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FIN 353 - Financial Institutions > Quiz 2 > Flashcards

Quiz 2 Flashcards

1
Q

Which of the following Fed objectives conflict?

a. price stability, lender of last resort
b. low unemployment, lender of last resort
c. price stability, low unemployment
d. economic growth, low unemployment

A

price stability, low unemployment

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2
Q

Who sets monetary policy?

a. Board of Governors
b. FOMC
c. Federal Reserve Banks

A

FOMC

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3
Q

The yield to maturity on a 1 year discount bond with a $1,000 face value and $977 price is?

a. 2.18%
b. 1.18%
c. 2.35%
d. 2.30%

A

2.35%

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4
Q

The one-year interest rate over the next three years is expected to be 5%, 7%, and 10%. The liquidity premium for one to three year bonds is 0%, 0.25%, and 0.75%. What is the interest rate on the three-year bond?

a. 8.08%
b. 7.67%
c. 7.75%
d. 8.33%

A

8.08%

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5
Q

The current one year interest rate is 5% on a T-bill. The current two year interest-rate is 7% on the T-note. What is the market predicting about the interest rate on a one year bond in year 2 (one year from now) solely based on the expectations theory?

a. 9%
b. 12%
c. 6%
d. 7.75%

A

9%

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6
Q

In which situation would you prefer to be a borrower?

a. The interest rate is 4% and expected inflation is 5%
b. The interest rate is 3% and expected inflation is 10%
c. The interest rate is 5% and expected inflation is 4%
d. The interest rate of 6% and expected inflation is 3%

A

The interest rate is 3% and expected inflation is 10%

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7
Q

How many district presidents sit on the FOMC?

a. 5
b. 12
c. 1
d. 4

A

5

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8
Q

Suppose there is a financial crisis. What will the Fed do to stimulate the financial system?

a. Raise the discount rate
b. Increase reserve appointment
c. Open market sales
d. Open market purchases

A

Open market purchases

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9
Q

When the Fed sells treasury securities, supply curve shifts to the _______ and the federal funds rate _______ ?

a. Left, decreases
b. Left, increases
c. Right, increases
d. Right, decreases

A

Left, increases

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10
Q

If the Fed decreases the discount rate, what part of the supply curve moves?

a. Vertical selection moves to the left
b. Vertical selection moves to the right
c. Horizontal section moves down
d. Horizontal section moves up

A

Horizontal section moves down

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11
Q

If the Fed decreases the reserve requirement what happens?

a. The demand curve shifts to the right and the federal funds rate decreases
b. The demand curve shifts to the left and the federal funds rate decreases
c. The demand curve shifts to the right and the federal funds rate increases
d. The demand curve shifts to the left and the federal funds rate increases

A

The demand curve shifts to the left and the federal funds rate decreases

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12
Q

A 10 year, 6% coupon bond with a face value of $1000 dollars is currently selling for $900. Compute your rate of return if you sell the bond next year for $973.

a. 11.11%
b. 8.94%
c. 8.11%
d. 14.78%

A

14.78%

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13
Q

When there occurs an economic recession, the supply curve shifts to the _______ , the demand curve shifts to the _______ , and the supply curve moves _______ than the demand curve.

a. Left, left, less
b. Right, right, less
c. Left, left, more
d. Right, right, more

A

Left, left, more

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14
Q

Debt issued by Southeastern Corporation has a coupon of 10% and currently yields 9%. A municipal bond of equal risk currently has a coupon of 6% and yields 6%. Your marginal tax bracket is 35%. Which investment is a better buy?

a. Corporate bond
b. Municipal bond
c. None, they have the same yield

A

Municipal bond

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15
Q

There is an economic recession such that default risk of businesses has increased. The demand for treasury bonds has _______ , the demand for corporate bonds has _______ , and the spread has _______ .

a. Decreased, increased, widened
b. Increased, decreased, widened
c. Decreased, increased, narrowed
d. Increased, decreased, narrowed

A

Increased, decreased, widened

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16
Q

The yield curve is slightly increasing. Based on the expectations theory what is the market predicting about future interest rates?

a. Decrease slightly
b. Decrease significantly
c. Stay constant
d. Increase slightly

A

Increase slightly

17
Q

If the supply curve shifts to the right and the demand curve shifts to the right which factor causes those shifts?

a. Business cycle recession
b. Business cycle boom
c. Increase in expected inflation
d. Decrease in expected inflation

A

Business cycle boom

18
Q

How do higher commissions on bonds affect interest rates?

a. Increase interest rates
b. Decrease interest rates
c. Unrelated to interest rates

A

Increase interest rates

19
Q

The U.S. president says they are committed to increasing the size of the deficit. How will this affect interest rates?

a. Demand curve will shift to the left decreasing the interest rate
b. Demand curve will shift to the right increasing the interest rate
c. Supply curve will shift to the left decreasing the interest rate
d. Supply curve will shift to the right increasing the interest rate

