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

Transcription

1 Econ 330 Spring 2015: EXAM 1 Name ID Section Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If during the past decade the average rate of monetary growth has been 5% and the average inflation rate has been 5%, everything else held constant, when the Federal Reserve announces that the new rate of monetary growth will be 10%, the adaptive expectation forecast of the inflation rate is A) 10%. B) between 5 and 10%. C) more than 10%. D) 5%. 1) 2) Which of the following is not a factor impacting today's yield? 2) A) Fed's monetary policy B) falling unemployment rate C) eurozone debt crisis D) emerging market turmoil 3) In the one-period valuation model, an increase in the required return on investments in equity 3) A) increases the expected sales price of a stock. B) increases the current price of a stock. C) reduces the expected sales price of a stock. D) reduces the current price of a stock. 4) If the interest rate on a bond is above the equilibrium interest rate, there is an excess for bonds and the bond price will. A) supply; rise B) supply; fall C) demand; rise D) demand; fall 5) Which of the following was not a contributing factor to all the failure of Fannie Mae and Freddie Mac in 2008? A) falling home prices B) falling values of MBS C) tighter mortgage loan underwriting standards D) rising home loan defaults 6) When an economy grows out of a recession, normally the demand for bonds and the supply of bonds, everything else held constant. A) increases; decreases B) increases; increases C) decreases; decreases D) decreases; increases 7) When the price of a bond is the equilibrium price, there is an excess demand for bonds and price will. A) above; fall B) below; rise C) above; rise D) below; fall 4) 5) 6) 7) 8) A change in perceived risk of a stock changes 8) A) the required rate of return. B) the expected dividend growth rate. C) the current dividend. D) the expected sales price. 9) When the inflation rate is expected to increase, the for bonds falls, while the curve shifts to the right, everything else held constant. A) supply; demand B) demand; demand C) demand; supply D) supply; supply 9)

2 10) Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10%, the current price of the stock would be A) $ B) $ C) $ D) $ ) If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is A) 5 percent. B) 10 percent. C) 12.5 percent. D) 15 percent. 12) Everything else held constant, during a business cycle expansion, the supply of bonds shifts to the as businesses perceive more profitable investment opportunities, while the demand for bonds shifts to the as a result of the increase in wealth generated by the economic expansion. A) right; left B) right; right C) left; right D) left; left 13) The bond demand curve is sloping, indicating a(n) relationship between the price and quantity demanded of bonds. A) upward; direct B) downward; inverse C) upward; inverse D) downward; direct 14) If 1-year interest rates for the next five years are expected to be 4, 2, 5, 4, and 5 percent, and the 5-year term premium is 1 percent, than the 5-year bond rate will be A) 2 percent. B) 3 percent. C) 4 percent. D) 5 percent. 10) 11) 12) 13) 14) 15) Interest rates are low in the U.S. today because of all the following factors except: 15) A) the remnants of the Fed's QE program B) low surplus funds at banks C) corporate sector excess cash D) eurozone debt crisis 16) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year? A) -5 percent B) 5 percent C) 10 percent D) 25 percent 17) 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 slow adjustment of expected inflation. C) there is fast adjustment of expected inflation. D) the liquidity effect is larger than the other effects. 18) 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) increases; left; rises D) decreases; left; falls 19) A decrease in the riskiness of corporate bonds will the price of corporate bonds and the price of Treasury bonds, everything else held constant. A) increase; reduce B) increase; increase C) reduce; reduce D) reduce; increase 20) An increase in default risk on corporate bonds the demand for these bonds, but the demand for default-free bonds, everything else held constant. A) moderately lowers; does not change B) increases; lowers C) lowers; increases D) does not change; greatly increases 16) 17) 18) 19) 20)

