Monetary and Financial Theories Test 11. The Fisher effect states thatA) nominal interest rates equals the expected inflation rate plus the real rate of interest.B) nominal interest rates equals the real interest rate of interest minus the expected inflation rateC) real rate of interest equals the nominal interest rate plus the expected inflation rate.D) expected inflation rate equals the nominal interest rate plus the real rate of interest.2. If inflation is expected to decrease, thenA) savers will provide less funds at the existing equilibrium interest rate.B) the equilibrium interest rate will increase.C) the equilibrium interest rate will decrease.D) borrowers will demand more funds at the existing equilibrium interest rate.3. If the economy weakens, there is _______ pressure on interest rates. If the Federal Reserve increases the money supply, there is _______ pressure on interest rates (assume that inflationary expectations are not affected).A) upward; upwardB) upward; downwardC) downward; upwardD) downward; downward4. The real interest rate can be forecasted by subtracting the ____ from the ____ for that period.A) nominal interest rate; expected inflation rateB) prime rate; nominal interest rateC) expected inflation rate; nominal interest rateD) prime rate; expected inflation rate.5. Coupon payments are equal to theA) coupon rate on a bond multiplied by the face value of the bond.B) par value on a bond divided by the face value of the bond.C) par value on a bond minus the face value of the bond.D) coupon rate on a bond minus the face value of the bond.6. If a bond is sold at a discount from par, thisA) lowers the yield on the bond.B) does not change the yield on the bond.C) raises the yield on the bond.D) None of the above7. As market interest rates fall, what happens to the prices of existing bonds?A) Prices of existing bonds fall.B) Prices of existing bonds increase.C) Prices of existing bonds remain the same.D) Prices of existing bonds increase and the decrease.8. In general, when income falls, the willingness and ability to borrow and spend willA) increase B) decrease C) remain the same D) be impossible to determine.9. Given an interest rate of 5%, which has a higher present value: A payment of 80 at the present time, or 100 in 2 years?A) The present amount (80 now, has a higher present value because of a positive time preference.B) The present amount (100 in 2 years, has a higher present value, give an interest rate of 5%.C) The present amount (80 now, has a higher present value, give an interest rate of 5%.D) The present amount (80 now, has a higher compounded value.10. If a bond has 10 years to go to maturity, a par value of 5,000, is paying a dividend of 300 annually, and costs 6,000 today, the current yield is which of the following?A) 6% B) 5% C)10% D) impossible to deduce from the information given11. If the nominal interest rate is 9% and expected inflation is 11%, then the real interest rate isA) 2% B) 2% C) 20% D) unknown12. A consol with a coupon payment of 100 iss purchased for 1,000. When the consol is sold, the interest rate is 20%. What has happended to the price of the consol?A) The consol’s price remains at 1,000.B) The consol’s price will have increased to 2,000.C) The consol’s price will have decreased to 500.D) It is impossible to determined from the information given what the price of the consol will be.13. If a bank will pay 7% interest compounded annually on 2,500 deposited today, the depositor will receive how much at the end of 8 years?A) 3,900.00 B) 3,950.45 C) 4,267.63 D) 4,295.4714. Which of the following 1,000 face – value securities has the highest yield to maturity?A) A 5% coupon bond selling for 1,000.B) A 10% coupon bond selling for 1,000.C) A 12% coupon bond selling for 1,000.D) A 12% coupon bond selling for 1,100
Monetary and Financial Theories Test 1 The Fisher effect states that A) nominal interest rates equals the expected inflation rate plus the real rate of interest B) nominal interest rates equals the real interest rate of interest minus the expected inflation rate C) real rate of interest equals the nominal interest rate plus the expected inflation rate D) expected inflation rate equals the nominal interest rate plus the real rate of interest If inflation is expected to decrease, then A) savers will provide less funds at the existing equilibrium interest rate B) the equilibrium interest rate will increase C) the equilibrium interest rate will decrease D) borrowers will demand more funds at the existing equilibrium interest rate If the economy weakens, there is _ pressure on interest rates If the Federal Reserve increases the money supply, there is _ pressure on interest rates (assume that inflationary expectations are not affected) A) upward; upward B) upward; downward C) downward; upward D) downward; downward The real interest rate can be forecasted by subtracting the from the for that period