TUTORIAL 1
OVERVIEW OF FINANCIAL SYSTEM
Part 1. Questions for review
1. What is the main function of financial markets
2. Classify financial markets
3. List and distinguish the differences among financial instruments
4. Identify the differences among types of financial intermediaries (in terms of primary
liabilities and assets) using Table 3, page 40
Part 1. Multiple-choice questions
1. Evidence from the United States and other foreign countries indicates that
A. Money growth is clearly unrelated to inflation
B. There is a strong positive association between inflation and growth rate of money over
long periods of times
C. Countries with low monetary growth rate tend to experience higher rates of inflation, all
else being constant
D. There is a little support for the assertion that “inflation is always and everywhere a
monetary phenomenon”
-Inflation: change in Price level � price
2. Economists group commercial banks, saving and loans associations, credit unions, mutual
funds, mutual savings banks, insurance companies, pension funds and finance companies
under the heading financial intermediaries. Financial intermediaries:
A. produce nothing of value and therefore a drain on society’s resources
B. provide a channel for linking between those who want to save and those who want to
spend
C. can hurt the performance of the economy
D. have been a source of slow and resistant financial innovation
3. What is the basic activity of banks?
A. To sell shares of corporations to the general public
B.
C.
D.
E.
To facilitate the transfer of money from savers to borrowers
To represent the interest of insurance companies
To ensure everyone who wants a loan gets one
To equate future consumption with current consumption
4. Banks, savings and loans associations, mutual savings banks and credit unions
A. are no longer important players in financial intermediation
B. have been adept at innovating in response to changes in regulatory environment
C. produce nothing of value and therefore a drain on society’s resources
D. since deregulation now provide services only to small depositors
5. Why are financial markets important to the health of the economy?
A. They channel funds from investors to savers (borrowers)
B. They identify and shut down inefficient firms
C. They eliminate the needs for financial intermediaries
D. They allow consumers to time their purchase better
6. These financial institutions are very small cooperative lending institutions organized around
a particular group: union members, employees of a firm and so forth. They acquire funds
from deposits called shares and primarily make consumer loans. They are
A. Credit unions
B. Commercial banks
C. Savings and loan associations
D. Mutual fund
7. These financial intermediaries raise funds primarily by issuing checkable deposits, savings
deposits and time deposits. They then use these funds to make commercial, consumer and
mortgage loans, and to buy US government securities and municipal bonds. They are
A. Credit union
B. Commercial bank
C. Savings and loan
D. Mutual fund
8. These instruments are typically overnight (<2 weeks) loans between banks of their deposits
(reserve requirement) at Federal Reserve.
A. Commercial paper
B. Treasury bills
C. Repurchase agreement
D. Federal Funds
E. Banker’s acceptances
9. Short-term debt instruments issued by large banks and well-known corporations
A. Commercial paper (no collateral)
B. Treasury bills
C. Repurchase agreement
D. Federal Funds
E. Banker’s acceptances
10. These instruments are effectively short-term loans (usually with maturity of less than two
weeks) for which Treasury bills serve as collateral, which the lender receives if the borrower
does not pay back the loan.
A. Commercial paper
B. Treasury bills
C. Repurchase agreement (kiểu giống cầm đồ)
D. Federal Funds
E. Banker’s acceptances
11. A share of Microsoft common stock is:
A. a liability to the shareholder because it must be sold to realize a capital gain
B. an asset of Microsoft because it allows Microsoft to invest in capital equipment or other
companies
C. identical to a bond issued by Microsoft
D. an asset for its owner and a liability for Microsoft.
12. A share of common stock is a claim on a corporationʹs
A) debt.
B) liabilities.
C) expenses.
D) earnings and assets.
13. The price paid for the rental of borrowed funds (usually expressed as a percentage of the rent
al of $100 per year) is commonly referred to as the
A) inflation rate.
B) exchange rate.
C) interest rate.
D) aggregate price level.
14. ___________ occurs when the potential borrowers who are the most likely to produce an
undesirable (adverse) outcome – the bad credit risks – are the ones who most actively seek
out a loan and are thus most likely to be selected.
A. Adverse selection ((người cho vay sợ người đi vay k thể trả nợ -> debt contract)
A. Asymmetric information
B. Moral hazard
C. Credit ratings
15. A situation where one party often does not know enough about the other party to make
accurate decisions
B. Adverse selection
C. Asymmetric information
D. Moral hazard
E. Credit ratings
16. A situation where the borrower might engage in activities that are undesirable from the
lender’s point of view because they make it less likely that the loan will be paid back.
A. Adverse selection
B. Asymmetric information
C. Moral hazard
D. Credit ratings
17. Which of the following is a true statement?
A) Money or the money supply is defined as Federal Reserve notes.
B)The average price of goods and services in an economy is called the aggregate price level
C)The inflation rate is measured as the rate of change in the federal government budget
deficit.
D) The aggregate price level is measured as the rate of change in the inflation rate.
18. Equity holders are a corporationʹs ________. That means the corporation must pay
all of its debt holders before it pays its equity holders.
A) debtors
B) brokers
C) residual claimants
D) underwriters
19. A corporation acquires new funds only when its securities are sold in the
A) secondary market by an investment bank.
B) primary market by an investment bank.
C) secondary market by a stock exchange broker.
D) secondary market by a commercial bank.
20. Which of the following statements about financial markets and securities is true?
A) Many common stocks are traded over-the-counter, although the largest corpotations usually
have their shares traded at organized stock exchanges such as such as the New York Stock
Exchange.
B)As a corporation gets a share of the brokerʹs commission, a corporation acquires new
funds whenever its securities are sold.
C) Capital market securities are usually more widely traded than shorter-term securities and
so tend to be more liquid.
D) Because of their short term to maturity, the prices of money market instruments tend to
fluctuate widely.
Part 2: Questions and applications
Chapter 2: Questions 3, 4, 6, 10
Question 3: Give at least three examples of a situation in which financial markets allow
consumers to better time their purchases.
• The purchase of a durable good, like a car or furniture.
• Paying for tuition.
• Paying the cost of repairing a flooded basement.
In all three cases, consumers were able to pay for a good or service (education or the reparation
of a flooded basement) without having to wait to save enough and only then being able to afford
such goods and services.
Question 4: If you suspect that a company will go bankrupt next year, which would you rather
hold, bonds issued by the company or equities issued by the company? Why?
=> I would rather hold bonds because bondholders are paid off before equity holders, who are
the residual claimants.
Question 6: Describe who issues each of the following money market instruments:
a. Treasury bills: In Vietnam is Vietnam State Treasury
b. Certificates of deposit: Bank
c. Commercial paper: large banks and well-known corporations
d. Repurchase agreement
e. Fed funds: The Federal Reserve Bank
Question 10: How does risk sharing benefit both financial intermediaries and private
investors?
Financial intermediaries earn from the difference between the earnings of the risky asset and
from the low risk assets. Investors benefit because they can invest in a lower risk asset now
TUTORIAL 2
MONEY AND INTEREST RATES
Part 1: Review questions
1. Definition of money, measuring money
2. Distinguish major credit types, provide examples
3. Relationship between YTM and bond prices
4. Yield and returns
Part 2: Multiple choice questions
1. Fiat money is:
A. credit card charges
B. not convertible into precious metals.
C. coins
D. checks
2. Which of these is not a function of money in an economy?
A. Unit of account
B. Source of income
C. Store of value
D. Medium of exchange
3. Which of the following is not part of M1?
A. traveler's checks
B. savings accounts
C. checking accounts
D. currency
4. If Mary deposits $100 of her currency in her checking account, then:
A. M2 will fall by $100.
B. M1 will increase by $100.
C. M1 and M2 will not change.
D. M2 will increase by $100.
5. If Mary moves $100 from her savings account (M2) to her checking account, then:
A. M2 will not change.
B. M2 will fall by $100.
C. M1 will not change.
D. M1 will fall by $100
6. Inefficiencies that are created when using checks as money include:
A. Checks can transfer funds slowly and require paper shuffling.
B. Checks can be written for any amount.
C. Checkbooks can be stolen.
D. There are too many bad checks written
7. The liquidity of an asset is:
A. the amount of an asset sold at discount or premium.
B. the ability of an asset to earn interest income.
C. the relative ease with which an asset can be converted into a medium of exchange.
D. the relative ease with which an asset can be converted into a common stock.
8. Which of the following is true regarding money's store of value function?
A. money is superior to all other stores of value during periods of inflation.
B. money is the most liquid store of value available.
C. money is the only store of value available.
D. money does not allow a person to hold purchasing power from the time income is
earned until it is spent.
9. Which of the following is not a disadvantage of electronic money?
A. The cost of setting up a system for processing e-money payments is high.
B. People are concerned about the privacy and security of e-money transactions.
C. E-money does not allow people to take advantage of float.
D. E-money transactions cost more than paper check transactions.
10. You receive a check for $100 two years from today. The discounted present value of this
$100 is:
A. $100*(1+i)
B. $100/(1+i)2
C. $100*(1+i)2
D. $100/(1+i)
11. Why do current prices on previously issued bonds offered for resale change when the
market interest rate changes?
A. Because old bonds cannot sell at face value today.
B. Because no buyer of bonds today will accept a lower yield to maturity than the
market rate, and no buyer will be able to get a higher yield.
C. Because the marketplace does not provide enough information to price bonds
accurately.
