Spring 2009 Final_Key

Spring 2009 Final_Key - Department of Economics Psofessor...

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Unformatted text preview: Department of Economics Psofessor G’Brien Lehigh University _ _ Spring 2009 Eco 29 Final A 1. Choose the best answer. Answers that might possibly Be right under unusual circumstances are not the correct choice. A ' 2. In order that everyone has the same amount of information available to answer the questions, we won’t be abie to respond to requests for clarification or eia‘ooration. ' 3. Write your answer on the answer sheet. M Choose the best answer. (0.5 pts each) i. As a T—bill approaches its maturity date its price will approach its face value. b. its yield to matm‘ity will increase. c. the gap between its price and its face value will increase. (1. there is no relationship between the price of a T—bill and the number of days until it matures. 2. If a security pays $110 next year and $121 the year afler that, What is its yield to maturity if it sells for $200? a. 9 percent ® 1 0 percent c. 11 percent d. 12 percent 3. Which of the following is true for a coupon bond? . rrWhenrthercouponibondisprieediatritswfacevalueytheyieldtornaturityrrequaisthecouporrrate; r h. The price of a coupon bond and the yield to materity are positively related. 0. The yield to maturity is greater than the coupon rate when the bond price is above the par value. 6. The yield to maturity will equal the current yield when the price is above the par value. 4. Whisk ofthe following $1,090 face-value securities has the highest yield to maturity? a. A 5 percent coupon bond selling for $1,000 b. A 10 percent coupon bond selling for $1,090 @ A 12 percent coupon bond selling for $1,000 d' A 12 percent coupon bond selling for $1,100 5. Which of the following are generally true of all bonds? 3. ’lhe longer a hond’s materity, the greater is the increase in the rate of return that occurs as a resert of an increase in market interest rates. Even though a bond has a substantial coupon rate, its rate of return can turn out to be negative if market interest rates rise. c. Prices and rates of return for short-term bonds are more volatile than those for longer term bonds. (1. A fall in market interest rates results in capital lOSSes for bonds whose years to maturity are longer than the period for which an investor intends to hold the bond. 6. In which of the following simations would you prefer to be the lender? a. The interest rate is 9 percent and the expected inflation rate is 7 percent. 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. You would be less willing to purchase US. Treasury bonds, other things equal, if ' a. you inherit $1 million from your Uncle Harry. b. you expect interest rates to fall. E @ mortgage-backed securities become more liquid. 7 d. the federal government begins to tax the coupons on municipal bonds. 1' 8. Factors that can cause the supply curve for bonds to shift to the right include an expansion in overall economic activity. ' b. a decrease in expected inflation. - p ' c. a decrease in government deficits. d. a business cycle recession. 9. The risk structure of interest rates is a. the structure of how interest rates move over time. o the relationship among interest rates of different ‘oonds with the same maturity. c. the relationship among the term to maturity of different bonds. d. therelationshipanionginterestratesronrbondswithgdifierentmaturities- . it). If you have a very low tolerance for risk, which of the following bonds would you be least likely to hold in your portfolio? ' . a. A US. Treasury bond b. A municipal bond c. A corporate bond with a rating of Aaa corporate bond with a rating of Baa 1 1. Everything else held constant, the interest rate on municipal bonds rises relative to the interest rate on Treasury securities when ' @ income tax rates are lowered. tfi'; are raised. ' . t c. municipal bonds become more Widely traded. (1. corporate bonds become riskier. 12. According to the expectations theory of the term structure a. when the yield curve is steeply upward sloping, short-term interest rates are expected to remain relatively stable in the fiiture. h. when the yield curve is downward sloping, short-term interest rates are expected to remain relatively stable in the fiiture. " c. investors have strong preferences for short~tenn relative to long-term bonds, explaining why yield . urves typically slope upward. d. ield curves should be equally likely to slope downward as slope upward. 13. Ifthe expected path of one-year interest rates 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 a. 4 percent. 13. 5 percent. @6 percent. CI. 7 percent. 14. Using the Gordon growth formula, if the firm is cunentiy paying a dividend of $2.00, the required rate of return is 12 percent, and the dividend is expected to grow at a constant rate of 10 percent, then the current price of the stock is a. $18.33. b. $20. (a) $110. d. $224. 