Econ 315 Midterm Review Flashcards


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1

If your friend is not looking for a job because she wishes to travel the world, she is _____.

not in the labor force at all

2

Many retail stores hire sales assistants during the Chrismas season. However, soon thereafter in January, they lay off these people, creating the problem of _______ unemployment.

seasonal

3

If your friend is unemployed because she has a mismatch of job skills, she is technically classified as a part of ______ unemployment.

structural

4

The inflation rate for the wholesale industry is measured by _______.

the Producer Price Index

5

An inflation rate can measured by the change in ____________.

the consumer price index (CPI), the producer price index (PPI), the GDP deflator

6

If a U.S. company produces and sells $1 million of cars in Europe, it would be included in _______ of the U.S.

the Gross National Product (GNP)

7

Well-functioning financial markets promote _______

growth.

8

Poorly performing financial markets can be the cause of______

poverty.

9

Stocks represent the value of ______ whereas bonds represents the value of _____.

equity; debt

10

If there are a large number of discouraged workers, the official unemployment rate published by the government may ______ the true unemployment rate in the economy.

under-estimate

11

Which of the following does NOT describes phases of a business cycle?

unemployment and peak

12

According to Professor Choi, the reason why it is difficult to cure an economic illness such as a cool-down or a recession is because there are time lags. Which of the following describes the time lag that is associated with knowing whether there is an economic problem or not?

recognition lag

13

Total national output of the U.S. is measured by ______ which is based on the concept of the ______ of production.

Gross Domestic Product (GDP); location

14

The National Bureau of Economic Research (NBER) is a ________ institute that declares a period of an economic ______, based on the past economic performance data of a nation.

private and not-for-profit; recession

15

According to Prof. Choi, ______ in an economy is like blood in a human body.

money

16

Trade deficit exists when exports are _______ imports.

smaller than

17

When the aggregate or average price level in an economy declines, it is known as ________.

deflation

18

If your 20-year old friend is "institutionalized," she is _____.

not in the labor force at all

19

In the past around the 1930s, _______ experienced a severe economic depression but _______ did not.

the U.S.; Japan

20

If the labor force has 250 million people and 5 million people are unemployed, the unemployment rate is cauclated as _____.

2%

21

The Gross Domestic Product is based on _______ whereas the Gross National Product (GNP) is based on ______.

the location of production; the ownership of factors of production

22

Sustained downward movements in the business cycle are referred to as

recessions.

23

During a recession, output declines result in

higher unemployment in the economy.

24

Which of the following is most often used in labor union contracts to adjust annual salaries or other compensations?

the consumer price index (CPI)

25

Trade deficit exists when exports are _______ imports and trade surplus exists when imports are _______ exports.

smaller than; smaller than

26

If a quarterly inflation rate, as measured by the consumer price index, is 4%, its annualized inflation rate is ______.

16%

27

The total market value of all final goods and services produced by the factors of production owned by citizens and companies of a given country during a given year, regardless of location of production, is known as _______.

the Gross National Product (GNP)

28

Strong U.S. dollar against Chinese yuan favors _______ .

the U.S. importers, the U.S. consumers, the Chinese exporters

29

Weak U.S. dollar against Chinese yuan favors _______ .

the U.S. exporters, the Chinese importers

30

If the price level increases from 200 in year 1 to 220 in year 2, the rate of inflation from year 1 to year 2 is

10%.

31

The gross domestic product is the

the market value of all final goods and services produced in an economy in a year.

32

If the aggregate price level at time t is denoted by Pt, the inflation rate from time t - 1 to t is defined as

πt = (Pt - Pt - 1)/Pt - 1.

33

Professor Choi describes and analyzes the overall health of an economy by identifying such markets as _____?

The labor market and the product market, The financial market and the foreign market

34

An economic recession describes a ______ in the national output and an inflation describes a(n) _______ in an aggregate or average price level.

decrease; increase

35

The _______ is responsible for formulating and executing the monetary policy via the control of ______.

Federal Reserve System; money supply

36

Which of the following is most likely to result from a stronger dollar?

