Test 1

Question 1

1. Financial markets have the basic function of A) bringing together people with funds to lend and people who want to borrow funds. B) assuring that the swings in the business cycle are less pronounced. C) assuring that governments need never resort to printing money. D) both A and B of the above. E) both B and C of the above.

Answer 1

A

Question 2

2. Which of the following can be described as involving indirect finance? A) A corporation takes out loans from a bank. B) People buy shares in a mutual fund. C) A corporation buys commercial paper in a secondary market. D) All of the above. E) Only A and B of the above.

Answer 2

E

Question 3

3. Which of the following can be described as involving indirect finance? A) A bank buys a U.S. Treasury bill from one of its depositors. B) A corporation buys commercial paper issued by another corporation. C) A pension fund manager buys commercial paper in the primary market. D) Both A and C of the above.

Answer 3

D

Question 4

4. A country whose financial markets function poorly is likely to A) efficiently allocate its capital resources. B) enjoy high productivity. C) experience economic hardship and financial crises. D) increase its standard of living.

Answer 4

C

Question 5

5. Which of the following are securities? A) A certificate of deposit B) A share of Texaco common stock C) A Treasury bill D) All of the above E) Only A and B of the above

Answer 5

D

Question 6

6. Which of the following statements about the characteristics of debt and equity are true? A) They both can be long-term financial instruments. B) They both involve a claim on the issuer’s income. C) They both enable a corporation to raise funds. D) All of the above. E) Only A and B of the above.

Answer 6

D

Question 7

7. The money market is the market in which ________ are traded. A) new issues of securities B) previously issued securities C) short-term debt instruments D) long-term debt and equity instruments

Answer 7

C

Question 8

8. Long-term debt and equity instruments are traded in the ________ market. A) primary B) secondary C) capital D) money

Answer 8

C

Question 9

9. Which of the following are primary markets? A) The New York Stock Exchange B) The U.S. government bond market C) The over-the-counter stock market D) The options markets E) None of the above

Answer 9

E

Question 10

10. Which of the following are secondary markets? A) The New York Stock Exchange B) The U.S. government bond market C) The over-the-counter stock market D) The options markets E) All of the above

Answer 10

E

Question 11

11. A corporation acquires new funds only when its securities are sold in the A) secondary market by an investment bank. B) primary market by an investment bank. C) secondary market by a stock exchange broker. D) secondary market by a commercial bank.

Answer 11

B

Question 12

12. Intermediaries who are agents of investors and match buyers with sellers of securities are called A) investment bankers. B) traders. C) brokers. D) dealers. E) none of the above.

Answer 12

C

Question 13

13. Intermediaries who link buyers and sellers by buying and selling securities at stated prices are called A) investment bankers. B) traders. C) brokers. D) dealers. E) none of the above.

Answer 13

D

Question 14

14. Which of the following statements about financial markets and securities are true? A) A bond is a long-term security that promises to make periodic payments called dividends to the firm’s residual claimants. B) A debt instrument is intermediate term if its maturity is less than one year. C) A debt instrument is long term if its maturity is ten years or longer. D) The maturity of a debt instrument is the time (term) that has elapsed since it was issued.

Answer 14

C

Question 15

15. Which of the following statements about financial markets and securities are true? A) Few common stocks are traded over-the-counter, although the over-the-counter markets have grown in recent years. B) A corporation acquires new funds only when its securities are sold in the primary market. C) Capital market securities are usually more widely traded than longer-term securities and so tend to be more liquid. D) All of the above are true. E) Only A and B of the above are true.

Answer 15

B

Question 16

16. Bonds that are sold in a foreign country and are denominated in that country’s currency are known as A) foreign bonds. B) Eurobonds. C) Eurocurrencies. D) Eurodollars.

Answer 16

A

Question 17

17. Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known as A) foreign bonds. B) Eurobonds. C) Eurocurrencies. D) Eurodollars.

Answer 17

B

Question 18

18. Financial intermediaries A) exist because there are substantial information and transaction costs in the economy. B) improve the lot of the small saver. C) are involved in the process of indirect finance. D) do all of the above. E) do only A and B of the above

Answer 18

D

Question 19

19. The main sources of financing for businesses, in order of importance, are A) financial intermediaries, issuing bonds, issuing stocks. B) issuing bonds, issuing stocks, financial intermediaries. C) issuing stocks, issuing bonds, financial intermediaries. D) issuing stocks, financial intermediaries, issuing bonds.

