Review Exam 1. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

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1 Review Exam 1 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Financial markets promote economic efficiency by A) reducing investment. B) channeling funds from investors to savers. C) channeling funds from savers to investors. D) creating inflation. 1) 2) The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the A) inflation rate. B) interest rate. C) aggregate price level. D) exchange rate. 2) 3) Everything else held constant, a decline in interest rates will cause spending on housing to A) rise. B) fall. C) either rise, fall, or remain the same. D) remain unchanged. 3) 4) When stock prices fall A) an individual's wealth is not affected nor is their willingness to spend. B) an individual's wealth may decrease but their willingness to spend is not affected. C)a business firm will be more likely to sell stock to finance investment spending. D) an individual's wealth may decrease and their willingness to spend may decrease. 4) 5) High interest rates might purchasing a house or car but at the same time high interest rates might saving. A) discourage; discourage B) encourage; discourage C) discourage; encourage D) encourage; encourage 5) 6) A financial crisis is A) a feature of developing economies only. B) typically followed by an economic boom. C) a major disruption in the financial markets. D) not possible in the modern financial environment. 6) 7) Financial intermediaries A) provide a channel for linking those who want to save with those who want to invest. B) can hurt the performance of the economy. C) hold very little of the average American's wealth. D) produce nothing of value and are therefore a drain on society's resources. 7) 8) The delivery of financial services electronically is called A) e-commerce. B) e-possible. C) e-finance. D) e-business. 8) 9) It is true that inflation is a A) continuous increase in the money supply. B) continually rising price level. C) decline in interest rates. D) continuous fall in prices. 9) 1

2 10) There is a association between inflation and the growth rate of money. A) negative; supply B) positive; supply C) negative; demand D) positive; demand 10) 11) Financial markets have the basic function of A) providing a risk-free repository of spending power. B) getting people with funds to lend together with people who want to borrow funds. C) assuring that governments need never resort to printing money. D) assuring that the swings in the business cycle are less pronounced. 11) 12) A breakdown of financial markets can result in A) stable prices. B) political instability. C) rapid economic growth. D) financial stability. 12) 13) Which of the following can be described as involving direct finance? A) A pension fund manager buys a short-term corporate security in the secondary market. B) An insurance company buys shares of common stock in the over-the-counter markets. C) A corporation issues new shares of stock. D) People buy shares in a mutual fund. 13) 14) Which of the following is an example of an intermediate-term debt? A) A six month loan from a finance company. B) A sixty-month car loan. C) A Treasury bond. D) A thirty-year mortgage. 14) 15) A financial market in which previously issued securities can be resold is called a market. A) secondary B) tertiary C) primary D) used securities 15) 16) U.S. Treasury bills pay no interest but are sold at a. That is, you will pay a lower purchase price than the amount you receive at maturity. A) discount B) premium C) default D) collateral 16) 17) A short-term debt instrument issued by well-known corporations is called A) corporate bonds. B) municipal bonds. C) commercial mortgages. D) commercial paper. 17) 18) Collateral is the lender receives if the borrower does not pay back the loan. A) a present B) an offering C) a liability D) an asset 18) 19) The British Banker's Association average of interbank rates for dollar deposits in the London market is called the A) Treasury Bill rate. B) prime rate. C) Libor rate. D) federal funds rate. 19) 20) Which of the following instruments are traded in a capital market? A) U.S. Government agency securities B) Repurchase agreements C) U.S. Treasury bills D) Negotiable bank CDs 20) 2

3 21) Equity of U.S. companies can be purchased by A) U.S. citizens and foreign citizens. B) U.S. mutual funds only. C) U.S. citizens only. D) foreign citizens only. 21) 22) Bonds that are sold in a foreign country and are denominated in the country's currency in which they are sold are known as A) country bonds. B) Eurobonds. C) foreign bonds. D) equity bonds. 22) 23) If Microsoft sells a bond in London and it is denominated in dollars, the bond is a A) currency bond. B) British bond. C) foreign bond. D) Eurobond. 23) 24) The present value of an expected future payment as the interest rate increases. A) is constant B) rises C) is unaffected D) falls 24) 25) With an interest rate of 6 percent, the present value of $100 next year is approximately A) $106. B) $100. C) $94. D) $92. 25) 26) A pays the owner a fixed coupon payment every year until the maturity date, when the value is repaid. A) coupon bond; face B) coupon bond; discount C) discount bond; discount D) discount bond; face 26) 27) If a $10,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is A) 5 percent. B) 10 percent. C) 50 percent. D) 100 percent. 27) 28) The interest rate on Treasury Inflation Protected Securities is a direct measure of A) the rate of inflation. B) the real interest rate. C) the nominal interest rate. D) the rate of deflation. 28) 29) In the figure above, a factor that could cause the supply of bonds to increase (shift to the right) is: A) a decrease in government budget deficits. B) a decrease in expected inflation. C) a business cycle recession. D) expectations of more profitable investment opportunities. 29) 3

4 30) In the figure above, a factor that could cause the supply of bonds to shift to the right is: A) a decrease in expected inflation. B) a decrease in government budget deficits. C) a recession. D) a business cycle expansion. 30) 31) Higher government deficits the supply of bonds and shift the supply curve to the, everything else held constant. A) increase; right B) decrease; right C) increase; left D) decrease; left 31) 32) An increase in the expected inflation rate causes the supply of bonds to and the supply curve to shift to the, everything else held constant. A) decrease; right B) increase; left C) decrease; left D) increase; right 32) 33) Everything else held constant, an increase in the riskiness of bonds relative to alternative assets causes the demand for bonds to and the demand curve to shift to the. A) fall; right B) rise; left C) fall; left D) rise; right 33) 4

5 Answer Key Testname: EXAM 1 REVIEW (CHAP 1-5) 1) C 2) B 3) A 4) D 5) C 6) C 7) A 8) C 9) B 10) B 11) B 12) B 13) C 14) B 15) A 16) A 17) D 18) D 19) C 20) A 21) A 22) C 23) D 24) D 25) C 26) A 27) D 28) B 29) D 30) D 31) A 32) D 33) C 5