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Econ 351 > Unit 1-3 Econ 351 Exam 1 > Flashcards

Unit 1-3 Econ 351 Exam 1 Flashcards

1
Q

consists of markets, individuals, institutions, and regulators (supervision)

A

Financial system

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2
Q

transfer funds from households, governments, and firms that have a surplus funds to those that have a shortage of funds

A

purpose of the Financial system

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3
Q

Types of financial assets

A

money, stocks, bonds, foreign exchange

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4
Q

anything people are willing to accept for goods and services and to pay debts: fiat …., legal tender, notes and coins issued by the fed/ commodity …, beads animal skin(pelts), cigarettes, gold, silver

A

money

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5
Q

issued by corporations: raise funds, give ownership rights (sometimes allows holders to vote), does not mature, held until sold, in some cases pays dividend

A

stocks(equities, shares)

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6
Q

issued by corporations or governments: purpose is to raise funds, debt security(company owes you), matures, interest paid on bonds(coupon payments), at maturity principal repaid

A

bonds

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7
Q

units of foreign currency facilitates international trade

A

foreign exchange(foreign currency)

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8
Q

loans that banks can sell: package mortgage and sell units(like bonds), securitization: borrower makes mortgage payments/investors receive cash flow

A

securitized loans (most common is mortgage-backed securities)

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9
Q

funds are transferred through…

A

financial markets, banks, and other financial intermediaries

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10
Q

funds are used to …

A

purchase financial assets and settle financial liabilities

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11
Q

anything of value owned by a person or firm

A

asset

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12
Q

a financial claim on someone else to pay you money

A

financial asset

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13
Q

process of converting loans and other financial assets that are not tradeable to securities

A

securitization

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14
Q

financial claim owed by a person or firm

A

financial liability

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15
Q

facilitates the buying and selling of stocks, bonds, and other securities

A

financial markets

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16
Q

how do firms obtain funds?

A

issuing debt or equity in financial markets

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17
Q

what are debt or equity instruments referred as?

A

securities

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18
Q

bonds, debentures, fixed maturity date, fixed periodic payment, principal returned at maturity

A

debt (securities)

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19
Q

ownership rights, voting rights if ordinary shares, dividends if preference shares, claim residuals if a company closes

A

equity (securities)

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20
Q

financial markets facilitate: reduction of time and cost associated with lending

A

operational efficiency

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21
Q

financial markets facilitate: funds are allocated in the most productive use

A

allocational efficiency

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22
Q

financial markets facilitate: market price reflects the value of security

A

informational efficiency

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23
Q

types of markets?

A

financial, primary, secondary, over-the-counter, exchanges

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24
Q

where new securities are issued

A

primary market

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25
Q

where new securities are being issued to initial buyers, proceeds are going to firms(stocks)/ government(bonds), IPO(initial public offering of shares), involves an investment bank that underwrites the offering

A

primary market

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26
Q

example of primary markets

A

JP Morgan, Wells Fargo, Citi Group, Bank of America

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27
Q

where previously issued securities are bought and sold

A

secondary market

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28
Q

where funds do not go to the firm, determines the market price of securities, involves brokers(work for investors) and dealers(holders of shares and equities on account)

A

secondary market

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29
Q

two types of secondary markets

A

exchange and over-the-counter markets

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30
Q

secondary market where assets are acquired at a central location (Newyork Stock Exchange(stocks), Chicago Board of Trade(commodities)), there is an open and closing time

A

Exchanges(Auction Markets)

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31
Q

secondary market that can be in different locations, primarily over the internet( no set operating period, sells bonds, foreign exchange, negotiable certificated deposits

A

Over the Counter

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32
Q

we can distinguish between markets based on the … … of securities

A

maturity date

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33
Q

trade short-term debt instruments, including debt securities (ex. bonds) less than 1 year, more widely traded and liquid(easy to convert to cash), primary players are usually banks

A

money market

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34
Q

trade long-term debt instruments, include debt securities greater than 1 year and equity(no maturity), often held by insurance companies and pension funds

A

capital market

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35
Q

buy and sell securities on behalf of customers, “go-between”, “middle man”

A

financial institutions(financial intermediaries)

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36
Q

type of financial intermediaries that accept deposits and make loans

A

depository institutions

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37
Q

examples of depository institutions

A

commercial banks, saving and loan associations, mutual savings banks, credit unions

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38
Q

non-despository institutions can be divided into … … … and … ….

