Money & Banking Exam 2 Study Flashcards

The interest rate that equates the present value of payments received from a debt instrument with its value today is the:

1) simple interest rate.

2) current yield.

3) Yield to maturity.

4) real interest rate.

A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of:

1) 3 percent.

2) 20 percent.

3) 25 percent.

4) 33.3 percent

If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is:

1) 2.5 percent.

2) 5 percent.

3) 7.5 percent.

4) 10 percent.

The price of a consol equals the coupon payment

1) times the interest rate.

2) plus the interest rate.

3) minus the interest rate.

4) divided by the interest rate.

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

1) $10,030.

2) $10,300.

3) $13,000.

4) $13,310

The yield to maturity for a perpetuity is a useful approximation for the yield to maturity on long-term coupon bonds. It is called the ________ when approximating the yield for a coupon bond.

1) current yield.

2) discount yield.

3) future yield.

4) star yield.

A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of:

1) 8 percent.

2) 10 percent.

3) 12 percent.

4) 14 percent.

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

1) coupon bond; discount.

2) discount bond; discount.

3)coupon bond; face.

4) discount bond; face

If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the interest rate is:

1) 5 percent.

2) 10 percent.

3) 22 percent.

4) 25 percent.

With an interest rate of 6 percent, the present value of $100 to be received next year is approximately:

1) $106.

2) $100.

3) $94.

4) $92.

The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's

1) coupon rate.

2) maturity rate.

3) face value rate.

4) payment rate.

A coupon bond that has no maturity date and no repayment of principal is called a

1) consol.

2) cabinet.

3) Treasury bill.

4) Treasury note.

An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of

1) 5 percent.

2) 8 percent.

3) 10 percent.

4) 40 percent.

A ________ is bought at a price below its face value, and the ________ value is repaid at the maturity date.

1) coupon bond; discount.

2) discount bond; discount

3) coupon bond; face

4) discount bond; face

Negative yields to maturity imply that bond purchasers are better off to hold cash. Acceptance of slightly negative yields by purchasers in recent times suggest that the

1) convenience of storing large sums is also important to decisions.

2) inflation rate is positive.

3) governments have issued too many bonds.

4) decision-makers only concerned with yields.

If stock prices are expected to climb next year, everything else held constant, the ________ curve for bonds shifts ________ and the interest rate ________.

1) demand; left; rises

2) demand; right; rises

3) demand; left; falls

4) demand left; rises

Deflation causes the demand for bonds to ________, the supply of bonds to ________, and bond prices to ________, everything else held constant.

1) increase; increase; increase

2) increase; decrease; increase

3) decrease; increase; increase

4) decrease; decrease; increase

If prices in the bond market become more volatile, everything else held constant, the demand curve for bonds shifts ________ and interest rates ________.

1)

2)

3)

4)

An increase in the expected inflation rate causes the supply of bonds to ________ and the supply curve to shift to the ________, everything else held constant.

1) increase; left

2) increase; right

3) decrease; left

4) decrease; right

The reduction of brokerage commissions for trading common stocks that occurred in 1975 caused the demand for bonds to ________ and the demand curve to shift to the ________.

1) left; rise

2) left; fall

3) right; rise

4) right; fall

Holding the expected return on bonds constant, an increase in the expected return on common stocks would ________ the demand for bonds, shifting the demand curve to the ________.

1) decrease; left

2) decrease; right

3) increase; left

4) increase; right

The interest rate falls when either the demand for bonds ________ or the supply of bonds ________.
1) increase; increase

2) increase; decrease

3) decrease; decrease

4) decrease; increase

Holding everything else constant, if interest rates are expected to increase, the demand for bonds ________ and the demand curve shifts ________.

1) increase; right

2) decreases; right

3) increases; left

4) decreases; left

When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant.

1) increases; increases; rises

2) decreases; decreases; falls

3) increases; decreases; falls

4) decreases; increases; rises

If brokerage commissions on stocks fall, everything else held constant, the demand for bonds ________, the price of bonds ________, and the interest rate ________.

1) decreases; decreases; increases

2) decreases; decreases; decreases

3) increases; decreases; increases

4) increases; increases; increases

When the economy slips into a recession, normally the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant.

1) increases; increases; rises

2) decreases; decreases; falls

3) increases; decreases; falls

4) decreases; increase; rises

In the figure above, a factor that could cause the supply of bonds to increase (shift to the right) is

1) a decrease in government budget deficits.

2) a decreases in expected inflation.