U.S. goods exported abroad will cost more in foreign countries, and so foreigners will buy fewer of them.

37

Everything else constant, a stronger dollar will mean that

vacationing in England becomes less expensive.

38

Stocks represent ______ and ______ in a company .

equity; ownership

39

Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.

assets; liabilities

40

The principal lender-savers are

households.

41

Which of the following can be described as involving indirect finance?

You make a deposit at a bank.

42

_______ uses the expected inflation rates in two countries to evaluate a forward foreign exchange (FX) rate.

The purchase power parity

43

The (securitized) bonds issued by government-sponsored enterprises (GSEs) are called _________.

government agency securities

44

The capital market trades ______ financial instruments.

long-term

45

Which of the following is a contractual savings institution?

a life insurance company

46

An investment intermediary that lends funds to consumers is

a finance company.

47

Which of the following are NOT contractual savings institutions?

credit unions

48

Nonbank financial institutions are also known as _______.

nonbank banks, shadow banks

49

Indirect financing uses _______________ whereas direct financing uses ________ to connect the lenders to the borrowers.

financial intermediaries; financial markets

50

If a Japanese company such as Toyota sells a $1000 bond in the United States, the bond is a _____.

foreign bond.

51

If Microsoft sells a bond in London and it is denominated in US dollars, the bond is a ______.

Eurodollar bond.

52

If you trade a currency in a 6-month forward foreign exchange (FX) market, you are ______.

agreeing now on the FX rate that will be used in 6 months from now

53

A trade made via an exchange is guaranteed by _______ whereas that made in an OTC (=over the counter) market is guaranted by __________.

the exchange; the interested parties

54

The action of buying a certificate of deposit from a bank is a form of ______.

lending money to the bank

55

The action of buying a sandwich is a form of ______.

paying money to the merchant

56

When a Japanese merchant quotes the British pound as $2 per British pound, this is known as _______.

an American quotation or terms

57

If the foreign exchange rate moves from 2 euros per US dollar to 1 euro per US dollar, it means that the euro became _______ and US dollar became _________.

stronger; weaker

58

The price of one country's currency in terms of another country's currency is called the

exchange rate.

59

The market for initial public offerings (IPOs) of stocks is an example of ________.

the primary market for stocks

60

The purchasing power parity is often used to determine a _____ forward foreign exchange (FX) rates whereas the interest rate parity is often used to determine a ______ forward FX rates.

long-term; short-term

61

Bonds issued by state and local governments are called ________ bonds.

municipal

62

Which of the following instruments are traded in a money market?

U.S. Treasury bills

63

Equity and debt instruments with maturities greater than one year are called ________ market instruments.

capital

64

Mortgage-backed securities are similar to ________ but the interest and principal payments are backed by the individual mortgages within the security.

bonds

65

Which of the following instruments are traded in a capital market?

corporate bonds

66

A financial market in which only short-term debt instruments are traded is called the ________ market.

money

67

If the maturity of a debt instrument is less than one year, the debt is called

short-term.

68

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.

money market

69

The process of indirect finance using financial intermediaries is called

financial intermediation.

70

Which of the following gives an owner a claim to the ownership of a corporation?

common stock

71

Which of the following is/are the capital market instrument(s)?

Corporate bonds and Treasury notes, Municipal bonds

72

The financial intermediaries that the average person interacts with most frequently are

banks.

73

Financial markets promote economic efficiency by

channeling funds from savers to borrowers, channeling funds from borrowers to savers

74

Financial intermediation conducted by banks and other financial institutions _______.

can benefit economic performance.

75

Which of the following is a depository institution?

Commercial banks, Savings and loan associations (S&Ls), Credit unions

76

Lenders are also known as _______.

bond buyers

77

Borrowers are also known as _______.

demanders of loanable funds, bond sellers, bond issuers

78

A debt instrument issued by a corporation is called ______ if it has a maturity less than 1 year.

a commercial paper

79

Corporate checks whose payment terms are guaranteed by an endorsing bank and predominantly, used in international business by importers are ________.

banker's acceptance

80

Short-term financing arrangements where debt instruments are sold one day and usually repurchased next day (or in a few days) are ________.

repurchase agreements

81

Which of the following are depository institutions?

commercial banks, credit unions

82

Which of the following are NOT nonbank financial institutions?

commercial banks, credit unions

83

The unit of Chinese currency is known as _____.

yuan

84

The unit of Japanese currency is known as _____.

yen

85

If an individual moves money from currency to a demand deposit account

M1 stays the same and M2 stays the same.