A

contractual savings institutions and investment institutions

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39
Q

primary liabilities(sources of funds): customer deposits
primary assets(uses of funds): business & consumer loans, mortgages, US securities, municipal bonds
(about 4800)

A

commercial banks

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40
Q

primary liabilities(sources of funds): customer deposits
primary assets(uses of funds): mortgages

A

Savings and loan associations

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41
Q

primary liabilities(sources of funds): customer deposits
primary assets(uses of funds): mortgages
* owned by depositors, does not issue stock

A

Mutual savings banks

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42
Q

primary liabilities(sources of funds): customer deposits
primary assets(uses of funds): consumer loans (student loans)
*owned by depositors, based on membership in a particular group

A

Credit unions

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43
Q

a non-depository institution that acquires funds at periodic intervals on a contractual basis

A

contractual saving institutions

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44
Q

primary liabilities(sources of funds): premiums from policies
primary assets(uses of funds): corporate bonds, mortgages

A

life insurance companies

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45
Q

primary liabilities(sources of funds): premiums from policies
primary assets(uses of funds): corporate bonds, stocks, US securities

A

fire and casualty insurance companies

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46
Q

primary liabilities(sources of funds): employer and employee contributions
primary assets(uses of funds): corporate bonds, US securities, stocks

A

pension funds, government retirement funds

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47
Q

a non-depository institution that invests in securities & makes loans

A

Investment institutions

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48
Q

primary liabilities(sources of funds): commercial paper, stocks, bonds
primary assets(uses of funds): consumer and business loans

A

finance companies

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49
Q

primary liabilities(sources of funds): shares/ units
primary assets(uses of funds): stocks, bonds

A

mutual funds

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50
Q

primary liabilities(sources of funds): shares/ units
primary assets(uses of funds): money market instruments(short-term)

A

money market mutual funds

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51
Q

primary liabilities(sources of funds): partnership participation w/ a company
primary assets(uses of funds): stocks, bonds, loans, foreign currency, etc

A

hedge funds

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52
Q

financial institutions(intermediaries) are crucial because they:

A

reduce transaction costs, lower information costs, increase liquidity and lower price risks, provide payment services, allow for the transmission of monetary policy, provide credit allocation, provide maturity intermediation, provide intergenerational transfers or time intermediation, and provide denomination intermediation

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53
Q

financial institutions(intermediaries) are crucial because they deposit small funds and pool funds to make large loans

A

denomination intermediation

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54
Q

financial institutions(intermediaries) are crucial because they deposit funds today and make funds available to families in the future

A

intergenerational transfers or time intermediation

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55
Q

financial institutions(intermediaries) are crucial because they allow customers to deposit for a short term while they can lend for the long term

A

maturity intermediation

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56
Q

financial institutions(intermediaries) are crucial because they can access credit and make different categories of loans

A

credit allocation

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57
Q

financial institutions(intermediaries) are crucial because the fed relies on them to help control money supply

A

transmission of monetary policy

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58
Q

financial institutions(intermediaries) are crucial because they allow users to pay bills, set up standing order, and get salary

A

payment services

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59
Q

financial institutions(intermediaries) are crucial because they take savings short term and make long term loans, solves value inconsistency problem, create market for securities

A

increase liquidity and lower price risks

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60
Q

financial institutions(intermediaries) are crucial because they collect information on borrowers to forecast credit risk, better able to screen out bad credit from good ones

A

lower information costs

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61
Q

financial institutions(intermediaries) are crucial because of their large size which allows them to take advantage of economies of scale(Ex. one contract used for multiple loans

