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econ330 spring2016 exam1v1

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Econ 330 – Spring 2016: EXAM 1
Name __________________________________
ID ___________________________________
Section Number ________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is
A) 2.5 percent.
B) 5 percent.
C) 7.5 percent.
D) 10 percent.
1) _______
2) An inverted yield curve predicts that short-term interest rates
A) will fall in the future.
B) will remain unchanged in the future.
C) are expected to rise in the future.
D) will rise and then fall in the future.
2) _______
3) If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it
sells for $200?
A) 9 percent
B) 10 percent
C) 11 percent
D) 12 percent
3) _______
4) U.S. Treasury bills are considered the safest of all money market instruments because there is a
low probability of
A) defeat.
B) default.
C) desertion.
D) demarcation.
4) _______
5) An equal increase in all bond interest rates
A) has no effect on the returns to bonds.
B) decreases long-term bond returns more than short-term bond returns.
C) increases the return to all bond maturities by an equal amount.
D) decreases the return to all bond maturities by an equal amount.
5) _______
6) 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
A) discount bond.
B) simple loan.
C) fixed-payment loan.
D) coupon bond.
6) _______
7) Which of the following statements about financial markets and securities is TRUE?
A) A debt instrument is intermediate term if its maturity is less than one year.
B) The maturity of a debt instrument is the number of years (term) to that instrument's
expiration date.
C) A debt instrument is intermediate term if its maturity is ten years or longer.
D) A bond is a long-term security that promises to make periodic payments called dividends
to the firm's residual claimants.
7) _______
8) If the Fed wants to permanently lower interest rates, then it should raise the rate of money
growth if
A) the liquidity effect is smaller than the expected inflation effect.
B) there is fast adjustment of expected inflation.
C) the liquidity effect is larger than the other effects.
D) there is slow adjustment of expected inflation.
8) _______
9) Fannie Mae and Freddie Mac were put into conservatorship by the FHFA in 2008. Which of the
following was not a contributing factor to this event?
A) falling home prices
B) falling MBS prices
C) falling interest rates
D) rising mortgage defaults
9) _______
10) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900
next year?
A) -10 percent
B) -5 percent
C) 10 percent
D) 5 percent
10) ______
11) Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales
price of $100, and a required rate of return of 5%, the current price of the stock would be
A) $110.00.
B) $101.00.
C) $100.00.
D) $96.19.
11) ______
12) Because these securities are more liquid and generally have smaller price fluctuations,
corporations and banks use the ________ securities to earn interest on temporary surplus funds.
A) capital market
B) stock market
C) bond market
D) money market
12) ______
13) Interest rates are low in the U.S. in 2016 because of all the following except:
A) rising stock prices.
B) corporate sector excess cash.
C) euro zone debt crisis.
D) large amount of bank surplus funds.
13) ______
14) The figure above illustrates the effect of an increased rate of money supply growth at time
period T0. From the figure, one can conclude that the
14) ______
A) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly
to changes in expected inflation.
B) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to
changes in expected inflation.
C) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to
changes in expected inflation.
D) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly
to changes in expected inflation.
15) Which one of the following factors is not impacting the shape of the yield curve in 2016?
A) emerging market turmoil
B) euro zone debt crisis
C) rising home prices
D) fed monetary policy
15) ______
16) Risk premiums on corporate bonds tend to ________ during business cycle expansions and
________ during recessions, everything else held constant.
A) increase; decrease
B) decrease; decrease
C) increase; increase
D) decrease; increase
16) ______
17) When the price level falls, the ________ curve for nominal money ________, and interest rates
________, everything else held constant.
A) supply; increases; rise
B) demand; decreases; fall
C) supply; decreases; fall
D) demand; increases; rise
17) ______
18) Federal funds are
A) loans made by banks to each other.
B) loans made by banks to the Federal Reserve System.
C) loans made by the Federal Reserve System to banks.
D) funds raised by the federal government in the bond market.
18) ______
19) A decline in the expected inflation rate causes the demand for money to ________ and the
demand curve to shift to the ________, everything else held constant.
A) increase; right
B) decrease; left
C) decrease; right
D) increase; left
19) ______
20) A bank's tangible equity includes all of the following except:
A) retained earnings
B) equity
C) bonds
D) preferred stock
20) ______
21) Bonds issued by state and local governments are called ________ bonds.
A) Treasury
B) municipal
C) corporate
21) ______
D) commercial
22) Of the four effects on interest rates from an increase in the money supply, the initial effect is,
generally, the
A) liquidity effect.
B) income effect.
C) price level effect.
D) expected inflation effect.
22) ______
23) A stockholder's ownership of a company's stock gives her the right to
A) vote and be the residual claimant of all cash flows.
B) manage and assume responsibility for all liabilities.
C) vote and be the primary claimant of all cash flows.
D) vote and assume responsibility for all liabilities.
23) ______
24) Assume a bank wants to maintain their 8% capital-to-asset ratio over the next year while their
asset base increases 10%. What must the bank's return-on-asset ratio be?
A) 0.08%
B) 80%
C) 8%
D) 0.80%
24) ______
25) Which of the following is not a characteristic of a failed bank?
A) located in fast growing housing markets
B) pursued aggressive growth strategies
C) chartered less than 10 years
D) exhibited strong underwriting standards
25) ______
26) It is possible that when the money supply rises, interest rates may ________ if the ________ effect
is more than offset by changes in income, the price level, and expected inflation.
