Midterm 1

35 Questions  I  By Stlepin
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Midterm Quizzes & Trivia

  
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  • 1. 
    1. The statement "risk requires compensation" implies that people: 
    • A. 

      Do not take risk

    • B. 

      Only accept risk when they absolutely have to

    • C. 

      Will only accept risk when they are rewarded for doing so

    • D. 

      Avoid risk at all cost


  • 2. 
    2. Banks usually offer higher rates of interest to people willing to keep their funds in the bank longer because:   
    • A. 

      These depositors are the banks' best customers

    • B. 

      Banks really do not want a lot of people coming into the bank

    • C. 

      Bankers realize time has value and people need to be compensated if they are to keep their money in the bank longer

    • D. 

      These depositors are very wealthy and so have other options about what to do with their funds


  • 3. 
    3. Studying money and banking through five core principles is helpful because: 
    • A. 

      Studies have shown students have a difficult time remembering more than five topics

    • B. 

      Everything in economics can be reduced to five core principles

    • C. 

      Money and banking can undergo drastic changes overtime, but the five principles do not

    • D. 

      These five principles are understood by everyone


  • 4. 
    4. Identify which item is not one of the six parts of the financial system. 
    • A. 

      Financial markets

    • B. 

      Central banks

    • C. 

      Credit cards

    • D. 

      Financial institutions


  • 5. 
    5. The unit of account characteristic of money: 
    • A. 

      Makes it difficult to compare the relative prices of goods and services

    • B. 

      Refers to how we use money to transfer purchasing power over time

    • C. 

      Means all prices are expressed in terms of money

    • D. 

      Means that money finalizes payments


  • 6. 
    6. The store of value characteristic of money refers to the fact that: 
    • A. 

      People save most of their money

    • B. 

      Sellers are less likely to accept perishable goods in exchange for goods they sell

    • C. 

      Money is not valuable unless it is stored

    • D. 

      Money is the only way people have to store value


  • 7. 
    7. The high transaction costs associated with a barter system refers to: 
    • A. 

      The fact that, often times, these exchanges are taxed by governments

    • B. 

      The risk associated with having to carry an inventory of goods to trade

    • C. 

      The high cost associated with finding someone with whom to exchange

    • D. 

      The cost of drawing up complete contracts


  • 8. 
    8. An advantage that money has over other assets is that it: 
    • A. 

      Increases in value over time

    • B. 

      Has lower transaction costs to use as a means of payment than other assets

    • C. 

      Provides a higher return to the owner

    • D. 

      Is a safer asset to hold during times of inflation


  • 9. 
    9. The money aggregate M2 includes: 
    • A. 

      Large denomination time deposits

    • B. 

      Stock and bond mutual fund shares

    • C. 

      Savings deposits but not money market deposit accounts

    • D. 

      M1


  • 10. 
    10. M1 has decreased in its usefulness in understanding inflation due to: 
    • A. 

      The increased use of checks in the economy

    • B. 

      The introduction of money market mutual fund shares and similar checking substitutes

    • C. 

      More reliance on the use of currency

    • D. 

      The increased use of electronic payments


  • 11. 
    11. Many financial instruments are standardized because: 
    • A. 

      It is believed that most parties to a contract do not read them anyway

    • B. 

      Complexity is costly, the more complex a contract, the more it costs to create

    • C. 

      The standardization of contracts makes them harder to understand

    • D. 

      It is required by the government


  • 12. 
    12. Asymmetric information in financial markets is a potential problem usually resulting from: 
    • A. 

      Borrowers having more information than the lenders, and not disclosing this information

    • B. 

      Lenders having more information than borrowers and not disclosing this information

    • C. 

      The fact that people are basically dishonest

    • D. 

      The uncertainty about Federal Reserve monetary policy


  • 13. 
    13. A share of Microsoft stock would best be described as which of the following? 
    • A. 

      A derivative instrument

    • B. 

      A means of payment

    • C. 

      An underlying instrument

    • D. 

      A debt instrument


  • 14. 
    14. Financial instruments used primarily as stores of value include each of the following, except: 
    • A. 

      Bonds

    • B. 

      Futures contracts

    • C. 

      Stocks

    • D. 

      Home mortgages


  • 15. 
    15. Roles served by financial markets include the following, except: 
    • A. 

      Eliminating risk

    • B. 

      Providing liquidity

    • C. 

      Pooling and communicating information

    • D. 

      Sharing of risk


  • 16. 
    16. Debt instruments that have maturities less than one year are traded in: 
    • A. 

      The primary market exclusively

    • B. 

      The bond markets exclusively

    • C. 

      The bond market if they are already in existence

    • D. 

      The money market


  • 17. 
    17. Suppose Mary receives an $8,000 loan from First National Bank. Mary repays $8,480 to First National Bank at the end of one year. Assuming the simple calculation of interest, the interest rate on Mary's loan was: 
    • A. 

      8.00%

    • B. 

      $480

    • C. 

      6.00%

    • D. 

      5.66%


  • 18. 
    18. A lender is promised a $100 payment (including interest) one year from today. If the lender has a 6% opportunity cost of money, he/she should be willing to accept what amount today? 
    • A. 

      $100.00

    • B. 

      $106.20

    • C. 

      $96.40

    • D. 

      $94.34


  • 19. 
    19. The rule of 72 says that at 6% interest $100 should become $200 in about: 
    • A. 

