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Econ midterm 1
Terms in this set (40)
A person's house is part of her
According to the WSJ article, in 2016 many anticipated a tax overhaul by the Congress that would eliminate special tax status of municipal bonds. Some 600 state and local officials urged Congress to maintain the tax-free protection municipal bonds have enjoyed for decades. Which of the following the best explains such calls?
A) Elimination of tax-free status would result in higher prices for municipal bonds. hurting investors.
B) Elimination of tax-free status would imply higher borrowing costs of the federal government.
C) Elimination of tax-free status would result in higher yields of municipal bonds, raising borrowing costs of the cities and states.
D) Elimination of tax-free status would result the cities and states to increase state income tax to compensate for the lost revenue.
Suppose in 2017 you buy two year $1,000 face-value 2% coupon bond for $1,000. In 2018, interest rates increase to 5%. If you decide to sell your bond in 2018, what will be the selling price and one-year rate of return for you?
A) $1,020; 4%
B) $1,000; 2%
C) $971; -1%
D) $960; 0%
A discount bond selling for $5,000 with a face value of $6,000 in one year has a yield to maturity of
A) 3 percent.
B) 20 percent.
C) 25 percent.
D) 16.7 percent.
If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will ________ and that of Treasury bills will ________.
A) increase; decrease
B) decrease; decrease
C) increase; increase
D) decrease; increase
If an individual moves money from a savings deposit to currency,
A) M1 increases and M2 decreases.
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 stays the same.
Which of the following is not a contractual savings institution?
A) A fire and casualty insurance company
B) A pension fund
C) A savings and loan association
D) A life insurance company
When an investment bank ________ securities, it guarantees a price for a corporation's securities and then sells them to the public.
If the maturity of a debt instrument is less than one year, the debt is called
Which of the following $5,000 face-value securities has the highest yield to maturity?
A) A 10 percent coupon bond selling for $5,000
B) A 12 percent coupon bond selling for $4,500
C) A 6 percent coupon bond selling for $5,500
D) A 6 percent coupon bond selling for $5,000
According to the WSJ article, after the surprise victory in the US elections by Donald Trump, the bond market saw a sharp increase in yields. Which of the following the best explains such increase in yields?
A) Investors reacted by selling off governments bonds to Donald Trump's promise of reducing income tax rates.
B) Investors increased demand for government bonds anticipating future rise in interest rates.
C) Investors reacted by selling off governments bonds to Donald Trump's promise of reducing federal budget deficit.
D) Investors decreased demand for government bonds anticipating future rise in interest rates.
Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called ________ money.
Kevin purchasing concert tickets with his debit card is an example of the ________ function of money.
A) unit of account
B) medium of exchange
C) store of value
Deflation causes the demand for bonds to ________, the supply of bonds to ________, and bond prices to ________, everything else held constant.
A) decrease; increase; increase
B) increase; increase; increase
C) increase; decrease; increase
D) decrease; decrease; increase
If a perpetuity has a price of $5000 and an annual interest payment of $50, the interest rate is
A) 1 percent.
B) 5 percent.
C) 7.5 percent.
D) 10 percent.
According to the WSJ article, in the late 2016 amid inflationary concerns, many investors piled cash into TIPS, Treasury Inflation Protected Securities.. Why do TIPS become attractive option for the investors when the inflation expectations are high?
A) TIPS are not taxable under the Federal Income Tax whereas government nominal bonds are.
B) In anticipating Federal Reserve's hiking up interest rates, the investors are piling cash into TIPS.
C) TIPS are secured by a collateral whereas nominal government bonds are not.
D) TIPS pay higher amount with rising price level whereas nominal government bonds pay fixed amount.
The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates ________ as the expected rate of inflation ________, everything else held constant.
A) fall; stabilizes
B) fall; increases
C) rise; increases
D) rise; stabilizes
Financial institutions that accept deposits and make loans are called ________ institutions.
A) contractual savings
During a "flight to quality"
A) the spread between Treasury bonds and Baa bonds decreases.
B) the spread between Treasury bonds and Baa bonds increases.
C) the spread between Treasury bonds and Baa bonds is not affected.
D) the change in the spread between Treasury bonds and Baa bonds cannot be predicted.