Answer 19

A

Question 20

20. Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage of A) poorly informed consumers. B) standardization. C) economies of scale. D) their market power.

Answer 20

C

Question 21

21. The purpose of diversification is to A) reduce the volatility of a portfolio’s return. B) raise the volatility of a portfolio’s return. C) reduce the average return on a portfolio. D) raise the average return on a portfolio.

Answer 21

A

Question 22

22. The presence of ________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets. A) noncollateralized risk B) free-riding C) asymmetric information D) costly state verification

Answer 22

C

Question 23

23. When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, ________ is said to exist. A) asymmetric information B) adverse selection C) moral hazard D) fraud

Answer 23

B

Question 24

24. When the borrower engages in activities that make it less likely that the loan will be repaid, ________ is said to exist. A) asymmetric information B) adverse selection C) moral hazard D) fraud

Answer 24

C

Question 25

25. Adverse selection is a problem associated with equity and debt contracts arising from A) the lender’s relative lack of information about the borrower’s potential returns and risks of his investment activities. B) the lender’s inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults. C) the borrower’s lack of incentive to seek a loan for highly risky investments. D) none of the above.

Answer 25

A

Question 26

26. When the least desirable credit risks are the ones most likely to seek loans, lenders are subject to the A) moral hazard problem. B) adverse selection problem. C) shirking problem. D) free-rider problem. E) principal-agent problem.

Answer 26

B

Question 27

27. Which of the following financial intermediaries are depository institutions? A) A savings and loan association B) A commercial bank C) A credit union D) All of the above E) Only A and C of the above

Answer 27

D

Question 28

28. Which of the following is a contractual savings institution? A) A life insurance company B) A credit union C) A savings and loan association D) A mutual fund

Answer 28

A

Question 29

29. Which of the following are investment intermediaries? A) Finance companies B) Mutual funds C) Pension funds D) All of the above E) Only A and B of the above

Answer 29

E

Question 30

30. The government regulates financial markets for two main reasons: A) to ensure soundness of the financial system and to increase the information available to investors. B) to improve control of monetary policy and to increase the information available to investors. C) to ensure that financial intermediaries do not earn more than the normal rate of return and to improve control of monetary policy. D) to ensure soundness of financial intermediaries and to prevent financial intermediaries from earning less than the normal rate of return.

Answer 30

A

Question 31

31. U.S. dollars deposited in foreign banks outside the United States or in foreign branches of U.S. are referred to as A) Eurodollars. B) Eurocurrencies. C) Eurobonds. D) foreign bonds.

Answer 31

A

Question 32

32. A credit market instrument that pays the owner the face value of the security at the maturity date and nothing prior to then is called a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond.

Answer 32

D

Question 33

33. Which of the following are true of coupon bonds? A) The owner of a coupon bond receives a fixed interest payment every year until the maturity date, when the face or par value is repaid. B) U.S. Treasury bonds and notes are examples of coupon bonds. C) Corporate bonds are examples of coupon bonds. D) All of the above. E) Only A and B of the above.

Answer 33

D

Question 34

34. If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is A) $650. B) $1,300. C) $130. D) $13. E) None of the above.

Answer 34

A

Question 35

35. Dollars received in the future are worth ________ than dollars received today. The process of calculating what dollars received in the future are worth today is called ________. A) more; discounting B) less; discounting C) more; inflating D) less; inflating

Answer 35

B

Question 36

36. With an interest rate of 5 percent, the present value of $100 received one year from now is approximately A) $100. B) $105. C) $95. D) $90.

Answer 36

C

Question 37

37. With an interest rate of 8 percent, the present value of $100 received one year from now is approximately A) $93. B) $96. C) $100. D) $108.

Answer 37

A

Question 38

38. The interest rate that financial economists consider to be the most accurate measure is the A) current yield. B) yield to maturity. C) yield on a discount basis. D) coupon rate.

Answer 38

B

Question 39

39. The yield to maturity of a one-year, simple loan of $500 that requires an interest payment of $40 is A) 5 percent. B) 8 percent. C) 12 percent. D) 12.5 percent.

Answer 39

B

Question 40

40. A $10,000, 8 percent coupon bond that sells for $10,000 has a yield to maturity of A) 8 percent. B) 10 percent. C) 12 percent. D) 14 percent

Answer 40

A

Question 41

41. Which of the following $1,000 face value securities has the highest yield to maturity? A) A 5 percent coupon bond selling for $1,000 B) A 10 percent coupon bond selling for $1,000 C) A 12 percent coupon bond selling for $1,000 D) A 12 percent coupon bond selling for $1,100

Answer 41

C

Question 42

42. Which of the following are true for a coupon bond? A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. B) The price of a coupon bond and the yield to maturity are positively related. C) The yield to maturity is greater than the coupon rate when the bond price is above the par value. D) All of the above are true. E) Only A and B of the above are true.