A

reduce transaction cost

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62
Q

funds flow from lenders to borrowers via two routes:

A

direct and indirect finance

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63
Q

flows of funds where borrowers borrow directly from lenders by selling them financial instruments

A

direct finance

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64
Q

securities that do not require financial intermediaries in the flow of funds

A

financial instruments

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65
Q

These are examples of?
IPO, a new bond from the US government, making a loan to a friend

A

direct finance

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66
Q

constraints of direct finance

A

transaction costs, diseconomies of scale, asymmetric information, moral hazard, adverse selection, time and value inconsistencies

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67
Q

a constraint of direct finance where time and money are needed to complete the transaction

A

transaction costs

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68
Q

a constraint of direct finance where an increasing number of transactions, due to a small scale of operation, makes transaction costs increase

A

diseconomies of scale

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69
Q

a constraint of direct finance where one party in the transaction has more information(usually the borrower who knows what they are doing with the loan and their willingness to repay)

A

asymmetric information

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70
Q

adverse selection and moral hazard are a consequence of … …

A

asymmetric information

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71
Q

a constraint of direct finance is that bad credit risks are more likely to seek out loans even with high interest rates(happens before entering transaction)

A

adverse selection

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72
Q

a constraint of direct finance is that a borrower takes on risky activity after receiving the loan (happens after entering transaction)

A

moral hazard

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73
Q

a constraint of direct finance is that savers want to lend for the short-term, borrowers want to borrow for the long-term, and it takes time to convert asset to money

A

time inconsistencies

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74
Q

a constraint of direct finance is that assets depreciate in value over loan period

A

value inconsistencies

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75
Q

flow of funds that involves a financial intermediary

A

indirect finance(financial intermediation)

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76
Q

these are examples of what type of flow of funds: deposit funds, in a savings account, purchase stocks in a secondary market

A

indirect finance(financial intermediation)

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77
Q

How does indirect finance smooth asymmetric information?

A
  • savers lend to trustworthy financial intermediary
  • FI are able to differentiate bad credit risks
  • FI are able to monitor loans
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78
Q

How does indirect finance reduce transaction risk?

A

FI reduces possibility of defaulting on a loan

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79
Q

How does indirect finance lower cost and increase volume of financial flows?

A

FI have large size benefits from economies of scale

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80
Q

How does indirect finance facilitate investment and economic activity?

A

FI increases the volume of loans and economic activity

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81
Q

What three key services does the financial system provide to savers and borrowers?

A

risk sharing, liquidity, information

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82
Q

allows savers to spread and transfer risk

A

risk sharing

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83
Q

aspects of risk-sharing includes:

A

asset transformation and diversification

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84
Q

aspect of risk-sharing where FI invest short term liabilities into long term assets, FI sell liabilities to customers(deposits, CD’s, money market investments), then convert small deposits into loans(assets)

A

asset transformation

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85
Q

aspect of risk sharing that allows savers to hold a variety of assets(savings, CD’s, stocks, and bonds) based on risk preference

A

diversification

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86
Q

ease of converting an asset into money

A

liquidity

87
Q

service to savers and borrowers where savers are able to deposit for short term instruments purchase can be converted to money fast and easily dur to market created by FI

A

liquidity

88
Q

service to savers and borrowers that provides facts about borrowers and returns on financial assets (access to this allows markets to operate efficiently)

A

information

89
Q

financial regulation is important to:

A

increase the information available to investors
ensure the soundness of the financial system

90
Q

who does the securities and exchange commission regulate?

A

financial markets

91
Q

who does the federal deposit insurance corporation regulate?

A

insures deposits in banks

92
Q

who does the office of the comptroller of the currency regulate?

A

federally chartered banks

92
Q

who does the consumer financial protection bureau regulate?

A

protects consumers from fraud and deceptive practices in financial markets

92
Q

who does the federal reserve system regulate?

A

the banking system

93
Q

An interest rate represents:

A

“return” financial investment
cost of borrowing

94
Q

These are examples of what in the macroeconomy: mortgage rates, savings rates, interest on car loan

A

interest rates

95
Q

what do interest rates depend on?