Bonds with relatively high risk of default are called
A) zero coupon bonds.
B) junk bonds.
C) investment grade bonds.
D) Brady bonds.
Everything else held constant, a decrease in marginal tax rates would likely have the effect of ________ the demand for municipal bonds, and ________ the demand for U.S. government bonds.
A) increasing; decreasing
B) increasing; increasing
C) decreasing; decreasing
D) decreasing; increasing
Currently, a 2-year Treasury bond has a yield of 1.6% while the yield on a 5-year Treasury bond is 2.4%. What is the risk premium of the typical A-rated 5-year corporate bond with a yield of 3.7%?
The Bush tax cut reduced the top income tax bracket from 39% to 35% over a ten-year period. Supply and demand analysis predicts the impact of this change was a ________ interest rate on municipal bonds and a ________ interest rate on Treasury bonds.
A) higher; higher
B) lower; higher
C) higher; lower
D) lower; lower
Everything else held constant, when the government has higher budget deficits
A) the demand curve for bonds shifts to the left and the interest rate rises.
B) the supply curve for bonds shifts to the right and the interest rate rises.
C) the supply curve for bonds shifts to the right and the interest rate falls.
D) the demand curve for bonds shifts to the left and the interest rate falls.
According to the WSJ article, in 2015 investors seeking to invest in government bonds were presented with only two choices: bonds offering super low yields from the governments of Japan, Germany and the United States; or bonds offering very high yields from the governments of Russia, Ukraine, and Greece. Such stark difference is mainly attributed to
A) countries in the first group having much lower default risk.
B) countries in the first group having much higher default risk.
C) countries in the first group having volatile currencies.
D) countries in the first group having much higher inflation rate.
Of the following, the largest is
B) checking deposits.
C) money market deposit accounts.
U.S. Treasury bills pay no interest but are sold at a ________. That is, you will pay a lower purchase price than the amount you receive at maturity.
An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant.
A) reduce; increase
B) increase; reduce
C) increase; increase
D) reduce; reduce
What is the price of a coupon bond that has annual coupon payments of $85, a face value of $1000, a yield to maturity of 10%, and a maturity of three years?
Suppose you have a fixed-rate mortgage with a nominal interest rate of 6% and the expected annual inflation rate over the life of the mortgage is 2%. What is the expected real interest rate?
The spread between interest rates on low quality corporate bonds and U.S. government bonds
A) did not change during the Great Depression.
B) widened significantly during the Great Depression.
C) narrowed moderately during the Great Depression.
D) narrowed significantly during the Great Depression.
With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets.
If the expected return on bonds increases, all else equal, the demand for bonds increases, the price of bonds ________, and the interest rate ________.
A) increases; decreases
B) decreases; increases
C) increases; increases
D) decreases; decreases
________ are short-term loans in which Treasury bills serve as collateral.
A) Federal funds
B) Repurchase agreements
C) U.S. government agency securities
D) Negotiable certificates of deposit
In the figure above, a factor that could cause the supply of bonds to increase (shift to the right) is:
A) a decrease in government budget deficits.
B) a decrease in expected inflation.
C) a business cycle recession.
D) expectations of more profitable investment opportunities.
In the figure above, a factor that could cause the demand for bonds to shift to the right is:
A) an increase in the riskiness of bonds relative to other assets.
B) a decrease in wealth.
C) an increase in the expected rate of inflation.
D) expectations of lower interest rates in the future.
Suppose that your marginal federal income tax rate is 30%, the sum of your marginal state and local tax rates is 5%, and the yield on thirty-year U.S. Treasury bonds is 6%. You would be indifferent between buying a thirty-year Treasury bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield of
Patrick places his pocket change into his savings bank on his desk each evening. By his actions, Patrick indicates that he believes that money is a
A) medium of exchange.
B) store of value.
C) unit of specialization.
D) unit of account.
The currency component includes paper money and coins held in
A) bank vaults.
C) the central bank.
D) the hands of the nonbank public.
If an investor is certain that market interest rates will decline in the future, which of the following will she be most likely to purchase today?
A) a ten-year government bond
B) a two-year government note
C) a fifty-year government bond
D) a six-month government bill
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