15. Aecordhrgtorationai expectationstheory;"forecast errors of expectations a. are more iike y to he negative than positive. ' b. are more Eker to be positive than negative. c. tend to be persistently high or low. are unpredictable. 16. If a mutual fund outperforms the market in one period, evidence suggests that this fimd is a. highly fikely to consistently outperform the market in subsequent periods due to its superior investment strategy. h. liker to under-perform the market in subsequent periods to average its overall returns. @not liker to consistentiy outperform the market in subsequent periods. (1. not liker to outperform the market in any subsequent period. 17. As of last Friday, what was the discount rate on primary credit discount 103113? a. 0% @ 0.50% c. 2.50% d. 5.00% 18. Currently, the value of monetary base is about a. $675 billion 1). $675 trillion @ $1.7 trillion d. $8.6 billion Ii) 19. You read a story in the newspaper announcing the proposed merger of Dell Computer and Hewlett-Packard (I-I-P). The merger is expected to greatly increase Dell’s profitability. Ifyou decide to invest in Dell’s stock, you can expect to earn ' a. an above average return because you will receive higher dividend payments out of the higher profits. b. an above average return because the price of Dell’s stock will increase as higher profits are earned. c. a below average return because computer makers have low profit rates. an average return because stock prices almost immediately adjust to reflect expected changes in profitability. 20. The reduction in transactions costs per dollar of investment as the size of transactions increases is a. discounting. @economies of scale. c. economies of trade. d. diversification. 21. The problem of adverse selection helps to explain whyfirrnsearemorelikelyrtoobtainfinrds'fiomrbanksandotherfinancial~interrnediaries;ratherthan' " ' ' from securities markets. '0. why collateral is an important feature of consumer, but not business, debt contracts. c. why direct finance is more important than indirect finance as a source of business finance. d. Why lenders refiise loans to individuals with high net worth. 22. The principal-agent problem a. occurs when managers have more incentive to maximize profits than the stockholders-owners do. b. in financial markets helps to explain why equity is a relatively important source of finance for American business. @Nould not arise if the owners ofthe firm had Complete information about the activities of the managers; 7 d. explains Why direct finance is mor“ important firm-r indirect thence M a source of business Eranee. 23. Solutions to the moral hazard problem in the financial system include a. borrowers having low net worth. lenders monitoring the actions of borrowers and enforcing restrictive covenants. c. greater reliance on equity contracts and less on debt contracts. d. greater reliance on debt contracts than on financial intermediaries. 24. Which ofthe following statements is false? a. A bank’s assets are its uses offimds. b. A bank issues liabilities to acquire funds. c. I A bank’s assets provide the bani: with income. ' @Bank capital is recorded as an asset on the bank balance sheet. 25. Which ofthe foilowing bank assets is the most iiquid? a. Consumer loans Excess reserves c. Cash items in process of collection {1. US. government securities 26. When you deposit a $50 bill in the Security Pacific National Bank, a. its Liabilities decrease by $50. @its assets increase by $50. c. its reserves decrease by $50. d. its cash items in the process of collection increase by $50. .27. When a $10 check written on the First National Bard: of Chicago is deposited in an account at Citibank, a. the liabilities of the First National Bank increase by $10. 13. the reserves of the First National Bank increase by $10. 'etheiiabiiitiesofCitibarflc'increase’by‘fi0: " ' ' ' ' ' d. the assets of Citibank fail by $10. 28. If you deposit $50 in your account at First National Bank and at the same time a $100 check you have written on this account is cashed at Chemical Bank, then the net effect is that a. the assets ofFirst National rise by $50. 13. the assets of Chemical Bank rise by $5 0. @the reserves at First National fail by $50. d. the liabilities at Chemical Bank rise by $50. 29. A bank is insolvent when {at} its iiabilities exceed its assets. ‘0. its assets exceed its iiabilities. c. its capital exceeds its liabilities. d. its assets increase in value. 30. The difference between a bank’s rate-sensitive liabilities and rate-sensitive assets is known as the a. duration gap. b. interest-sensitivity index. c. rate-risk index. @gap- 31. If a banker expects interest rates to fail in‘the future, her best strategy for the present is a. to increase the duration of the bank's liabilities. b. to buy short-term bonds. c. to sell long—term certificates of deposit. i @o increase the duration of the bank’s assets. 