Answer 42

A

Question 43

43. The yield to maturity on a consol bond that pays $100 yearly and sells for $500 is A) 5 percent. B) 10 percent. C) 12.5 percent. D) 20 percent. E) 25 percent.

Answer 43

D

Question 44

44. If a $10,000 face value discount bond maturing in one year is selling for $8,000, then its yield to maturity is A) 10 percent. B) 20 percent. C) 25 percent. D) 40 percent.

Answer 44

C

Question 45

45. If a $5,000 face value discount bond maturing in one year is selling for $5,000, then its yield to maturity is A) 0 percent. B) 5 percent. C) 10 percent. D) 20 percent.

Answer 45

A

Question 46

46. The Fisher equation states that A) the nominal interest rate equals the real interest rate plus the expected rate of inflation. B) the real interest rate equals the nominal interest rate less the expected rate of inflation. C) the nominal interest rate equals the real interest rate less the expected rate of inflation. D) both A and B of the above are true. E) both A and C of the above are true.

Answer 46

D

Question 47

47. If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A) 7 percent. B) 22 percent. C) -15 percent. D) -8 percent. E) none of the above.

Answer 47

D

Question 48

48. In which of the following situations would you prefer to be making a loan? A) The interest rate is 9 percent and the expected inflation rate is 7 percent. B) The interest rate is 4 percent and the expected inflation rate is 1 percent. C) The interest rate is 13 percent and the expected inflation rate is 15 percent. D) The interest rate is 25 percent and the expected inflation rate is 50 percent.

Answer 48

B

Question 49

49. What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 one year later? A) 5 percent B) 10 percent C) -5 percent D) 25 percent E) None of the above

Answer 49

D

Question 50

50. Which of the following are true concerning the distinction between interest rates and return? A) The rate of return on a bond will not necessarily equal the interest rate on that bond. B) The return can be expressed as the sum of the current yield and the rate of capital gains. C) The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1. D) All of the above are true. E) Only A and B of the above are true.

Answer 50

E

Question 51

51. If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding? A) A bond with one year to maturity B) A bond with five years to maturity C) A bond with ten years to maturity D) A bond with twenty years to maturity

Answer 51

A

Question 52

52. The riskiness of an asset’s return that results from interest rate changes is called A) interest-rate risk. B) coupon-rate risk. C) reinvestment risk. D) yield-to-maturity risk.

Answer 52

A

Question 53

53. If an investor’s holding period is longer than the term to maturity of a bond, he or she is exposed to A) interest-rate risk. B) reinvestment risk. C) bond-market risk. D) yield-to-maturity risk.

Answer 53

B

Question 54

54. The duration of a ten-year, 10 percent coupon bond when the interest rate is 10 percent is 6.76 years. What happens to the price of the bond if the interest rate falls to 8 percent? A) It rises 20 percent. B) It rises 12.3 percent. C) It falls 20 percent. D) It falls 12.3 percent.

Answer 54

B

Question 55

55. The interest rate that is adjusted for actual changes in the price level is called the A) ex post real interest rate. B) expected interest rate. C) ex ante real interest rate. D) none of the above.

Answer 55

A

Question 56

56. When the price of a bond is above the equilibrium price, there is excess ________ in the bond market and the price will ________. A) demand; rise B) demand; fall C) supply; fall D) supply; rise

Answer 56

C

Question 57

57. When the interest rate on a bond is below the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________. A) demand; rise B) demand; fall C) supply; fall D) supply; rise

Answer 57

D

Question 58

58. Factors that determine the demand for an asset include changes in the A) wealth of investors. B) liquidity of bonds relative to alternative assets. C) expected returns on bonds relative to alternative assets. D) risk of bonds relative to alternative assets. E) all of the above.

Answer 58

E

Question 59

59. The higher the standard deviation of returns on an asset, the ________ the asset’s ________. A) greater; risk B) smaller; risk C) greater; expected return D) smaller; expected return

Answer 59

A

Question 60

60. Diversification benefits an investor by A) increasing wealth. B) increasing expected return. C) reducing risk. D) increasing liquidity.

