1. Among their many functions, financial institutions
A) Transform illiquid assets into liquid assets.
B) Reduce transactions costs through things like standard lending contracts.
C) Pool the funds of many small savers to make large loans.
D) All of the above.
2. Auto insurance premiums are higher for younger drivers. This illustrates
A) The importance of stability in financial markets.
B) That the risk premium is sometimes negative.
C) That risk requires compensation.
D) The time value of money.
3. Which of the following statements is true?
A) Money is a better means of payment than other financial assets.
B) Money is a better store of value than other financial assets.
C) Money is a better way to transfer risk than other financial assets.
4. The yield on commercial paper is always higher than the yield on a Treasury bill with the same maturity. This is because
A) cash flows are less valuable further into the future.
B) risk requires compensation and the commercial paper carries MORE risk than the Treasury bill.
C) risk requires compensation and the commercial paper carries LESS risk than the Treasury bill.
D) there is no secondary market for commercial paper.
5. In an interest rate swap, the size of payments swapped is determined by
A) a notional principle amount that is never transferred between counterparties.
B) a notional principle held by a clearinghouse to guarantee payment.
C) a notional principle borrowed from a third party.
D) a notional principle amount that is transferred between counterparties when the swap is complete.
6. Unlike futures contracts, a major risk for swaps is that:
A) Interest rates will not change.
B) One of the parties will default.
C) They are highly liquid and the market price will change.
D) High U.S. government deficits will limit the availability of swaps.
7. For a credit default swaps:
A) The buyer assumes the risk of a debt default.
B) The sellers are protecting themselves from the risk of a debt default.
C) The buyer’s risk is limited to the amount of the premium payment.
D) A clearinghouse guarantees the performance of the contract.
8. Under the efficient markets hypthesis:
A) only bond prices reflect all available information.
B) The prices of all financial instruments reflect all available information.
C) Stock prices are predictable.
D) The best approach to determining stock prices is to follow the chartists.
9. If a mutual fund managers is earning above-average returns and markets are efficient, one possible explanation for this is:
A) the manager is taking on more risk.
B) the manager is using technical analysis.
C) the manager is more experienced.
D) all of the above.
10. Stock market bubbles are bad for the economy because
A) They force the actual stock price to be equal to the fundamental value of the stock.
B) They favor debtors over lenders
C) They lead to wrong decisions about the allocation of resources for firms and consumers.
D) They lead to a shortfall of investment capital
11. Suppose I am given a choice between $8800 today or $10,000 in 3 years. If I choose to wait for the $10,000, this implies that
A) my discount rate is less than 4.35%
B) my discount rate must be more than 12%
C) my discount rate must be between 5% and 12%
D) my discount rate is greater than 4.35%
12. A lender, who makes a $1000 loan for one year and earns interest in the amount of $75, earns a nominal interest rate of ______and a real interest rate of _____ if inflation is 2 percent.
A) 7.5%; 5.5%
B) 13%; 5.5%
C) 9.5%; 7.5%
D) 9.5%; 5.5%
13. Bill deposits $500.00 in his savings account at the bank. At the end of one year he has $532 in that account. What was the interest rate that earned?
A) 1.1%
B) 3.2%
C) 6.4%
D) 9.4%
14. US Treasury securities are known as benchmark bonds. This is because:
A) They are the closest thing to a risk-free bond
B) They are issue by a national government
C) They all have the same rate of interest
D) They are all tax exempt from federal income taxes
15. An investor who is in a 30% tax bracket, holding risk constant, would be indifferent between earning 7% from a tax exempt bond and:
A) a taxable bond with a 10% yield.
B) a taxable with a 8.0% yield.
C) a taxable bond with a 4.9% yield.
D) a taxable bond with a 23.33% yield.
16. A $1000 face value bond, with one year to maturity that sells for $950 and has a $40 annual coupon:
A) Has a current yield and yield to maturity of 4.00%.
B) Has a yield to maturity that is less than 4.00%.
C) Has a coupon rate of 4.00% and a current yield that is below this.
D) Has a current yield of 4.21%.
17. The price of a 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) Taking the present value of the bond's final payment.
18. Which of the following is true of interest-rate risk?
A) It is the risk that the coupon rate for a bond will change, affecting current bondholders' coupon payments.
B) It refers to the probability that a borrower will default on debt obligations.
C) It is the risk that the face value of a bond will change before maturity.
D) Individuals owning long-term bonds are exposed to greater interest-rate risk.
19. The principle of risk aversion means that
A) Investors will pay to avoid certain risks.
B) Risk premiums are always negative.
C) Investors never take on risk.
D) Investors require larger compensation when the risk of a security decreases.
20. If an investment pays a return of 50% with a 10% probability and 0% otherwise,
A) A risk averse investor would never pick this investment over any, positive, certain return.
B) A risk averse investor would never pick this investment over a certain return of 5%.
C) A risk averse investor would never pick this investment over a certain return of 1%.
D) All of the above.
21. The yield on a 10-year U.S. Treasury security is 2.5%; the yield on a 2-year U.S. Treasury security is 4.0%. This data:
A) Indicate the yield curve is downward sloping
B) Indicate the yield curve is flat since the risk premium needs to be added for longer maturities
C) Indicate the yield curve is upward sloping
D) Indicate that people expect inflation to increase in the future
22. Suppose the Liquidity Premium Theory is true. Then, a flat yield curve means:
A) interest rates are expected to rise slightly.
B) interest rates are expected to fall.
C) interest rates are expected to remain unchanged.
D) interest rates are expected to rise then fall.
23. During 2001, the Yen/$ exchange rate rose from 117 Yen/$ to 127 Yen/$. This meant that
A) the yen had depreciated and the dollar has appreciated.
B) the yen had appreciated and the dollar has depreciated.
C) U.S exports became cheaper in Japan.
D) Both a and c.
E) Both b and c.
24. Which of the following can explain the appreciation of the U.S. dollar against other major currencies in 2008-09?
A) the expectation of a falling dollar.
B) lower tariffs in the U.S.
C) increased demand for U.S. Treasury bonds.
D) increased demand by U.S. consumers for European imports.
25. If real interest rates in Europe are higher than those in the U.S.:
A) The supply of dollars decreases and the dollar depreciates.
B) The demand for dollars decreases and the dollar depreciates.
C) The demand for dollars increases and the dollar appreciates.
D) The supply of dollars increases and the dollar appreciates.