Test 1 (Prev Quiz) Flashcards
Compared to interest rates on long-term U.S. government bonds, interest rates on three-month Treasury bills fluctuate ________ and are ________ on average.
more; lower
What effect does a rising stock market index due to higher share prices have on people’s wealth?
It increases people’s wealth and may increase their willingness to spend.
Evidence from business cycle fluctuations in the United States indicates that recessions have been preceded by a decline in the growth rate of ________.
money
Channeling funds from individuals with surplus funds to those desiring funds when the saver does not purchase the borrower’s security is known as ________.
financial intermediation
An important financial institution that assists in the initial sale of securities in the primary market is the ________.
investment bank
Which of the following instruments is not traded in a money market?
Residential mortgages.
Which of the following can be described as direct finance?
You borrow $2500 from a friend.
Contractual savings institutions include ________.
life insurance companies.
Financial institutions that accept deposits and make loans are called ________ institutions.
depository
The primary liabilities of a commercial bank are ________.
deposits
An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families.
moral hazard
Reducing risk through the purchase of assets whose returns do not always move together is called ________.
diversification
Money ________ transaction costs, allowing people to specialize in what they do best.
reduces
As the payments system evolves from barter to a monetary system, commodity money is likely to precede the use of ________.
paper currency
A fall in the level of prices ________ the value of money.
increases
A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a ________.
coupon bond
If the amount payable in two years is $2420 for a simple loan at 10 percent interest, the loan amount is ________.
2000
With an interest rate of 6 percent, the present value of $100 next year is approximately ________.
94
A coupon bond with a face value of $10,000 and a coupon rate of 8 percent that sells for $10,000 has a yield to maturity of ________.
8 percent
If a coupon bond with a face value of $5,000 has a coupon rate of 13 percent, then the coupon payment every year is ________.
650
Which of the following $1,000 face-value securities has the highest yield to maturity?
A 5 percent coupon bond with a price of $600
If a $5,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is ________.
percent
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 bond with one year to maturity
What is the one-year holding-period return on a 5-percent coupon bond that you buy today for $1,000 and sell in one year for $900? Assume that, during the time you hold the bond, you collect one annual coupon payment.
-5 percent
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 ________.
-8 percent
Everything else held constant, if the expected return on U.S. Treasury bonds falls from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return of holding GE stock ________ relative to U.S. Treasury bonds and the demand for GE stock ________.
rises; rises
Of the four factors that influence asset demand, which factor will cause the demand for all assets to increase when it increases, everything else held constant?
wealth
You would be more willing to buy AT&T bonds (holding everything else constant) if ________.
the brokerage commissions on bond sales become cheaper
When the interest rate on a bond is above the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________.
demand; fall
When the price of a bond is above the equilibrium price, there is an excess ________ bonds and price will ________.
supply of; fall
An increase in the expected inflation rate causes the supply of bonds to ________ and the supply curve to shift to the ________, everything else held constant.
increase; right
Everything else held constant, when households save less, wealth and the demand for bonds ________ and the bond demand curve shifts ________.
decrease; left
Everything else held constant, if interest rates are expected to fall in the future, the demand for long-term bonds today ________ and the demand curve shifts to the ________.
rises; right
Everything else held constant, an increase in the riskiness of bonds relative to alternative assets causes the demand for bonds to ________ and the demand curve to shift to the ________.
fall; left
Everything else held constant, when the inflation rate is expected to rise, interest rates will _________; this result has been termed the ________.
rise; Fisher effect
The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is ________.
default risk
The spread between the interest rates on bonds with default risk and default-free bonds is called the ________.
risk premium
When the Treasury bond market becomes more liquid, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.
left; right
Everything else held constant, 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.
increasing; decreasing
Bonds with relatively high risk of default are called ________.
junk bonds
During a ‘flight to quality’, the spread between Aaa and Baa bonds ________.
increases
Everything else held constant, if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future, the interest rate on corporate bonds will ________ and the interest rate on Treasury securities will ________.
decrease; increase
Municipal bonds have default risk, yet their interest rates are lower than the rates on default-free Treasury bonds. This suggests that ________.
the benefit from the tax-exempt status of municipal bonds exceeds their default risk
The interest rate on Baa (medium quality) corporate bonds is ________, on average, than other interest rates, and the spread between it and other rates became ________ in the 1970s.
higher; larger
American farmers who sell beef to Europe benefit most from ________.
an increase in the dollar price of euros
________ theory relates changes in the quantity of money to changes in aggregate economic activity and the price level.
Monetary
________ policy involves decisions about government spending and taxation.
Fiscal
The organization responsible for the conduct of monetary policy in the United States is the ________.
Federal Reserve System
A financial market in which previously issued securities can be resold is called a _________ market.
secondary
U.S. Treasury bills are considered the safest of all money market instruments because there is no risk of ________.
default
Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as ________.
Eurobonds
Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.
assets; liabilities
A plot of the interest rates on default-free government bonds with different terms to maturity is called a ________.
yield curve
When yield curves are steeply upward sloping, long-term interest rates are ________ short-term interest rates.
above
According to the expectations theory of the term structure, interest rates on bonds of different maturities ________ over time.
move together
If the expected path of 1-year interest rates over the next five years is 2 percent, 4 percent, 1 percent, 4 percent, and 3 percent, the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of ________.
one year
According to the liquidity premium theory of the term structure, if yield curves are downward sloping, then short-term interest rates are expected to ________ by so much that, even when the positive term premium is added, long-term rates fall below short-term rates.
fall
If 1-year interest rates for the next five years are expected to be 4, 2, 5, 4, and 5 percent, and the 5-year term premium is 1 percent, than the 5-year bond rate will be ________.
5 percent
If the yield curve is flat for short maturities and then slopes downward for longer maturities, the liquidity premium theory indicates that the market is predicting ________.
a decline in short-term interest rates in the near future and an even steeper decline further out in the future
A stockholder’s ownership of a company’s stock gives her the right to ________ and be the ________ of all cash flows.
vote; residual claimant
Periodic payments of net earnings to shareholders are known as ________.
dividends
In the one-period valuation model, an increase in the required return on investments in equity ________ the current price of a stock.
reduces
In the generalized dividend model, the current stock price is the sum of ________.
the present value of the future dividend stream
Using the Gordon growth model, a stock’s current price decreases when ________.
the growth rate of dividends decreases
The view that expectations change relatively slowly over time in response to new information is known in economics as ________.
adaptive expectations
When using rational expectations, forecast errors will, on average, be ________ and ________ be predicted ahead of time.
zero; cannot
According to the efficient markets hypothesis, the current price of a financial security ________.
fully reflects all available relevant information
________ occurs when market participants observe returns on a security that are larger than what is justified by the characteristics of that security and take action to quickly eliminate the unexploited profit opportunity.
Arbitrage
You read a story in the newspaper announcing the proposed merger of Dell Computer and Gateway. The merger is expected to greatly increase Gateway’s profitability. If you decide to invest in Gateway stock, you can expect to earn ________.
a normal return since stock prices adjust to reflect expected changes in profitability almost immediately