D. Because new bonds are always preferred to old bonds.
12. If a bond sells at a premium, where price exceeds face value, then we would expect to
see:
A. market interest rates could be the same, higher, or lower than the coupon rate.
B. market interest rate the same as the coupon rate.
C. market interest rates below the coupon rate.
D. market interest rates above the coupon rate.
Coupon rate < YTM (Price < FV) -> Traded at a discount -> lãi suất offer thấp hơn thị trg
Coupon rate >YTM (Price >FV)-> Traded at a premium
Coupon rate = YTM (Price = FV) -> Traded at a par
13. As bond prices increase:
A. yields to maturity decrease.
B. yields to maturity increase.
C. yields to maturity can rise, fall, or not change.
D. yields to maturity do not change.
14. For a $1000 one year discount bond with a price of $975, the yield to maturity is
A. ($1000 – $975)/($1000)
B. $975/$1000
C. ($1000 – $975)/$975
D. $1000/$975
15. The return on a bond is
A. current yield + rate of capital gain.
B. coupon rate – rate of capital gain.
C. coupon rate + rate of capital gain.
D. current yield – rate of capital gain
16. Interest rate risk is:
A. the risk the coupon rate on the bond will fall.
B. the risk the government or firm will not make interest payments.
C. the risk associated with change in return with changes in interest rates.
D. the risk the coupon payment will rise.
17. The real interest rate is:
A.
B.
C.
D.
the nominal rate plus the expected inflation rate.
the nominal interest rate/the CPI.
the product of the nominal rate and the CPI.
the nominal rate minus the expected inflation rate
18. For a coupon bond, the yield to maturity is the:
A. difference between the bond's price and its face value.
B. annual interest payment divided by the bond's face value.
C. interest rate that equates the bond's present value with its price.
D. interest rate that equates the bond's present value with its face value.
19. When interest rates fluctuate, which bonds will experience the least price volatility? (sử
dụng SD để do )
A. 20-year bonds
B. 1-year bonds
C. 5-year bonds
D. 10-year bonds
20. Why is the Rate of Return often the most relevant measure of a bond's benefit to the
buyer?
A. Because the Rate of Return uses the current yield.
B. Because the Rate of Return includes the return of the face value at maturity.
C. Because the Rate of Return uses the difference between the face value and the
purchase price to compute a capital gain on the bond.
D. Because the Rate of Return recognizes that many bond buyers do not plan to hold to
maturity, but will sell the bond before maturity.
21. If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment
every year is
A) $650.
B) $1,300.
C) $130.
D) $13.
22. Examples of discount bonds include
A) U.S. Treasury bills.
B) corporate bonds.
C) U.S. Treasury notes.
D) municipal bonds.
23.Economists consider the ________ to be the most accurate measure of interest rates
A) simple interest rate.
B) current yield.
C) yield to maturity.
D) real interest rate.
24.If the amount payable in two years is $2420 for a simple loan at 10 percent interest, the
loan amount is
A) $1000.
B) $1210.
C) $2000.
D) $2200.
25.If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the
interest rate is
A) 5 percent.
B) 10 percent.
C) 22 percent.
D) 25 percent
26.If a security pays $110 next year and $121 the year after that, what is its yield to maturit
y if it sells for $200?
A) 9 percent
B) 10 percent
C) 11 percent
D) 12 percent
200= 110/(1+x) +121/(1+x)^2
27.The price of a coupon bond and the yield to maturity are ________ related; that is, as
the yield to maturity ________, the price of the bond ________.
A) positively; rises; rises
B) negatively; falls; falls
C) positively; rises; falls
D) negatively; rises; falls
.
28. Which of the following $5,000 face-value securities has the highest to maturity?
A) A 6 percent coupon bond selling for $5,000 FV=P-> YTM<C=6%
B) A 6 percent coupon bond selling for $5,500 P>FV-> YTM<C=6%
C) A 10 percent coupon bond selling for $5,000
D) A 12 percent coupon bond selling for $4,500 P<FV-> YTM>C=12%
29. In which of the following situations would you prefer to be the lender?
A) The interest rate is 9 percent and the expected inflation rate is 7 percent.
B) The interest rate is 4 percent and the expected inflation rate is 1 percent. Highest real interest
rate
C) The interest rate is 13 percent and the expected inflation rate is 15 percent.
D) The interest rate is 25 percent and the expected inflation rate is 50 percent.
30. In which of the following situations would you prefer to be the borrower?
A) The interest rate is 9 percent and the expected inflation rate is 7 percent.
B) The interest rate is 4 percent and the expected inflation rate is 1 percent.
C) The interest rate is 13 percent and the expected inflation rate is 15 percent.
D) The interest rate is 25 percent and the expected inflation rate is 50 percent.
Part 3: End-of-chapter questions
Chapter 3:
Questions 12, 13, 15
Question 12: Explain the concept of liquidity. Rank the following assets from most liquid to
least liquid:
6-a. Land
5-b. The inventory of a merchandiser (inventory turnover) ->
1-c. Cash in hand
2-d. A savings account at a local bank
4-e. A one-year bond
3-f. Ordinary shares
Question 13: Which of the Federal Reserve’s measures of the monetary aggregates—M1 or
M2—is composed of the most liquid assets? Which is the larger measure?
All else equal _M1____ is the monetary aggregate composed of the most liquid assets and
__M2___ is the larger measure
-
M1 is the most liquid
M2 is the largest measure
Because it includes all of M1 + small-denomination time deposits + saving deposits and
money market deposit accounts + money market mutual fund shares
Question 15: For each of the following assets, indicate which of the monetary aggregates (M1
and M2) includes them:
a. Currency (M1 and M2)
b. Money market mutual funds (M2)
c. Small-denomination time deposits (M2)
d. Checkable deposits (M1 and M2)
Chapter 4:
Questions 2, 6, 7, 10, 11
Question 2: What is the formula used to calculate the yield to maturity on a 20-year coupon
bond with a current yield of 12% and $1,000 face value that sells for $2,500.
Current yield= C/Pt=> Coupon payment =
C= 12% x1000= 120
$2,500 = $120/(1 + i) + 120/(1 + i)^2 + . . . + 120/(1 + i)^20 + $1,000/(1 + i)^20
Question 6: If mortgage rates rise from 5% to 10% but the expected rate of increase in
housing prices rises from 2% to 9%, are people more or less likely to buy houses?
Simply compute real interest rates (r = i - π) in both periods:
Before r = 5% - 2% = 3%
After r = 10% - 9% = 1%
People are more likely to buy houses now because the real interest rate they have to pay has
fallen from 3% to 1%. People are paying back more in terms of dollars, but the values of their
houses have risen at such a rate that the real cost of financing their homes has actually fallen.
Question 7: When is the current yield a good approximation of the yield to maturity?
The current yield will be a good approximation to the yield to maturity whenever the bond price
is very close to par or when the maturity of the bond is over about ten years. This is because cash
flows farther in the future have such small present discounted values that the value of a longterm coupon bond is close to a perpetuity with the same coupon rate.
Question 10: True or False: With a discount bond, the return on the bond is equal to the rate
of capital gain.
True: A discount bond has no coupon payments so the return on the bond is equal to the rate of
capital gain.
RET= YTM= (FV-P)/P=CGY
Question 11: If interest rates decline, which would you rather be holding, long-term bonds or
short-term bonds? Why? Which type of bond has the greater interest-rate risk?
If there is a decline in interest rates, you would rather be holding long-term bonds because their
price would increase more than the price of the short-term bonds, giving them a higher return.
However, long-term bonds have a greater interest-rate risk. And, this answer really depends on
the duration of the bonds, not just there term to maturity. For example, a 5 year coupon bond
might be subject to less interest rate risk than a 4 year zero coupon bond
I giảm-> P tăng -> giá bond long term tăng mạnh hơn bond short-term-> holding long term bond
Higher price vilalit-> higher IR risk
Part 4: Additional problems
1. You have just purchased a 10-year, $1,000 par value bond. The coupon rate on this bond
is 8 percent annually, with interest being paid each 6 months. If you expect to earn a 10
percent yield on this bond, how much did you pay for it?
PMT= 0.08/2 x 1,000=40
P=40/5% x[1-1/(1+5%)^20] + 1,000/(1+5%)^20 = $875.38
2. Callaghan Motors ‘bonds have 10 years remaining to maturity. Interest is paid annually,
they have a $1,000 par value, the coupon interest rate is 8%, and the yield to maturity is
9%. What is the bond’s current market price?
PMT=.08 x 1,000= 80
P = 80/9% x [1-1/(1+9%)^10] + 1,000/(1+9%)^10=$935.82
3. A bond has a $1,000 par value, 10 years to maturity, and a 7% annual coupon and sells for
$985.
a. What is its yield to maturity (YTM)?
b. Assume that the yield to maturity remains constant for the next 3 years. What will the
price be 3 years from today?
a) PMT= 7% x 1000= 70
985= 70/YTM x [1-1/(1+YTM)^10] + 1000/(1+YTM)^10 -> YTM= 7.215%
b) P = 70/7.215% x [1-1/(1+7.125%)^7]+1000/(1+7.215%)^7 = $988.50
TUTORIAL 3
BEHAVIOR OF INTEREST RATES
Part 1. Review questions
1. Explain the theory of asset demand. Provide example
2. Loanable fund framework:
- Explain how the interest rate is determined
- Distinguish movement and shift of demand and supply curves;
- Factors affecting interest rates.
3. Liquidity preference framework:
- Demand for money
- Supply of money;
- Change in equilibrium interest rate
Part 2. Multiple-choice questions
1. If brokerage commissions on bond sales decrease, then, other things equal, the demand
for bonds will ______ and the demand for real estate will ______
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
2. If gold becomes acceptable as a medium of exchange, the demand for gold
will ________ and the demand for bonds will ______, everything else held constant.
A) decrease; decrease
B) decrease; increase
C) increase; increase
D) increase; decrease
3. The demand curve for bonds has the usual downward slope, indicating that at ________
prices of the bond, everything else equal, the ________ is higher.
A) higher; demand
B) higher; quantity demanded
C) lower; demand
D) lower; quantity demanded
4. 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 ________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
5. An increase in the expected rate of inflation will ________ the expected return on bonds
relative to the that on ________ assets, everything else held constant.
A) reduce; financial
B) reduce; real
C) raise; financial
D) raise; real
6.
A)
B)
C)
D)
The theory of asset demand tells us that
The demand for an asset will increase if the expected return on an asset rises.
Risky assets have higher liquidity.
Risky assets bring higher returns.
The higher the return on an asset, the lower the liquidity.
