FIN 310 SECOND TEST

Question 1

How does the Fed’s monetary policy affect economic conditions?

The Fed’s monetary policy can affect the supply of loanable funds available in financial markets and therefore may affect interest rates. It may also affect inflation (with a lag) and therefore affect the demand for loanable funds by influencing inflationary expectations.

The Fed’s monetary policy influences consumer spending and investment behavior, which in turn affects overall economic growth and employment levels.

The Fed’s monetary policy can lead to changes in exchange rates, impacting international trade and the competitiveness of domestic industries.

The Fed’s monetary policy influences financial market stability by regulating the availability of credit and liquidity in the banking system.

Answer 1

The Fed’s monetary policy can affect the supply of loanable funds available in financial markets and therefore may affect interest rates. It may also affect inflation (with a lag) and therefore affect the demand for loanable funds by influencing inflationary expectations.

Question 2

Describe the economic tradeoff faced by the Fed in achieving its
economic goals.

Stimulative policy boosts growth, lowers unemployment, but can raise inflation. Restrictive policy curbs inflation but may slow growth and increase unemployment.

Stimulative policy can boost growth, lower unemployment, but may raise inflation. Restrictive policy curbs inflation but may slow growth, increase unemployment.

Stimulative policy lowers inflation risk but may slow growth, increase unemployment. Restrictive policy boosts growth, lowers unemployment but may raise inflation.

Restrictive policy curbs inflation but may slow growth, increase unemployment. Stimulative policy can boost growth, lower unemployment, but may raise inflation.

Answer 2

Stimulative policy boosts growth, lowers unemployment, but can raise inflation. Restrictive policy curbs inflation but may slow growth and increase unemployment.

Question 3

When does the Fed use a stimulative monetary policy and when does it use a restrictive-monetary policy?

Stimulative policy: used to boost economy, especially if no inflation. Restrictive policy: used to slow growth, reduce inflationary fears.

Restrictive policy: used to boost economy, especially if no inflation. Stimulative policy: used to slow growth, reduce inflationary fears.

Stimulative policy: used to reduce inflationary fears, especially if growth not a concern. Restrictive policy: used to stimulate growth when inflation not a concern.

Stimulative policy: used to slow growth, reduce inflationary fears. Restrictive policy: used to boost economy, especially if no inflation.

Answer 3

Stimulative policy: used to boost economy, especially if no inflation. Restrictive policy: used to slow growth, reduce inflationary fears.

Question 4

What is a criticism of a stimulative monetary policy?

A stimulative monetary policy may result in higher inflation.
A stimulative monetary policy may lead to lower interest rates.
A stimulative monetary policy may improve economic growth.
A stimulative monetary policy may decrease unemployment rates.

Answer 4

A stimulative monetary policy may result in higher inflation.

Question 5

What is the risk of using a monetary policy that is too restrictive?

The risk of a restrictive monetary policy is a potential slowdown in the economy.

The risk of a restrictive monetary policy is increased inflation.

The risk of a restrictive monetary policy is lower interest rates.

The risk of a restrictive monetary policy is improved economic growth.

Answer 5

The risk of a restrictive monetary policy is a potential slowdown in the economy.

Question 6

Compare the recognition lag and the implementation lag.

Recognition lag: time from problem exists until Fed recognizes it. Implementation lag: Fed delays policy after recognizing problem.

Recognition lag: time from problem until Fed recognizes it. Implementation lag: Fed recognizes problem but delays policy.

Recognition lag: time until Fed recognizes problem. Implementation lag: Fed delays policy after recognizing problem.

Recognition lag: time from problem until Fed recognizes it. Implementation lag: Fed recognizes problem but delays policy implementation.

Answer 6

Recognition lag: time from problem exists until Fed recognizes it. Implementation lag: Fed delays policy after recognizing problem.

Question 7

Describe the Fed’s monetary policy response to the credit crisis that began in 2008.

The Fed employed a stimulative monetary policy during the 2008 credit crisis due to weak economic conditions, resulting in lower interest rates in the U.S.

The Fed took no action in response to the 2008 credit crisis, resulting in stable interest rates in the U.S.

