a liquidity​ effect, which will raise interest rates.​ Moreover, the lower​ income, price​ level, and inflation will reinforce the increase in interest rates. C. Slower money growth will lead to a liquidity​ effect, which will lower interest​ rates; however, the lower​ income, price​ level, and inflation will tend to raise interest rates. D. Slower money growth will lead to a liquidity​ effect, which will lower interest rates.​ Moreover, the lower​ income, price​ level, and inflation will reinforce the decrease in interest rates.

a

In​ 2008, as a financial crisis began to unfold in the United​ States, the FDIC raised the limit on insured losses to bank depositors from​ $100,000 per account to​ $250,000 per account. How would this help stabilize the financial​ system? A. It would reassure depositors that their money was safe in banks and prevent a possible bank panic. Your answer is correct. B. It would decrease​ banks' reserve requirements and thus increase their available assets. C. It would attract new foreign depositors and rapidly increase the cash amounts available to banks. D. It would enable banks to lower interest rates​ (as money is more​ safe) and decrease future interest payments.

a

In​ prison, cigarettes are sometimes used among inmates as a form of payment. All of the following explain how cigarettes solve the​ "double coincidence of​ wants" problem, even if a prisoner does not​ smoke, except​: A. exchanging cigarettes for other goods and services increases transaction costs. Your answer is correct. B. prisoners can exchange cigarettes for other goods and services. C. cigarettes are widely accepted as a form of payment in prison. D. cigarettes serve as a medium of exchange.

a

Is it better for bondholders when the yield to maturity increases or​ decreases? Bondholders are better off when the yield to​ maturity: A. ​decreases, since this represents an increase in the price of the bond and a decrease in potential capital losses. Your answer is correct. B. ​increases, since this represents a decrease in the bond maturity and a decrease in potential capital losses. C. ​increases, since this represents a decrease in the price of the bond and an increase in potential capital gains. D. ​decreases, since this represents an increase in the coupon payment and an increase in potential capital gains

a

People in the United States in the nineteenth century were sometimes willing to be paid by cheque rather than with​ gold, even though they knew that there was a possibility that the cheque might bounce. Which of the following would represent an advantage of gold over cheques as a form of​ money? A. Gold has intrinsic value when compared to cheques Your answer is correct. B. Gold is easy to transfer from one city to another or one state to another C. Gold is easy for an individual to carry from place to place D. Gold is easily divisible and may be used for small expenditures

a

Problems created by asymmetric information after the transaction occurs is called​ ________, while the problem created before a transaction occurs is called​ ________. A. moral​ hazard; adverse selection Your answer is correct. B. adverse​ selection; moral hazard C. free​ riding; costly state verification D. costly state​ verification; free riding

a

Would you be more or less willing to buy a share of Microsoft stock in the following​ situations: LOADING... Your wealth falls. You expect the stock to appreciate in value. The bond market becomes more liquid. You expect gold to appreciate in value. Prices in the bond market become more volatile.

less willing more willing less willing less willing more willing

Which of the Federal​ Reserve's measures of the monetary aggregates—M1 or M2—is composed of the most liquid​ assets? Which is the larger​ measure? All else​ equal, M is the monetary aggregate composed of the most liquid assets and M is the larger measure.

m1, m2

Brooke accepts money in exchange for performing her daily tasks at her​ office, since she knows she can use that money to buy goods and services. In this​ case, money is being used as a

medium of exchange

Maria is currently pregnant. She expects her expenditures to increase in the future and decides to increase the balance in her savings account. In this​ case, money is being used as

store of value

As a real estate​ speculator, you are planning and able to buy a house that costs​ $200,000, borrowing the full amount with no money down with the goal of selling this same property in exactly one year. Mortgage interest rates are​ 5%, and the expected increase in housing prices is​ 2%.​ (All rates and percentages are annual​ values.) What is your expected capital​ gain/loss when you flip the house in one​ year? The expected capital gain​ (or loss) is ​$. ​(Round your response to the nearest dollar.​) What is your real rate of​ return? The real rate of return is negative . ​(Round your response to the nearest​ integer.) How will an increase in mortgage rates to​ 10% and an expected increase in housing prices of​ 9% affect your​ decision? You will

$4000 -3 more likely to buy

How much would you pay for a perpetual bondLOADING... that pays an annual coupon of ​$100 per year and yields on competing instruments are 20​%? You would pay ​$. ​(Round your response to the nearest penny.​) If competing yields are expected to change to 15​%, what is your expected capital gain​ (or loss)? The expected capital gain​ (or loss) is ​$1. ​(Round your response to the nearest penny.​)

$500, $166.67

How much is ​$100 to be received in exactly one year worth to you today if the interest rate is 12​%? The value today is ​$(Round your response to the nearest penny.​) This same ​$100 received in one year would be worth to you today if the interest rate rose to 17​%.

