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Financial Institutes and Markets

Terms in this set (25)

The U.S. Treasury
collects tax revenue and pays for the federal government's expenditures on goods and services.
This year,
the federal government is likely to generate a government budget deficit of less than $3 trillion.
In the primary market,
borrowers receive funds in return for newly issued securities.
Which of the following amounts is currently the smallest?
he U.S. federal government budget deficit
A high inflation rate exists when
the percent increase in the aggregate price level is high.
Holding everything else constant, which of the following would most likely lead to a broad-based increase in stock prices?
The increase in the CPI exceeds the increase in the PPI for several consecutive months.
Recent reports suggest that
the unemployment rate is below 5%.
Holding everything else constant, when economic growth accelerates,
the demand for funds shifts to the right.
Households' demand for loanable funds is expected to increase when
consumer confidence increases.
Holding everything else constant, a tax break for corporations investing in new equipment is likely to
increase the number of profitable business projects that require financing.
If businesses and households expect a broad acceleration in price increases for goods and services,
the current demand for funds likely shifts to the right and the current supply of funds likely shifts to the left
Holding everything else constant which of the following would likely cause interest rates on U.S. Treasury securities to increase?
a reduction in social security funds invested in U.S. Treasury securities.
Which of the following events may fuel rising inflation expectations?
Reports that economic growth is higher than expected.
Holding everything else constant, foreign lenders tend to be more attracted to U.S. markets when
real interest rates in the U.S. are relatively high.
Holding everything else constant, households tend to borrow more when
household incomes are going up as economic growth accelerates.
The real interest rate earned at the end of a period is calculated as
nominal interest rate - actual inflation
The inflation risk premium that is part of a current nominal interest rate
is based on current market expectations regarding future inflation.
Suppose you bought a one-year Treasury bill with a nominal interest rate of 1%. The expected inflation rate at that time was 1%. One year later, you find out that the aggregate price level actually decreased at an annual rate of 1%. Your actual real rate of return on the T- bill is estimated to be
2%
When, in 2008, investors worried that problems from the subprime mortgage market were spreading to the broader credit markets, which of the following likely occurred?
The demand for Treasury securities increased. Investors shifted funds from high-risk markets into low-risk Treasury markets. Interest rates on Treasury securities fell, while interest rates on risky debt securities increased.
In response to the Enron collapse and other corporate scandals in 2002,
investors reduced their supply of funds to even high-quality companies.
A market is considered liquid when
its assets can be converted into cash quickly without any loss in market value.
Default uncertainty risk tends to increase when
there is conflicting information about the health of the economy.
Municipal bonds
are typically tax-exempt.
Daniel Matthews is considering the purchase of a taxable corporate security that offers a before-tax yield of 7.2% or a municipal security of similar default risk that offers an annual yield of 5.5%. Daniel's marginal tax rate is 30%. Based on this information, Daniel should choose
the municipal security.
Fantastic Systems, Inc. is considering the issue of 180-day commercial paper and would like to know the yield it should offer. The corporation believes that a 1.5 percent default risk premium and a 0.5 percent liquidity premium are necessary to sell its commercial paper to investors. Furthermore, annualized 180-day T-bill rates are 0.5 percent. Based on this information, Fantastic should offer which of the following rates on its commercial paper?
2.5%
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