Money and Banking Exam 1

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Financial markets have the basic function of
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Terms in this set (88)
Equity instruments are traded in the ________ market.capitalU.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.discount_______ are short-term loans in which Treasury bills serve as collateral.Repurchase agreementsFederal funds areloans made by banks to each other and loans by some nonbank financial institutions to banks.Which of the following are short-term financial instruments?a repurchase agreementWhich of the following instruments is NOT traded in a money market?residential mortgagesBonds issued by state and local governments are called ________ bonds.municipalBonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known asEurobonds.If the Argentina government sells a bond in Hong Kong and it is denominated in U.S. dollar, the bond is aEurobond.If Toyota (headquarters in Japan) sells a $1,000 bond in the United States, the bond is aforeign bond.U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are calledEurodollars.Financial institutions that accept deposits and make loans are called ________ institutions.depository________ are financial intermediaries that acquire funds by selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds.Mutual fundsThe primary assets of money market mutual funds aremoney market instruments.A mutual fund that is organized as a limited partnership with high minimum investments is called ahedge fund.An investment bank purchases securities from a corporation at a predetermined price and then resells them in the market. This process is calledunderwriting.The present value of an expected future payment ________ as the interest rate decreases.risesA credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as afixed-payment loan.A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is bond; faceThe dollar amount of the yearly coupon payment expressed as a percentage of the face value of the coupon bond is called the bond'scoupon rate.All of the following are examples of coupon bondscorporate bonds, U.S. Treasury notes, U.S. Treasury bonds but NOT U.S. Treasury billsA ________ is bought at a price below its face value, and the ________ value is repaid at the maturity bond; faceThe interest rate that equates the present value of payments received from a debt instrument with its value today is theyield to maturity.For simple loans, the simple interest rate is ________ the yield to maturity.equal toTo help pay for college, you have just taken out a $10,000 government loan that makes you pay $1,260 per year for 25 years. However, you don't have to start making these payments until you graduate from college two years from now. What can you say about the yield to maturity of this loan? (12% is the yield to maturity on a normal $1,0000 fixed-payment loan on which you pay $1,260 per year for 25 years.) (Hint: you don't need to calculate the yield to maturity to answer this question.)low than 12% If the interest rate were 12%, the present discounted value of the payments on the government loan are necessarily less than the $10,000 loan amount because they do not start for two years. Thus the yield to maturity must be lower than 12% in order for the present discounted value of these payments to add up to $10,000.Which of the following are TRUE for a coupon bond?When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________.negatively; rises; fallsA coupon bond that has no maturity date and no repayment of principal is called aconsol.The ________ is a useful approximation for the yield to maturity on long-term coupon bonds.current yieldThe yield to maturity for a discount bond is ________ related to the current bond price.negativelyThe ________ 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 returnthe distinction between interest rates and returns?The rate of return on a bond will not necessarily equal the interest rate on that bond.Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity of 15 percent. If the interest rate on one-year bonds rises from 15 percent to 20 percent over the course of the year, what is the yearly rate of return on the bond you are holding?15, When the holding period is the same as time to maturity, the rate of return on a bond is equal to its yield to maturity.I purchase a 10 percent coupon bond. Based on my purchase price, I calculate a yield to maturity of 8 percent. If I hold this bond to maturity, then my return on this asset is8%If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding?a bond with one year to maturity, The more distant a bond's maturity, the lower the rate of return the occurs as a result of an increase in the interest rate.An equal decrease in all bond interest ratesincreases the price of a ten-year bond more than the price of a five-year bond., A decrease in interest rates is associated with a rise in bond prices. The more distant a bond's maturity, the greater the size of the percentage price change associated with an interest-rate change.The riskiness of an asset's returns due to changes in interest rates isinterest-rate risk.Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant.long-term; short-termThe ________ interest rate is adjusted for expected changes in the price level.ex ante realThe ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation.Fisher equationIf wealth increases, the demand for stocks ________ and that of long-term bonds ________, everything else held constant.increases; increasesEverything else held constant, if the expected return on U.S. Treasury bonds falls from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return of holding GE stock ________ relative to U.S. Treasury bonds and the demand for GE stock ________.rises; risesIf housing prices are expected to increase, then, other things equal, the demand for houses will ________ and that of Treasury bills will ________.increase; decreaseAn increase in the expected rate of inflation will ________ the expected return on bonds relative to the that on ________ assets, everything else held constant.reduce; realIf brokerage commissions on bond sales decrease, then, other things equal, the demand for bonds will ________ and the demand for real estate will ________.increase; decreaseYou would be more willing to buy AT&T bonds (holding everything else constant) ifthe brokerage commissions on bond sales become cheaper.In the bond market, the bond demanders are the ________ and the bond suppliers are the ________.lenders; borrowersThe demand curve for bonds has the usual downward slope, indicating that at ________ prices of the bond, everything else equal, the ________ is higher.lower; quantity demandedEverything else held constant, if interest rates are expected to fall in the future, the demand for long-term bonds today ________ and the demand curve shifts to the ________.rises; rightWhen the expected inflation rate increases, the real cost of borrowing ________ and bond supply ________, everything else held constant.decreases; increasesEverything else held constant, when bonds become less widely traded, and as a consequence the market becomes less liquid, the demand curve for bonds shifts to the ________ and the interest rate ________.left; risesWhen the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant.decreases; increases; risesIf stock prices are expected to climb next year, everything else held constant, the ________ curve for bonds shifts ________ and the interest rate ________.demand; left; risesIn Keynes's liquidity preference framework, as the expected return on bonds increases (holding everything else unchanged), the expected return on money ________ relative to the expected return on bonds, causing the demand for ________ to fall.falls; moneyHolding 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 ________.increases; fallsIn the market for money, a lower level of income causes the demand for money to ________ and the interest rate to ________, everything else held constant.decrease; decreaseIn the market for money, when the Fed decreases the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant.left; risesMilton Friedman called the response of lower interest rates resulting from an increase in the money supply the ________ effect.liquidityThe risk structure of interest rates isthe relationship among interest rates of different bonds with the same maturity.Three factors explain the risk structure of interest ratesliquidity, default risk, and the income tax treatment of a security.The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures isdefault risk.The spread between the interest rates on bonds with default risk and default-free bonds is called therisk premium.If the probability of a bond default increases because corporations begin to suffer large losses, then the default risk on corporate bonds will ________ and the expected return on these bonds will ________, everything else held constant.increase; decreaseA(n) ________ in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds, all else equal.increase; decrease; increaseEverything else held constant, if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future, the interest rate on corporate bonds will ________ and the interest rate on Treasury securities will ________.decrease; increaseBonds with relatively low risk of default are called ________ securities and have a rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and are called ________.investment grade; junk bondsJunk bonds, bonds with a low bond rating, are also known ashigh-yield bonds.Risk premiums on corporate bonds tend to ________ during business cycle expansions and ________ during recessions, everything else held constant.decrease; increaseDuring a "flight to quality"he spread between Baa bonds and Treasury bonds increases.A(n) ________ in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds, all else equal.increase; increase; decreaseThe risk premium on corporate bonds reflects the fact that corporate bonds have a higher default risk and are ________ U.S. Treasury bonds.less liquid thanMunicipal bonds have default risk, yet their interest rates are usually lower than the rates on default-free Treasury bonds. This suggests thatthe benefit from the tax-exempt status of municipal bonds exceeds their default risk.Everything else held constant, if the tax-exempt status of municipal bonds were eliminated, thenthe interest rate on municipal bonds would exceed the rate on Treasury bonds.Everything else held constant, an increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds, and ________ the demand for U.S. government bonds.increasing; decreasingThe term structure of interest rates isthe relationship among interest rates on bonds with different maturities.A plot of the interest rates on default-free government bonds with different terms to maturity is calleda yield curve.When yield curves are downward slopingshort-term interest rates are above long-term interest rates.An inverted yield curveslopes down.