A

rate of return expected
time preference
level of risk
expected inflation

95
Q

interest rates affect consumers’ willingness to … or … and the businesses’ decisions …

A

consume or save
whether to invest in productive activity(use own funds or borrow funds to use)

96
Q

Interest rates can viewed as:

A

compensation for inflation
compensation for default risk
compensation for the opportunity cost of waiting to spend your money

97
Q

types of time preferences

A

short term horizon
long term horizon

98
Q

riskiness of an asset relative to other assets (default, interest risk, reinvestment risk)

A

level risk

99
Q

weighted average of all possible returns

A

rate of return expected

100
Q

expected change in the price level
Fisher equation(links expected inflation to the nominal and real interest

A

expected inflation

101
Q

Interest rates are a vital tool of monetary policy and can be used to control:

A

investment
inflation
unemployment

102
Q

Interest rates are based on the principle of the … … of …

A

Time Value of Money

103
Q

This sates that money held today is worth more than the value of the same sum of money in the future

A

Time Value of Money

104
Q

amount of funds the lender provides to the borrower

A

loan principal

105
Q

date a loan must be repaid

A

maturity date

106
Q

amount (percentage) the borrower has to pay the lender to use the principal (Ex. Bond payment is called a coupon)

A

interest payment

107
Q

length of time the security is held

A

holding period

108
Q

how much a current sum of money is worth at some point in the future

A

future value

109
Q

what is the future value formula?

A

FV= PV(1 + i)^t

110
Q

interest calculated based on the principal and interest previously earned

A

compounding

111
Q

how much a future sum of money is worth today(value of future sum discounted to … … at some interest rate)

A

present value

112
Q

what is the present value formula?

A

PV = FV/(1+ i)^t

113
Q

what changes in the future/present value formula happen when the time period is changed to semiannually and quarterly?

A

semiannually:
t= years x 2
i = i/2
quarterly:
t= years x 4
i = i/4

114
Q

Suppose that a wealthy relative gives you $5000 to help provide for your newborn child’s university fees. You decide to invest this money at 10% p.a.(per annum) until your child is ready to begin their university studies. How much will be in the account 18 years from now?

A

$27,799.58

115
Q

You can afford to put $10,000 in a savings account that pays 6% interest compounded annually. How much will you have five years from now if you make no withdrawals? per annum and semiannually?

A

per annum: $13,382.26
semiannually: $13,439.16

116
Q

What is the present value of $250 to be paid in two years if the interest rate is 15%?

A

$189.04

117
Q

Suppose you are depositing an amount today in an account that earns 5% interest, compounded annually. If your goal is to have $5,000 in the account at the end of six years, how much must you deposit in the account today?

A

$3,731.08

118
Q

What are the four basic types of credit market instruments?

A

simple loan, fixed payment loan, coupon bond, and discount bonds

119
Q

credit market instrument where the principal and interest are paid at maturity?
Only one payment made at the end
principal= loan amount
interest depends on the amount borrowed

A

simple loan

120
Q

credit market instrument where equal payments consisting of principal and interest are made each period (amortized loans)(ex. mortgages, car loans, student loans)
equal payment until maturity

A

fixed payment loan

121
Q

What is the formula for a fixed-payment loan?

A

fixed payment = (principal + interest)/ t
fixed payment = total amount owed/ time period

122
Q

a credit market instrument where a fixed interest payment is made each period and principal repaid at maturity

A

coupon bond

123
Q

amount that will be repaid at maturity
usually $1000

A

face value(par value)(principal)

124
Q

periodic interest payment received (usually annually or semi-annually)

A

coupon

125
Q

coupon formula

A

coupon =(face value)(coupon rate)

126
Q

fixed interest rate received on the bond, stipulated in the bond contract

A

coupon rate

127
Q

annual interest earned on holding bond (profitability of a bond)

A

current yield

128
Q

current yield formula

A

coupon/face value x 100 = coupon/price

129
Q

length of time(loan period) before a bond expires

A

maturity

130
Q

credit market instrument that is purchased at a price below face value, at maturity I receive face value(pays no coupon)(Ex. US treasure bills and US savings bonds)

A

discount bond(zero- coupon bond)

131
Q

the return on a bond or other fixed-income security if held until the maturity date

A

Yield to Maturity (YTM)

132
Q

for simple loans, the simple interest rate equals the yield to maturity what is the formula for YTM?

