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

Transcription

1 Econ 330 Spring 2016: EXAM 1 Name ID Section Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is 1) A) 2.5 percent. B) 5 percent. C) 7.5 percent. D) 10 percent. 2) An inverted yield curve predicts that short-term interest rates 2) A) will fall in the future. B) will remain unchanged in the future. C) are expected to rise in the future. D) will rise and then fall in the future. 3) If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200? A) 9 percent B) 10 percent C) 11 percent D) 12 percent 4) U.S. Treasury bills are considered the safest of all money market instruments because there is a low probability of A) defeat. B) default. C) desertion. D) demarcation. 3) 4) 5) An equal increase in all bond interest rates 5) A) has no effect on the returns to bonds. B) decreases long-term bond returns more than short-term bond returns. C) increases the return to all bond maturities by an equal amount. D) decreases the return to all bond maturities by an equal amount. 6) A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a A) discount bond. B) simple loan. C) fixed-payment loan. D) coupon bond. 6) 7) Which of the following statements about financial markets and securities is TRUE? 7) A) A debt instrument is intermediate term if its maturity is less than one year. B) The maturity of a debt instrument is the number of years (term) to that instrument's expiration date. C) A debt instrument is intermediate term if its maturity is ten years or longer. D) A bond is a long-term security that promises to make periodic payments called dividends to the firm's residual claimants. 8) If the Fed wants to permanently lower interest rates, then it should raise the rate of money growth if A) the liquidity effect is smaller than the expected inflation effect. B) there is fast adjustment of expected inflation. C) the liquidity effect is larger than the other effects. D) there is slow adjustment of expected inflation. 9) Fannie Mae and Freddie Mac were put into conservatorship by the FHFA in Which of the following was not a contributing factor to this event? A) falling home prices B) falling MBS prices C) falling interest rates D) rising mortgage defaults 8) 9)

2 10) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year? A) -10 percent B) -5 percent C) 10 percent D) 5 percent 11) Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales price of $100, and a required rate of return of 5%, the current price of the stock would be A) $ B) $ C) $ D) $ ) Because these securities are more liquid and generally have smaller price fluctuations, corporations and banks use the securities to earn interest on temporary surplus funds. A) capital market B) stock market C) bond market D) money market 10) 11) 12) 13) Interest rates are low in the U.S. in 2016 because of all the following except: 13) A) rising stock prices. B) corporate sector excess cash. C) euro zone debt crisis. D) large amount of bank surplus funds. 14) The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the A) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly B) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to C) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to D) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly 14) 15) Which one of the following factors is not impacting the shape of the yield curve in 2016? 15) A) emerging market turmoil B) euro zone debt crisis C) rising home prices D) fed monetary policy 16) Risk premiums on corporate bonds tend to during business cycle expansions and during recessions, everything else held constant. A) increase; decrease B) decrease; decrease C) increase; increase D) decrease; increase 16)

3 17) When the price level falls, the curve for nominal money, and interest rates, everything else held constant. A) supply; increases; rise B) demand; decreases; fall C) supply; decreases; fall D) demand; increases; rise 17) 18) Federal funds are 18) A) loans made by banks to each other. B) loans made by banks to the Federal Reserve System. C) loans made by the Federal Reserve System to banks. D) funds raised by the federal government in the bond market. 19) A decline in the expected inflation rate causes the demand for money to and the demand curve to shift to the, everything else held constant. A) increase; right B) decrease; left C) decrease; right D) increase; left 19) 20) A bank's tangible equity includes all of the following except: 20) A) retained earnings B) equity C) bonds D) preferred stock 21) Bonds issued by state and local governments are called bonds. 21) A) Treasury B) municipal C) corporate D) commercial 22) Of the four effects on interest rates from an increase in the money supply, the initial effect is, generally, the A) liquidity effect. B) income effect. C) price level effect. D) expected inflation effect. 22) 23) A stockholder's ownership of a company's stock gives her the right to 23) A) vote and be the residual claimant of all cash flows. B) manage and assume responsibility for all liabilities. C) vote and be the primary claimant of all cash flows. D) vote and assume responsibility for all liabilities. 24) Assume a bank wants to maintain their 8% capital-to-asset ratio over the next year while their asset base increases 10%. What must the bank's return-on-asset ratio be? A) 0.08% B) 80% C) 8% D) 0.80% 24) 25) Which of the following is not a characteristic of a failed bank? 25) A) located in fast growing housing markets B) pursued aggressive growth strategies C) chartered less than 10 years D) exhibited strong underwriting standards 26) It is possible that when the money supply rises, interest rates may if the effect is more than offset by changes in income, the price level, and expected inflation. A) fall; risk B) rise; risk C) fall; liquidity D) rise; liquidity 27) A decrease in the liquidity of corporate bonds will the yield of corporate bonds and the yield of Treasury bonds, everything else held constant. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase 26) 27)