$89.29, Less

Suppose that a commercial bank wants to buy Treasury bills. These instruments pay ​$4,000 in one year and are currently selling for ​$4,200. The yield to maturity of these bonds is negative . ​(Round your response to two decimal​ places.) Is this a typical​ situation?

-4.77% No. In normal times banks will not choose to pay more than the face value of a discount​ bond, since that implies negative yields to maturity.

What is the opportunity cost of holding ​$1,500 in cash if the relevant interest rate is 8 ​percent? The opportunity cost is ​$. ​(Round your response to the nearest​ dollar.) If interest rates​ rise, this opportunity cost will , and individuals will hold cash balances.

120, increase, smaller

The free rider​ problem: A. results from the production of information being much like a public good where exclusion is not possible Your answer is correct. B. makes it easier for an investor to continue to buy securities at less than the true value C. will make more people willing to provide information services D. will only occur if information costs are zero

A

Why would a life insurance company be concerned about the financial stability of major corporations or the health of the housing​ market? A. Most life insurance companies hold large amounts of corporate bonds and mortgage assets. Your answer is correct. B. Today life insurance companies are the largest holders of corporate stocks and​ mortgage-backed securities. C. During financial crises and​ recessions, the number of deaths is much higher than usual and payments of insurance indemnity increase significantly. D. When there are negative changes in financial or housing​ markets, people have no money for life insurance payments.

A

Assume the expectations theory of the term structure holds. If bond investors decide that​ 30-year bonds are no longer as desirable an​ investment, the yield curve​ would: A. steepen at the end of the yield curve and flatten somewhere along the rest of the curve. Your answer is correct. B. flatten near the​ 30-year rate and steepen slightly along the smaller rates. C. result in a jump in the 30−year rate, with the remainder of the yield curve unchanged. D. slope less steeply upward toward the​ 30-year rate and remain the same after it.

A.

Asymmetric information in equity contracts is known as the​ ______________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer. A. adverse selection B. ​free-rider C. debt deflation D. ​principal-agent

D

What effect would reducing income tax rates have on the interest rates of municipal​ bonds? A. Interest rates would fall because the reduction in income tax rates would make the​ tax-exempt privilege for municipal bonds less valuable and reduce the demand for municipal bonds. B. Interest rates would rise because Treasury securities are now less valuable and more people will want to hold municipal bonds. C. Interest rates would fall because Treasury securities are now less valuable and more people will want to hold municipal bonds. D. Interest rates would rise because the reduction in income tax rates would make the​ tax-exempt privilege for municipal bonds less valuable and reduce the demand for municipal bonds. Your answer is correct. Would interest rates of Treasury securities be affected by the tax rate​ change? A. ​No, there would be no impact on the market for Treasury securities. B. ​Yes, because municipal bonds are less risky than Treasury​ securities, the demand for Treasury securities will decrease. C. ​Yes, because the reduction in the​ tax-exempt privilege in municipal bonds would raise the relative value of Treasury​ securities, making Treasury securities more desirable. Your answer is correct. D. ​Yes, because the increase in interest rates would increase the desire to hold more municipal bonds and less Treasury securities.

D. C.

Examples of flow variables:

Debt and income

Currency

M1 and M2

f. Checkable deposits

M1 and M2

ssume that you are interested in earning some return on idle balances you usually keep in your checking account and decide to buy some money market mutual fund shares by writing a check. Everything else the​ same, M1 will and M2

M1, DECREASE, M2 STAY THE SAME

b. Money market mutual funds​ (noninstitutional)

M2 only

d. ​ Small-denomination time deposits

M2 only

Examples of stock variables:

Money, savings deposits, wealth

What is the difference between a mortgage and a ​mortgage-backed security​?

Mortgages are​ loans, whereas​ mortgage-backed securities are​ bond-like debt instruments.

c. U.S.​ T-bills (with maturities of less than 90​ days)

Neither M1 nor M2

e. ​ Large-cap mutual funds

Neither M1 nor M2

I need to borrow​ $5,000 for a car because it enables me to get a job as a traveling anvil seller. Larry the Loan Shark will loan me the​ $5,000 at an interest rate of​ 90%. Principle and interest are due in exactly 12 months. With the​ car, I will be able to earn​ $10,000 in extra income over the next 12 months. What is the net cash flow by taking out the​ loan?