A) nominal interest rate; expected inflation rate B) prime rate; nominal interest rate C) expected inflation rate; nominal interest rate D) prime rate; expected inflation rate Coupon payments are equal to the A) coupon rate on a bond multiplied by the face value of the bond B) par value on a bond divided by the face value of the bond C) par value on a bond minus the face value of the bond D) coupon rate on a bond minus the face value of the bond If a bond is sold at a discount from par, this A) lowers the yield on the bond B) does not change the yield on the bond C) raises the yield on the bond D) None of the above As market interest rates fall, what happens to the prices of existing bonds? A) Prices of existing bonds fall B) Prices of existing bonds increase C) Prices of existing bonds remain the same D) Prices of existing bonds increase and the decrease In general, when income falls, the willingness and ability to borrow and spend will A) increase B) decrease C) remain the same D) be impossible to determine Given an interest rate of 5%, which has a higher present value: A payment of $80 at the present time, or $100 in years? A) The present amount ($80 now, has a higher present value because of a positive time preference B) The present amount ($100 in years, has a higher present value, give an interest rate of 5% C) The present amount ($80 now, has a higher present value, give an interest rate of 5% D) The present amount ($80 now, has a higher compounded value 10 If a bond has 10 years to go to maturity, a par value of $5,000, is paying a dividend of $300 annually, and costs $6,000 today, the current yield is which of the following? A) 6% B) 5% C)10% D) impossible to deduce from the information given 11 If the nominal interest rate is 9% and expected inflation is 11%, then the real interest rate is A) -2% B) 2% C) 20% D) unknown 12 A consol with a coupon payment of $100 iss purchased for $1,000 When the consol is sold, the interest rate is 20% What has happended to the price of the consol? A) The consol’s price remains at $1,000 B) The consol’s price will have increased to $2,000 C) The consol’s price will have decreased to $500 D) It is impossible to determined from the information given what the price of the consol will be 13 If a bank will pay 7% interest compounded annually on $2,500 deposited today, the depositor will receive how much at the end of years? A) $3,900.00 B) $3,950.45 C) $4,267.63 D) $4,295.47 14 Which of the following $1,000 face – value securities has the highest yield to maturity? A) A 5% coupon bond selling for $1,000 B) A 10% coupon bond selling for $1,000 C) A 12% coupon bond selling for $1,000 D) A 12% coupon bond selling for $1,100 15 If a $10,000 face – value discount bond maturing in one year is selling for $5,000, then its yield to maturity is A) percent B) 10 percent C) 50 percent D) 100 percent 16 The sum of the current yield and the rate of capital gain is called the A) rate of return B) discount yield C) pertuity yield D) par value 17 Financial markets A) facilitate the flow of funds from deficit surplus units B) facilitate the flow of funds from surplus to deficit units C) are markets in which financial assets such as stocks and bonds can be purchased and sold D) Only answers B and C are correct E) None of the above are true 18 Financial markets facilitating the trading of existing securities are known as _ A) money markets B) capital markets C) primary market D) secondary markets above 19. _ are not considered capital market securities A) Repurchase agreements B) Municipal bonds D) Equity securities E) Mortgages E) none of the C) Coporate bonds 20 Long-term debt securities tend to have a expected return and risk than money market securities A) lower; lower B) lower; higher C) higher; lower D) higher; higher 21 When security prices fully reflect all available information, the markets for these securities are said to be A) inefficient B) efficient C) perfect D) imperfect E) none of the above 22.The time and money spent in carrying out financial transactions are called A) economies of scale B) financial intermediation C) liquidity services D) transaction costs 23 Financial intermediaries prodive customers with liquidity services Liquidity services _ A) make it easier for custumers to conduct transactions B) allow customers to have coffee while waiting in the lobby C) are a result of the asymmetric information problem D) are another term for asset transformation 24 The primary liabilities of a commercial bank are A) bonds B) mortgages C) deposits D) commercial paper 25 Economies of scale enable financial institutios to A) reduce transactions costs B) avoid the asymmetric inromation problem C) avoid adverse selection problems D) reduce moral hazard 26 The primary assets of a commercial bank are A) securities B) loans C) cash and reserves D) fixed assets 27 Typically, borrowers have superior information relative