86

Recent financial innovation makes the Federal Reserve's job of conducting monetary policy

more difficult, since the Fed no longer knows what to consider money.

87

Income is based on a ______ concept and money as used in Econ 315 is based on a ______ concept.

flow; stock

88

The narrowest definition of money used in Econ 315 is ______.

M1

89

The Federal Reserve Bank's definition of money or money supply is ______.

M2

90

Currency includes

paper money and coins.

91

Which of the following statements uses the economists' definition of money?

I hope that I have enough money to buy my lunch today.

92

To an economist, ________ is anything that is generally accepted in payment for goods and services or in the repayment of debt.

money

93

Money is

anything that is generally accepted in payment for goods and services or in the repayment of debt.

94

Compared to an economy that uses a medium of exchange, in a barter economy

transaction costs are higher.

95

Dennis notices that jackets are on sale for $99. In this case money is functioning as a

unit of account.

96

Whatever a society uses as money, the distinguishing characteristic is that it must

be generally acceptable as payment for goods and services or in the repayment of debt.

97

Of the following assets, the least liquid is

a house.

98

If peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts are

money.

99

When money prices are used to facilitate comparisons of value, money is said to function as a

unit of account.

100

_________ is a type of e-money that is linked to the bank account for immediate deduction of funds when used.

A debit card

101

If the price level doubles, the value of money

falls by 50 percent.

102

During hyperinflations

money no longer functions as a good store of value and people may resort to barter transactions on a much larger scale.

103

As the payments system evolves from barter to a monetary system,

commodity money is likely to precede the use of paper currency.

104

Which of the following sequences accurately describes the evolution of the payments system?

barter, coins made of precious metals, paper currency, checks, electronic funds transfers

105

________ money could be used for some other purpose other than as a medium of exchange, for example, gold coins could be melted down and turned into gold jewelry.

Commodity

106

A smart card is the equivalent of

cash.

107

The gold standard for curency means that currency can be converted into gold at a specified rate. The main issue with the gold standard is: _______.

When too much gold is supplied, inflation tends to occur.

108

Bitcoin is _______.

a digital currency

109

Which of the following are the functions of money?

a store of value

a unit of account

110

If you borrow $2000 for two years at an annual interest rate of 5%, you will be paying back _______at the end of the second year. (Assume annual compounding.)

$2,205

111

If an interest rate is expected to decrease, you would ______ Treasury bonds now _________ after the interest rate decrease.

buy; to earn a capital gain

112

If an interest rate is expected to decrease, which debt instrument would give you a larger capital gain if you buy now?

Treasury bonds

113

If an annual percentage rate (APR) is 10%, its corresponding semi-annual rate is _____ and quarterly rate is ______.

5%; 2.5%

114

If the current market interest rate is 5% while a consol with a $5 annual coupon payment is being sold at $110, you would ________ the consol because it yields _______ the market interest rate.

not buy; less than

115

A consol is known as a ______ bond and makes ______ .

Perpetual; coupon payments forever

116

What is the price of a zero-coupon bond with a maturity of 2 years and a face value of $2,000 when the current market interest rate is 4%? Assume an annual coupon payment.

$1849.11

117

What is the price of a zero-coupon bond with a maturity of 3 years and a face value of $3,000 when the current market interest rate is 3%? Assume an annual coupon payment.

$2745.42

118

If you buy a 5-year, 5% coupon T-bond with a face value of $1,000 at a price of $1100 and sell it back a year later at a price of $1210, the current yield of this bond is _____ and the total rate of return is _____.