The net cash flow is ​$500

Financial intermediariesLOADING... have a role to play in matching savers and borrowers for all of the following reasons except​: A. minimising transaction costs B. information symmetries Your answer is correct. C. economies of scale D. risk sharing

b

True or​ False: With a discount​ bond, the return on a bond is equal to the rate of capital gain. A. ​True: A discount bond has no coupon payments so the return on the bond is equal to the rate of capital gain. Your answer is correct. B. ​False: Bond returns can never equal the rate of capital​ gain; there must be a capital loss or gain indicated. C. ​True: A discount bond pays fixed interest payments every year so the return is equal to the rate of capital gain. D. There is no way to determine this without the knowing the coupon amount and interest rate.

a

What is the main disadvantage of moving to e-moneyLOADING... or moving to a cashless​ society? A. There are problems with security and privacy Your answer is correct. B. Funds are debited too quickly from the​ payer's account C. The use of​ e-money does not work with vending machines or other​ coin-based transactions D. It is difficult to keep track of electronic purchases

a

Which of the following is not a factor that commonly initiates financial​ crises? A. Increases in government regulations that make it harder to manage the risks of financial assets. Your answer is correct. B. The mismanagement of financial liberalization and innovation. C. ​Asset-price booms and busts. D. The increased uncertainty that occurs when a major financial institution fails.

a

Why is it important for the U.S. government to have resolution​ authority? A. Resolution authority allows the government to quickly takeover a failing firm. Your answer is correct. B. Resolution authority solves asymmetric information problems and thus prevents a contagion effect. C. It provides that banks cannot engage in​ high-risk trading when receiving the benefits of federal deposit insurance. D. Resolution authority gives the government the authority to increase the level of deposit insurance if necessary

a

Which relationship would you expect to exist between measures of corruption and living standards at the country​ level? A. Corruption is likely to be negatively correlated with living standards. Your answer is correct. B. Corruption is likely to have zero correlation with living standards. C. Corruption is likely to be positively correlated with living standards. By which channel most likely corruption affect living​ standards? A. Education. B. Research and development. C. The legal system.

a,c

Rank the following assets from most liquid ​(1​) to least liquid ​(6​): LOADING... Asset Rank a. Checking account deposits b. Houses c. Currency d. Automobile e. Savings deposits f. Common stock

a. 2 b. 6 c. 1 d. 5 e. 3 f. 4

In which of the following situations do financial markets allow consumers to better time their​ purchases? ​(Select all that apply.​) A. Paying the cost of repairing a flooded basement. Your answer is correct. B. Buying groceries. C. Paying for tuition Your answer is correct. D. Purchasing a car or furniture.

a.c.d.

How do checkable depositsLOADING... differ from demand depositsLOADING...​? A. Only checkable deposits can be utilized as a medium of exchange. B. Demand deposits are those transactions accounts against which an unlimited number of checks can ordinarily be written. Checkable deposits often carry restrictions on transferability. Your answer is correct. C. Demand deposits are those transactions accounts against which a limited number of checks can ordinarily be written. Checkable deposits carry no restrictions on transferability. D. Only demand deposits can be utilized as a medium of exchange.

b

Suppose Maria prefers to buy a bond with a​ 7% expected return and​ 2% standard deviation of its expected​ return, while Jennifer prefers to buy a bond with a​ 4% expected return and​ 1% standard deviation of its expected return. Can you tell if Maria is more or less​ risk-averse than​ Jennifer? A. Maria is less​ risk-averse than Jennifer because Maria is choosing a bond with higher standard deviation. B. There is not enough information to tell. In order to decide whether Maria or Jennifer is more risk​ averse, one will need to compare two bonds with the same expected return and different standard deviations of their expected returns. Your answer is correct. C. Maria is more​ risk-averse than Jennifer because Maria is choosing a bond with lower volatility of its expected return.