3 21) Assuming the same coupon rate and maturity length, when the interest rate on a Treasury Inflation Protected Security is 3 percent, and the yield on a non-indexed Treasury bond is 8 percent, the expected rate of inflation is A) 3 percent. B) 5 percent. C) 8 percent. D) 11 percent. 21) 22) In asset markets, an asset's price is 22) A) set equal to the highest price a seller will accept. B) set equal to the lowest price a seller is willing to accept. C) set equal to the highest price a buyer is willing to pay. D) set by the buyer willing to pay the highest price. 23) According to rational expectations theory, forecast errors of expectations 23) A) tend to be persistently high or low. B) are more likely to be negative than positive. C) are unpredictable. D) are more likely to be positive than negative. 24) If there is an excess supply of money 24) A) individuals sell bonds, causing the interest rate to rise. 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 fall. 25) 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; money C) rises; bonds D) falls; bonds 26) According to this theory of the term structure, bonds of different maturities are not substitutes for one another. A) Segmented markets theory B) Liquidity premium theory C) Expectations theory D) Separable markets theory 27) A particularly attractive feature of the is that it tells you what the market is predicting about future short-term interest rates by just looking at the slope of the yield curve. A) liquidity premium theory B) segmented markets theory C) expectations theory D) separable markets theory 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 rise immediately above the initial level when the money supply grows. B) interest rate will rise. C) interest rate will fall. D) interest rate will fall immediately below the initial level when the money supply grows. 25) 26) 27) 28) 29) Keynes assumed that money has rate of return. 29) A) a positive B) a negative C) an increasing D) a zero

4 30) When yield curves are steeply upward sloping, 30) A) short-term interest rates are above long-term interest rates. B) short-term interest rates are about the same as long-term interest rates. C) medium-term interest rates are above both short-term and long-term interest rates. D) long-term interest rates are above short-term interest rates. 31) 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 is less than their default risk. B) Treasury bonds are not default-free. C) the benefit from the tax-exempt status of municipal bonds exceeds their default risk. D) the benefit from the tax-exempt status of municipal bonds equals their default risk. 32) 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; falls B) rises; rises C) falls; falls D) falls; rises 33) If investors expect interest rates to fall significantly in the future, the yield curve will be inverted. This means that the yield curve has a slope. A) downward B) flat C) steep upward D) slight upward 31) 32) 33) 34) Which of the following is not a component of a bank's tangible equity? 34) A) net income B) cumulative perpetual preferred stock C) retained earnings D) equity 35) If stock prices are expected to climb next year, everything else held constant, the curve for bonds shifts and the interest rate. A) demand; left; rises B) demand; left; falls C) supply; left; rises D) demand; right; rises 36) Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity of 15 percent. If the interest rate on one-year bonds rises from 15 percent to 20 percent over the course of the year, what is the yearly return on the bond you are holding? A) 5 percent B) 10 percent C) 15 percent D) 20 percent 35) 36) 37) Which of the following bonds are considered to be default-risk free? 37) A) Junk bonds B) U.S. Treasury bonds C) Municipal bonds D) Investment-grade bonds 38) 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) no longer pay close attention to movements in this variable. B) change the way they form expectations about future values of the variable. C) begin to make systematic mistakes. D) give up trying to forecast this variable. 39) Over the next three years, the expected path of 1-year interest rates is 4, 1, and 1 percent. The expectations theory of the term structure predicts that the current interest rate on 3-year bond is A) 1 percent. B) 2 percent. C) 3 percent. D) 4 percent. 38) 39)

5 40) 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. 40) 41) If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is 41) A) $650. B) $130. C) $1,300. D) $13. 42) During the financial crisis, the Federal Reserve intervened in the commercial paper market. Which government institution opened a "supplementary financing" account at the Fed to provide the necessary financing? A) Fannie Mae B) Freddie Mac C) Federal Deposit Insurance Corporation D) Treasury 43) If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is A) 2 percent. B) 8 percent. C) 10 percent. D) 12 percent. 42) 43) 44) A movement along the bond demand or supply curve occurs when changes. 44) A) income B) wealth C) expected return D) bond price 45) Which of the following is not one of the ten characteristics of the 500 recent failed banks? 45) A) chartered for less than 10 years B) pursued aggressive growth strategies C) exhibited weak underwriting standards D) located in the north central U.S. 46) 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) decrease; less B) decrease; more C) increase; more D) increase; less 46) 47) The is the final amount that will be paid to the holder of a coupon bond. 47) A) coupon value B) present value C) discount value D) face value 48) An equal increase in all bond interest rates 48) A) decreases the return to all bond maturities by an equal amount. 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) has no effect on the returns to bonds. 49) If people expect real estate prices to increase significantly, the curve for bonds will shift to the, everything else held constant. A) supply; right B) demand; left C) supply; left D) demand; right 50) 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. 49) 50)

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