A

YTM = interest paid/ principal x100

133
Q

If Susan borrows $1,500 from her sister and next year, she wants $1650 back from her, what is the YTM on this loan?

A

10%

134
Q

You borrow $1 million from your friend today and promise to repay them $2.5 million in 2 years. What is the YTM on the loan?

A

0.581/ 58.1%

135
Q

Formula for a discount bond
(price =present value)

A

Face Value-Price/ Price

136
Q

What is the yield to maturity for a discount bond that is currently selling for $560 and will mature in 5 years with a face value of $1000?

A

0.123/ 12.3%

137
Q

A discount bond pays a face value of $1500 in two years. If the current purchase price of this bond is $1200, calculate the YTM.

A

0.118/ 11.8%

138
Q

Fixed payment loan formula?

A

LV = FP/(1+i) + FP/(1+i)^2 +FP/(1+i)^3 +FP/(1+i)^n

139
Q

You borrow some money from a loan shark and promise to repay them in 3 equal payments of $300,000 per week. Suppose the loan shark requires a return of 40% per week, how much money have they lent you?

A

$476,676.38

140
Q

Coupon Bond Formula(2)

A

P = C/(1+i) + C/(1+i)^2 + C/(1+i)^n + F/(1+i)^n
or
P =

141
Q

calculate the present value of a $1000,10% coupon bond with five years to maturity if the yield to maturity is 6%?.

A

$1,168.49
max willing to pay today for 5 year, $100, 10% coupon bond given the YTM is 6%

142
Q

what changes in the coupon bond formula is it is a semi-annual coupon bond?

A

coupon payments/2
number of years until maturity x 2
interest rate/2

143
Q

What is the price of a bond that has a coupon rate of 4%, matures in 2 years, has a face value of $1,000 and whose yield to maturity is 5%(coupon payments are made semi-annually)

A

$981.19
max willing to pay given YTM is 5%

144
Q

What is a special case of a coupon bond called where the bond has no maturity date(> 25 years) and no repayments of principal that make fixed coupon payments of $C forever?

A

Perpetuity of Consol bond

145
Q

What is the perpetuity or consol bond formula?

A

Pc = C/ic
price
yearly payment
yield to maturity of the perpetuity

146
Q

What is the yield to maturity on a bond that has a price of $3000 and pays $600 annually forever?

A

0.2/20%

147
Q

What is the price of a perpetuity that has a coupon of $50 per year and a yield to maturity of 2.5%?

A

$2000

148
Q

the price of a coupon bond and the yield to maturity are … related?

A

negatively related
As YTm increases –> price decreases(discounting cash flow at a higher rate)

149
Q

If the coupon bond is priced at its face value, the yield to maturity and the coupon rate are?

A

equal

150
Q

If the YTM is greater than the coupon rate then the bond price is … its face value

A

below
price is less than face value (below par [at a discount])

151
Q

if YTM is less than the coupon rate when then the price of the bond is … its face value

A

above (above par, at a premium)

152
Q

Consider a bond with a 4% annual coupon and a face value of $1000. What is the current price of the bond if
Years to Maturity / Yield to Maturity
2 2%
2 4%
3 4%
5 2%
5 6%

A

$1038.83
$1000
$1000
$1094.27
$915.75

153
Q

Given the same years to maturity: as YTM increases the price of the bond …

A

decreases

154
Q

Given the same YTM: as years to maturity increases the price of the bond …

A

increases

155
Q

measures how profitable an investment is

A

rate of return

156
Q

what is rate of return is impacted by?