The Fed used a stimulative monetary policy during the 2008 credit crisis, causing higher interest rates in the U.S.

The Fed implemented a restrictive monetary policy during the 2008 credit crisis, leading to higher interest rates in the U.S.

Answer 7

The Fed employed a stimulative monetary policy during the 2008 credit crisis due to weak economic conditions, resulting in lower interest rates in the U.S.

Question 8

Explain how the Fed’s monetary policy could depend on the fiscal
policy that is implemented.

High government borrowing can raise interest rates. To keep rates low and stimulate the economy, the Fed might use a loose monetary policy to counter this effect.

High government borrowing can lower interest rates. To control inflation, the Fed might use a tight monetary policy to counter this effect.

High government borrowing may have no impact on interest rates. The Fed may adjust monetary policy independently to maintain rates.

High government borrowing can lead to lower inflation rates. To increase inflation, the Fed might use a loose monetary policy to counter this effect.

Answer 8

High government borrowing can raise interest rates. To keep rates low and stimulate the economy, the Fed might use a loose monetary policy to counter this effect.

Question 9

Explain how the Treasury uses the primary market to obtain adequate funding from the U.S. government.
Treasury bills are issued by the Treasury through a yearly auction. Investors can submit bids, and the Treasury accepts bids based on the bidding amount.

The Treasury issues Treasury bonds through a quarterly auction. Investors can submit competitive bids, and the Treasury accepts bids based on the bond’s interest rate.

Treasury bills are issued by the Treasury through a monthly auction. Investors submit bids, and the Treasury accepts bids based on their maturity dates.

The Treasury issues Treasury bills through a weekly auction. Investors can submit competitive bids, where the Treasury will accept the highest bids first.

Answer 9

The Treasury issues Treasury bills through a weekly auction. Investors can submit competitive bids, where the Treasury will accept the highest bids first.

Question 10

Who issues commercial paper?

Commercial paper is typically issued by banks.
Commercial paper is usually issued by small businesses.
Commercial paper is normally issued by well-known, creditworthy firms.
Commercial paper is commonly issued by government agencies.

Answer 10

Commercial paper is normally issued by well-known, creditworthy firms.

Question 11

Which types of financial institutions issue
commercial paper?

Bank holding companies and finance companies commonly issue commercial paper.

Credit unions and investment banks usually issue commercial paper
.
Insurance companies and mutual funds typically issue commercial paper.

Mortgage lenders and brokerage firms frequently issue commercial paper.

Answer 11

Bank holding companies and finance companies commonly issue commercial paper.

Question 12

Explain how investors’ preferences for commercial paper change during a recession

Investors are less interested in commercial paper during a recession because the probability of default increases.

Investors become more interested in commercial paper during a recession due to its higher yields.

Investors’ preferences for commercial paper remain unchanged during a recession.

Investors prioritize commercial paper investments during a recession to diversify their portfolios.

Answer 12

Investors are less interested in commercial paper during a recession because the probability of default increases.

Question 13

How can small investors participate in investments in negotiable certificates of deposits (NCDs)?

Small investors can participate in investments in negotiable certificates of deposits (NCDs) by purchasing them through brokerage firms.

Money market funds can pool invested funds by individual investors and purchase NCDs. In this way, small investors can invest in NCDs.

Small investors can participate in investments in negotiable certificates of deposits (NCDs) by trading them on stock exchanges.

Small investors can participate in investments in negotiable certificates of deposits (NCDs) by pooling funds with other investors to buy them collectively.

Answer 13

Money market funds can pool invested funds by individual investors and purchase NCDs. In this way, small investors can invest in NCDs.

Question 14

Based on what you know about repurchase agreements, would you expect them to have a lower or higher annualized yield than commercial paper?

Repurchase agreements with a similar maturity as commercial paper would likely have a slightly lower yield, since they are typically backed by Treasury securities.

Repurchase agreements with a similar maturity as commercial paper would likely have a slightly higher yield, since they involve a higher level of risk.

Repurchase agreements with a similar maturity as commercial paper would likely have the same yield, since they are both short-term money market instruments.

Repurchase agreements with a similar maturity as commercial paper would likely have a significantly lower yield, since they are backed by government guarantees.

