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) _______ 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.
2) An inverted yield curve predicts that short term interest rates 2) _______
A) will fall in the future.
C) are expected to rise in the future.
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?
B) will remain unchanged in the future.
D) will rise and then fall in the future.
A) 9 percent B) 10 percent C) 11 percent D) 12 percent
4) U.S. Treasury bills are considered the safest of all money market instruments because there is a low probability of
C) desertion. D) demarcation. A) defeat. B) default.
5) An equal increase in all bond interest rates
A) has no effect on the returns to bonds.
3) _______
4) _______
5) _______
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.
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.
C) fixed payment loan.
B) simple loan.
D) coupon bond.
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.
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.
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
6) _______
7) _______
8) _______
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
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.
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
C) bond market
B) stock market
D) money market
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.
10) ______
11) ______
12) ______
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
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
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
14) ______
15) ______
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
D) demand; increases; rise C) supply; decreases; fall
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.
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
20) A bank's tangible equity includes all of the following except:
A) retained earnings
C) bonds
B) equity
D) preferred stock
21) Bonds issued by state and local governments are called ________ bonds.
A) Treasury B) municipal C) corporate 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.
C) price level effect.
B) income effect.
D) expected inflation effect.
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.
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%
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
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
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
17) ______
18) ______
19) ______
20) ______
21) ______
22) ______
23) ______
24) ______
25) ______
26) ______
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.
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.
30) The present value of an expected future payment ________ as the interest rate increases.
A) falls B) is constant C) is unaffected D) rises
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
C) decreasing; decreasing
B) increasing; decreasing
D) increasing; increasing
28) ______
29) ______
30) ______
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.
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
32) ______
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
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.
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.
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
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
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
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.
41) The higher a security's price in the secondary market the ________ funds a firm can raise by
34) ______
35) ______
36) ______
37) ______
38) ______
39) ______
40) ______
41) ______ selling securities in the ________ market.
A) more; primary
C) less; secondary
B) less; primary
D) more; secondary
42) Which of the following was not a factor contributing to the rise in stock prices during 2010 2015? 42) ______
A) rising profit expectations B) low money market rates
C) falling oil prices D) low borrowing costs
43) ______ 43) Using the Gordon growth model, if D1 is $.50, ke is 7%, and g is 5%, then the present value of the 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
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
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.
47) ________ are short term loans in which Treasury bills serve as collateral.
A) U.S. government agency securities
C) Negotiable certificates of deposit
D) 12 percent.
B) Repurchase agreements
D) Federal funds
48) The riskiness of an asset's returns due to changes in interest rates is
A) interest rate risk.
C) price risk.
B) exchange rate risk.
D) asset risk.
49) The yield to maturity for a discount bond is ________ related to the current bond price.
A) positively B) not C) negatively D) directly
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
44) ______
45) ______
46) ______
47) ______
48) ______
49) ______
50) ______

16) D
17) B
18) A
19) B
20) C
21) B
22) A
23) A
24) D
25) D
26) D
27) C
28) A
29) A
30) A
31) A
1) B
2) A
3) B
4) B
5) B
6) D
7) B
8) C
9) C
10) B
11) D
12) D
13) A
14) D
15) C
32) B
33) D
34) C
35) C
36) C
37) C
38) C
39) C
40) A
41) A
42) C
43) D
44) B
45) B
46) A
47) B
48) A
49) C
50) C