Bonds and Stocks. Page 1

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Harry Tate
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1 Bonds and Stocks Pretend you are going to start a lemonade stand. You need some money to get started. What do you do? You ask your grandmother to lend you $10. Your grandmother just bought a bond. Bonds (securities) are loans, or IOUs, that represent debt that the government, business, or individual must repay to the lender. The bond holder has no ownership, just a requirement to fulfill payment. Stocks represent ownership in a corporation and the stockholder is often entitled to a portion of the profit. Page 1

Bonds and Stocks How does changes in the interest rate effect bond prices? When you buy bonds, you can wait for them to mature to full price before cashing them in or you can sell them off early.

2 Bonds and Stocks How does changes in the interest rate effect bond prices? When you buy bonds, you can wait for them to mature to full price before cashing them in or you can sell them off early. Assume you bought a bond at a 5% interest rate that will mature in 10 years. If the interest rates increases to 10%, will buyers be more or less interested in buying your bond? What will happen to the price of your bond? Buyers would be less interested in your bond; the price would decrease. Interest rates and bond prices are inversely related! Page 2

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4 Asset Reserve Required $80,000 Exce ss $20,000 Loans Total $ $300,000 $400,000 Checkable Deposits ' Liabilitie s demand deposits $ Total $400,000 Page The table above show s the current entries in the T-account of XYZ Bank. Kim purchase s a bond issued by the Federal Reserve Bank for $50,000 and pays for the bond by drawin g on her company's account at XYZ Bank. What is the effect of Kim ' purchase of the bond on the required and excess reserves of XYZ Bank and the total money supply? Required Excess Money Supply (A) Incre ase Decrease Decrease (B) Decrease Decrea se Decrease (C) No Change Decrea se No Change (D) Increa se No change Increa se (E) Decrease Increase Increase

5 Asset Reserve Required $80,000 Exce ss $20,000 Loans Total $ $300,000 $400,000 Checkable Deposits ' Liabilitie s demand deposits $ Total $400,000 Page The table above show s the current entries in the T-account of XYZ Bank. Kim purchase s a bond issued by the Federal Reserve Bank for $50,000 and pays for the bond by drawin g on her company's account at XYZ Bank. What is the effect of Kim ' purchase of the bond on the required and excess reserves of XYZ Bank and the total money supply? Required Excess Money Supply (A) Incre ase Decrease Decrease Decrease Decrea se Decrease (C) No Change Decrea se No Change (D) Increa se No change Increa se (E) Decrease Increase Increase

18. Which of the following de cribe a major difference between tock and bonds? Page 6 (A) Stock represent ownership in a corporation, and bond represent a loan to a corporation.

6 18. Which of the following de cribe a major difference between tock and bonds? Page 6 (A) Stock represent ownership in a corporation, and bond represent a loan to a corporation. (B) Bond repre ent owner hip in a corporation, and tock repre ent a loan to a corporation. (C) Stock are counted in gro domestic product, and bond are not counted. (D Bond are counted in gro s dome tic product, and tock are not counted. (E) Bond pay dividends, and tock earn intere t. 46. Which of the following mixes of fiscal and monetary policy would reduce inflation? Fi cal Policy Monetary Policy (A) Decrea e pending Buy bonds (B) Decrea e taxes Buy bonds (C Increa e taxe Sell bond (D) Increase spending Buy bonds (E) Increa e pending Sell bond

7 18. Which of the following de cribe a major difference between tock and bonds? Page 7 (. ) Stock represent ownership in a corporation, and bond represent a loan to a corporation. (B) Bond repre ent owner hip in a corporation, and tock repre ent a loan to a corporation. (C) Stock are counted in gro domestic product, and bond are not counted. (D Bond are counted in gro s dome tic product, and tock are not counted. (E) Bond pay dividends, and tock earn intere t. 46. Which of the following mixes of fiscal and monetary policy would reduce inflation? Fi cal Policy Monetary Policy (A) Decrea e pending Buy bonds (B) Decrea e taxes Buy bonds (. Increa e taxe Sell bond (D) Increase spending Buy bonds (E) Increa e pending Sell bond

8 40. Assume that the government finances its spending by bon owing from the public. If the government increa es deficit spending the price of previously issued bonds and the real interest rate will change in which of the following ways? Page 8 Price of Bond (A) Decrease (B) Decrea e (C) Increase (D) lncrea e (E) Increase Real Interest Rate Decrease Increa e Decrea e No change lncrea e 9. If the interest rate on ho rt-term government bonds declined as a result of open market operations by a central bank, the central bank must have (A) purchased government bond (B) old government bond to commercial bank (C) decrea ed the amount of currency in circulation (D) increased the upply of bonds (E) increased the discount rate on loans to commercial bank

9 40. Assume that the government finances its spending by bon owing from the public. If the government increa es deficit spending the price of previously issued bonds and the real interest rate will change in which of the following ways? Page 9 Price of Bond (A) Decrease Decrea e (C) Increase (D) lncrea e (E) Increase Real Interest Rate Decrease Increa e Decrea e No change lncrea e 9. If the interest rate on ho rt-term government bonds declined as a result of open market operations by a central bank, the central bank must have. ) purchased government bond (B) old government bond to commercial bank (C) decrea ed the amount of currency in circulation (D) increased the upply of bonds (E) increased the discount rate on loans to commercial bank

the This is Macroeconomics In this chapter, we will examine the role of money and banks in the economy. We will look at how central banks~ such as the

the This is Macroeconomics In this chapter, we will examine the role of money and banks in the economy. We will look at how central banks~ such as the This is Macroeconomics the In this chapter, we will examine the role of money and banks in the economy. We will look at how central banks~ such as the FED (the Federal Reserve in the U.S.), regulate the