Answer 14

Repurchase agreements with a similar maturity as commercial paper would likely have a slightly lower yield, since they are typically backed by Treasury securities.

Question 15

The maximum maturity of commercial paper is 270 days. Why
would a firm issue commercial paper instead of longer-term securities, even if it needs funds for a long period of time?

The firm may issue commercial paper instead of longer-term securities because it offers a higher yield than long-term bonds, providing better returns for investors.

The firm may issue commercial paper because it requires funds for a short period and wants to avoid the higher interest costs associated with long-term borrowing.

The firm may issue commercial paper because it believes that short-term interest rates are more favorable compared to long-term rates.

The firm may be unwilling to lock in the prevailing long-term yield on bonds, perhaps because it expects that long-term interest rates (and yields offered on new bonds) will decline in the near future.

Answer 15

The firm may be unwilling to lock in the prevailing long-term yield on bonds, perhaps because it expects that long-term interest rates (and yields offered on new bonds) will decline in the near future.

Question 16

ou have the choice of investing in top-rated commercial
paper or commercial paper that has a lower risk rating. How do you think the risk and return performances of the two investments differ?

Investing in top-rated commercial paper typically offers lower returns but also lower risk compared to lower-rated commercial paper.

The commercial paper with the lower rating should have a higher rate of return and also a
higher degree of default risk.

Commercial paper with a lower risk rating should have a higher rate of return and also a higher degree of default risk.

The risk and return performances of the two investments are similar, with top-rated commercial paper offering slightly higher returns but also slightly higher risk.

Answer 16

ANSWER: The commercial paper with the lower rating should have a higher rate of return and also a
higher degree of default risk.

Question 17

Explain how the credit crisis affected the credit
risk premium in the commercial paper market

The credit crisis caused the credit risk premium in the commercial paper market to decrease as investors sought safer investments.

The credit crisis led to an increase in the credit risk premium in the commercial paper market as investors demanded higher returns to compensate for increased risk.

The credit crisis had no significant impact on the credit risk premium in the commercial paper market as investors continued to value commercial paper based on standard risk metrics.

During the credit crisis, some institutional investors avoided commercial paper issued by financial institutions because of the financial problems they were experiencing.

Answer 17

During the credit crisis, some institutional investors avoided commercial paper issued by financial institutions because of the financial problems they were experiencing

Question 18

f the Fed attempts to reduce inflation, it would likely
increase money supply growth.
a. True
b. False

Answer 18

false

Question 19

The time lag between when an economic problem arises and when it is reported in economic statistics is the
a. recognition lag.
b. implementation lag.
c. impact lag.
d. open-market lag.

Answer 19

a. recognition lag.

Question 20

A loose money policy tends to ____ economic growth and ____ the inflation rate.
a. stimulate; place downward pressure on
b. stimulate; place upward pressure on
c. dampen; place upward pressure on
d. dampen; place downward pressure on

Answer 20

b. stimulate; place upward pressure on

Question 21

4. To correct excessive inflation, the Fed could use open market
   operations by buying Treasury securities in the secondary market.
   a. True
   b. False

Answer 21

b. False

Question 22

The federal funds market allows depository institutions to borrow
a. short-term funds from each other.
b. short-term funds from the Treasury.
c. long-term funds from each other.
d. long-term funds from the Federal Reserve.
e. B and D

Answer 22

a. short-term funds from each other.

Question 23

Treasury bills
a. have a maturity of up to five years.
b) have an active secondary market
c. are commonly sold at par value.
d. commonly offer coupon payments

Answer 23

b) have an active secondary market

Question 24

f an investor buys a T-bill with a 120-day maturity and $50,000 par value for $48,500 and holds it to maturity,
what is the annualized yield?
a. Less than 6%
b. Between 6% and 9.5%
c. Between 9.51% and 12%
d. Between 12.01% and 14%
e. Greater than 14%

Answer 24

idk solve it

Question 25

ssume investors require a 7 percent annualized return on a six-month T-bill with a par value of $10,000. The price investors would be willing to pay is $____. a. 10,000 b. 9,524 c. 9,756 d. none of the above