4.54%; 14.54%

119

If you bought a 10-year, 10% coupon bond with a face value of $1,000 at a price of $950 and sold it back a year later at a price of $990, you would realize a capital gain (or loss) of ______.

4.21%

120

If you bought a 10-year, 10% coupon bond with a face value of $1,000 at a price of $950 and sold it back a year later at a price of $990, you would realize the total rate of return of ______.

14.73%

121

If you buy an IBM share at $200 and sell it back a year later at $180, your _____ would be ____.

capital loss; -10%

122

If you bought an IBM share at $200, received a $25 dividend, and sold it back at $210 a year later, your dividend yield would be _____.

12.5%

123

If you are quoted of a quarterly interest rate of 0.8%, its annualized interest rate would be _____.

3.2%

124

Holding all other things constant, when an interest rate (yield) decreases, a bond price ________.

increases

125

Holding all other things constant, when a bond price decreases, an interest rate (yield) ________.

increases

126

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?

25 percent

127

its semi-annual coupon payment is _______.

$10

128

The coupon rate is ____________.

the interest rate that a bond will pay until its maturity.

129

If there is a 3-year $1,000 bond with a coupon rate of 4%,
its annual coupon payment is _______.

$40

130

Assume that you are in a 20% tax bracket. If a tax-exempt bond yields 8% and a taxable bond yields 9%, you would prefer to invest in _________.

the tax-exempt bond of 8%

131

Assume that you are in a 10% tax bracket. If a tax-exempt bond yields 5% and a taxable bond yields 6%, you would prefer to invest in _________.

the taxable bond of 6%

132

Assuming that the real interest rate is stable, if expected inflation ____, then the nominal interest rate will most likely _____ per the Fisher equation.

increases; increase

decreases; decrease

133

A par bond is found when ______.

the coupon rate (CR) = the current APR

134

A discount bond is found when ______.

the current bond price (BP) < the face value (FV)

135

A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid.

coupon bond; face

136

Which of the following are TRUE for discount bonds?

The purchaser receives the face value of the bond at the maturity date.

137

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.

present value

138

If the amount payable in two years is $2420 for a simple loan at 10 percent interest, the loan amount is

$2000.

139

A discount bond is also called a ________ because the owner does not receive periodic payments.

zero-coupon bond

140

For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is

$13,310.

141

A $1000 face value coupon bond with a $60 coupon payment every year has a coupon rate of

6 percent.

142

Which of the following bonds would you prefer to be buying?

a $10,000 face-value security with a 10 percent coupon selling for $9,000

143

The ________ of a coupon bond and the yield to maturity (=market interest rate) are inversely related.

price

144

Assume that Bank A offers an APY of 5% and Bank B offers an APR of 5% if you open a 1-year certificate of deposit. Which bank would you deposit your money with if both banks calculate interest monthly?

Bank B

145

Assume that Bank A offers an APR of 5% and Bank B offers an APY of 5% if you open a 1-year certificate of deposit. Which bank would you deposit your money with if both banks calculate interest monthly?

Bank A

146

Compared to interest rates on long-term U.S. government bonds, interest rates on three-month Treasury bills change ________ frequently and are ________ on average.

more; lower

147

The interest rate on a consol equals the

coupon payment divided by the price.

148

If you borrow $1,000 for two years at an interest rate of 4%, you will be paying back _______ at the end of the second year. (Assume quarterly compounding.)

$1,082.85

149

If you bought an IBM share at $200, received a $25 dividend, and sold it back at $210 a year later, your total rate of return would be _____.

17.5%

150

If you bought an IBM share at $120, received a $3 dividend, and sold it back at $110 a year later, your total rate of return would be _____.

-5.83%

151

The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the

interest rate.

152

High interest rates might cause a corporation to ________ building a new plant that would provide more jobs.

postpone

153

An increase in interest rates might ________ saving because more can be earned in interest income.

encourage

154

The _______ frequently compounding occurs, the _______ the ending balance is.

more; larger

155

An equal decrease in all bond interest rates

increases the price of a ten-year bond more than the price of a five-year bond.

156

An equal increase in all bond interest rates

decreases long-term bond returns more than short-term bond returns.