Answer 60

C

Question 61

61. In a recession when income and wealth are falling, the demand for bonds ________ and the demand curve shifts to the ________. A) falls; right B) falls; left C) rises; right D) rises; left

Answer 61

B

Question 62

62. Higher expected interest rates in the future ________ the demand for long-term bonds and shift the demand curve to the ________. A) increase; left B) increase; right C) decrease; left D) decrease; right

Answer 62

C

Question 63

63. When people begin to expect a large stock market decline, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; falls B) right; rises C) left; falls D) left; rises

Answer 63

A

Question 64

64. An increase in the expected rate of inflation will ________ the expected return on bonds relative to that on ________ assets, and shift the ________ curve to the left. A) reduce; financial; demand B) reduce; real; demand C) raise; financial; supply D) raise; real; supply

Answer 64

B

Question 65

65. When bond prices become more volatile, the demand for bonds ________ and the interest rate ________. A) increases; rises B) increases; falls C) decreases; falls D) decreases; rises

Answer 65

D

Question 66

66. When prices in the stock market become more uncertain, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; rises B) right; falls C) left; falls D) left; rises

Answer 66

B

Question 67

67. When bonds become more widely traded, and as a consequence the market becomes more liquid, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; rises B) right; falls C) left; falls D) left; rises

Answer 67

B

Question 68

68. Factors that cause the demand curve for bonds to shift to the left include A) a decrease in the inflation rate. B) an increase in the volatility of stock prices. C) an increase in the liquidity of stocks. D) all of the above. E) only A and B of the above.

Answer 68

C

Question 69

69. During an economic expansion, the supply of bonds ________ and the supply curve shifts to the ________. A) increases, left B) increases, right C) decreases, left D) decreases, right

Answer 69

B

Question 70

70. An increase in expected inflation causes the supply of bonds to ________ and the supply curve to shift to the ________. A) increase, left B) increase, right C) decrease, left D) decrease, right

Answer 70

B

Question 71

71. When the inflation rate is expected to increase, the expected return on bonds relative to real assets falls for any given interest rate; as a result, the ________ bonds falls and the ________ curve shifts to the left. A) demand for; demand B) demand for; supply C) supply of; demand D) supply of; supply

Answer 71

A

Question 72

In Figure 1, the most likely cause of the increase in the equilibrium interest rate from i1 to i2 is

A. an increase in the price of bonds.
B. a business cycle boom.
C. an increase in the expected inflation rate.
D. a decrease in the expected inflation rate.

Answer 72

C

Question 73

In Figure 1, the most likely cause of the increase in the equilibrium interest rate from i1 to i2 is a(n) ________ in the ________.

A. increase; expected inflation rate
B. decrease; expected inflation rate
C. increase; government budget deficit
D. decrease; government budget deficit

Answer 73

A

Question 74

In Figure 1, the most likely cause of a decrease in the equilibrium interest rate from i2 to i1 is

A. an increase in the expected inflation rate.
B. a decrease in the expected inflation rate.
C. a business cycle expansion.
D. a combination of both A and C of the above.

Answer 74

B

Question 75

An increase in the expected rate of inflation causes the demand for bonds to ________ and the supply for bonds to ________.

A. fall; fall
B. fall; rise
C. rise; fall
D. rise; rise

Answer 75

B

Question 76

When the economy slips into a recession, normally the demand for bonds ________, the supply of bonds ________, and the interest rate ________.

A. increases; increases; rises
B. decreases; decreases; falls
C. increases; decreases; falls
D. decreases; increases; rises

Answer 76

B

Question 77

In Figure 2, one possible explanation for the increase in the interest rate from i1 to i2 is a(n) ________ in ________.

A. increase; the expected inflation rate
B. decrease; the expected inflation rate
C. increase; economic growth
D. decrease; economic growth

Answer 77

C

Question 78

In Figure 2, one possible explanation for the increase in the interest rate from i1 to i2 is

A. an increase in economic growth.
B. an increase in government budget deficits.
C. a decrease in government budget deficits.
D. a decrease in economic growth.
E. a decrease in the riskiness of bonds relative to other investments.

Answer 78

A

Question 79

In Figure 2, one possible explanation for a decrease in the interest rate from i2 to i1 is

A. an increase in government budget deficits.
B. an increase in expected inflation.
C. a decrease in economic growth.
D. a decrease in the riskiness of bonds relative to other investments.

Answer 79

C

Question 80

A ________ prefers stock in a less risky asset than in a riskier asset.

A. risk preferrer
B. risk-averse person
C. risk lover
D. risk-favorable person

Answer 80

B