7. At a bond price above the equilibrium
A) there is an excess supply and the price will tend to fall. (Bond demand < Bond supply ->
excess supply -> P giảm, IR tăng
B) there is an excess demand and the price will tend to rise.
C) there is an excess demand and the price will tend to fall.
D) there is an excess supply and the price will tend to rise.
8.
A)
B)
C)
D)
Suppose the price of bond J rises. This will:
increase the supply of bond K and reduce the interest rate on bond K.
increase the demand for bond K and decrease the interest rate on bond K.
increase the demand for bond K and increase the interest rate on bond K.
increase the supply of bond K and increase the interest rate on bond K
9. Which of the following will increase the supply of bonds (shift the supply curve to the
right)?
A) A government budget surplus.(deficit)
B) An increase in the bond prices.
C) A business cycle expansion. (Expected profitability of Investment opportunity)
D) A decrease in the expected inflation rate
10. At interest rates below the equilibrium rate of interest
A) there is an excess demand for money and the interest rate will rise.
B) there is an excess demand for bonds and the interest rate will fall.
C) there is an excess supply of bonds and the interest rate will fall.
D) there is an excess demand for money and the interest rate will fall.
11. Why does the supply curve for bonds slope upward?
A) Because as the price falls, firms are more willing to supply bonds.
B) Because as the interest rate falls, firms are more willing to borrow money.
C) Because as the price rises, firms are more willing to buy bonds.
D) Because as the interest rate rises, firms are more willing to borrow money
12. Increasing government deficits causes
A) The supply curve for bonds to shift right because government bonds pay higher interest
relative to other bonds
B) The supply curve for bonds to shift right because the U.S. Treasury will issue bonds to pay
for the deficit
C) The supply curve for bonds to shift left because government bonds slow expected inflation
D) The supply curve for bonds to shift left because corporations will borrow less due to
decreased profitability when the government is in debt
13. When the price of a bond decreases, all else equal, the bond demand curve ________.
A) shifts right
B) shifts left
C) does not shift
D) inverts
14. Everything else held constant, if interest rates are expected to fall in the
future, the demand for long-term bond today______ and the demand curve shifts to the
_____________.
A) rises; right
B) rises; left
C) falls; right
D) falls; left
15. In a business cycle expansion, the ________ of bonds increases and the ________ curve s
hifts to the ______ as business investments are expected to be more profitable.
A) supply; supply; right
B) supply; supply; left
C) demand; demand; right
D) demand; demand; left
16. The bond supply and demand framework is easier to use when analyzing the effects of
changes in ________, while the liquidity preference framework provides a simpler
analysis of the effects from changes in income, the price level, and the supply of
________.
A) expected inflation; bonds
B) expected inflation; money
C) government budget deficits; bonds
D) government budget deficits; money
17. In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of
return; thus,
A) when interest rates rise, the expected return on money falls relative to the expected return on
bonds, causing the demand for money to fall.
B) when interest rates rise, the expected return on money falls relative to the expected return on
bonds, causing the demand for money to rise.
C) when interest rates fall, the expected return on money falls relative to the expected return on
bonds, causing the demand for money to fall.
D) when interest rates fall, the expected return on money falls relative to the expected return on
bonds, causing the demand for money to rise.
18. In Keynes's liquidity preference framework,
A) the demand for bonds must equal the supply of money.
B) the demand for money must equal the supply of bonds.
C) an excess demand of bonds implies an excess demand for money.
D) an excess supply of bonds implies an excess demand for money.
19. The opportunity cost of holding money is
A) the level of income.
B) the price level.
C) the interest rate.
D) the discount rate.
20. An increase in the interest rate
A) increases the demand for money.
B) increases the quantity of money demanded.
C) decreases the demand for money.
D) decreases the quantity of money demanded.
21. If there is an excess supply of money
A) individuals sell bonds, causing the interest rate to rise.
B) individuals sell bonds, causing the interest rate to fall.
C) individuals buy bonds, causing interest rates to fall.
D) individuals buy bonds, causing interest rates to rise.
22. 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) shift left
C) stay where it is
D) invert
23. When the price level ________, the demand curve for money shifts to the ________ and
the interest rate ________, everything else held constant.
A) falls; left; falls
B) rises; right; falls
C) falls; left; rises
D) rises; right; rises
24. When the Fed ________ the money stock, the money supply curve shifts to the ________
and the interest rate ________, everything else held constant.
A) decreases; right; rises
B) increases; right; falls
C) decreases; left; falls
D) increases; left; rises
25. ________ in the money supply creates excess ________ money, causing interest rates to
________, everything else held constant.
A) a decrease; demand for; rise
B) an increase; demand for; fall
C) an increase; supply of; rise
D) a decrease; supply of; fall
26. When the growth rate of the money supply increases, interest rates end up being
permanently lower if
A) the liquidity effect is larger than the other effects.
B) there is fast adjustment of expected inflation.
C) there is slow adjustment of expected inflation.
D) the expected inflation effect is larger than the liquidity effect.
27. Of the four effects on interest rates from an increase in the money supply, the one that
works in the opposite direction of the other three is the
A) liquidity effect.
B) income effect.
C) price level effect.
D) expected inflation effect.
28. If the liquidity effect is smaller than the other effects, and the adjustment to expected
inflation is immediate, then the
A) interest rate will fall.
B) interest rate will rise.
C) interest rate will fall immediately below the initial level when the money supply grows.
D) interest rate will rise immediately above the initial level when the money supply grows.
29. When the growth rate of the money supply is increased, interest rates will fall
immediately if the liquidity effect is _________ than the other money supply effects and
there is ________ adjustment of expected inflation.
A) larger; fast
B) larger; slow
C) smaller; slow
D) smaller; fast
30. 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 smaller than the expected inflation effect and interest rate adjust quickly to
changes in expected inflation
B) Liquidity effect is larger than the expected inflation effect and interest rate adjust quickly to
changes in expected inflation
C) Liquidity effect is larger than the expected inflation effect and interest rate adjust slowly to
changes in expected inflation
D) Liquidity effect is smaller than the expected inflation effect and interest rate adjust slowly to
changes in expected inflation
Part 3. Questions and applications
Chapter 5: Questions 1, 4, 6, 12, 13, 18
1. Explain why you would be more or less willing to buy a share of Microsoft stock in the
following situations:
a. Your wealth falls. (Less) W -> Qd
b. You expect the stock to appreciate in value. (More)
c. The bond market becomes more liquid. (Less bz ppl will buy more bonds)
d. You expect gold to appreciate in value. (Less bz gold market becomes more attractive)
e. Prices in the bond market become more volatile. (Less bz volatile = riskier)
4. Explain why you would be more or less willing to buy long-term Delta Air Lines bonds
under the following circumstances:
a. The company just released its financial statements, indicating that income decreased and
liabilities increased.
Less, because they have less revenue and more debts to pay, so probably my bonds will become
worth less.
b. You expect a bull market in stocks (stock prices are expected to increase).
Less, because bonds’expected return has fallen relative to stocks.
c. You have analyzed your country’s monetary policy and expect interest rates to decrease.
More, becausewhen interest rates tend to decrease, bondprices tend to rise→their expected
returns are expected to increase.
d. Brokerage commissions on bonds fall.
More, because they have become more liquid
e. Your income and wealth increased over the last two years.
More, because I will have more money to invest in bonds.
6. Raphael observes that at the current level of interest rates there is an excess supply of
bonds, and therefore he anticipates an increase in the price of bonds. Is Raphael correct?
Incorrect. If at the current level of interest rates there is an excess supply of bonds, the supply and
demand analysis tells us that interest rates will increase, creating a movement along both the
demand curve (in the southeast direction) and the supply curve (in the southwest direction) in order
to reach the equilibrium interest rate (and price). The bond's price will therefore fall and the interest
rate will rise to the equilibrium level.
12. Will there be an effect on interest rates if brokerage commissions on stocks fall? Explain
your answer.
Yes, interest rates will rise. The lower commission on stock makes them more liquid than bonds,
and the demand for bonds will fall. The demand curve Bdwill therefore shift to the left, and the
equilibriuminterest rate will rise.
13. The president of the United States announces in a press conference that he will fight the
higher inflation rate with a new anti-inflation program. Predict what will
happen to interest rates if the public believes him.
If the public believes the president’s program will be successful,interest rates will fall. The
president’s announcement will lower expected inflation so that the expected return on goods
decreases relative to bonds. The demand for bonds increases and the demand curve, Bd, shifts to
the right. For a given nominal interest rate, the lower expected inflation means that the real interest
rate has risen, raising the cost of borrowingso that the supply of bonds falls. The resulting leftward
shift of the supply curve, Bs, and the rightward shift of the demand curve, Bd, causes the
equilibrium interest rate to fall.
18. If the next chair of the Federal Reserve Board has a reputation for advocating an even
slower rate of money growth than the current chair, what will happen to interest rates?
Discuss the possible resulting situations.
Slower rate of money growth, money supply decreases relatively. Consider 4 effects:
liquidity,price level, income level, and expected inflation. Combine these 4 effects to get possible
situations (referto Figure 11). The slower rate of money growth will lead to a liquidity effect, which
raises interest rates, while the lower price level, income, and inflation rates in the future will tend
to lower interest rates. There are three possible scenarios for what will happen: (a) if the liquidity
effectis larger than the other effects, then interest rates will rise; (b) if the liquidity effect is smaller
than the other effects and expected inflation adjusts slowly, then interest rates will rise at first but
will eventually fall below their initial level; and (c) if the liquidity effect is smaller than
theexpected inflation effect and there is rapid adjustment of expected inflation, then interest rates
will immediately fall
TUTORIAL 4
RISK AND TERM STRUCTURE OF INTEREST RATES
Part 1: Review questions
1. What is the risk structure of the interest rate? What factors explain the risk structure
2. What is the term structure of the interest rate? Yield curve? What theories are used to explain
the shape of the yield curve? What are three main facts of the yield curve?
