Choose the one alternative that best completes the statement or answers the question.

Transcription

1 Econ 330 Spring 2017: EXAM 1 Name ID Section Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If market participants notice that a variable behaves differently now than in the past, then, according to rational expectations theory, we can expect market participants to A) begin to make systematic mistakes. B) change the way they form expectations about future values of the variable. C) give up trying to forecast this variable. D) no longer pay close attention to movements in this variable. 2) If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A) 7 percent. B) 22 percent. C) -15 percent. D) -8 percent. 3) Using the Gordon growth formula, if D1 is $1.00, ke is 10% or 0.10, and g is 5% or 0.05, then the current stock price is A) $10. B) $20. C) $30. D) $40. 4) The short-run Phillips Curve has shifted left and become flatter due to all the following factors except: A) persistent downward price rigidities. B) rising inflation expectations. C) slack remains in the labor market. D) lower natural rate of unemployment. 1) 2) 3) 4) 5) Which of the following is not a component of a bank's tangible equity? 5) A) reserves B) retained earnings C) equity D) preferred stock 6) Which of the following were bailed out by the Federal Housing Finance Administration during the financial crisis of 2008? A) FDIC B) Lehman Brothers C) Mortgage Association of America D) Fannie Mae 7) Long term interest rates rose 1 percentage point soon after the election of Donald Trump to the presidency. Which of the following best explains the rate increase? A) the Phillips Curve effect B) the political business cycle C) the Fisher effect D) the Friedman effect 6) 7) 8) For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is 8) A) $10,030. B) $10,300. C) $13,000. D) $13,310. 9) If a bank had $13.2 million in their allowance for loan loss account at the beginning of a year, how much will be in the account at the end of the year if provisions for loan losses were $3.4 million and net chargeoffs were 4.9? A) $9.8 million B) $11.7 million C) $18.1 million D) $16.6 million 10) The interest rate that describes how well a lender has done in real terms after the fact is called the A) ex post nominal interest rate. B) ex ante nominal interest rate. C) ex post real interest rate. D) ex ante real interest rate. 9) 10)

2 11) Which of the following statements are TRUE? 11) A) As their relative riskiness increases, the expected return on corporate bonds increases relative to the expected return on default-free bonds. B) The expected return on corporate bonds decreases as default risk increases. C) A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. D) A corporate bond's return becomes less uncertain as default risk increases. 12) If you have a very low tolerance for risk, which of the following bonds would you be least likely to hold in your portfolio? A) a corporate bond with a rating of Aaa B) a corporate bond with a rating of Baa C) a municipal bond D) a U.S. Treasury bond 12) 13) Differences in explain why interest rates on Treasury securities are not all the same. 13) A) time to maturity B) risk C) liquidity D) tax characteristics 14) When treasury yield curves are relatively, bank earnings will typically. 14) A) flat; increase B) steep; decrease C) steep; increase D) inverted; increase 15) Holding the expected return on bonds constant, an increase in the expected return on common stocks would the demand for bonds, shifting the demand curve to the. A) decrease; right B) increase; left C) decrease; left D) increase; right 16) 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) $ B) $ C) $ D) $ ) The supply curve for bonds has the usual upward slope, indicating that as the price, ceteris paribus, the increases. A) rises; supply B) rises; quantity supplied C) falls; supply D) falls; quantity supplied 18) 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) rises; right; falls C) rises; right; rises D) falls; right; rises 19) The injection of liquidity into the financial system after a financial crisis reduces stock prices is referred to as which of the following? A) Friedman Follies B) Greenspan Put C) Keynesian Cross D) Hayek Haymaker 20) According to John Hobson, a /an in the rate of interest may cause a/an in the amount of savings, rather than a in the amount of savings. A) decrease; decrease; increase B) increase; decrease; increase C) increase; increase; decrease D) decrease; increase; decrease 15) 16) 17) 18) 19) 20)

3 21) During the Great Recession, hundreds of banks failed for all the following reasons except: 21) A) rapid growth in auto loan portfolio. B) they exhibited weak underwriting standards. C) pursued aggressive growth strategies. D) rapid growth of commercial real estate loan portfolio. 22) If there is an excess supply of money 22) A) individuals sell bonds, causing the interest rate to fall. B) individuals buy bonds, causing interest rates to rise. C) individuals buy bonds, causing interest rates to fall. D) individuals sell bonds, causing the interest rate to rise. 23) The of the term structure of interest rates states that the interest rate on a long-term bond will equal the average of short-term interest rates that individuals expect to occur over the life of the long-term bond, and investors have no preference for short-term bonds relative to long-term bonds. A) segmented markets theory B) expectations theory C) liquidity premium theory D) separable markets theory 24) 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 25) When the interest rate on a bond is above the equilibrium interest rate, in the bond market there is excess and the interest rate will. A) demand; rise B) demand; fall C) supply; fall D) supply; rise 26) If the expected path of 1-year interest rates over the next five years is 2 percent, 4 percent, 1 percent, 4 percent, and 3 percent, the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of A) one year. B) two years. C) three years. D) four years. 23) 24) 25) 26) 27) In the figure above, the factor responsible for the decline in the interest rate is 27) A) a decline the price level. B) a decline in income. C) an increase in the money supply. D) a decline in the expected inflation rate.