4 28) A liquid asset is 28) A) an asset that can easily and quickly be sold to raise cash. B) a share of an ocean resort. C) always sold in an over-the-counter market. D) difficult to resell. 29) A corporation acquires new funds only when its securities are sold in the 29) A) primary market by an investment bank. B) primary market by a stock exchange broker. C) secondary market by a securities dealer. D) secondary market by a commercial bank. 30) The present value of an expected future payment as the interest rate increases. 30) A) falls B) is constant C) is unaffected D) rises 31) Everything else held constant, a decrease in marginal tax rates would likely have the effect of the demand for municipal bonds, and the demand for U.S. government bonds. A) decreasing; increasing B) increasing; decreasing C) decreasing; decreasing D) increasing; increasing 31) 32) In the figure above, illustrates the effect of an increased rate of money supply growth at time period 0. From the figure, one can conclude that the A) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to B) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly C) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly D) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to 32) 33) Which of the following $1,000 face-value securities has the highest yield to maturity? 33) A) a 10 percent coupon bond selling for $1,000 B) a 5 percent coupon bond selling for $1,000 C) a 12 percent coupon bond selling for $1,100 D) a 12 percent coupon bond selling for $1,000

5 34) When I purchase, I own a portion of a firm and have the right to vote on issues important to the firm and to elect its directors. A) notes B) bills C) stock D) bonds 34) 35) According to the liquidity premium theory of the term structure 35) A) because of the positive term premium, the yield curve will not be observed to be downward sloping. B) because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time. C) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. D) the interest rate for each maturity bond is determined by supply and demand for that maturity bond. 36) The segmented markets theory can explain 36) A) why interest rates on bonds of different maturities tend to move together. B) why yield curves have been used to forecast business cycles. C) why yield curves usually tend to slope upward. D) why yield curves tend to slope upward when short-term interest rates are low and to be inverted when short-term interest rates are high. 37) Over the last 10 years, over 500 banks failed because tangible equity as a percent of assets fell below percent. A) 0 B) 3 C) 2 D) 8 38) When an investment bank securities, it guarantees a price for a corporation's securities and then sells them to the public. A) overwrites B) overtakes C) underwrites D) undertakes 39) When the price level, the demand curve for money shifts to the and the interest rate, everything else held constant. A) falls; left; rises B) falls; right; rises C) rises; right; rises D) rises; right; falls 37) 38) 39) 40) In which of the following situations would you prefer to be the borrower? 40) A) The interest rate is 25 percent and the expected inflation rate is 50 percent. B) The interest rate is 13 percent and the expected inflation rate is 15 percent. C) The interest rate is 9 percent and the expected inflation rate is 7 percent. D) The interest rate is 4 percent and the expected inflation rate is 1 percent. 41) The higher a security's price in the secondary market the funds a firm can raise by selling securities in the market. A) more; primary B) less; primary C) less; secondary D) more; secondary 41) 42) Which of the following was not a factor contributing to the rise in stock prices during ? 42) A) rising profit expectations B) low money market rates C) falling oil prices D) low borrowing costs 43) Using the Gordon growth model, if D1 is $.50, ke is 7%, and g is 5%, then the present value of the stock is A) $50. B) $2.50. C) $ D) $25. 43)

6 44) In the Keynesian liquidity preference framework, an increase in the interest rate causes the demand curve for money to, everything else held constant. A) shift right B) stay where it is C) invert D) shift left 45) The risk premium on corporate bonds reflects the fact that corporate bonds have a higher default risk and are U.S. Treasury bonds. A) less speculative than B) less liquid than C) lower-yielding than D) tax-exempt unlike 46) If you expect the inflation rate to be 12 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A) -5 percent. B) -2 percent. C) 2 percent. D) 12 percent. 44) 45) 46) 47) are short-term loans in which Treasury bills serve as collateral. 47) A) U.S. government agency securities B) Repurchase agreements C) Negotiable certificates of deposit D) Federal funds 48) The riskiness of an asset's returns due to changes in interest rates is 48) A) interest-rate risk. B) exchange-rate risk. C) price risk. D) asset risk. 49) The yield to maturity for a discount bond is related to the current bond price. 49) A) positively B) not C) negatively D) directly 50) A monetary expansion stock prices due to a decrease in the and an increase in the, everything else held constant. A) increases; required rate of return; future sales price B) reduces; future sales price; expected rate of return C) increases; required rate of return; dividend growth rate D) reduces; current dividend; expected rate of return 50)

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