b

Just before the collapse of the subprime mortgage market in​ 2007, the most important​ credit-rating agencies rated​ mortgage-backed securities with Aaa and AAA ratings. Explain how it was possible that a few months into​ 2008, the same securities had the lowest possible ratings. A. As inflation soared in early​ 2008, returns on​ mortgage-backed securities was wiped out. Many​ AAA-rated products had to be downgraded to junk status. B. When housing prices began to fall and subprime mortgages began to​ default, many​ AAA-rated products had to be downgraded over and over again. Your answer is correct. C. The government revoked tax exemption to investors for these​ securities, thereby lowering returns and ratings. Should we always trust​ credit-rating agencies? A. Yes. The​ credit-rating agencies are involved with structuring products that they rate. This ensures that their ratings are often accurate. Sometimes credit rating agencies also make mistakes in assigning risks. B. No. The credit rating agencies lack the mathematics and technology to assign correct ratings to securities. C. No. Sometimes there are conflicts of interests in​ credit-rating agencies.

b.c

During​ 2008, the difference in yield​ (the yield spread​) between​ 3-month AA-rated financial commercial paper and​ 3-month AA-rated nonfinancial commercial paper steadily increased from its usual level of close to​ zero, spiking to over a full percentage point at its peak in October 2008. Which of the following explains this sudden​ increase? A. The increase in the yield spread was caused by an increase in the supply of financial commercial paper to fund future real estate investments. B. The increase in the yield spread was due to government efforts to ease the debt burden for financial companies during the financial crisis. C. The increase in the yield spread was a result of the decrease in demand for financial commercial paper due to the uncertainty and soundness of financial companies and banks. Your answer is correct. D. Increased yield spreads tend to occur because of the inefficient nature of nonfinancial commercial paper when economic instability is present.

c

Risk premiums on corporate bonds are usually anticyclical​; that​ is, they decrease during business cycle expansions and increase during recessions. Why is this​ so? A. During an economic​ expansion, there is greater inflationary pressure driving interest rates upward. B. As an economy enters a​ recession, business firms are less likely to default on their debt. C. As the economy enters an​ expansion, there is greater likelihood that borrowers will be able to service their debt. Your answer is correct. D. In anticipation of a​ recession, the Federal Reserve will begin to lower interest rates.

c

Which of the following is a disadvantage of using fiat moneyLOADING...​? A. Fiat money is not easily divisible or suitable for small purchases B. Fiat money is not portable or widely accepted C. Public authorities may be tempted to produce too much of it

c

Which of the following statements is true of financial​ frictions? A. Financial frictions help avoid the problem of adverse selection in financial transactions. B. Financial frictions help avoid the problem of moral hazard in financial markets. C. Financial frictions are a set of conditions that prevents financial markets from effectively assigning funds to the best investment opportunities. Your answer is correct. D. Financial frictions are a set of conditions that prevents financial markets from undertaking​ high-risk investment.

c

Why is a financial crisis likely to lead to a contraction in economic​ activity? A. Those that borrow funds to finance productive investment opportunities will have a greater opportunity to obtain financing. B. Disruptions in the financial system decreases asymmetric​ information, thereby decreasing the associated problems of adverse selection and moral hazard. C. A disruption in the financial system diminishes the flow of funds from savers to borrowers. Your answer is correct. D. None of the above are correct.

c

Will there be an effect on interest rates if brokerage commissions on stocks​ fall? A. ​Yes, interest rates would rise because people would want to hold more stocks and fewer​ bonds, which would increase the demand for bonds B. ​No, interest rates would remain the same because the brokerage commissions would only affect the stock market C. ​Yes, interest rates would rise because stocks become more liquid than​ before, which would reduce the demand for bonds Your answer is correct. D. ​Yes, interest rates would fall because stocks would have a relatively higher rate of return than​ bonds, which would reduce the demand for bonds

c

Would you be more willing to lend to a friend if she put all of her life savings into her business than you would if she had not done​ so? A. You would be less willing because putting her life savings into a business that can potentially fail makes it more risky for you to loan her money. If the business​ fails, she will protect her investment before she considers repaying you B. You would be more willing because putting her life savings into her business provides you protection against the problem of adverse selection C. You would be more willing because putting her life savings into her business provides you protection against the problem of moral hazard Your answer is correct. D. Whether or not she puts her life savings into her business has no bearing on whether she repays the loan or not.​ Therefore, it should have no effect on your decision to loan her money

c

​__________ occurs when a substantial unanticipated decline in the price level sets​ in, leading to a further deterioration in a​ firm's net worth because of the increased burden of indebtedness. A. Moral hazard B. Deleveraging C. Debt deflation Your answer is correct. D. Adverse selection