157

What is the price of a 10% coupon bond with a maturity of two years and a face value of $100,000 when the current market interest rate (= APR) is 11%? Assume annual compounding.

$98,287.47

158

What is the price of a 10% coupon bond with a maturity of two years and a face value of $100,000 when the current market interest rate (= APR) is 12%? Assume annual compounding.

$96,619.89

159

What is the price of a 10% coupon bond with a maturity of two years and a face value of $100,000 when the current market interest rate (= APR) is 5%? Assume annual compounding.

$109,297.05

160

Which of the following is the correct expression to calculate Present Value via the Time-Value-of-Money Equation?

PV = FV/(1+r)^t

161

When there is a monthly compounding of interest, the APR (=annual percentage rate) is _______ the APY (=annual percentage yield).

less than

162

Which of the following relationship between APR (=annual percentage rate) and APY (=annual percentage yield) is true?

APR=APY if no compounding

163

If the interest rate increases from 3.01% to 4.25%, the interest rate is increased by ________ basis points.

124

164

A decrease in wealth or income is _______ related to the change in the asset demand.

positively

165

A change in the level of risk is _______ related to the change in the asset demand.

negatively

166

In the loanable funds framework, borrowers are known as _______ and lenders are known as ______.

bond issuers; bond demanders

bond issuers; investors

167

The loanable fund framework is called the ________ and uses ______ to understand the behavior of interest rates.

indirect approach; the bond market

168

Holding all else constant, if government deficit increases, the ______ curve of bonds will shift to _______.

supply; the right

169

Holding all else constant, if government deficit increases, the ______ curve of bonds will shift to _______.

supply; the right

170

Holding all else constant, if the risk of losing money from bond investment increases, the demand for bonds will ______ and the demand curve for bonds shift to ______.

decrease; the left

171

When the liquidity effect is _______ the combined force of the income, price level, and expected inflation effects, the interest rate will end up being ______ where it was at.

smaller than; higher than

larger than; lower than

172

In the loanable funds framework, the ________ curve of bonds is equivalent to the ________ curve of loanable funds.

demand; supply

173
card image

In the figure above, the factor responsible for the decline in the interest rate is

an increase in the money supply.

174

Using the Liquidity Preference Framework, when the Fed ________ the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant.

increases; right; falls

175

Using the Liquidity Preference Framework, when the price level falls, the ________ curve for money ________, and interest rates ________, everything else held constant.

demand; decreases; fall

176

Assume that stocks and Treasury bills are substitutes in investment. If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will ________ and that of Treasury bills will ________.

decrease; increase

177

The demand for silver decreases, other things equal, when

the gold market is expected to boom.

178

Assume that bonds and gold are substitutes in investment. If prices in the diamond market become less volatile, all else equal, then the demand for diamonds ________ and the demand for gold ________.

increases; decreases

179

When the price of a bond decreases, all else equal, the bond demand curve

does not shift.

180

A movement along the bond demand or supply curve occurs when ________ changes.

bond price

181

Everything else held constant, when the inflation rate is expected to rise, interest rates will ________; this result has been termed the ________.

rise; Fisher effect

182

During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________, everything else held constant.

rises; right

183

Everything else held constant, an increase in the riskiness of bonds relative to alternative assets causes the demand for bonds to ________ and the demand curve to shift to the ________.

fall; left

184

Which of the following effects are discussed in the liquidity preference framework?

Income effect and liquidity effect

Price level effect and expected inflation effect

185

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.

rise; liquidity

186

Of the four effects on interest rates from an increase in the money supply, the one that works in the opposite direction of the other three is the

liquidity effect.