Part 2: Multiple-choice questions
1. Generally, which bond has the highest interest rate?
A. Corporate Baa Bonds (highest default risk)4
B. Long-term Government Bonds (default free)1
C. Municipal Bonds2
D. Corporate Aaa Bonds3
A.
B.
C.
D.
2. Default risk is:
the chance the issuer will be unable to make interest payments or repay principal.
the chance the issuer will retire the debt early.
the chance the issuer will sell more debt.
the chance the issuing firm will be sold to another firm.
A.
B.
C.
D.
3. Suppose that there are two bonds, A and B. Suppose also the default risk on bond A
increases. As a result of this we would expect to see:
the demand for A to decrease and the demand for B to increase.
the demand for A to increase and the demand for B to decrease.
the demand for A to decrease and the demand for B to decrease.
the demand for A to increase and the demand for B to increase.
Default risk bond A increase -> shift demand curve to the left
4. The risk premium on a bond is:
A. the difference in interest rate between that bond and a US Treasury bond.
B. the difference in interest rate between that bond and a municipal bond.
C. the difference in interest rate between that bond and a bank CD.
D. the difference in interest rates between that bond and a S&P 500 firm bond.
A.
B.
C.
D.
5. An increase in the level of risk for bond A will: (high risk-> risk premum increase
relative to B
increase the risk premium on bond A and reduce the risk premium on bond B.
increase the risk premium on bond B and reduce the risk premium on bond A.
increase the risk premium on bond A and increase the risk premium on bond B.
reduce the risk premium on bond A and reduce the risk premium on bond B.
A.
B.
C.
D.
6. Municipal bonds generally have lower interest rates than U.S. Government bonds
because:
they have less risk.
they never mature.
they are exempt from Federal taxes.
they are more liquid.
A.
B.
C.
D.
7. Yield curves show:
the relationship between time to maturity and bond interest rates (yields).
the relationship between bond interest rates (yields) and bond prices.
the relationship between risk and bond interest rates (yields).
the relationship between liquidity and bond interest rates (yields).
8. The liquidity premium theory explains an inverted yield curve by
A. Assuming that interest rated move together over time
B. Assuming that the liquidity premium is always positive
C. Assuming that short-term rates are expected to fall to a great degree in the future
D. Assuming that investors prefer shorter-term bonds over longer maturity bonds
A.
B.
C.
D.
9. The liquidity premium theory suggests that yield curves should usually be:
inverted.
up-sloping through year 1, then flat thereafter.
up-sloping.
flat.
A.
B.
C.
D.
10. The liquidity premium theory is based upon the idea that, other things remaining
equal,
investors are indifferent between short-term and long-term bonds.
investors prefer long-term bonds.
investors prefer short-term bonds.
investors prefer intermediate-term bonds.
A.
B.
C.
D.
11. The shape of the yield curve is usually:
flat.
downward sloping.
upward sloping for shorter maturities and downward sloping for longer maturities.
upward sloping.
A.
B.
C.
D.
12. The expectations theory of the term structure assumes:
buyers of bonds consider bonds of different maturities to be perfect substitutes.
buyers of bonds prefer bonds with shorter maturities.
buyers of bonds prefer bonds with longer maturities.
markets for different maturity bonds are completely separate
A.
B.
C.
D.
13. What will the yield curve look like if future short-term interest rates are expected to
rise sharply?
It will steeply slope upward.
It will slightly slope upward.
It will be horizontal.
It will slope downward.
A.
B.
C.
D.
14. Reduced liquidity of a bond causes the interest rate on that bond
To be higher because it is more widely traded.
To be higher because it is less widely traded.
To be lower because it is less widely traded
To be lower because it is more widely traded
15. The Segmented Markets theory of term structure suggests that
A.
B.
C.
D.
Interest rates on long-term bonds strongly influence the demand for short-term bonds.
Bonds of different maturities are perfect substitutes for each other.
Investors have no preference for short-term bonds over long-term bonds, or vice versa.
Investors have strong preferences for bonds of a particular maturity
Part 3: Applications
Chapter 6:
Questions and Problems 2, 5, 7, 8, 17, 23, 25
2. Which should have the higher risk premium on its interest rates, a corporate bond with a
Moody’s Baa rating or a corporate bond with a C rating? Why?
The bond with a C rating should have a higher risk premium because it has a higher default risk,
which reduces its demand and raises its interest rate relative to that of the Baa bond.
C bond
5. Risk premiums on corporate bonds are usually anticyclical; that is, they decrease during
business cycle expansions and increase during recessions. Why is this so?
(Phí bảo hiểm rủi ro trên trái phiếu công ty thường không theo chu kỳ; nghĩa là, chúng giảm
trong thời gian mở rộng chu kỳ kinh doanh và tăng lên trong thời kỳ suy thoái. Tại sao cái này
rất?)
As the economy enters an expansion, there is greater likelihood that borrowers will be able to
service their debt.
(Risk premiums will fall in an economic expansion as business revenue and profits improve,
making it easier for borrowers to make scheduled interest payments on their debt and increasing
the likelihood that the business will repay the principle of that debt.)
-Expensions: default risk giảm -> risk premium increase-> lãi suất cho bond thấp
-Recession:
tăng->
tăng ->lãi suất cho bond cao
7. What is a key function of credit-rating agencies? Do credit-rating agencies always provide
reliable information? What was the role of credit-rating agencies in the sub-prime crisis of
2008? (Chức năng chính của tổ chức xếp hạng tín nhiệm là gì? Các cơ quan xếp hạng tín nhiệm
có luôn cung cấp thông tin đáng tin cậy không? Vai trò của các tổ chức xếp hạng tín nhiệm trong
cuộc khủng hoảng dưới chuẩn năm 2008 là gì?)
Credit rating agencies provide investors with information about whether bond and debt
instrument issuers can meet their obligations.
Agencies also provide information about countries' sovereign debt.
The global credit rating industry is highly concentrated, with three agencies: Moody's, Standard
& Poor's, and Fitch.
8. Predict what will happen to interest rates on a corporation’s bonds if the federal government
guarantees today that it will pay creditors if the corporation goes
bankrupt in the future. What will happen to the interest rates on Treasury securities? (Dự đoán
điều gì sẽ xảy ra với lãi suất trái phiếu của một công ty nếu ngày hôm nay chính phủ liên bang
đảm bảo rằng chính phủ sẽ trả cho các chủ nợ nếu công ty phá sản trong tương lai. Điều gì sẽ xảy
ra với lãi suất chứng khoán kho bạc?)
Interest rates would fall because Treasury securities are now less valuable and more people will
want to hold municipal bonds.
The government guarantee will reduce the default risk on corporate bonds, making them more
desirable relative to Treasury securities. The increased demand for corporate bonds and
decreaseddemand for Treasury securities will lower interest rates on corporate bonds and raise
them on Treasury bonds.
Default risk giảm -> relative to T bond -> Demand CB tăng, Demand TB giảm
-> Pcb tăng, Ptb giảm-> icb giảm, itb tăng
17. If a yield curve looks like the one shown in the figure below, what is the market predicting
about the movement of future short-term interest rates? What might the yield curve indicate
about the market’s predictions for the inflation rate in the future?
The steep upward-sloping yield curve at shorter maturities suggests that short-term interest rates
are expected to rise moderately in the near future because the initial, steep upward slope indicates
that the average of expected short-term interest rates in the near future is above the current shortterm interest rate. The downward slope for longer maturities indicates that short-term interest rates
are eventually expected to fall sharply. Since interest rates and expected inflation move together,
the yield curve suggests that the market expects inflation to rise moderately in the near future but
fall later on.
23. Assuming the expectations theory is the correct theory of the term structure, calculate the
interest rates in the term structure for maturities of one to four years, and plot the resulting yield
curves for the following paths of one-year interest rates over the next four years:
a. 4%, 6%, 11%, 15%
b. 3%, 5%, 13%, 15%
How would your yield curves change if people preferred shorter-term bonds to longer-term
bonds?
25. The table below shows current and expected future one-year interest rates, as well as current
interest rates on multiyear bonds. Use the table to calculate the liquidity premium for each
multiyear bond.
i1 = 2%/1 + l1 l1 = 2% - 2% = 0%
i2 = (2% + 4%)/2 + l2 l2 = 4% - 3% = 1%
i3= (2% + 4% + 5%)/3 + l3 l3 = 6% - 3.67% = 2.33%
i4 = (2% + 4% + 5% + 8%)/4 + l4 l4 = 9% - 4.75% = 4.25%
i5 = (2%+ 4% + 5% + 8% + 11%)/5 + l5 l5 = 12% - 6% = 6%
Part 4: Additional problems:
In the bond market, ABC Corp. issues multiple maturities bonds, all selling at the face value of
$1000 as follow:
1-year bond 3% coupon
2-year bond 5% coupon
3-year bond 7% coupon
5-year bond 8% coupon
thời gian càng dài thì IR tăng. Future
short term rate tăng. Vì long term nó tăng mà theo cái expectation theory đấy, long term bằng trung
bình của short term
a. Calculate the YTM of all ABC’s bonds above.
b. Based on the expectation theory, what are expected future short term (1-year) interest
rates in 1 year and in the next 2 years?
TUTORIAL 5
STOCK MARKET: THE EFFICIENT MARKET HYPOTHESIS
Part 1: Review questions
1. Gordon Growth model
2. Efficient market hypothesis
Part 2: Multiple-choice questions
1.
A.
B.
C.
D.
Rational expectations are:
identical to optimal forecasts using all available information.
always correct.
based only on past information.
identical to optimal forecasts using all information.
2. An implication of rational expectation is that
A. Forecast errors of expectations will, on the average, be zero.-> chênh lệch thưc tế vs dự
đoán và trung bình bằng 0
B. Changes in how a variable move over time will not affect the way expectations are
formed.
C. Some error can be forecast.
D. Forecast error will always be zero
3. People and firms make optimal forecasts based upon all available information
because:
A. Forecasting error is costly.-> bz it’s has big loss if it’s not base.
B. Optimal forecasting errors are zero.
C. Optimal forecasting errors are small.
D. All forecasting errors are small
4. The efficient market hypothesis states that
A. prices of securities in financial markets reflect only past price information on that and
similar securities.