c

Gustavo is a young doctor who lives in a country with a relatively inefficient legal and financial system. When Gustavo applied for a​ mortgage, he found that banks usually required collateral for up to​ 300% of the amount of the loan. Why might banks require that much collateral in a financial system like​ Gustavo's country? A. An inefficient legal system implies strong property​ rights, and under such a strong​ system, collateral is more highly valued and hence more desirable. B. An inefficient legal system implies weak property rights but also high property​ values, making collateral more highly valued and hence more desirable. C. An inefficient legal system implies weak property​ rights, and collateral helps banks recoup some of their loan if the borrower defaults. Your answer is correct. D. An inefficient legal system implies strong property​ rights, and collateral helps banks recoup some of their loan if the borrower defaults. As a​ result, when compared to other​ countries, we would expect​ Gustavo's nation to​ have: A. less investment and slower economic growth. Your answer is correct. B. more investment and faster economic growth. C. more investment and slower economic growth. D. less investment and faster economic growth.

c,a

A bond has a face value of ​$900 and an 8​% coupon​ rate, its current price is ​$840​, and it is expected to increase to ​$880 next year. The current yield is 8.68.6​%. ​(Enter your response rounded to one decimal​ place.) The expected rate of capital gain is 4.84.8​%. ​(Enter your response rounded to one decimal​ place.) The expected rate of return is 13.413.4​%. ​(Enter your response rounded to one decimal​ place.)

cy 8.6 expected rate of capital gain 4.8 expected rate of return 13.4

A financial crisis occurs​ when: A. capital is allocated to its most productive uses. B. financial frictions decrease sharply. C. there are predictable market disruptions. D. a particularly large disruption to information flows occurs in financial markets.

d

Bonds account for a larger fraction of external funds relative to equities raised by American businesses​ because: A. of the reduced scope for moral hazard problems under equity contracts as compared to debt contracts. B. there is no moral hazard problem when using a debt contract. C. equity contracts do not permit borrowing firms to raise additional funds by issuing debt. D. costly state verification makes the equity contract less desirable than the debt contract.

d

How can a bursting of an​ asset-price bubble in the stock market trigger a financial crisisLOADING...​? A. A reduction in asset prices causes borrowing firms to have less to lose so they are willing to take on additional risk B. A reduction in asset prices causes lenders to become more cautious and reduce the amount of loans they make C. A reduction in asset prices causes a serious deterioration in borrowing​ firms' balance sheets D. All of the above are correct

d

How can economies of scale help explain the existence of financial intermediariesLOADING...​? A. Financial intermediaries are relatively large institutions. B. Financial intermediaries with their vault technology can specialize in keeping deposits safe. C. Financial intermediaries have exclusive access to communications technology in the financial sector. D. Financial intermediaries are able to operate with lower transaction costs relative to individual lenders or borrowers.

d

How can the existence of asymmetric informationLOADING... provide a rationale for government regulation of financial​ markets? A. Good information becomes quickly obsolete B. The production of good information is so costly that all potential buyers of this information are priced out of the market C. The production of information to combat these asymmetries is subject to moral hazard D. The production of information to combat these asymmetries is subject to the​ free-rider problem

d

How did financial innovations in mortgage markets contribute to the​ 2007-2009 financial​ crisis? A. Borrowers could get mortgage loans with little or no money down and could borrow more money relative to the value of the house they were buying and relative to their incomes than allowed with traditional mortgages. B. Advances in information technology and new statistical techniques lowered the cost of evaluating the risk of mortgages to subprime borrowers who did not meet the standards for traditional mortgage loans. C. Information technology lowered the cost of packaging numerous subprime mortgages into​ mortgage-backed securities that could be sold in financial​ markets, attracting more funds into mortgage finance. D. All of the above are correct.

d

How do financial intermediariesLOADING... benefit by providing​ risk-sharing services? A. Customers pay a fee to financial intermediaries for being able to invest in safer assets B. A collection of riskier assets is always more profitable for a bank or intermediary C. They are able to turn safe assets into​ high-risk, high-return investments D. They are able to earn a profit on the spread between the returns they earn on risky assets and the payments they make on the assets they have sold

d

What are the five areas included in the​ Dodd-Frank Act of​ 2010? A. Capital​ requirements, resolution​ authority, compensation,​ credit-rating agencies, and systemic risk regulation. B. Consumer​ protection, capital​ requirements, GSEs,​ credit-rating agencies, and derivatives. C. Capital​ requirements, resolution​ authority, compensation,​ credit-rating agencies, and GSEs. D. Consumer​ protection, resolution​ authority, systemic risk​ regulation, Volcker​ rule, and derivatives.