4 28) If expectations are formed adaptively, then people 28) A) often change their expectations quickly when faced with new information. B) never change their expectations once they have been made. C) use more information than just past data on a single variable to form their expectations of that variable. D) use only the information from past data on a single variable to form their expectations of that variable. 29) A monetary expansion stock prices due to a decrease in the and an increase in the, everything else held constant. A) reduces; future sales price; expected rate of return B) increases; required rate of return; future sales price C) increases; required rate of return; dividend growth rate D) reduces; current dividend; expected rate of return 30) Everything else held constant, if the expected return on U.S. Treasury bonds falls from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected return of corporate bonds relative to U.S. Treasury bonds and the demand for corporate bonds. A) rises; rises B) rises; falls C) falls; falls D) falls; rises 31) During the last few months expectations for future inflation have increased due to all the following factors except: A) expectations of rising infrastructure spending. B) expectations of a strong dollar policy. C) expectations of lower corporate taxes. D) the introduction of a 5% tariff. 29) 30) 31) 32) Which of the following is not a factor currently impacting the shape of the yield curve? 32) A) Federal Reserve reinvesting maturing treasury securities B) treasury deficit C) rising inflation expectations D) rising value of the dollar 33) If 1-year interest rates for the next three years are expected to be 1, 1, and 1 percent, and the 3-year term premium is 1 percent, than the 3-year bond rate will be A) 1 percent. B) 2 percent. C) 3 percent. D) 4 percent. 33)

5 34) In the figure above, one factor NOT responsible for the decline in the demand for money is 34) A) an increase in income. B) a decline the price level. C) a decline in the expected inflation rate. D) a decline in income. 35) When the expected inflation rate increases, the demand for bonds, the supply of bonds, and the interest rate, everything else held constant. A) increases; decreases; falls B) increases; increases; rises C) decreases; increases; rises D) decreases; decreases; falls 36) Municipal bonds have default risk, yet their interest rates are lower than the rates on default-free Treasury bonds. This suggests that A) the benefit from the tax-exempt status of municipal bonds equals their default risk. B) the benefit from the tax-exempt status of municipal bonds exceeds their default risk. C) the benefit from the tax-exempt status of municipal bonds is less than their default risk. D) Treasury bonds are not default-free. 35) 36) 37) In Keynes's liquidity preference framework 37) A) an excess supply of bonds implies an excess demand for money. B) the demand for bonds must equal the supply of money. C) the demand for money must equal the supply of bonds. D) an excess demand of bonds implies an excess demand for money. 38) The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates as the expected rate of inflation, everything else held constant. A) fall; increases B) rise; increases C) fall; stabilizes D) rise; stabilizes 38) 39) New information that might lead to a decrease in a stock's price might be 39) A) a decrease in the required rate of return. B) an expected decrease in the level of future dividends. C) an expected increase in the future sales price. D) an expected increase in the dividend growth rate.

6 40) In the generalized dividend model, a future sales price far in the future does not affect the current stock price because A) the present value is almost zero. B) the sales price does not affect the current price. C) the stock may never be sold. D) the present value cannot be computed. 41) In the Gordon Growth Model, the growth rate is assumed to be the required return on equity. A) proportional to B) equal to C) greater than D) less than 42) Which of the following is not one of the 3 components of net interest margin as illustrated by the yield curve? A) funding spread B) credit spread C) interest rate risk spread D) liquidity spread 43) If the possibility of a default increases because corporations begin to suffer losses, then the default risk on corporate bonds will, and the bonds' returns will become uncertain, meaning that the expected return on these bonds will decrease, everything else held constant. A) increase; more B) decrease; less C) increase; less D) decrease; more 40) 41) 42) 43) 44) If expectations are formed rationally, then individuals 44) A) change their forecast when faced with new information. B) have forecast errors that are persistently low. C) will have a forecast that is 100% accurate all of the time. D) use only the information from past data on a single variable to form their forecast. 45) The spread between the interest rates on bonds with default risk and default-free bonds is called the A) default premium. B) bond margin. C) risk premium. D) junk margin. 46) If the yield curve is flat for short maturities and then slopes downward for longer maturities, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting A) a decline in short-term interest rates in the near future and a rise further out in the future. B) constant short-term interest rates in the near future and a decline further out in the future. C) a rise in short-term interest rates in the near future and a decline further out in the future. D) a decline in short-term interest rates in the near future and an even steeper decline further out in the future. 45) 46) 47) Which of the following is not a factor pushing up stock prices in the U.S. over the last few years? 47) A) rising economic growth expectations B) low cash and money market rates C) rising inflation D) declining fear and uncertainty 48) In Keynes's liquidity preference framework, as the expected return on bonds increases (holding everything else unchanged), the expected return on money, causing the demand for to fall. A) rises; money B) falls; bonds C) falls; money D) rises; bonds 48)

7 49) The reduction of brokerage commissions for trading common stocks that occurred in 1975 caused the demand for bonds to and the demand curve to shift to the. A) rise; right B) rise; left C) fall; right D) fall, left 50) 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; falls B) rises; rises C) falls; falls D) falls; rises 49) 50)

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