B. prices of securities in financial markets reflect all available information.
C. prices of securities in financial markets reflect only monetary policy changes.
D. prices of securities in financial markets reflect only past price information on that
security
5.
A.
B.
C.
D.
The expected rate of return (RETe) on a security is:
(Pet+1 – Pt + C)/Pt
(Pet+1 – Pt+1 + C)/Pt+1
(Pet+1 – Pt + C)/Pt+1
(Pet+1 – Pt+1 + C)/Pt
6.
A.
B.
C.
D.
Based upon unexploited profit opportunities, if RETOF > RET*, then:
people will buy the security, increasing its price, and reducing RET*.
people will not buy the security, lowering its price, and reducing RET*.
people will buy the security, increasing its price, and reducing RETOF.
people will not buy the security, lowering its price, and reducing RETOF.
7. A random walk describes movements of a variable:
A. whose future changes can be perfectly predicted.
B. whose future changes can only be predicted with past information.
C. whose future changes can be predicted based upon money supply changes.
D. whose future changes cannot be predicted.
8.
A.
B.
C.
D.
Technical analysis:
is the study of past stock price data in search of patterns.
generates buy/sell rules that usually outperform the markets as a whole.
exploits the idea that stocks follow a random walk.
examines the role of unexpected events in determining stock prices
9.
A.
B.
C.
D.
Which of the following is not part of the evidence against market efficiency?
Markets overreact to news and announcements.
Stocks with high returns now tend to have high returns in the future.=> Mean reversion
The January effect.
The small firm effect.
10. Stock prices respond to announcements and news only when:
A. the announcements are well-known anyway before the official release of the
announcement.
B. the announcements are new and unexpected.
C. the announcements are about predictable events.
D. the announcements are made early in the day.
11. Which of the following is true regarding adaptive expectations?
A. They are identical to optimal forecasts.
B. They are based only on past values of the variable being forecasted.
C. They quickly adjust to changes in the value of the variable being forecasted.
D. They are based on all available information.
12. Which is not an implication of the stronger version of efficient markets theory?
A. There are unexploited profit opportunities.
B. Any investment is as good as any other.
C. Securities' prices are based on market fundamentals.
D. Securities' prices are correct.
13. The generalized dividend model of determining stock prices hypothesizes that
A. The price you are willing to pay for a stock depends only on the amount of the dividends
you expect to receive from the stock.
B. The price you are willing to pay for a stock today depends on the price you expect it to be
next year.
C. The price you are willing to pay for a stock depends upon both the dividends you expect
to receive and the capital gain you expect to get from owning the stock.
D. The price you are willing to pay for a stock depends on the present value of the dividends
you expect to receive from the stock.
14. In an auction environment, a stock's price
A. Is determined by the buyer willing to pay the lowest price.
B. Is determined by the buyer for whom the stock poses the greatest risk.
C. Will rise with the perceived risk of the stock.
D. Is determined by the buyer willing to pay the highest price.
15. “An efficient market is one in which no one ever profits from having better
information than the rest”. Why this statement is false?
A. Acting by better information is not allowed by market regulators and organized exchange
B. People with better information make the market more efficient by exploiting profitmaking opportunities
C. An efficient market is one where the share prices never change
D. If markets follow a “random walk”, there is never opportunity for making profit
Part 3: chapter 7: Questions and Problems No. 3, 5, 7, 22, 23
Question 3: Some economists think that central banks should try to prick bubbles in the stock
market before they get out of hand and cause later damage when they burst. How can monetary
policy be used to prick a market bubble? Explain using the Gordon growth model. (Một số nhà
kinh tế cho rằng các ngân hàng trung ương nên cố gắng chọc thủng bong bóng trên thị trường
chứng khoán trước khi chúng vượt ra khỏi tầm tay và gây ra thiệt hại sau này khi chúng vỡ ra.
Chính sách tiền tệ có thể được sử dụng như thế nào để tạo ra bong bóng thị trường? Giải thích
bằng cách sử dụng mô hình tăng trưởng Gordon.)
=> Answer:
A stock market bubble can occur if market participants either believe that dividends will have rapid
growth or if they substantially lower the required return on their equity investments, thus lowering
the denominator in the Gordon model and thereby causing stock prices to climb. By raising interest
rates the central bank can cause the required rate of return on equity to rise, thereby keeping stock
prices from climbing as much. Also raising interest rates may help slow the expected growth rate
of the economy and hence of dividends, thus also keeping stock prices from climbing.
Question 5: Suppose that you are asked to forecast future stock prices of ABC Corporation, so
you proceed to collect all available information. The day you announce your forecast,
competitors of ABC Corporation announce a brand new plan to merge and reshape the structure
of the industry. Would your forecast still be considered optimal? (Giả sử rằng bạn được yêu cầu
dự báo giá cổ phiếu trong tương lai của Công ty Cổ phần ABC, vì vậy bạn tiến hành thu thập tất
cả các thông tin có sẵn. Vào ngày bạn công bố dự báo của mình, các đối thủ cạnh tranh của ABC
Corporation công bố một kế hoạch hoàn toàn mới để hợp nhất và định hình lại cấu trúc của ngành.
Dự báo của bạn có còn được coi là tối ưu không?)
=> Answer:
Your forecast is still considered to be optimal, since it was made with all available information at
the time. The fact that new information that would most probably impact the stock price of ABC
Corporation arrived today, is simply out of the forecaster's control. In this case, your forecast was
optimal, but shortly lived.
Question 7: Suppose that you decide to play a game. You buy stock by throwing a dice a few
times, using that method to select which stock to buy. After ten months you calculate the return
on your investment and the return earned by someone who followed “expert” advice during the
same period. If both returns are similar, would this constitute evidence in favor of or against
the efficient market hypothesis? (Giả sử rằng bạn quyết định chơi một trò chơi. Bạn mua cổ phiếu
bằng cách ném một con xúc xắc một vài lần, sử dụng phương pháp đó để chọn cổ phiếu cần mua.
Sau mười tháng, bạn tính toán lợi tức đầu tư của mình và lợi nhuận thu được từ một người đã làm
theo lời khuyên của “chuyên gia” trong cùng khoảng thời gian. Nếu lợi nhuận của cả hai là như
nhau, thì điều này có phải là bằng chứng ủng hộ hay chống lại giả thuyết thị trường hiệu quả
không?)
=> Answer:
If both returns are similar, this would constitute evidence in favor of the efficient market
hypothesis, that states that so called "expert" advice is not a better predictor of movements in stock
prices than a random method. No one can predict a stock price movement if the market is efficient.
The only thing that can create a price movement is new information, that by definition no one has.
Problem 22: Compute the price of a share of stock that pays a $5 per year dividend and that you
expect to be able to sell in one year for $40, assuming you require a 5% return.
= D1/(ke+1)+P1/(1+ke)= 42.85714
Problem 23: After careful analysis, you have determined that a firm’s dividends should grow at
15%, on average, in the foreseeable future. The firm’s last dividend was $1.5. Compute the
current price of this stock, assuming the required return is 20%
= 1.5(1+15%)/(20%-15%) = 34.5
TUTORIAL 6
ECONOMIC ANALYSIS OF FINANCIAL STRUCTURE
Part 1. Multiple choice questions
1. The largest source of external funds for U.S. firms is:
A. loans.
B. bonds.
C. stocks
D. trade debts
2. Asymmetric information occurs when
A. one party in a transaction has more information than another.
B. one party in a transaction has more influence than another.
C. each party in a transaction gains from the transaction.
D. each party has equal information
3. A bad credit risk seeks out loans more actively. This is a(n): Rủi ro tín dụng xấu tìm kiếm
các khoản vay tích cực hơn
A. adverse selection problem.
B. moral hazard problem.
C. principal-agent problem.
D. liquidity problem
4. A borrower engages in activities that are undesirable from a lender's point of view.
This is the:
A. moral hazard problem.
B. liquidity problem.
C. transaction costs problem.
D. adverse selection problem.
5. The free-rider problem
A. will only occur if information costs are zero.
B. is that people who do not pay for information take advantage of information other people
have paid for.
C. will make more people willing to provide information services.
D. makes it easier for an investor to continue to buy securities at less than the true value.
6. The principal-agent problem
A. occurs because owners have complete information about managers.
B. is a type of moral hazard.
C. eliminates costly state verification.
D. is not related to asymmetric information.
7. When interest rates are high, lenders may not want to make loans because of: (Before
trans occurs)
A. moral hazard.
B. the principal-agent problem.
C. adverse selection.
D. costly state verification.
8. A venture capital firm:
A. increases the size of the moral hazard problem.
B. pools resources to help entrepreneurs start new firms.
C. allows equity shares of the new firm to be sold in the marketplace.
D. has no say in the management of the new firm.
9. Which of the following describes the "lemons problem?"
A. Sellers have more information than buyers and more transactions occur.
B. Buyers have more information than sellers and more transactions occur.
C. Sellers have more information than buyers and few transactions occur.
D. Buyers have more information than sellers and few transactions occur.
10. By taking advantage of economies of scale and developing expertise (landing,
services,...) , financial intermediaries overcome the problem of:
A. adverse selection.
B. free-riding.
C. high transaction costs.
D. moral hazard.
11. Regulation of the financial system
A. occurs only in the United States.
B. protects the jobs of employees of financial institutions.
C. protects the wealth of owners of financial institutions.
D. ensures the stability of the financial system.
12. One purpose of regulation of financial markets is to
A. limit the profits of financial institutions.
B. increase competition among financial institutions.
C. promote the provision of information to shareholders, depositors and the public.
D. guarantee that the maximum rates of interest are paid on deposits.
13. Property that is pledged to the lender in the event that a borrower cannot make his or
her debt payment is called
A. collateral.
B. points.
C. interest.
D. good faith money.
14. The predominant form of household debt is (Hình thức nợ hộ gia đình chiếm ưu thế)
A. consumer installment debt.
B. collateralized debt.
C. unsecured debt.
D. unrestricted debt.
15. Collateralized debt is also known as
A. unsecured debt.
B. unrestricted debt.
C. secured debt.
D. promissory debt.
16. Credit card debt is
A. secured debt.
B. restricted debt.
C. unrestricted debt.
D. unsecured debt.
17. If you default on your auto loan, your car will be repossessed because it has been
pledged as ________ for the loan.