d

What will happen in the bond market if the government imposes a limit on the amount of daily​ transactions? Which characteristic of an asset would be​ affected? A. Liquidity of bonds relative to other assets will​ increase, decreasing the interest rate and lowering​ bond's prices. B. Riskiness of bonds relative to other assets will​ increase, decreasing the interest rate and increasing​ bond's prices. C. Riskiness of bonds relative to other assets will​ decrease, increasing the interest rate and increasing​ bond's prices. D. Liquidity of bonds relative to other assets will​ decrease, increasing the interest rate and lowering​ bond's prices.

d

Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States is​ true? A. Stocks and bonds combined supply more than​ one-half of the external funds B. Financial intermediaries such as banks are the least important source of external funds for businesses C. Since​ 1970, more than half of the new issues of stock have been sold to American households D. Bonds are a far more important source of financing than are stocks

d

Why is the​ originate-to-distribute business model subject to the​ principal-agent problem? A. Once the mortgage broker earns his or her​ fee, the broker does not care if the borrower makes good on his payment B. The mortgage broker has little incentive to ensure the borrower is​ credit-worthy, since loans will be sold as​ mortgage-backed securities C. The more volume the broker​ originates, the more he or she makes D. All of the above are correct

d

Which problem of asymmetric information are prospective employers trying to solve when they ask applicants to go through a job​ interview? A. Moral hazard in equity contracts. B. ​Free-rider problem. C. Moral hazard in debt contracts. D. Adverse selection problem. Your answer is correct. Is that the end of the information​ asymmetry? A. Yes. Addressing adverse selection implies that other forms of information asymmetry have been resolved as well. B. No. Workers and employers have to continue to solve the problem of moral hazard.

d,b

Following a policy meeting on March​ 19, 2009, the Federal Reserve made an announcement that it would purchase up to​ $300 billion of​ longer-term Treasury securities over the following six months. What effect might this policy have on the yield​ curve? A. The yield curve would jump with​ medium- and​ long-term rates and remain unchanged with​ short-term rates. B. The yield curve would steepen at the end and flatten somewhere along the rest of the curve. C. The yield curve would steadily shift​ up, with slightly more increase in​ short-term rates. D. The yield curve would shift​ down, but mostly on​ medium- and​ long-term maturities.

d.

What is a credit​ spread? A. The difference between the net worth of a borrower and the amount of the loan the borrower would like to secure. B. The difference between a​ borrower's credit score and the score of the most​ credit-worthy borrower. C. The difference between the interest rate on corporate bonds with different maturities. D. The difference between interest rates on loans to households and businesses and interest rates on completely safe assets such as U.S. Treasury bonds. Your answer is correct. Why do credit spreads rise during financial​ crises? A. Credit spreads rise because the government becomes the only institution that is able to lend money to borrowers. B. Credit spreads rise because asymmetric information problems​ increase, making it more difficult to judge the risk of potential borrowers. Your answer is correct. C. Credit spreads rise because depositors with productive investment opportunities withdraw their funds from​ banks, which creates an incentive to lend to borrowers with riskier investment opportunities. D. None of the above are correct.

d.b

Suppose you observe a change in the relationship between​ short-term and​ long-term bonds.​ Specifically, you note that although interest rates on both​ short-term and​ long-term bond are rising​ together, as​ expected, the rate on​ long-term bonds is not rising by as much as has been observed in the past. Assuming the liquidity premium theory of term​ structure, you conclude that the liquidity premium is As a​ result, the yield curve becomes

decreasing, flatter

Suppose today you buy a coupon bond that you plan to sell one year later. Which part of the rate of return formula incorporates future changes into the​ bond's price? is the part of the rate of return formula that incorporates future changes in the price of the bond.

rate of capital gain

Tim wants to calculate the relative value of oranges and​ apples, and therefore checks the price per pound of each of these goods quoted in currency units. In this​ case, money is being used as a

unit of account

Suppose that you​ buy, and one year later​ sell, a foreign​ (British) bondLOADING... under the following​ circumstances: When you buy the bond the exchange rate is ​$2.00 ​= £1. You pay £45 ​($90.00​) for the British bond. You sell the bond for £50. No interest payment was expected or received. When you sell the​ bond, the exchange rate is​ $1.80 ​= £1. What is your gain or loss in​ dollars?

​$0

A lottery claims its grand prize is ​$20 ​million, payable over 5 years at ​$4,000,000 per year. If the first payment is made​ immediately, what is the grand prize really​ worth? Use an interest rate of 5​%.

​$18183802