Econ 337 Midtem 1

The risk structure of interest rates is

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

Which of the following bonds are considered to be default-risk free?

US treasury bonds

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

positive; raise

An increase in default risk on corporate bonds ___ the demand for these bonds, but ___ the demand for default-free bonds, everything else held constant.

lowers; increases

Bonds with relatively low risk of defaults are called ___ securities and have a rating of Baa/BBB and above; bonds with ratings below have a higher default risk and are called ___.

investment grade; junk bonds

The term structure of interest rates is

the relationship among interest rates on bonds with different maturities.

Differences in ___ explain why interest rates on Treasury securities are not all the same.

time to maturity

If the expected path of one-year interest rate 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

6 percent

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 bonds is

2 percent

When the yield curve is flat or downward sloping, it suggests that the economy is more likely to enter

a recession

Pieces of property that serve as a store of value are called

assets

Of the four factors that influence asset demand, which factor will cause the demand for all assets to increase when it increases, everything else held constant?

wealth

In the bond market, the bond demanders are the ___ and the bond suppliers are the ___.

lenders; borrowers

In the bond market, the market equilibrium shows the market-clearing ___ and market-clearing ___.

price; interest rate

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

bond price

Holding everything else constant, if the price of a Bitcoin becomes less volatile, the demand for bonds ____, the price of bonds ___, and the interest rate ___.

falls; falls; rises

In Keynes liquidity preference framework, individuals are assumed to hold their wealth in two forms

money and bonds

Holding everything else constant in the market for money, as the interest rate rises, the opportunity cost of holding money ___ thus making money less desirable. So the quantity of money demanded falls.

increases

In the Keynesian liquidity preference framework, an increase in the interest rate causes he demand curve for money to ___, everything else held constant.

stay where it is

Milton Friedman called the response of lower interest rates resulting from an increase in the money supply the ___ effect.

liquidity

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

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

100/(1+0.06) = 94

If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is

10 percent

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

coupon bond; face

The __ is defined as the payments to the owner plus the change in a security’s value expressed as a fraction of the security’s purchase price.

rate of return

The sum of the current yield and the rate of capital gain is called the

rate of return

What is the return on a 5 percent coupon bond initially sells for $1000 and sells for $900 next year?

(900-100)/100 = 10%

Short-term bonds are subject to __ risk because proceeds must be put into some future asset at an unknown interest rate.

reinvestment

The ___ interest rate more accurately reflects the true cost of borrowing

real

If a financial institution has 50% of its portfolio in a bond with a five-year duration and 50% of its portfolio in a bond with a seven-year duration, what is the duration of the portfolio?

6 years

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

money

Money is

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

Currency includes

paper money and coins.

Of money’s three functions, the one that distinguishes money from other assets is its function as a

medium of exchange

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

money

_____ are the time and resources spent trying to exchange goods and services.

transaction costs

The payments system is

the method of conducting transactions in the economy.

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

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

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

commodity

Defining money becomes ___ difficult as the pace of financial innovation ___.

more; quickens

Every financial market has the following characteristic.

it channels funds from lenders-savers to borrowers-spenders

Assume that you borrow $2000 at 10% annual interest finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is ___

$201

Which of the following statements about the characteristics of debt and equity is FALSE?

they can both be short term financial instruments

A short term debt instrument issued by well known corporations is called ___.

commercial paper

Equity of US companies can be purchased by ___.

US citizens and foreign citizens.

The process of indirect finance using financial intermediaries is called ___.

financial intermediation.

Financial institutions that accept deposits and make loans are called ___ institutions.

depository

Hedge funds require large minimum investments ranging from ___ to ___ or more.

$100,000; $1 million

Which of the following is NOT a goal of financial regulation?

ensuring that investors never suffer losses

Increasing the amount of information available to investors helps to reduce the problems of ___ and ___ in the financial markets.

adverse selection; moral hazard

Financial markets promote economic efficiency by

channeling funds from savers to investors.

When I purchase a corporate ___, I am lending the corporation funds for a specific time. When I purchase a corporation’s ___, I become an owner in the corporation.

bond; stock

Channeling funds from individuals with surplus funds to those desiring funds when the saver does not purchase the borrower’s security is known as

financial intermediation

A financial crisis is

a major disruption of financial markets

Money is defined as

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

American companies can borrow funds

in both US and foreign financial markets.

Students studying money, banking, and financial markets will learn ___.

critical thinking skills that will be useful in all careers.

The basic concepts used in the analytic framework of this text include all of the following EXCEPT

the not-for-profit nature of most financial institutions.

The most comprehensive measure of aggregate output is

gross domestic product.

The gross domestic product is the

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