A. interest
B. collateral
C. dividend
D. commodity
18. A ________ is a provision that restricts or specifies certain activities that a borrower
can engage in.
A. residual claimant
B. risk hedge
C. restrictive barrier
D. restrictive covenant: điều khoản hợp đồng cho vay khuyến khích,y/c 1 số hđ như maintain
capital structure, cấm vay, cơ cấu nợ,...
19. A clause in a mortgage loan contract requiring the borrower to purchase homeowner's
insurance is an example of a
A. proscriptive covenant.
B. prescriptive covenant.
C. restrictive covenant.
D. constraint-imposed covenant.
20. That only large, well-established corporations have access to securities markets
A. explains why indirect finance is such an important source of external funds for businesses.
B. can be explained by the problem of moral hazard.
C. can be explained by government regulations that prohibit small firms from acquiring funds
in securities markets.
D. explains why newer and smaller corporations rely so heavily on the new issues market for
funds.
21. The concept of adverse selection helps to explain
A. why collateral is not a common feature of many debt contracts.
B. why large, well-established corporations find it so difficult to borrow funds in securities
markets.
C. why financial markets are among the most heavily regulated sectors of the economy.
D. why stocks are the most important source of external financing for businesses.
22. As information technology improves, the lending role of financial institutions such as
banks should ________.
A. increase somewhat
B. decrease
C. stay the same
D. increase significantly
23. Net worth (giá trị tài sản ròng – Equity) can perform a similar role to ________.
A. diversification
B. collateral
C. intermediation
D. economies of scale
Part 2. Group Discussion questions:
I. How does a mutual fund lower transactions costs through economies of scale?
The mutual fund takes the funds of the individuals who have purchased shares and uses them to
purchase bonds or stocks. Because the mutual fund will be purchasing large blocks of stocks or
bonds they will be able to obtain them at lower transactions costs than the individual purchases
of smaller amounts could.
II. Explain the principal-agent problem as it pertains to equity contracts
The principals are the stockholders who own most of the equity. The agents are the managers of
the firm who generally own only a small portion of the firm. The problem occurs because the
agents may not have as much incentive to profit maximize as the stockholders.
Part 3. End-of-chapter question:
2. What are the transaction costs problems facing financial organizations? Explain how
financial Intermediaries can help reduce these problems.
-Transaction costs:
-FI reduce transaction costs through: economies of scale, expertise.
3. Explain why dating can be considered a method to solve the adverse selection problem.
When a couple dates, they are (explicitly or implicitly) extracting information about the significant
other. At the same time, they are sharing information about themselves. This information flow
helps both individuals to make better decisions about a probable (or not) future life together. In
this way, one can think that this process is formally no different from the one in which the loan
officer tries to choose the right borrower.
4. Why are financial intermediaries willing to engage in information collection activities when
investors in financial instruments may be unwilling to do so?
Investors in financial instruments who engage in information collection face a free-rider problem,
which means other investors may be able to benefit from their information without paying for it.
Individual investors therefore have inadequate incentives to devote resources to gather information
about borrowers who issue securities. Financial intermediaries avoid the free-rider problem
because they make private loans to borrowers rather than buy the securities borrowers have issued.
Since they will reap all the benefits from the information they collect, their information collection
activities will be more profitable. They thus have greater incentive to invest in information
collection.
OR:
7. Suppose you have data about two groups of countries, one with efficient legal systems and
the other with slow, costly, and inefficient legal systems. Which group of countries would you
expect to exhibit higher living standards?
One would expect the group of countries with more efficient legal systems to exhibit higher living
standards. Legal systems are an important part in the lending process, precisely because they are
part of the mechanisms of enforcement of contracts that deal with the moral hazard problem.
Costly, slow, and inefficient legal systems do not promote lending and thereby funding of
investment opportunities.
10. What steps can the government take to reduce asymmetric information problems and help
the financial system function more smoothly and efficiently?
The government can produce information about borrowers and provide it to investors free of
charge, it can require borrowers to report honest information about themselves to investors, and it
can set and enforce rules that govern the behavior of financial institutions so they do not take on
too much risk. These prudential regulations for banks include banning certain activities and asset
categories considered too risky, establishing minimum capital requirements, and requiring
disclosure of financial information to regulators and investors.
OR:
19. Explain how the separation of ownership and control in American corporations might lead
to poor management.
OR:
The separation of ownership and control creates a principal-agent problem. The managers (the
agents) do not have as strong an incentive to maximize profits as the owners (the principals). Thus,
the managers might not work hard, might engage in wasteful spending on personal perks, or might
pursue business strategies that enhance their personal power but do not increase profits.
TUTORIAL 7
FOREIGN EXCHANGE RATE MARKET
Part 1: Review question
1. The law of one price
2. The purchasing power parity
3. The interest rate parity
4. Exchange rates determination and moverment in the short run
5. Exchange rates determination and moverment in the long run
Part 2: Multiple-choice question
A.
B.
1. Suppose the exchange rate between U.S. dollars and British pounds is
$1.51/£. Then
a £100 U.K. good will cost $151 in the U.S.
a $100 U.S. good will cost £100 in the U.K.
C.
D.
a £100 U.K. good will cost $100 in the U.S.
a $100 U.S. good will cost £151 in the U.K.
A.
B.
C.
D.
2. When a currency increases in value compared to other currencies
It is elastic.
It is inelastic.
It depreciates.
It appreciates.
A.
B.
C.
D.
3. When a currency appreciates in value compared to other currencies,
then
the rest of the world's goods become more expensive to that country.
that country's goods do not change in price to the rest of the world.
that country's goods become less expensive to the rest of the world.
that country's goods become more expensive to the rest of the world.
4. According to the law of one price, if the French price level rises by
10%, and the U.S. price level increases by 5%, then:
A. the dollar will depreciate by 10%.
B. the dollar will depreciate by 5%.
C. the dollar will appreciate by 10%.
D. the dollar will appreciate by 5%.
ại vì đồng Pháp Price level tăng, ý là đồng Pháp sẽ giảm giá trị 10%. Còn Mỹ nó chỉ giảm 5%, nếu
so Mỹ với Pháp, Mỹ vẫn hơn Pháp 5%
A.
B.
C.
D.
5. Which of the following does not account for the inability of PPP to
fully explain exchange rate movements?
goods that are not identical
different methods of calculating growth rates
goods that are not identical
trade barriers
6. Which of the following can cause a country’s currency to appreciate in
the long run?
A. A decrease in the demand for a country’s exports.
B. A rise in a country's relative price level.
C. A relative decrease in the productivity of a country.
D. Increasing tariffs.
Increase tariffs (tăng thuế nhập khẩu)->Price of import product increase-> Demand import
product decrease -> Demand for foreign G&S decrease -> Foreign currency decrease ->
Domestic currency increase-> Country’s currency appreciate
7. Suppose that you, in the U.S., are considering a one-year deposit of
$100 in a U.K. bank that currently has an interest rate of 5%.
Currently the dollar/pound exchange rate is $1.50. Your best guess is
that in one year the exchange rate will be $1.60. At the end of the year
your investment will be worth:
A.
B.
C.
D.
$98
$112
$67
$105
A.
B.
C.
D.
8. The relative expected return on deposits in terms of dollars is given by:
Relative RETD = iF – iD + (Eet+1 – Et)/Et-1
Relative RETD = iF – iD + (Eet+1 – Et)/Et
Relative RETD = iD – iF + (Eet+1 – Et)/Et
Relative RETD = iD – iF - (Eet+1 – Et)/Et
9. Which of the following will tend to cause domestic currency to
depreciate?
A. an increase in the domestic interest rate.
B. an increase in foreign interest rates.
C. An increase in the expected export demand
D. An increase in productivity.
iF increase -> relative to E(R) to domestic decrease -> Demand for domestic assets decrease ->
Demand curve shift to the left -> Domestic currency depreciate
10. A higher domestic money supply will tend to:
A. cause the domestic currency to appreciate.
B. cause the domestic currency to either depreciate or appreciate, depending on the size of the
change.
C.
D.
A.
B.
C.
D.
A.
B.
C.
D.
cause the domestic currency to depreciate.
cause the domestic currency to not change in value.
11. Which of the following expresses the interest-parity condition?
The domestic interest rate equals the foreign interest minus the expected appreciation of the
domestic currency.
The expected return on domestic deposits equals the inverse of the expected return on
foreign deposits.
The domestic interest rate equals the foreign interest rate.
The expected return on domestic deposits equals the negative of the expected return on
foreign deposits.
12. The demand curve for domestic assets is downward sloping because
As the expected appreciation on dollar assets rises the quantity demanded of dollar assets
rises
As the exchange rate rises the quantity demanded of dollar assets rises
As the price of domestic assets rises the quantity demanded of dollar assets rises
As the relative price of domestic assets rises the quantity demand of domestic assets rises
13. Suppose the domestic nominal interest rate rises. The domestic
currency ________ if this results from an increase in the domestic real
A.
B.
C.
D.
interest rate and ________ if it results from an increase in the expected
inflation rate
depreciates; depreciates
depreciates; appreciates
appreciates; appreciates
appreciates; depreciates
A.
B.
C.
D.
14. If people expect the dollar to appreciate in value against the euro,
Then they will buy euros and the euro will appreciate.
Then they will buy dollars and the dollar will depreciate.
Then they will buy dollars and the dollar will appreciate.
Then they will buy euros and the dollar will depreciate.