A

interest rate risk
default risk

157
Q

a good approximation for the YTM of a bond(changes as price changes), annual return on a bond based on coupon and the price paid for the bond

A

current yield

158
Q

current yield formula

A

coupon payment/ price

159
Q

the difference between the selling price and the purchase price of a bond

A

capital gain/loss

160
Q

capital gain/loss formula

A

selling price(Pt+1) - purchase price(Pt)/ Pt

161
Q

rate of return =

A

current yield + rate of capital gain

162
Q

rate of return formula

A

[C+ (Pt+1) - (Pt)]/ Pt

163
Q

What would the rate of return be on a bond bought for $1800 and sold one year later for $1500? The bond has a face value of $2000 and a coupon rate of 8%

A

-0.078/ -7.8%

164
Q

You have paid $950 for an 8% coupon bond with a face value of $1000 that matures in 5 years. You sell the bond one year later for $980. What would be the rate of return?

A

11.6%

165
Q

prices and returns for long-term bonds are … …. than those for shorter-term bonds due to …-… …

A

more volatile
interest-rate risk

166
Q

increase in the years to maturity causes:

A

decrease in the price of the bond
Pt+1 is less than Pt
capital loss

167
Q

The longer the time to maturity:

A

the greater the price change, the lower the rate of return

168
Q

when the principal is repaid?

A

term to maturity

169
Q

how long I keep the bond?

A

holding period

170
Q

what is true is the term to maturity and holding period are the same?

A

there is no interest rate risk

171
Q

market interest rate or quoted interest rate does not account for inflation

A

nominal interest rate

172
Q

interest rate adjusted for inflation

A

real interest rate

173
Q

uses expected inflation

A

ex ante real interest rate

174
Q

uses actual inflation

A

ex post real interest rate

175
Q

What is the Fisher Equation?

A

Nominal = Real + Expected Inflation (ex ante)
or
Real = Nominal - Expected Inflation

176
Q

low real interest rate means:

A

low incentive to save
prefer to spend than save

177
Q

high real interest rate means:

A

high incentive to save
prefer to save than spend

178
Q

Assume you just deposited $1000 into a bank account. The current real interest rate is 2%, and inflation is expected to be 6% over the next year.
a) what nominal rate would you require from the bank over the next year?
b) How much money will you have at the end of one year?
c) If you are saving to buy a stereo that currently sells for $1050, will you have enough to buy it?
d)Would the bank be better off if the actual inflation rate next year is 9% and the nominal rate on your account remained unchanged?

A

a) 8%
b) $1080
c) $1110, so no, because the price of the stereo increases due to expected inflation
d) actual inflation 9%, nominal interest 8%, the bank would be better off. Borrowers will gain while lenders will lose (expost real interest=nominal -actual)

179
Q

The quantity demand for bonds is … related to the price level

A

negatively

180
Q

bond demand depends on what 4 things? (shifters of bond demand)

A

wealth, expected return, risk, and liquidity

181
Q

the total resources owned by the individual
all assets owned: money, art, gold, bonds, stocks, cars, homes

A

wealth

182
Q

holding everything else constant, an increase in wealth … the quantity demanded of an asset (bonds at all prices)

A

raises

183
Q

How the business cycle affects wealth:
- expansion(Boom)–> … wealth–> … quantity demanded of bonds
- contraction(recession) –> … wealth–> … quantity demanded of bonds

A

increases, increases(shift right)
decreases, decreases(shift left)

184
Q

How does a consumer’s propensity to save affect wealth?
- Increase in propensity to save–> … hold of assets, … wealth, … quantity demanded of bonds at all prices

A

increase, increase, increase(shift right)

185
Q

weighted average of all possible returns

A

expected return

186
Q

Hold everything else constant, an increase in an asset’s expected return relative to that of an alternative asset … the quantity demanded of an asset.

A

raises(shift right)

187
Q

What are expected returns on bonds influenced by?

A

future interest rates, the expected inflation, and the expected return on other assets

188
Q

A change in the current prices and current interest rate … … shift the demand curve.

