Exam 1

Question 1

What is LIRE?

Answer 1

Liquidity of other assets, Income, Riskiness of other assets, Expected return of other assets

Question 2

How much of currency is backed by gold?

Answer 2

3%

Question 3

Flight to Quality

Answer 3

Occurs when investors shift their asset allocation away from riskier investments into safer ones

Question 4

Expectations Theory

Answer 4

Interest rate on long-term bond equals average of the short-term interest rates people expect to occur over the life of the long-term bond; identical bonds with different maturities are perfect substitutes

Question 5

Market Segmentation Theory

Answer 5

Borrowers have preferences for certain yields when they invest in fixed-income securities; bonds of different maturities are not perfect substitutes

Question 6

Preferred Habitat Theory

Answer 6

Suggests different investors prefer a particular maturity length over another, likely to prefer short-term bonds over long-term

Question 7

What does price discovery segment market into?

Answer 7

Primary and secondary

Question 8

Eurobond

Answer 8

Bond issued offshore by governments or corporates denominated in a currency other than that of the issuer’s country

Question 9

Eurocurrency

Answer 9

Currency held on deposit by governments or corporations operating outside of their home market

Question 10

What do collateral and net worth tools do?

Answer 10

Reduce adverse selection

Question 11

Properties of Money

Answer 11

Medium of exchange, store of value, unit of account

Question 12

What does FDIC do?

Answer 12

Regulates all state banks, mutual savings, savings and loans that are not members of the federal reserve

Question 13

Wealth

Answer 13

Total collection of piece of property that serve to store value

Question 14

Income

Answer 14

Flow of earnings per unit of time

Question 15

Elements of M1

Answer 15

Currency, traveler’s checks, demand deposits, other checkable deposits

Question 16

Elements of M2

Answer 16

M1 + small denomination deposits, savings/money market deposits, money market mutual fund shares

Question 17

Equation of Exchange

Answer 17

M * V = P * Y

Question 18

Theory of Portfolio Choice

Answer 18

Method that maximizes overall returns within an acceptable level of risk

Question 19

Keynesian Liquidity Preference

Answer 19

Total spending in the economy effects output, employment, and inflation

Question 20

Income Effect

Answer 20

Higher level of income causes demand for money at each interest rate to increase

Question 21

Price-Level Effect

Answer 21

A rise in price level causes demand for money at each interest rate to increase

Question 22

Risk Structure of Interest Rates

Answer 22

Bonds with same maturity have different interest rates due to outside risks

Question 23

Liquidity

Answer 23

The relative ease with which an asset can be converted into cash

Question 24

Term Structure of Interest Rates

Answer 24

Bonds with identical risk, liquidity and tax characteristics may have different interest rates because time to maturity is different

Question 25

Direct Finance

Answer 25

Borrowers borrow funds directly from lenders by selling them securities

Question 26

Foreign Bonds

Answer 26

Sold in a foreign country and denominated in that country’s currency

Question 27

Adverse Selection

Answer 27

Trying to avoid risky borrower by gathering information about them

Question 28

Office of Comptroller of the Currency

Answer 28

Examines books of federally chartered commercial banks and institutions

Question 29

Commodities Futures Trading Comission

Answer 29

Regulates trading in futures markets

Question 30

Free-Rider Problem

Answer 30

Inefficient distribution of goods or services that occurs when some individuals are allowed to consume more than their fair share of the shared resource or pay less than their fair share of the costs

Question 31

Tools to solve adverse selection

Answer 31

Private sale of info, collateral and net worth

Question 32

Tools to hedge against moral hazard

Answer 32

Monitoring of information, debt contracts