Test 1 (Prev Quiz)

Question 1

Compared to interest rates on long-term U.S. government bonds, interest rates on three-month Treasury bills fluctuate ________ and are ________ on average.

Answer 1

more; lower

Question 2

What effect does a rising stock market index due to higher share prices have on people’s wealth?

Answer 2

It increases people’s wealth and may increase their willingness to spend.

Question 3

Evidence from business cycle fluctuations in the United States indicates that recessions have been preceded by a decline in the growth rate of ________.

Answer 3

money

Question 4

Channeling funds from individuals with surplus funds to those desiring funds when the saver does not purchase the borrower’s security is known as ________.

Answer 4

financial intermediation

Question 5

An important financial institution that assists in the initial sale of securities in the primary market is the ________.

Answer 5

investment bank

Question 6

Which of the following instruments is not traded in a money market?

Answer 6

Residential mortgages.

Question 7

Which of the following can be described as direct finance?

Answer 7

You borrow $2500 from a friend.

Question 8

Contractual savings institutions include ________.

Answer 8

life insurance companies.

Question 9

Financial institutions that accept deposits and make loans are called ________ institutions.

Answer 9

depository

Question 10

The primary liabilities of a commercial bank are ________.

Answer 10

deposits

Question 11

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.

Answer 11

moral hazard

Question 12

Reducing risk through the purchase of assets whose returns do not always move together is called ________.

Answer 12

diversification

Question 13

Money ________ transaction costs, allowing people to specialize in what they do best.

Answer 13

reduces

Question 14

As the payments system evolves from barter to a monetary system, commodity money is likely to precede the use of ________.

Answer 14

paper currency

Question 15

A fall in the level of prices ________ the value of money.

Answer 15

increases

Question 16

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 ________.

Answer 16

coupon bond

Question 17

If the amount payable in two years is $2420 for a simple loan at 10 percent interest, the loan amount is ________.

Answer 17

2000

Question 18

With an interest rate of 6 percent, the present value of $100 next year is approximately ________.

Answer 18

94

Question 19

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 ________.

Answer 19

8 percent

Question 20

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 ________.

Answer 20

650

Question 21

Which of the following $1,000 face-value securities has the highest yield to maturity?

Answer 21

A 5 percent coupon bond with a price of $600

Question 22

If a $5,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is ________.

Answer 22

percent

Question 23

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?

Answer 23

A bond with one year to maturity

Question 24

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.

Answer 24

-5 percent

Question 25

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 ________.

Answer 25

-8 percent

Question 26

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 ________.

Answer 26

rises; rises

Question 27

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?

Answer 27

wealth

Question 28

You would be more willing to buy AT&T bonds (holding everything else constant) if ________.

Answer 28

the brokerage commissions on bond sales become cheaper

Question 29

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 ________.

Answer 29

demand; fall

Question 30

When the price of a bond is above the equilibrium price, there is an excess ________ bonds and price will ________.

Answer 30

supply of; fall

Question 31

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.

Answer 31

increase; right

Question 32

Everything else held constant, when households save less, wealth and the demand for bonds ________ and the bond demand curve shifts ________.

Answer 32

decrease; left

Question 33

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 ________.

Answer 33

rises; right

Question 34

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 ________.

Answer 34

fall; left

Question 35

Everything else held constant, when the inflation rate is expected to rise, interest rates will _________; this result has been termed the ________.

Answer 35

rise; Fisher effect

Question 36

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 ________.

Answer 36

default risk

Question 37

The spread between the interest rates on bonds with default risk and default-free bonds is called the ________.

Answer 37

risk premium

Question 38

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 ________.

Answer 38

left; right

Question 39

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.

Answer 39

increasing; decreasing

Question 40

Bonds with relatively high risk of default are called ________.

Answer 40

junk bonds

Question 41

During a 'flight to quality', the spread between Aaa and Baa bonds ________.

Answer 41

increases

Question 42

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 ________.

Answer 42

decrease; increase

Question 43

Municipal bonds have default risk, yet their interest rates are lower than the rates on default-free Treasury bonds. This suggests that ________.

Answer 43

the benefit from the tax-exempt status of municipal bonds exceeds their default risk

Question 44

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.

Answer 44

higher; larger

Question 45

American farmers who sell beef to Europe benefit most from ________.

Answer 45

an increase in the dollar price of euros

Question 46

________ theory relates changes in the quantity of money to changes in aggregate economic activity and the price level.

Answer 46

Monetary

Question 47

________ policy involves decisions about government spending and taxation.

Answer 47

Fiscal

Question 48

The organization responsible for the conduct of monetary policy in the United States is the ________.

Answer 48

Federal Reserve System

Question 49

A financial market in which previously issued securities can be resold is called a _________ market.

Answer 49

secondary

Question 50

U.S. Treasury bills are considered the safest of all money market instruments because there is no risk of ________.

Answer 50

default

Question 51

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 ________.

Answer 51

Eurobonds

Question 52

Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.

Answer 52

assets; liabilities

Question 53

A plot of the interest rates on default-free government bonds with different terms to maturity is called a ________.

Answer 53

yield curve

Question 54

When yield curves are steeply upward sloping, long-term interest rates are ________ short-term interest rates.

Answer 54

above

Question 55

According to the expectations theory of the term structure, interest rates on bonds of different maturities ________ over time.

Answer 55

move together

Question 56

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 ________.

Answer 56

one year

Question 57

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.

Answer 57

fall

Question 58

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 ________.

Answer 58

5 percent

Question 59

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 ________.

Answer 59

a decline in short-term interest rates in the near future and an even steeper decline further out in the future

Question 60

A stockholder's ownership of a company's stock gives her the right to ________ and be the ________ of all cash flows.

Answer 60

vote; residual claimant

Question 61

Periodic payments of net earnings to shareholders are known as ________.

Answer 61

dividends

Question 62

In the one-period valuation model, an increase in the required return on investments in equity ________ the current price of a stock.

Answer 62

reduces

Question 63

In the generalized dividend model, the current stock price is the sum of ________.

Answer 63

the present value of the future dividend stream

Question 64

Using the Gordon growth model, a stock's current price decreases when ________.

Answer 64

the growth rate of dividends decreases

Question 65

The view that expectations change relatively slowly over time in response to new information is known in economics as ________.

Answer 65

adaptive expectations

Question 66

When using rational expectations, forecast errors will, on average, be ________ and ________ be predicted ahead of time.

Answer 66

zero; cannot

Question 67

According to the efficient markets hypothesis, the current price of a financial security ________.

Answer 67

fully reflects all available relevant information

Question 68

________ 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.

Answer 68

Arbitrage

Question 69

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 ________.

Answer 69

a normal return since stock prices adjust to reflect expected changes in profitability almost immediately