A

do not

189
Q

decrease in the future nominal interest rate –> … future price of bond(Pt+1), … expected return, … quantity demanded of bonds at all prices

A

increase, increase(capitol gain), increase(shift right)

190
Q

increase in expected inflation–> … in real interest rate, … real expected return on asset, … quantity demanded bond at all

A

decrease, decrease, decrease (shift left)

191
Q

increase expected return on bonds relative to other assets–> … quantity demanded of bonds at all prices

A

increase (shift right)

192
Q

degree of uncertainty associated with the return on one asset relative to alternative assets

A

risk

193
Q

Holding everything else constant, if an asset’s risk rises relative to that of alternative assets, it quantity demanded will …

A

fall(shift left)

194
Q

ease and speed with which an asset can be turned into cash relative to alternative assets

A

liquidity

195
Q

increase in relative risk of their assets and risk of bonds remained unchanged or changed by less than other assets–> … quantity demanded of bonds at all prices

A

increase(shift right)

196
Q

Holding everything else constant, the more liquid an asset is relative to alternative assets, the … … it is, and the … will be the quantity demanded.

A

more desirable
greater(shift right)

197
Q

An increase in the relative liquidity of other assets –> … in quantity demanded of bonds

A

decrease(shift left)

198
Q

the quantity supply of bonds is … related to the price level

A

positively

199
Q

firms (large) and government: increase the price of bonds –> … quantity supplied

A

increase

200
Q

What does bond supply depend on?(shifters)

A

expected profitability of investment opportunites
business taxes
expected inflation
government budget deficits

201
Q

increase in the profitability of firms investment –> … quantity supplied bonds at all prices
impacted by business cycle Boom –> … profitability –> … quantity suppled at all prices

A

increase, increase, increase (shift right)

202
Q

increase business taxes –> … firm profitability, … investment, … quantity supplied at all prices

A

decrease, decrease, decrease (shift left)

203
Q

increase expected inflation –> … real interest –> … real cost of borrowing, … quantity supplied at all prices

A

decrease, decrease, increase (shift right)

204
Q

increase government budget deficit –> … issue of bonds, … quantity supplied bonds at all prices

A

increase, increase(shift right)

205
Q

if bond supply > bond demand(price above p): bond prices will … (interest …) to return to P(i*)

A

fall, rise

206
Q

Bond Supply and Demand Example: Business cycle expansion and interest rate:
increase wealth –> bond demand shifts … –> price …(interest rate …)
… investment opportunities(firms) –> … profitability, … bond supply(shift …), … price(… interest rates)

A

right, increases, decreases
increase, increase, increase, right, decrease, increase

207
Q

Fisher Effect and Real Interest Rate Example:
increase expected inflation –> … nominal interest rates, … price of bonds, capitol …, … expected return, bond demand shifts … , price …(interest rates …)
… real interest rate, … real cost of borrowing, bond supply shifts …, price …, interest rates …

A

increase, decrease, loss, decrease, , left, decrease, increase

decrease, decrease, right, falls, rises

208
Q

The federal government runs a series of budget surpluses:
Bond supply shifts … –> price …, interest rates …, bond demand is …

A

left, rises, falls, unaffected

209
Q

Investors believe that the level of risk in the stock market has declined:
Bond demand shifts … –> … risk in stock relative, … demand for bonds

A

left, increase, decrease

210
Q

Wealth in the economy increases at the same time that Congress raises the corporate income tax:
increases in wealth–> bond demand shifts …, price …( interest rates …)
Increase corporate income tax–> … firms profitability, … in investment, bond supply shifts …, price …(interest …)

A

right, rises, falls
decrease, decrease, left, rise, falls

211
Q

The demand curve and supply curve for one-year discount bonds with a face value of $1000 are represented by the following equations:
bond demand: Price = -0.6Q+1140
bond supply: Price = Q + 700
a) What is the expected equilibrium price and quantity of bonds in the market?
b) What is the expected interest rate in this market?

A

Q= 275, P=$975
YTM= 2.56%

Econ 351 (3 decks)

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