Answer 25

d. none of the above. n=1, i/y=3.5

Question 26

At any given time, the yield on commercial paper is ____ the yield on a T-bill with the same maturity a. slightly less than b. slightly higher than c. equal to d. A and B both occur with about equal frequency

Answer 26

b. slightly higher than

Question 27

A repurchase agreement calls for an investor to buy securities for $4,825,000 and sell them back in 60 days for $5,000,000. What is the yield? . Less than 6% b. Between 6% and 8% c. Between 8.01% and 10.5% d. None of the above

Answer 27

d. None of the above its 22.06%. just use formula sheet

Question 28

the so-called "flight to quality" causes the risk differential between risky and risk-free securities to be . eliminated. b. reduced. c. increased. d. unchanged (there is no effect).

Answer 28

c. increased.

Question 29

The coupon rate of most variable-rate bonds is tied to a. the prime rate. b. the discount rate. c. LIBOR. d. the federal funds rate.

Answer 29

c. LIBOR.

Question 30

When would a firm most likely call bonds? a. after interest rates have declined b. if interest rates do not change c. after interest rates increase d. just before the time at which interest rates are expected to decline

Answer 30

a. after interest rates have declined

Question 31

A ten-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5 percent. During the first six months since the bond was issued, the inflation rate was 2 percent. Based on this information, the coupon payment after six months will be $____ a. 250 b. 255 c. 500 d. 510

Answer 31

b. 255

Question 32

4. Under the STRIP program created by the Treasury, stripped securities are created and sold by the Treasury. a. True b. False

Answer 32

b. False

Question 33

Everything else being equal, which of the following bond ratings is associated with the highest yield? a. Baa b. A c. Aa d. Aaa

Answer 33

a. Baa

Question 34

2. The key difference between a note and a bond is that note maturities are usually less than one year, while bond maturities are one year or more. a. True b. False

Answer 34

b. False

Question 35

Devin is, a private investor, purchases $1,000 par value bonds with a 10 percent coupon rate and a 9.5 percent yield to maturity. Devin will hold the bonds until maturity. Thus, he will earn a return of ____ percent. a. 12 b. 9.5 c. 10.0 d. more information is needed to answer this question

Answer 35

b. 9.5

Question 36

What is a bond indenture? A bond indenture is a contract between the issuer and the underwriter specifying the terms of the bond offering. The bond indenture is a legal document specifying the rights and obligations of both the issuing firm and the bondholders. A bond indenture is a financial statement that outlines the bond's interest payments and maturity date. The bond indenture is a document issued by a credit rating agency, assessing the creditworthiness of a bond issuer.

Answer 36

b.a legal document specifying the rights and obligations of both the issuing firm and the bondholders.

Question 37

What is the function of a trustee, with respect to the bond indenture? A trustee is responsible for issuing bonds on behalf of the issuer and managing the bond indenture. The trustee represents the bondholders in all matters concerning the bond issue, including the monitoring of the issuing firm’s activities to assure compliance with the terms of the indenture. A trustee serves as a financial advisor to the issuer, providing guidance on bond issuance strategies. The trustee acts as an intermediary between the issuer and the bondholders, facilitating communication and resolving disputes. Please let me know which answer choice is correct.

Answer 37

trustee represents the bondholders in all matters concerning the bond issue, including the monitoring of the issuing firm’s activities to assure compliance with the terms of the indenture.

Question 38

Explain the use of a sinking-fund provision. How can it reduce the investor’s risk? A sinking-fund provision is a clause in a bond indenture that allows the issuer to retire bonds before maturity using funds set aside for this purpose. The sinking-fund provision requires the issuer to contribute funds to an account that will be used to repay bondholders at maturity. A sinking-fund provision is a requirement that the firm retire a certain amount of the bond issue each year. The sinking-fund provision allows the issuer to extend the maturity date of the bond if needed, reducing the risk of default for investors.

Answer 38

sinking-fund provision is a requirement that the firm retire a certain amount of the bond issue each year.

Question 39

what are protective covenants? Protective covenants are clauses in a bond indenture that outline the rights and responsibilities of the bond issuer and bondholders. Protective covenants are provisions that allow bondholders to convert their bonds into shares of the issuing company's stock. Protective covenants are restrictions placed on the firm issuing bonds, in order to protect the bondholders. Protective covenants are financial ratios that determine the creditworthiness of the bond issuer.