15. Exchange rate overshooting (Mô hình tỷ giá tăng quá mức)
A. Occurs because the market has difficulty interpreting changes in the money supply.
B. Occurs because an increase in the domestic money supply lowers domestic interest rates in
the short run, but they return to previous levels in the long run.
C. Occurs because an increase in the domestic money supply has no effects on domestic
interest rates, but does raise foreign interest rates.
D. Occurs because an increase in the domestic money supply lowers domestic interest rates in
the long run but not the short run.
Part 3: Questions and problems 2, 4, 5, 10, 14 - chapter 18
2. “A country is always worse off when its currency is weak (falls in value).” Is this statement
true, false, or uncertain? Explain your answer.
False. Although a weak currency has the negative effect of making it more expensive to buy
foreign goods or to travel abroad, it may help domestic industry. Domestic goods become cheaper
relative to foreign goods, and the demand for domestically produced goods increases. The resulting
higher sales of domestic products may lead to higher employment, a beneficial effect on the
economy.
4. If the Japanese price level rises by 5% relative to the price level in the United States, what
does the theory of purchasing power parity predict will happen to the value of the Japanese
yen in terms of dollars?
5. If the demand for a country’s exports falls at the same time that tariffs on imports are
raised, will the country’s currency tend to appreciate or depreciate in the long run?
10. If the Indian government unexpectedly announces that it will be imposing higher tariffs on
foreign goods one year from now, what will happen to the value of the
Indian rupee today?
14. Through the summer and fall of 2008, as the global financial crisis began to take hold,
international financial institutions and sovereign wealth funds significantly
increased their purchases of U.S. Treasury securities as a safe haven investment. How should
this have affected U.S. dollar exchange rates?
The dollar should appreciate relative to other currencies because of an increase in demand for
U.S. dollar-denominated assets.
TUTORIAL 8
BANKS AND MANAGEMENT
Part 1: Review questions
1. What are uses of funds and sources of funds for a bank?
2. How does a bank make profit?
3. What are the major aspects of bank management?
4. How can a bank manage credit risks?
5. How can a bank manage interest rate risks?
Part 2: Multiple-choice questions
1. The fundamental balance sheet identity is:
A. Total assets = total liabilities + capital
B. total assets + capital = total liabilities
C. Total assets = total liabilities
D. total assets = total liabilities – capital
2. The largest bank asset is
A. Securities
B. Loans
C. Physical Assets
D. Reserves
3. The largest bank liability is
A. non-transaction deposits
B. government bonds
C. borrowing
D. checkable deposits
4. Short-term security holdings by banks are often referred to as:
A. secondary reserves
B. required reserves
C. excess reserves
D. total reserves
5. For bank A, a deposit of $100 (in cash or currency) in a checking account will:
A. increase the money supply by $100.
B. reduce the money supply by $100.
C. increase both reserves and checkable deposits by $100.
D. reduce both reserves and checkable deposits by $100.
6. If a bank gains $100 of reserves and $100 of checkable deposits, and the reserve
requirement ratio is 15%, then the bank will:
A. gain $85 of excess reserves.
B. gain $15 of excess reserves.
C. gain $85 of required reserves.
D. gain $100 of excess reserves.
Required reserve = $100x 15%= $15 -> Excess reserves= Total reserve- required reserves =
100-15 =$85
7. If a bank is short of required reserves, it may: (Borrowing from FED)
A. borrow from the Fed at the Fed Funds rate.
B. increase loans.
C. increase security holdings.
D. borrow from the Fed at the current discount rate.
8. If a bank sells $100 of securities, it will: (selling securities)
A. gain $100 of bank capital.
B. gain $100 of savings accounts.
C. gain $100 of loans.
D. gain $100 of reserves.
9. When a bank purchases an earning asset (security or loan) it will:
A. lose reserves.
B. increase reserves.
C. increase savings accounts.
D. gain bank capital.
10. Return on Assets (ROA) is defined as:
A. net profit before taxes/assets.
B. net profit before taxes/liabilities.
C. net profit after taxes/assets.
D. net profit after taxes/liabilities.
11. What do banks count as reserves?
A. Capital and deposits at the Fed
B. Vault cash and deposits at the Fed
C. Deposits at other banks and cash items in process of collection
D. Vault cash and U.S. government securities
12. Acquiring funds at low cost is the main concern of ________ management
A. liquidity
B. capital
C. liability
D. asset
13. To manage credit risk, financial intermediaries can:
A. Require collateral and compensating balances.
B. Screen and monitor customers.
C. Develop long term relationships with customers
D. All of the above
14. Off-balance sheet activities include all of the following except:
A. Secondary loan participation
B. Short term loans
C. Speculation in the futures markets
D. Loan commitment fees
Part 3: Applications
1. Problems 3, 4, 7, 10, 16, 19, 25 - chapter 9
Q3. Suppose your bank has the following balance sheet:
If the required reserve ratio is 10%, what actions should the bank manager take if there is an
unexpected deposit outflow (khách hàng rút tiền)of $50 million?
Required reserve = Required reserve ratio * deposits= 10%*$200=$20
Unexpected deposit outflow:
Assets
Liabilities
Reserves: $50-$50=$0
Checkable deposit: $200-$50=$150
Securities: $50
Bank capital: $50
Loans: $150
Required reserve = Required reserve ratio * deposits= 10%*$150=$15
=> Lack $15m to required reserve
=> 4 options:
⮚ Reduce loan:
Assets
Liabilities
Reserves: 0+15=$15m
Checkable deposit: $200-$50=$150
Securities: $50
Bank capital: $50
Loans: $150-$15= $135
⮚ Borrow from central bank
Assets
Liabilities
Reserves: 0+15=$15m
Checkable deposit: $200-$50=$150
Securities: $50m
Borrowing form central bank: $15m
Loans: $150m
Bank capital: $50
⮚ Borrowing from other bank
Assets
Liabilities
Reserves: 0+15=$15m
Checkable deposit: $200-$50=$150
Securities: $50m
Borrowing form other bank: $15m
Loans: $150m
Bank capital: $50
⮚ Selling securities
Assets
Liabilities
Reserves: 0+15=$15m
Checkable deposit: $200-$50=$150
Securities: $50-$15=$35
Bank capital: $50
Loans: $150m
Q4. Suppose your bank has the following balance sheet:
What would happen to bank profits if the interest rates in the economy go down by 1%? What
actions could you take to reduce the bank’s interest-rate risk?
nếu IR thay đổi, thì mấy cái tk có rate sensitive nó sẽ thay đổi theo
Q7. If a bank finds that its ROE is too low because it has too much bank capital, what can it
do to raise its ROE?
Q10. If a bank doubles the amount of its capital and ROA stays constant, what will happen to
ROE?
ROE falls a half
Q16. If you are a banker and expect interest rates to rise in the future, would you prefer to
make short-term loans or long-term loans?
P19. Using the T-accounts of the First National Bank and the Second National Bank given in
this chapter, describe what happens when Jane Brown writes a check for $90
on her account at the First National Bank to pay her friend Joe Green, who in turn deposits
the check in his account at the Second National Bank.
P25. Suppose you are the manager of a bank that has $15 million of fixed-rate assets, $30
million of ratesensitive assets, $25 million of fixed-rate liabilities, and $20 million of ratesensitive liabilities. Conduct a gap analysis for the bank, and show what will happen to bank
profits if interest rates rise by 5 percentage points. What actions could you take to reduce the
bank’s interest-rate risk?
Same Question 4
2. Additional problem:
A commercial bank has mixed up the assets and liabilities items as follows: (in $’m)
Checkable deposits L
80
Deposit with central bank A
Cash on hand A
20
20
Savings L
120
Long-term loan to customer A
150
Security (fixed rate) A
Capital L
80
120
Other assets A
35
Borrowing from other bank L
80
Time deposits L
150
Short-term loan to customer A
120
Deposit with other bank A
65
Security (floating rate) A
60
1. Rearrange the above items into a balance sheet of the bank
2. If the required reserve ratio is 10% for checkable deposit and 5% for saving deposits and
time deposits, does the bank hold any exess reserves? If yes, how much are they? What is
the meaning of these excess reserves.
3. If customers withdraw 10 from checkable deposits and 20 from saving accounts,
a. What will the bank’s balance sheet be? Using T-account
b. What is the problem of this new balance sheet.
c. How can the bank do to solve this problem
TUTORIAL 9
CENTRAL BANKS AND TOOLS OF MONETARY POLICY
Part 1: Review questions
1. Distinguish the difference between central banks and commercial banks
2. Tools of monetary policy: advantages and disadvantages
Part 2. Multiple-choice questions
1.
A.
B.
C.
D.
The federal funds rate
Is usually several percentage points above the discount rate.
Is set by the Board of Governors.
Is the interest rate banks charge each other when making overnight loans of reserves.
Is the interest rate the Fed charges when lending reserves to a bank.
2.
A.
B.
C.
D.
An open market purchase of securities by the Federal Reserve system will
increase the demand for Federal funds.
increase the supply of Federal funds.
reduce the demand for Federal funds.
reduce the supply of Federal funds.
3.
A.
B.
C.
D.
An increase in the discount rate can:
reduce the supply of Federal funds and increase the Federal funds rate.
reduce the demand for Federal funds and reduce the Federal funds rate.
increase the demand for Federal funds and increase the Federal funds rate.
increase the supply of Federal funds and reduce the Federal funds rate.
4. An increase in the reserve requirement ratio will:
A. reduce the supply of Federal funds and increase the Federal funds rate.
B. increase the supply of Federal funds and reduce the Federal funds rate.
C. increase the demand for Federal funds and increase the Federal funds rate.
D. reduce the demand for Federal funds and reduce the Federal funds rate.
5. Sometimes the Fed purchases a security and the seller agrees to buy the security back.
This is called a
A. TRAPS
B. Matched sale-purchase transaction
C. Reverse repurchase
D. Repurchase agreement
6. Which of the following is not an advantage of open market operations compared to
other methods of changing the money supply?
