Financial Markets & Inst. - Test 1

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This course will examine the types and functions of financial institutions and the operation of financial markets. Specifically, it will study how fluctuating economic and government forces, such as the Federal Reserve and SEC, influence money and capital markets.
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The price of one country's currency in terms of another's is called

the foreign exchange rate.


A security

is a claim on the issuers future income.


_______ is the total resources owned by an individual, including all assets.



The money market is the market in which ________ are traded.

short-term debt instruments


A coupon bond pays the owner of the bond

a fixed interest payment every period, plus the face value of the bond at the maturity date.


Factors that cause the demand curve for bonds to shift to the left include

-a decrease in the volatility of stock prices.
-an increase in the liquidity of stocks.
-an increase in the inflation rate.
(all of the above.)


In a recession when income and wealth are falling, the demand for bonds ________ and the demand curve shifts to the ________.

falls; left


Diversification benefits an investor by

reducing risk.


A $10,000, 8 percent coupon bond that sells for $10,100 has a yield to maturity

less than 8 perfect


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

5 percent.


Financial markets and institutions

-involve the movement of huge quantities of money.
-affect the profits of businesses.
-affect the types of goods and services produced in an economy.
(do all of the above.)


(I) A bond is a debt security that promises to make payments periodically for a specified period of time. (II) A stock is a security that is a claim on the earnings and assets of a corporation.

Both are true.


The stock market is important because

it is the most widely followed financial market in the United States.


Holding everything else constant, an increase in wealth lowers the quantity demanded of an asset.



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

25 percent


When the lender and the borrower have different amounts of information regarding a transaction, ________ is said to exist.

asymmetric information


Monetary policy is chiefly concerned with

the level of interest rates and the nation's money supply.


Which of the following financial intermediaries are depository institutions?

-commercial bank
-A savings and loan association
-A credit union
(All of the above)


Interest rates are important to financial institutions since an interest rate increase ________ the cost of acquiring funds and ________ the income from assets.

increases; increases


Bonds that are sold in a foreign country and are denominated in that country's currency are known as

foreign bonds.


Factors that can cause the supply curve for bonds to shift to the right include

an expansion in overall economic activity.


Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called

financial markets.


The efficient market hypothesis

-is based on the assumption that prices of securities fully reflect all available information.
-holds that the expected return on a security equals the equilibrium return.
(both A and B.)


(I) Banks are financial intermediaries that accept deposits and make loans.
(II) The term "banks" includes firms such as commercial banks, savings and loan associations, mutual savings banks, credit unions, insurance companies, and pension funds.

(I) is true, (II) false.


Which of the following $1,000 face value securities has the highest yield to maturity?

A 12 percent coupon bond selling for $1,000


According to the efficient market hypothesis, the current price of a financial security

fully reflects all available relevant information.


Bonds with relatively high risk of default are called

junk bonds.


Financial market activities affect

-the economy's location in the business cycle.
-spending decisions by individuals and business firms.
-personal wealth.
(all of the above.)


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.


The efficient market hypothesis suggests that allocating your funds in the financial markets on the advice of a financial analyst

is not likely to prove superior to a strategy of making selections by throwing darts at the financial page.


Dollars received in the future are worth ________ than dollars received today. The process of calculating what dollars received in the future are worth today is called ________.

less; discounting


Which of the following are generally true of all bonds?

-Prices and returns for long-term bonds are more volatile than those for shorter-term bonds.
-The longer a bond's maturity, the lower is the rate of return that occurs as a result of the increase in the interest rate.
-Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise.
(All of the above are true.)


If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is



Which of the following is not a regulator of part of the U.S. financial system?

-Federal Reserve System
-Federal Deposit Insurance Corporation
-National Credit Union Administration
-Securities and Exchange Commission
(All of the above are regulators.)


An investor gains from short selling by ________ and then later ________.

selling a stock; buying it back at a lower price


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

present value


The organization responsible for the conduct of monetary policy in the United States is the

Federal Reserve System.