Answer 39

protective covenants are restrictions placed on the firm issuing bonds, in order to protect the bondholders

Question 40

Explain the use of call provisions on bonds Call provisions on bonds allow bondholders to demand early repayment of the bond principal. Call provisions on bonds enable the issuer to extend the maturity date of the bond if needed. Call provisions on bonds allow the issuing firm to purchase its bonds back prior to maturity at a specific price (the call price). Call provisions on bonds require the issuer to pay a higher interest rate if the bonds are not called before maturity.

Answer 40

Call provision allows the issuing firm to purchase its bonds back prior to maturity at a specific price (the call price).

Question 41

What are debentures Debentures are bonds that are secured by specific assets of the issuing firm. Debentures are bonds that can only be issued by government entities. Debentures are loans that are obtained from banks and financial institutions. Debentures are bonds that are backed only by the general credit of the issuing firm.

Answer 41

Debentures are bonds that are backed only by the general credit of the issuing firm.

Question 42

Explain the use of bond collateral and identify the common types of collateral for bonds. ANSWER: Bond collateral may be established by the bond issuer as a means of backing the bond. If the issuer defaults on the bonds, the investors would have a claim on the collateral. Some of the more common types of collateral for bonds are mortgages or real property (land and buildings).

Question 43

Why can convertible bonds be issued by firms at a higher price than other bonds? Convertible bonds can be issued at a higher price than other bonds because they have a lower risk of default. Convertible bonds can be issued at a higher price than other bonds because they have a shorter maturity period. Convertible bonds can be issued at a higher price than other bonds because they offer higher coupon payments. Convertible bonds can be issued at a higher price than other bonds because they allow investors to exchange the bonds for a stated number of shares of the firm’s common stock.

Answer 43

Convertible bonds can be issued at a higher price than other bonds because they allow investors to exchange the bonds for a stated number of shares of the firm’s common stock.

Question 44

If a bond’s coupon rate is greater than the investor’s required rate of return on the bond, would the bond’s price be greater than or less than its par value? If a bond’s coupon rate is greater than the investor’s required rate of return, the bond’s price would be greater than its par value because the coupons provide more than the return required. If a bond’s coupon rate is greater than the investor’s required rate of return, the bond’s price would be less than its par value because the coupons provide less than the return required. If a bond’s coupon rate is greater than the investor’s required rate of return, the bond’s price would be equal to its par value because the coupons provide exactly the return required. If a bond’s coupon rate is greater than the investor’s required rate of return, the bond’s price would fluctuate randomly around its par value due to market conditions.

Answer 44

When a bond’s coupon rate is above the investor’s required rate of return, the price of the bond would be above its par value because the coupons provide more than the return required

Question 45

Is the price of a long-term bond or the price of a short-term security more sensitive to a change in interest rates? The price of a long-term bond is more sensitive to a change in interest rates than the price of a short-term security. The price of a short-term security is more sensitive to a change in interest rates than the price of a long-term bond. The price of a long-term bond and the price of a short-term security are equally sensitive to a change in interest rates. The sensitivity of the price of a long-term bond or a short-term security to a change in interest rates depends on market conditions.

Answer 45

he price of a long-term bond is more sensitive to a change in interest rates than the price of a short-term security

Question 46

Assume that inflation is expected to decline in the near future. How could this affect future bond prices? Would you recommend that financial institutions increase or decrease their concentration in long-term bonds based on this expectation? Explain. Lower inflation leads to declining interest rates, potentially increasing bond prices. Recommend increasing concentration in long-term bonds. Lower inflation may lead to lower interest rates, affecting future bond prices positively. Recommend increasing focus on long-term bonds. Lower inflation could decrease interest rates, raising bond prices. Recommend increasing investment in long-term bonds. Lower inflation tends to lower interest rates, impacting bond prices positively. Recommend increasing exposure to long-term bonds.

Answer 46

Lower inflation leads to declining interest rates, potentially increasing bond prices. Recommend increasing concentration in long-term bonds.