A. Open market operations are easily reversible.
B. Open market operations are done at the Fed's initiative.
C. Open market operations do not need the approval of Congress.
D. Open market operations can be implemented quickly.
7. The demand for reserves has a negative slope because
A. A lower Federal Funds rate increases deposits and increases required reserves.
B. A higher Federal Funds rate increases the cost of excess reserves so that banks wish to hold
smaller amounts of reserves. (iff higher-> excess reserve increase -> hold smaller reserve)
C. A lower Federal Funds rate induces banks to borrow more from the Federal Reserve System,
decreasing reserves.
D. A higher Federal Funds rate reduces the required reserve ratio and the amount of required
reserves.
8. The shape of the supply curve for reserves
A. Depends on the relationship between the Federal Funds rate and the discount rate.
B. Is vertical at the level of reserves determined by the Fed because banks have no influence on
the supply of reserves.
C. Is upward-sloping because as the Federal Funds rate rises, banks are more willing to supply
reserves for lending.
D. Is horizontal at the Federal Funds rate set by the Fed, because banks can borrow as much as
they want at that rate.
9.
A.
B.
C.
D.
When the Fed sells government securities on the open market,
The Federal Funds rate rises.
The Federal Funds rate falls.
The Federal Funds rate remains unchanged.
The volume of reserve lending in the Federal Funds market increases.
10. If the Fed eliminated reserve requirements,
A. banks would keep no reserves.
B. banks would still keep reserves because of the need for vault cash.
C. the money supply would grow out of control.
D. the money multiplier would be undefined.
11. The objective of a defensive open market operation is to:
A. change the money supply.
B. prevent a change in the monetary base.
C. increase the monetary base.
D. decrease the monetary base.
12. An advantage of using reserve requirement changes to control the money supply is:
A. they affect all banks equally.
B. they ease banks' liquidity management concerns.
C. banks' cost of adjusting to them is low.
D. it is easy to achieve small changes in the money supply.
13. The primary role of discount lending is now
A. To allow the Fed to easily control the money supply.
B. To allow the Fed to act as the lender of last resort to troubled banks.
C. To influence the Federal Funds rate.
D. To provide a source of low-cost funds to banks so they can increase their profitability.
14. In the market for reserves, when the federal funds interest rate is below the discount
rate, the supply curve of reserves is
A. vertical.
B. horizontal.
C. positively sloped.
D. negatively sloped.
15. When the federal funds rate equals the discount rate
A. the supply curve of reserves is vertical.
B. the supply curve of reserves is horizontal.
C. the demand curve for reserves is vertical.
D. the demand curve for reserves is horizontal.
16. In the market for reserves, an open market ________ the supply of reserves, raising the
federal funds interest rate, everything else held constant.
A. sale decreases
B. sale increases
C. purchase increases
D. purchase decreases
17. Suppose on any given day there is an excess demand of reserves in the federal funds
market. If the Federal Reserve wishes to keep the federal funds rate at its current level,
then the appropriate action for the Federal Reserve to take is a ________ open market
________, everything else held constant.
A. defensive; sale
B. dynamic; sale
C. dynamic; purchase
D. defensive; purchase
18. In the market for reserves, an open market purchase ________ the supply of reserves
and causes the federal funds interest rate to ________, everything else held constant.
A. decreases; fall
B. increases; rise
C. increases; fall
D. decreases; rise
Part 3. Problems and applications
Chapter 16: problem 2, 4, 6, 15, 23, 24
2. During the holiday season, when the public’s holdings of currency increase, what defensive
open market operations typically occur? Why?
OR
4. If float decreases to below its normal level, why might the manager of domestic operations
consider it more desirable to use repurchase agreements to affect the monetary base, rather
than an outright purchase of bonds?
6. “The federal funds rate can never be above the discount rate.” Is this statement true, false,
or uncertain? Explain your answer.
OR
15. Compare the methods of controlling the money supply—open market operations, loans to
financial institutions, and changes in reserve requirements—on the basis of the following
criteria: flexibility, reversibility, effectiveness, and speed of implementation.
Text, slide
23. If a switch occurs from deposits into currency, what happens to the federal funds rate?
Use the supply and demand analysis of the market for reserves to explain your answer.
OR
24. Why is it that a decrease in the discount rate does not normally lead to an increase in
borrowed reserves? Use the supply and demand analysis of the market for reserves to explain.
21. What is the main rationale behind paying negative interest rates to banks for keeping their
deposits at central banks in Sweden, Switzerland, and Japan? What could happen to these
economies if banks decide to loan their excess reserves, but no good investment opportunities
exist?
16. What are the advantages and disadvantages of quantitative easing as an alternative to
conventional monetary policy when short-term interest rates are at the zero lower bound?
TUTORIAL 10
MULTIPLE DEPOSIT CREATION
Part 1. Review question
1. A central bank balance sheet
2. Multiple deposit creation process
Part 2. Multiple-choice questions
1. The largest source of Federal Reserve System income is:
A. Fees charged to member banks.
B. Interest and capital gains on government securities.
C. Discount loans.
D. Interest on loans to businesses.
2. When the Fed sells governments securities to a private firm or individual who pays for
them with a check
A. Currency in circulation decreases.
B. The money supply increases.
C. Bank reserves increase.
D. Bank reserves decrease.
3. The monetary base (or high-powered money) is equal to:
A. Federal Reserve float.
B. Fed security holdings + discount loans.
C. reserves + outstanding Federal Reserve notes.
D. reserves + currency in circulation.
4. An open market purchase of securities by the Fed from banks will:
A. increase bank security holdings.
B. increase bank loans.
C. increase bank reserves.
D. increase the public's currency holdings.
5. An open market purchase of securities by the Fed from the public will:
A. always increase the monetary base.
B. always increase bank reserves.
C. always increase the public's currency holdings.
D. always increase bank loans.
6. If a bank borrows from the Fed at the discount window, then:
A. bank reserves increase.
B. bank loans will increase.
C. Federal Reserve notes outstanding will increase.
D. currency holdings by the public will increase.
7. Bank A faces a 15% reserve requirement ratio (rr). If this bank gains $100 (D) of
deposits and $100 of new reserves, then this bank has:
A. $85 of new required reserves.
B. $15 of excess reserves.
C. $15 of new loans.
D. $15 of new required reserves
= 15%x 100= $15
8. As banks make new loans, they will:
A. increase reserves.
B. increase discount loans.
C. lose reserves.
D. increase security holdings.
9. If banks have a 20% reserve requirement ratio (rr), then for the banking system an
addition of $100 of new reserves will create:
A.
B.
C.
D.
$500 of new reserves.
$500 of new excess reserves.
$500 of new deposits.
$500 of security holdings on the Fed's balance sheet.
= $100x 20%=$500
10. The deposit expansion multiplier is:
A. rD R
B. 1/rD D
C. rD D
D. 1/rD R
11. Which of the following is not a player in the money supply process?
A. The central bank
B. Borrowers
C. Depository institutions
D. Congressional banking committees
12. On the Federal Reserve System's balance sheet, float is:
A. the monetary base minus high-powered money.
B. cash items in process of collection minus deferred-availability cash items.
C. total reserves minus excess reserves.
D. Federal Reserve assets minus Federal Reserve liabilities.
13. Which of the following is an assumption of the simple model of multiple deposit
creation?
A. Depositors hold no currency.
B. Banks do not lend all their excess reserves.
C. Open market sales increase bank reserves.
D. The required reserve ratio is zero.
14. If bank depositors begin to withdraw more currency from banks,
A. The monetary base is unchanged.
B. The monetary base decreases.
C. Bank reserves increase.
D. Bank reserves are unchanged.
15. The maximum amount a bank can lend is
A. The amount it has on deposit with the Fed.
B. The amount of its total reserves.
C. 90 percent of its deposits.
D. The amount of its excess reserves.
Part 3. Applications
Chapter 15: Question 1, 2, 18, 20, 21, 25
1. Classify each of these transactions as an asset, a liability, or neither for each of the “players”
in the money supply process—the Federal Reserve, banks, and depositors.
a. You get a $10,000 loan from the bank to buy an automobile.
b. You deposit $400 into your checking account at the local bank.
c. The Fed provides an emergency loan to a bank for $1,000,000.
d. A bank borrows $500,000 in overnight loans from another bank.
e. You use your debit card to purchase a meal at a restaurant for $100.
2. The First National Bank receives an extra $100 of reserves but decides not to lend but any of
these reserves. How much deposit creation takes place for the entire banking system?
18. If the Fed lends five banks a total of $100 million but depositors withdraw $50 million and
hold it as currency, what happens to reserve and the monetary base? Use T-accounts to explain
your answer.
20. Using T-accounts, show what happens to checkable deposits in the banking system when the
Fed sells $2 million of bonds to the First National Bank.
21. If the Fed buys $1 million of bonds from the First National Bank, but an additional 10% of
any deposit is held as excess reserves, what is the total increase in
checkable deposits? (Hint: Use T-accounts to show what happens at each step of the multiple
expansion process.)
25. Suppose that the required reserve ratio is 9%, currency in circulation is $620 billion, the
amount of checkable deposits is $950 billion, and excess reserves are $15 billion.
a. Calculate the money supply, the currency deposit ratio, the excess reserve ratio, and the money
multiplier.
b. Suppose the central bank conducts an unusually large open market purchase of bonds held by
banks of $1,300 billion due to a sharp contraction in the economy. Assuming the ratios you
calculated in part (a) remain the same, predict the effect on the money supply.
OR
c. Suppose the central bank conducts the same open market purchase as in part (b), except that
banks choose to hold all of these proceeds as excess reserves rather than loan them out, due to
fear of a financial crisis. Assuming that currency and deposits
remain the same, what happens to the amount of excess reserves, the excess reserve ratio, the
money supply, and the money multiplier?
OR
d. Following the financial crisis in 2008, the Federal Reserve began injecting the banking system
with massive amounts of liquidity, and at the same time,
very little lending occurred. As a result, the M1 money multiplier was below 1 for most of the
time from October 2008 through 2011. How does this scenario relate to your answer to part (c)?