When the price of a bond is above the equilibrium price, there is excess ________ in the bond market and the price will ________.

supply; fall


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

-An insurance company buys shares of common stock in the over-the-counter markets.
-A corporation's stock is traded in an over-the-counter market.
-People buy shares in a mutual fund.
-A pension fund manager buys commercial paper in the secondary market.
(None of the above.)


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

8 percent.


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

Corporate Baa bonds


When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, ________ is said to exist.

adverse selection


________ are an example of a financial institution.

-Insurance companies
-Finance companies
(All of the above)


To say that stock prices follow a "random walk" is to argue that

stock prices are, for all practical purposes, unpredictable.


The efficient market hypothesis suggests that

-investors should not try to outguess the market by constantly buying and selling securities.
-investors do better on average if they adopt a "buy and hold" strategy.
-buying into a mutual fund is a sensible strategy for a small investor.
(all of the above are sensible strategies.)


The government regulates financial markets for two main reasons:

to ensure soundness of the financial system and to increase the information available to investors.


The current yield on a coupon bond is the bond's ________ divided by its ________.

annual coupon payment; price


Factors that determine the demand for an asset include changes in the

-wealth of investors.
-expected returns on bonds relative to alternative assets.
-liquidity of bonds relative to alternative assets.
-risk of bonds relative to alternative assets.
(all of the above.)


If Moody's or Standard and Poor's downgrades its rating on a corporate bond, the demand for the bond ________ and its yield ________.

decreases; increases


________ bonds are exempt from federal income taxes.


card image

In Figure 4.3, the factor responsible for the decline in the interest rate is

an increase in the money supply.


(I) Debt markets are often referred to generically as the bond market.
(II) A bond is a security that is a claim on the earnings and assets of a corporation.

(I) is true, (II) false.


The purpose of diversification is to

reduce the volatility of a portfolio's return.


The change in the bond's price relative to the initial purchase price is

rate of capital gain.


A credit market instrument that pays the owner the face value of the security at the maturity date and nothing prior to then is called a

discount bond.


The nominal interest rate minus the expected rate of inflation

-is a more accurate indicator of the tightness of credit market conditions than the nominal interest rate.
-defines the real interest rate.
-is a better measure of the incentives to borrow and lend than the nominal interest rate.
(all of the above.)


A corporation acquires new funds only when its securities are sold in the

primary market by an investment bank.


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

-A corporation takes out loans from a bank.
-People buy shares in a mutual fund.
(Only A and B of the above.)


Which of the following are primary markets?

(None of the above)
-The New York Stock Exchange
-The options markets
-The U.S. government bond market
-The over-the-counter stock market


With an interest rate of 10 percent, the present value of a security that pays $1,100 next year and $1,460 four years from now is approximately



Bonds with relatively low risk of default are called

investment-grade bonds.


A stronger dollar benefits ________ and hurts ________.

American consumers; American businesses


Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known as



Another way to state the efficient market condition is that in an efficient market,

unexploited profit opportunities will be quickly eliminated.


In which of the following situations would you prefer to be making a loan?

The interest rate is 4 percent and the expected inflation rate is 1 percent.


The bond markets are important because

they are the markets where interest rates are determined.


Which of the following statements about financial markets and securities are true?

-Money market securities are usually more widely traded than longer-term securities and so tend to be more liquid.
-Most common stocks are traded over-the-counter, although the largest corporations have their shares traded at organized stock exchanges such as the New York Stock Exchange. Incorrect
-A corporation acquires new funds only when its securities are sold in the primary market.
(All of the above are true.)


Financial markets have the basic function of

bringing together people with funds to lend and people who want to borrow funds.


How expectations are formed is important because expectations influence

-the demand for assets.
-the term structure of interest rates.
-bond prices.
-the risk structure of interest rates.
(all of the above.)


A person who is risk averse prefers to hold assets that are more, not less, risky.


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