to lenders about the potential returns a risks associated with an investment project The difference in information is called A) moral selection B) risk sharing C) asymmetric information D) adverse hazard 28 The problem created by asymmetric information before the transaction occurs is called _, while the problem created after the transaction occurs is called _ A) adverse selection; moral hazard B) moral hazard; adverse selection C) costly state verification; free-riding D) free-riding; costly state verification 29 Financial institutions that accept deposits and make loans are called _ institutions A) investment B) contractual savings C) depository D) underwriting 30 Which of the following are the investment intermediaries? A) Life insurance companies B) Mutual funds C) Pension funds D) State and local government retirement funds 31 Which of the following is a contractual savings institution? A) A life insurance company B) A credit union C) A savings and loan association mutual fund 32 An investment intermediary that lends funds to consumers is _ A) a finance company B) an investment bank C) a finance fund company 33 The primary assets of a finance company are _ A) municipal bonds B) corporate stocks and bonds mortgages D) A D) a consumer C) consumer and business loans D) 34 Contractual savings institutions include A) mutual savings banks B) money market mutual funds insurance companies 35 Which of the following can be described as direct finance? A) You take out a mortgage from your local bank C) You buy shares of common stock in the secondary market C) commercial banks D) life B) You borrow $2500 from a friend D) You buy shares in a mutual fund 36 Which of the following can be described as involving indirect finance ? A) You make a loan to your neighbor B) You buy shares in a mutual fund C) You buy a U.S Treasury bill from the U.S Treasury D) A corporation buys a short-term security issued by another corporation in the primary market 37 The stock market is important because it is _A) where interest rates are determined B) the most widely followed financial market in the United States C) where foreign exchange rates are determined D) the market where most borrowers get their funds 38 The main source of funds for _ is proceeds from selling securities to households and businesses, while their main use of funds is providing loans to households and businesses A) saving institutions B) commercial banks C) mutual funds D) finance companies E) pension funds 39 The market where one currency is converted into another currency is called the market A) stock B) bond C) derivatives D) foreign exchange 40 With direct finance funds are channeled through the financial market from the directly to the _ A) savers, spenders B) spenders, investors C) borrowers, savers D) investors, savers 41 A corporation acquires new funds only when its securities are sold in the 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 42 Secondary markets make financial instruments more A) solid B) vapid C) liquid D) risky 43 Which of the following statements about the characteristics of debt and equity is true? A) They can both be long-term financial instruments B) Bond holders are residual claimants C) The income from bonds is typically more variable than that from equities D) Bonds pay dividends 44 When secondary market buyers and sellers of securities meet in one central location to conduct trades the market is called a(n) _ A) exchange B) over – the – counter market C) common market D) barter market 45 Equity instruments are traded in the _market A) money B) bond C) captital D) commodities 46 are financial intermediaries that acquire funds by selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds A) Mutual funds B) Investment banks C) Finance companies D) Credit unions 47 Transactions that involve currently produced goods and servides, including the balance of goods and services and net unilateral transfers, are explicitly measured in the A) current account B) capital account C) foreign exchange market D) transfers account 48 As the dollar appreciates, holding all other factors constant, dollar prices of foreign goods A) decrease B) increase C) remain the same D) increase, holding all foreign exchange constant 49 The exchange rate is best defined as A) the number of units of domestic currency which can be acquired with one unit of foreign money B) the number of units of domestic currency which can be acquired with one units of domestic money C) the number of units of foreign currency which can be acquired with one units of domestic money D) the number of units of foreign currency which can be acquired with one units of foreign money 50 The balance of payments for the U.S is the record of transactions between the U.S and A) the United Nations B) the World Trading Orrganization C) its international trading partners D) countries that are members of the Federal Reserve System