Finance Exam 1

Question 1

What is a portfolio?

Answer 1

A collection of assets

Question 2

The average investor must weigh the benefits of liquidity against

Answer 2

the lower returns on liquid assets

Question 3

Why do CDs normally have lower interest rates?

Answer 3

CDs are less risky than stock

Question 4

The formula for the yield to maturity, i, on a discount bond (a T-bill) is

Answer 4

i=(Face value - Discount price)/Discount price

Question 5

A one year discount bond (T-Bill) with a face value of $10,000 that is currently selling for $9890 has an interest rate of

Answer 5

1.11%

Question 6

How is interest rate that prevails in the bond market determined?

Answer 6

by the demand for and supply of bonds

Question 7

If a government’s income tax receipts exceed its expenditures, the government is running a

Answer 7

surplus and is a net saver of funds

Question 8

During most of the time in recent decades, the US government sector

Answer 8

has run large deficits

Question 9

The risk structure of interest rates refers to

Answer 9

the amount of additional interest necessary to compensate savers for the greater risk of default

Question 10

What a company whose ability to repay its obligations in full is uncertain,

Answer 10

it must offer investors or lenders higher yields to compensate them for the risk they take in buying their bonds or making loans to them

Question 11

Default risk on bonds

Answer 11

is the probability that a bond issuer will not pay in full the promised coupons or principal

Question 12

Issuers of a coupon bond

Answer 12

make a single repayment of principal when the bonds mature, but multiple payments of interest over the life of the bonds

Question 13

The amount of funds the borrower receives from the lender with a simple loan is called the

Answer 13

principal

Question 14

The coupon rate on a bond is the

Answer 14

annual coupon payment divided by the face value of the bond

Question 15

Which of the following is a fixed payment bank loan?

Answer 15

a conventional home mortgage loan

Question 16

Which of the following is NOT fixed on a coupon bond?

Answer 16

Market Price

Question 17

The “ask price” for a bond is

Answer 17

the price that you must pay a securities dealer to purchase a bond

Question 18

If, while you are holding a coupon bond, the interest rates on similar bonds rise, you can be sure that

Answer 18

the market price of your bond will fall

Question 19

If the current market price of a bond is equal to its face value

Answer 19

there is no capital gain or loss from holding the bond until maturity

Question 20

The expected real interest rate approximately equals

Answer 20

the nominal interest rate minus the expected rate of inflation

Question 21

A sustained decrease in the price level is known as

Answer 21

deflation

Question 22

Nominal interest rates are higher than real interest rates as long as

Answer 22

inflation is positive

Question 23

Which is an example of a commodity money?

Answer 23

Gold coins

Question 24

Money that has no inherent value other than its use as money is known as

Answer 24

fiat money

Question 25

When economist refer to the role of money as a store of value, they mean that

Answer 25

money allows value to be stored easily

Question 26

When economist refer to the role of money as a unit of account, they mean that

Answer 26

money gives traders a way of measuring relative values in the economy