A

Supply curve will shift to the right increasing the interest rate

20
Q

An increase in marginal tax rates would likely have the effect of _______ the demand for municipal bonds and _______ the demand for U.S. government bonds.

a. Increasing; decreasing
b. Decreasing; increasing
c. Decreasing; decreasing
d. Increasing; increasing

A

Increasing; decreasing

21
Q

What does the spread between the yield on a 10 year treasury security and a three-month treasury security tell us?

a. Expectation of default risk, thereby the expectation of future economic growth
b. Expectation of reinvestment risk, thereby the expectation of future bond risk
c. Expectation of future stock market returns
d. Expectation of future interest rates, thereby the expectation of future economic growth

A

Expectation of future interest rates, thereby the expectation of future economic growth

22
Q

Mr. Peters is a financial advisor. One of his clients called and asked about a recent change in the shape of the yield curve from upward sloping to downward sloping. The client told Mr. Peters that she thought the market was signaling that interest rates were expected to decline in the future. Is the client correct?

a. No, interest rates are expected to increase first and then decline
b. No, if yield curve is downward sloping it suggests rates to stay the same
c. Yes, since the shape of the yield curve changed
d. Yes, since a downward sloping yield curve suggests rates are expected to decline

A

Yes, since a downward sloping yield curve suggests rates are expected to decline

23
Q

Which factor(s) do not increase the supply of bonds?

a. Government deficit increase
b. Decrease in expected inflation
c. Business cycle expansion
d. All of the above
e. None of the above

A

Decrease in expected inflation

24
Q

What are the Fed’s main liabilities?

a. Currency in circulation
b. Currency in circulation and deposits
c. Treasuries
d. Loans and treasuries

A

Currency in circulation and deposits

25
Q

When the Federal Reserve wants to increase the money supply, what do they typically do (not including quantitative easing periods)?

a. Sell long term corporate bonds
b. Purchase short term corporate bonds
c. Sell short term U.S. treasury securities
d. Purchase short term U.S. treasury securities

A

Purchase short term U.S. treasury securities

26
Q

How does an increase in stock volatility affect interest rates?

a. Stock volatility has nothing to do with interest rates
b. Bonds are relatively more risky compared to stocks, decreasing bond demand thereby increasing interest rates
c. Bonds are relatively less risky compared to stocks, increasing bond demand thereby decreasing interest rates

A

Bonds are relatively less risky comparative stocks, increasing bond demand thereby decreasing interest rates

27
Q

Mortgage rates rise from 3% to 9%. In addition, housing prices are expected to increase from 1% to 6%. Are you more likely to buy a house?

a. Yes, real rates have decreased
b. No, real rates have increased
c. Yes, real rates have increased
d. No, real rates have decreased
e. Yes or no, real rates remained unchanged

A

No, real rates have increased

28
Q

What does an upward yield curve say about the condition of the economy?

a. High economic growth
b. Decline and economic growth and then an increase in economic growth
c. Recession
d. Low economic growth

A

High economic growth

29
Q

Which of the following will increase the demand for an asset?

a. Wealth decreases
b. The asset’s risk increases relative to other assets
c. The asset’s expected return falls relative to other assets
d. The asset’s liquidity rises relative to other assets

A

The asset’s liquidity rises relative to other assets

30
Q

What is the comparable name for the FOMC of the FED with the ECB?

a. Governing council
b. Reserve banks
c. Country central banks
d. Executive board

A

Governing council

31
Q

The extra yield on corporate bonds over treasury bonds is due to what?

a. Default risk
b. Tax risk
c. Liquidity risk
d. A and C
e. All of the above

A

A and C

32
Q

How many members of the board of governors are there and how are they chosen?

a. 7, appointed by the President of the United States and confirmed by the Senate as members resign
b. 12, appointed by the board of directors of the fed district banks
c. 12, chosen by the Federal Reserve bank presidents
d. 7, appointed by the newly elected president of United States, as are cabinet positions

A

7, appointed by the President of the United States and confirmed by the Senate as members resign

33
Q

What kind of credit instrument pays the face value at maturity at maturity?

a. Coupon bond
b. Fixed payment loan
c. Simple loan
d. Discount bond

A

Discount bond

34
Q

If you have a lot of student loan debt, which do you prefer?

a. High nominal yield
b. High expected inflation
c. Low expected inflation
d. High real interest rate

A

High expected inflation

35
Q

The term structure of interest rates is _______

a. The relationship among the prices and interest rates
b. The relationship among interest rates on bonds with different maturities
c. The structure of how interest rates move over time
d. The relationship among interest rates of different bonds with the same maturity

A

The relationship among interest rates on bonds with different maturities

36
Q

Which of the following is a main monetary policy goal?

a. Keep inflation around 2%
b. Keep inflation below 0%
c. Keep inflation around 0%
d. Move inflation around between 0% and 2%

A

Keep inflation around 2%

FIN 353 - Financial Institutions (2 decks)

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