187

When the growth rate of the money supply is increased, interest rates will fall immediately if the liquidity effect is ________ than the other money supply effects and there is ________ adjustment of expected inflation.

larger; slow

188

Milton Friedman's analysis of the impact of money supply change on the interest rate is a _______ analysis and that of John Maynard Keynes is a _______ analysis.

long-term; short-term

189

According to John Maynard Keynes, when government increases _______, the interest rate will tend to ______ in the short run.

money supply; decrease due to the liquidity effect

190

In the market for money, an interest rate below equilibrium results in an excess ________ money and the interest rate will ________.

demand for; rise

191

The demand curve for bonds has the usual downward slope, indicating that at ________ prices of the bond, everything else equal, the ________ is higher.

lower; quantity demanded

192

The supply curve for bonds has the usual upward slope, indicating that as the price ________, ceteris paribus, the ________ increases.

rises; quantity supplied

193

A situation in which the quantity of bonds supplied exceeds the quantity of bonds demanded is called a condition of excess supply; because people want to sell ________ bonds than others want to buy, the price of bonds will ________.

more; fall

194

Which of the following is a characteristic of yield curves?

They tend to swell (move) up and down together.

195

Based on the Expectations Hypothesis, if the short-term interest rate in Year 1 is 5% and the same in Year 2 is expected to be 7%, the interest rate for a 2-year bond would be ______.

6%

196

Based on the Expectations Hypothesis, if the short-term interest rate in Year 1 is 4% and the same in Year 2 is expected to be 6%, the interest rate for a 2-year bond would be ______.

5%

197

When yield curves are downward sloping

short-term interest rates are above long-term interest rates.

198

When yield curves are steeply upward sloping

long-term interest rates are above short-term interest rates.

199

The typical shape for a yield curve is

gently upward sloping.

200

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, then the 5-year bond rate will be

5 percent.

201

If the expected path of 1-year interest rates over the next five years is 1 percent, 2 percent, 3 percent, 4 percent, and 5 percent, the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of

five years.

202

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.

downward

203
card image

The mound-shaped yield curve in the figure above indicates that the inflation rate is expected to

rise moderately in the near-term and fall later on.

204

The additional incentive that the purchaser of a Treasury security requires to buy a long-term security rather than a short-term security is called the

term premium.

205

Given a yield curve, when the short-term interest rate is _____, the yield curve will tend to show a ______ slope.

low; positive

high; negative

206

TransUnion is a credit-rating company for ____.

Individuals

207

If you are to borrow money (=U.S. dollars) outside the U.S. such as London, which of the following interest rate would be most directly relevant to you?

The LIBOR

208

Which of the following long-term bonds has the highest interest rate?

corporate Baa bonds

209

Bonds with relatively low risk of default are called ________ securities and have a rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and are called ________.

investment grade; junk bonds

210

If the risk-free rate is 2% and the interest rate on a risky asset is 3%, the risk premium is ____.

1%

211

________ states that yield curves reflect the term-to-maturity premium such that a longer-term bond has a higher term premium.

The liquidity premium hypothesis

212

Municipal bonds have default risk, yet their interest rates are lower than the rates on default-free Treasury bonds. This suggests that

the benefit from the tax-exempt status of municipal bonds exceeds their default risk.

213

The spread between the interest rates on bonds with default risk and default-free bonds is called the

risk premium.

214

If the probability of a bond default increases because corporations begin to suffer large losses, then the default risk on corporate bonds will ________ and the expected return on these bonds will ________, everything else held constant.

increase; decrease

215

Assume that corporate bonds and Treasury bonds are substitutes in investment. An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant.

reduce; increase

216

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.

increase; more

217

As default risk increases, the expected return on corporate bonds ________, and the return becomes ________ uncertain, everything else held constant.

decreases; more

218

Assume that corporate bonds and Treasury bonds are substitutes in investment. An increase in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury bonds, everything else held constant.

increase; reduce

219

A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium.

positive; raise

220

Which of the following statements is TRUE?

A liquid asset is one that can be quickly and cheaply converted into cash.

221

Bonds with no default risk are called

default-free or risk-free bonds.

222

Assume that currently, the prime rate is 3% and the LIBOR is 2.9%. If Bank A charges you a prime rate + a risk premium of 2% and Bank B charges you a LIBOR + a risk premium of 2.2%, which bank would you borrow money from?

Bank A

223

The interest rate on Baa corporate bonds is ________, on average, than interest rates on Treasuries, and the spread between these rates became ________ in the 1970s.

higher; larger