practical

practical
Choose the one alternative that best completes the statement or answers the question.
1)If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to
maturity of 7 percent, then the real interest rate on this bond is
A) 7 percent. B) 22 percent.
C) -15 percent. D) -8 percent.
2)Which of the following sequences accurately describes the evolution of the payments system?
A)Barter, coins made of precious metals, paper currency, checks, electronic funds transfers
B)Barter, coins made of precious metals, checks, paper currency, electronic funds transfers
C)Barter, checks, paper currency, coins made of precious metals, electronic funds transfers
D)Barter, checks, paper currency, electronic funds transfers
3)Assuming the same coupon rate and maturity length, the difference between the yield on a Treasury Inflation Protected Security and the yield on a nonindexed Treasury security provides insight into
A)the nominal interest rate.
B)the real interest rate.
C)the nominal exchange rate.
D)the expected inflation rate.
4)Ranking assets from most liquid to least liquid, the correct order is
A)savings bonds; house; currency.
B)currency; savings bonds; house.
C)currency; house; savings bonds.
D)house; savings bonds; currency.
5)There is a ________ association between inflation and the growth rate of money
________.
A)positive; demand
B)positive; supply
C)negative; demand
D)negative; supply
6)In which of the following situations would you prefer to be the borrower?
A)The interest rate is 9 percent and the expected inflation rate is 7 percent.
B)The interest rate is 4 percent and the expected inflation rate is 1 percent.
C)The interest rate is 13 percent and the expected inflation rate is 15 percent.
D)The interest rate is 25 percent and the expected inflation rate is 50 percent.
7)When compared to exchange systems that rely on money, disadvantages of the barter system include:
A)the requirement of a double coincidence of wants.
B)lowering the cost of exchanging goods over time.
C)lowering the cost of exchange to those who would specialize.
D)encouraging specialization and the division of labor.
8)Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant.
A)long-term; long-term
B)long-term; short-term
C)short-term; long-term
D)short-term; short-term
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
9)Would it make sense to buy a house when mortgage rates are 14% and expected inflation is 15%? Explain your answer.
10)Because there is an imbalance of information in a lending situation, we must deal with the problems of adverse selection and moral hazard. Define these terms and explain how financial intermediaries can reduce these problems.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
11)If a $10,000 face-value discount bond maturing in one year is selling for $5,000, then its yield
to maturity is
A) 5 percent. B) 10 percent.
C) 50 percent. D) 100 percent.
12)A consol paying $20 annually when the interest rate is 5 percent has a price of
A) $100. B) $200.
C) $400. D) $800.
13)An asset’s interest rate risk ________ as the duration of the asset ________.
A)increases; decreases
B)decreases; decreases
C)decreases; increases
D)remains constant; increases
14)A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of
A) 8 percent. B) 10 percent.
C) 12 percent. D) 14 percent.
15)The present value of an expected future payment ________ as the interest rate
increases.
A) falls B) rises
C) is constant D) is unaffected
16)If an individual moves money from a money market deposit account to currency,
A)M1 increases and M2 stays the same.
B)M1 stays the same and M2 increases.
C)M1 stays the same and M2 stays the same.
D)M1 increases and M2 decreases.
17)A fall in the level of prices
A)does not affect the value of money.
B)has an uncertain effect on the value of money.
C)increases the value of money.
D)reduces the value of money.
18)Compared to an economy that uses a medium of exchange, in a barter economy
A)transaction costs are higher.
B)transaction costs are lower.
C)liquidity costs are higher.
D)liquidity costs are lower.
19)Even economists have no single, precise definition of money because
A)money supply statistics are a state secret.
B)the Federal Reserve does not employ or report different measures of the money supply.
C)the “moneyness” or liquidity of an asset is a matter of degree.
D)economists find disagreement interesting and refuse to agree for ideological reasons.
20)The agency that was created to protect depositors after the banking failures of 1930-1933 is the
A)Federal Reserve System.
B)Federal Deposit Insurance Corporation.
C)Treasury Department.
D)Office of the Comptroller of the Currency.
21)Increasing the amount of information available to investors helps to reduce the problems of
________ and ________ in the financial markets.
A)adverse selection; moral hazard
B)adverse selection; risk sharing
C)moral hazard; transactions costs
D)adverse selection; economies of scale
22)The British Banker’s Association average of interbank rates for dollar deposits in the London market is called the
A)Libor rate.
B)federal funds rate.
C)prime rate.
D)Treasury Bill rate.
23)An important function of secondary markets is to
A)make it easier to sell financial instruments to raise funds.
B)raise funds for corporations through the sale of securities.
C)make it easier for governments to raise taxes.
D)create a market for newly constructed houses.
24)Everything else constant, a stronger dollar will mean that
A)vacationing in England becomes more expensive.
B)vacationing in England becomes less expensive.
C)French cheese becomes more expensive.
D)Japanese cars become more expensive.
Write the word or phrase that best completes each statement or answers the question.
25)If the interest rate is 5%, what is the present value of a security that pays you $1, 050 next year and $1,102.50 two years from now? If this security sold for $2200, is the yield to maturity greater or less than 5%? Why?
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