A) fall; risk
B) rise; risk
C) fall; liquidity
D) rise; liquidity
26) ______
27) A decrease in the liquidity of corporate bonds will ________ the yield of corporate bonds and
________ the yield of Treasury bonds, everything else held constant.
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase
27) ______
28) A liquid asset is
A) an asset that can easily and quickly be sold to raise cash.
B) a share of an ocean resort.
C) always sold in an over-the-counter market.
D) difficult to resell.
28) ______
29) A corporation acquires new funds only when its securities are sold in the
A) primary market by an investment bank.
B) primary market by a stock exchange broker.
C) secondary market by a securities dealer.
D) secondary market by a commercial bank.
29) ______
30) The present value of an expected future payment ________ as the interest rate increases.
A) falls
B) is constant
C) is unaffected
D) rises
30) ______
31) Everything else held constant, a decrease in marginal tax rates would likely have the effect of
________ the demand for municipal bonds, and ________ the demand for U.S. government
bonds.
A) decreasing; increasing
B) increasing; decreasing
C) decreasing; decreasing
D) increasing; increasing
31) ______
32) In the figure above, illustrates the effect of an increased rate of money supply growth at time
period 0. From the figure, one can conclude that the
A) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to
changes in expected inflation.
B) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly
to changes in expected inflation.
C) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly
to changes in expected inflation.
D) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to
changes in expected inflation.
32) ______
33) Which of the following $1,000 face-value securities has the highest yield to maturity?
A) a 10 percent coupon bond selling for $1,000
B) a 5 percent coupon bond selling for $1,000
C) a 12 percent coupon bond selling for $1,100
D) a 12 percent coupon bond selling for $1,000
33) ______
34) When I purchase ________, I own a portion of a firm and have the right to vote on issues
important to the firm and to elect its directors.
A) notes
B) bills
C) stock
D) bonds
34) ______
35) According to the liquidity premium theory of the term structure
A) because of the positive term premium, the yield curve will not be observed to be
downward sloping.
B) because buyers of bonds may prefer bonds of one maturity over another, interest rates on
bonds of different maturities do not move together over time.
C) the interest rate on long-term bonds will equal an average of short-term interest rates that
people expect to occur over the life of the long-term bonds plus a term premium.
D) the interest rate for each maturity bond is determined by supply and demand for that
maturity bond.
35) ______
36) The segmented markets theory can explain
A) why interest rates on bonds of different maturities tend to move together.
B) why yield curves have been used to forecast business cycles.
C) why yield curves usually tend to slope upward.
D) why yield curves tend to slope upward when short-term interest rates are low and to be
inverted when short-term interest rates are high.
36) ______
37) Over the last 10 years, over 500 banks failed because tangible equity as a percent of assets fell
below _______ percent.
A) 0
B) 3
C) 2
D) 8
37) ______
38) When an investment bank ________ securities, it guarantees a price for a corporation's securities
and then sells them to the public.
A) overwrites
B) overtakes
C) underwrites
D) undertakes
38) ______
39) When the price level ________, the demand curve for money shifts to the ________ and the
interest rate ________, everything else held constant.
A) falls; left; rises
B) falls; right; rises
C) rises; right; rises
D) rises; right; falls
39) ______
40) In which of the following situations would you prefer to be the borrower?
A) The interest rate is 25 percent and the expected inflation rate is 50 percent.
B) The interest rate is 13 percent and the expected inflation rate is 15 percent.
C) The interest rate is 9 percent and the expected inflation rate is 7 percent.
D) The interest rate is 4 percent and the expected inflation rate is 1 percent.
40) ______
41) The higher a security's price in the secondary market the ________ funds a firm can raise by
selling securities in the ________ market.
A) more; primary
B) less; primary
C) less; secondary
D) more; secondary
41) ______
42) Which of the following was not a factor contributing to the rise in stock prices during 2010-2015?
A) rising profit expectations
B) low money market rates
C) falling oil prices
D) low borrowing costs
42) ______
43) Using the Gordon growth model, if D1 is $.50, ke is 7%, and g is 5%, then the present value of the
43) ______
stock is
A) $50.
B) $2.50.
C) $46.73.
D) $25.
44) In the Keynesian liquidity preference framework, an increase in the interest rate causes the
demand curve for money to ________, everything else held constant.
A) shift right
B) stay where it is
C) invert
D) shift left
44) ______
45) The risk premium on corporate bonds reflects the fact that corporate bonds have a higher default
risk and are ________ U.S. Treasury bonds.
A) less speculative than
B) less liquid than
C) lower-yielding than
D) tax-exempt unlike
45) ______
46) If you expect the inflation rate to be 12 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) -5 percent.
B) -2 percent.
C) 2 percent.
D) 12 percent.
46) ______
47) ________ are short-term loans in which Treasury bills serve as collateral.
A) U.S. government agency securities
B) Repurchase agreements
C) Negotiable certificates of deposit
D) Federal funds
47) ______
48) The riskiness of an asset's returns due to changes in interest rates is
A) interest-rate risk.
B) exchange-rate risk.
C) price risk.
D) asset risk.
48) ______
49) The yield to maturity for a discount bond is ________ related to the current bond price.
A) positively
B) not
C) negatively
D) directly
49) ______
50) A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in
the ________, everything else held constant.
A) increases; required rate of return; future sales price
B) reduces; future sales price; expected rate of return
C) increases; required rate of return; dividend growth rate
D) reduces; current dividend; expected rate of return
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