      72 months

    • B. 

      100 months

    • C. 

      12 years

    • D. 

      7.2 years


  • 20. 
    20. The lower the interest rate, i: 
    • A. 

      The lower is the present value

    • B. 

      The greater must be n

    • C. 

      The higher is the present value

    • D. 

      The higher is the future value


  • 21. 
    21. The price of a coupon bond is determined by: 
    • A. 

      Taking the present value of the bond's final payment and subtracting the coupon payments

    • B. 

      Taking the present value of the coupon payments and adding this to the face value

    • C. 

      Taking the present value of all of the bond's payments

    • D. 

      Estimating its future value


  • 22. 
    22. As inflation increases, for any fixed nominal interest rate, the real interest rate: 
    • A. 

      Also increases

    • B. 

      Remains the same, that's why it is real

    • C. 

      Decreases

    • D. 

      Decreases by less than the increase in inflation


  • 23. 
    23. Which of the following statements is most accurate? 
    • A. 

      Yield to maturity is equal to the coupon rate if the bond is held to maturity

    • B. 

      Yield to maturity is the same as the coupon rate

    • C. 

      Yield to maturity will exceed the coupon rate if the bond is purchased for face value

    • D. 

      Yield to maturity is the same as the coupon rate if the bond is purchased for face value and held to maturity


  • 24. 
    24. When the price of a bond is below the face value, the yield to maturity: 
    • A. 

      Is below the coupon rate

    • B. 

      Will be above the coupon rate

    • C. 

      Will equal the current yield

    • D. 

      Will equal the coupon rate


  • 25. 
    25. A $1000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has: 
    • A. 

      A current yield equal to 6.22%

    • B. 

      A current yield equal to 6.00%

    • C. 

      A coupon rate equal to 6.22%

    • D. 

      A yield to maturity and current yield equal to 6.00%


  • 26. 
    25. A $1000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has: 
    • A. 

      A current yield equal to 6.22%

    • B. 

      A current yield equal to 6.00%

    • C. 

      A coupon rate equal to 6.22%

    • D. 

      A yield to maturity and current yield equal to 6.00%


  • 27. 
    26. A $1,000 face value bond, with an annual coupon of $40, one year to maturity and a purchase price of $980 has: 
    • A. 

      A current yield that equals 4.00%

    • B. 

      A coupon rate that equals 4.08%

    • C. 

      A current yield that equals 4.08% and a yield to maturity that equals 6.12%

    • D. 

      A current yield that equals 4.08% and a yield to maturity that equals 4.0%


  • 28. 
    27. Suppose there is a decrease in the price at which a bondholder sells her bond. In this case, the holding period return will: 
    • A. 

      Increase, since yields and prices are inversely related

    • B. 

      Decrease, since this lowers the capital gain

    • C. 

      Be negative

    • D. 

      Equal the coupon rate


  • 29. 
    28. Interest-rate risk would not matter to which of the following bondholders? 
    • A. 

      A holder of a U.S. government bond

    • B. 

      A holder of a U.S. government bond indexed for inflation

    • C. 

      A holder of a U.S. government bond who plans on selling it in one year

    • D. 

      A holder of a U.S. government bond that plans on holding it until it matures


  • 30. 
    29. The impact of a decrease in expected inflation in the bond market will have a relatively large effect on the prices of bonds prices because: 
    • A. 

      The bond demand curve will shift right as will the bond supply curve

    • B. 

      The bond demand curve will shift right but the bond supply curve shifts left

    • C. 

      The bond demand and supply curves will shift left

    • D. 

      The bond demand curve will shift left as the bond supply curve shifts right


  • 31. 
    30. If the risk on foreign government bonds increases relative to U.S. government bonds, the price of U.S. government bonds should: 
    • A. 

      Not change since U.S. government bonds are free of default risk

    • B. 

      Decrease since people will bail out of all government bonds

    • C. 

      Increase as the demand for these bonds increases

    • D. 

      Not be affected because the two types of bonds are traded in different markets


  • 32. 
    31. If a bond's rating improves it should cause: 
    • A. 

      The bond's price and yield to increase, all other factors constant

    • B. 

      The bond's price and yield to decrease, all other factors constant

    • C. 

      The bond's price to increase and its yield to decrease, all other factors constant

    • D. 

      The bond's price to decrease and its yield to increase, all other factors constant


  • 33. 
    32. The risk spread is: 
    • A. 

      The difference between a bond's purchase price and selling price

    • B. 

      The difference between the bond's yield and the yield on a U.S. Treasury bond of the same maturity

    • C. 

      Less than 0 (zero) for a U.S. Treasury bond

    • D. 

      Assigned by a bond-rating agency


  • 34. 
    33. If a local government eliminates the tax exemption on municipal bonds, we'd expect to see: 
    • A. 

      An increase in the yield on taxable bonds

    • B. 

      A decrease in the gap in yields on taxable and tax-exempt bonds

    • C. 

      A decrease in the yield on municipal bonds

    • D. 

      Municipal bonds will become more attractive to investors


  • 35. 
    34.  Suppose the tax rate is 25% and the taxable Treasury bond yield is 8%. If a municipal bond with the same maturity has an yield of 7.5%, what is the risk spread on the municapal bond?  
    • A. 

      1.5%

    • B. 

      0.5%

    • C. 

      6%

    • D. 

      2%


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