3) expectations of more profitable investment opportunities.

4) a business cycle recession.

If the expected return on bonds increases, all else equal, the demand for bonds increases, the price of bonds ________, and the interest rate ________.

1) increases; decreases

2) increases; increases

3) decreases; decreases

4) decreases; increases

If real estate prices are expected to drop, all else equal, the demand for bonds ________ and the interest rate ________.

1) increases; rises

2) increases; falls

3) decreases; rises

4) decreases; falls

Factors that decrease the demand for bonds include

1) an increase in the volatility of stock prices.

2) a decrease in the expected return on stocks.

3) a decrease in the inflation rate.

4) a decrease in the riskiness of stocks.

The U-shaped yield curve in the figure above indicates that short-term interest rates are expected to

1) rise in the near-term and fall later on.

2) fall sharply in the near-term and rise later on.

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

4) remain unchanged in the near-term and rise later on.

An inverted yield curve

1) slopes up.

2) is flat.

3) slopes down.

4) has a U-shape.

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

1) remain constant in the near-term and fall later on.

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

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

4) remain unchanged in the near-term and rise later on.

The ________ of the term structure of interest rates states that the interest rate on a long-term bond will equal the average of short-term interest rates that individuals expect to occur over the life of the long-term bond, and investors have no preference for short-term bonds relative to long-term bonds.

1) segmented market theory

2) expectations theory

3) liquidity premium theory

4) separable market theory

If the expected path of one-year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's interest rate on the five-year bond is

1) 4 percent.

2) 5 percent.

3) 6 percent.

4) 7 percent.

According to the liquidity premium theory of the term structure

1) bonds of different maturities are not substitutes.

2) if yield curves are downward sloping, then short-term interest rates are expected to fall by so much that, even when the positive term premium is added, long-term rates fall below short-term rates.

3) yield curves should never slope downward.

4) interest rates on bonds of different maturities do not move together over time.

The term structure of interest rates is

1) the relationship among interest rates of different bonds with the same maturity.

2) the structure of how interest rates move over time.

3) the relationship among the term of maturity of different bonds.

4) the relationship among interest rates on bonds with different maturities.

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

1) 1 percent.

2) 2 percent.

3) 3 percent.

4) 4 percent.

The ________ of the term structure states the following: the interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of the long-term bond plus a term premium that responds to supply and demand conditions for that bond.

1) segmented market theory

2) expectations theory

3) liquidity premium theory

4) separable markets theory

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.

1) segmented market theory

2) expectations theory

3) liquidity premium theory

4) separable markets theory

In the generalized dividend model, the current stock price is the sum of

1) the actual value of the future dividend stream.

2) the present value of the future dividend stream.

3) the present value of the future dividend stream plus the actual future sales price.

4) the present value of the future sales price.

Using the Gordon growth model, a stock's current price will increase if

1) the dividend growth rate increases.

2) the growth rate of dividend falls.

3) the required rate of return on equity rises.

4) the expected sales price rises.

Periodic payments of net earnings to shareholders are known as

1) capital gains.

2) dividends.

3) profits.

4) interest.

Stockholders are residual claimants, meaning that they

1) have the first priority claim on all of a company's assets.

2) are liable for all of a company's debts.

3) will never share in a company's profits.

4) receive the remaining cash flow after all other claims are paid.

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

1) $110.11.

2) $121.12.

3) $100.10.

4) $100.11

An expectation may fail to be rational if

1) relevant information was not available at the time the forecast is made.

2) relevant information is available but ignored at the time the forecast is made.

3) information changes after the forecast is made.

4) information was available to insiders only.

According to rational expectations

1) expectations of inflation are viewed as being an average of past inflation rates.

2) expectations of inflation are viewed as being an average of expected future inflation rates.

3) expectations formation indicates that changes in expectations occur slowly over time as past data change.

4) expectations will not differ from optimal forecasts using all available information.

If additional information is not used when forming an optimal forecast because it is not available at that time, then expectations are

1) obviously formed irrationally.

2) still considered to be formed rationally.

3) formed adaptively.

4) formed equivalently.

According to rational expectations theory, forecast errors of expectations

1) are more likely to be negative than positive.

2) are more likely to be positive than negative.

3) tend to be persistently high to low.

4) are unpredictable.

If expectations are formed rationally, then individuals

1) will have a forecast that is 100% accurate all of the time.

2) change their forecast when faced with new information.

3) use only the information from past data on a single variable to form their forecast.

4) have forecast errors that are persistently low.