polling questions up to ch 8 - mid term

Question 1

what is the federal reserve mandate?

Answer 1

maximum employment and price stability

Question 2

The relationship between the interest rate and the quantity of funds demanded is:

Answer 2

inverse

Question 3

If The Demand For Funds Increases, What Happens To Interest Rates – All Else Being Equal?

Answer 3

interest rates go higher

Question 4

If The Supply of Funds Increases, What Happens To Interest Rates – All Else Being Equal?

Answer 4

interest rates go lower

Question 5

What makes up a truly risk free investment?

Answer 5

no credit risk and strong liquidity

Question 6

Which is larger in size (market value) – the stock market or the bond market

Answer 6

the bond market is slightly larger

Question 7

Which has more individual securities outstanding –bonds or stocks?

Answer 7

bond issuances far exceed the number of equity issuances

Question 8

what is moral hazard?

Answer 8

establishing policies that encourage risky behavior by assuming that policy makers or the Fed will bail them out

Question 9

In the following example - if the market discount rate moves to 8%, will the bond price be higher or lower than par - all other things being equal.

The coupon on the bond of 10% is now higher than the current discount rate. What happens if we move the discount rate to 8%?

Par Value: $1,000
Annual Coupon: $100
Maturity: 3 years

Polling question - is the bond value higher or lower than $1,000?

Answer 9

higher

Question 10

Assume there are still three years to maturity – what is the value of this bond:

Par Value: $1,000
Annual Coupon: $100
Maturity: 3 years
Current Discount rate - 8%

Answer 10

$1,052

Question 11

What is the relationship between price and yield?

Answer 11

inverse

Question 12

• A company issued a $1,000 par value coupon bond
• Maturity is in 7 years
• Your required rate of return (k) is 14%

Poll question: What is the price you are willing to pay?

Answer 12

$1,200

Question 13

If the Treasury issues an unusually large amount of bonds in the primary market, it places ____ pressure on bond prices and ____ pressure on yields to be earned by investors that purchase bonds and plan to hold them to maturity.

Answer 13

downward; upward

Question 14

Would you hold high or low coupon bonds when anticipating a rising rate environment?

Answer 14

high

Question 15

If your financial institution has a large credit card portfolio, is it possible to reduce the economic risk from credit losses in the portfolio by buying or selling U.S. Treasury bonds?

Answer 15

yes - buy treasuries