32. The National Bank Act of 1863, a. created a banking system of state-chartered banks. @ established the Office of the Comptroller of the Currency. c. broadened the regulatory powers of the Federal Reserve. d. provided for federal insurance of checkable deposits. 33. The Federal Reserve Act of 1913 reqrfired'that , a. state banks be subject to the same regulations as national banks. b. national banks establish branches in the cities containing Federal Reserve banks. (3 national banksjoin the Federal Reserve System. . cl. state banks could not join the Federal Reserve System. 34. The legislation that separated investment banking from commercial banking until its repeal in 1999 is known as the a. National Bank Act of 1863. b. Federal Reserve Act of 1913. @"Glass-Steagalllkcti " ' ' r r d- McFadden Act. 35. .Who pioneered the concept of selling junk bonds for companies that had not yet achieved investment— grade status? Michael Milken . Warren Buffett c. Paul Volcker ' d. Milton Friedman 36. Although the FDIC was created to prevent bank failures, its existence encourages banks to @take'too much risk. ' ' '0. hold too much capital. 0. open too many branches. (1. buy too much stock. 37. When interest rates fall, abank that perfectly hedges its portfolio of Treasury securities in the futures market ‘ a. suffers a loss. b. experiences a gain. @ has no change in its income. ‘ j :1. may either gain, lose or see no change in its inconre. 38. The number of futures contracts outstanding is called the a. remover. _ 3:). volume. 1 . float. * . r d open interest. ! 39. A call option gives the seller the a. right to sell the underlying security. 1). obligation to sell the underlying security. 0. right to buy the underlying security. @ obligation to buy the underlying security. 40. A financial contract that obligates one party to exchange a set of payments it owns for another set of payments owned by another party is called a a. hedge. b. call option. c. put option. swap. 41. If the United States unexpectedly experiences inflation, a. the ex post real interest rate will be greater than the ex ante real interest rate and borrowers will gain. . the,,expostrealinterestrate.willbegreaierthantheexanterealinterestrate.andlenderswillgain. 7 ti the ex ante real interest rate will be greater than the ex post real interest rate and borrowers will gain. d. the ex ante real interest rate will be greater than the ex post real interest rate and lenders will gain. 42. Ifyon purchase a ISO-day Treasury hilt for $980, the yield on a discount basis is a. 1%. @ 4%. c. 8%. d. 8.45%. e. 16% 43. Which of the following is included in both M1 or M2? 3.. Money market deposit accounts 33. Small-denomination time deposits 0. Treasury bills @ Other checkahle deposits 44. After 1980, support for monetarism declined among economists because a. the inflation rate continued to increase throughout the 19805. b. the Federal Reserve stopped collecting data. on M3. @ both M1 velocity and M2 velocity became less stable than in earlier years. d. the Federal Reserve began paying more attention to the policy goal of price stability and less attention to the policy goal of high employment. a. . (9 rise. c. remain unchanged. d. rise at first, but then fall. 46. The primary liabilities of a commercial bank are a. bonds. @ deposits. d. commercial paper. 47. Members of the Federal Reserve’s Board of Governors are a. chosen by the Federal Reserve Bank presidents. b. appointed by the newly elected president of the United States, as are cabinet positions. @appointed by the president of the United States and confirmed by the Senate as members resign. . never allowed to serve more than 7-year terms. 43. The Federal Open Market Committee consists of the a. the five most senior members of the seven-member Board of Governors. b. the seven members of the Board of Governors and the Secretary of the Treasury. C59 the seven members of the Board of Governors and five presidents of the regional Fed banks. d. the twelve presidents of the regional Fed banks and the chairman of the Board of Governors. 49. The long position in a futures contract is the party that will a. deliver a commodity or financial instrument to the buyer at a future date. b. assume all the risk in the transaction. c. suffer a reduction in liquidity. (d3 benefit from decreases in the price of the underlying asset. 50. Purchases and sales of government securities by the Federal Reserve are called a. discount loans. b. federal fund transfers. @ open market operations. . swap transactions. 51. When an individual sells a $100 bond to the Fed, she may either deposit the check she receives or cash it for currency. In both cases a. reserves increase. the monetary base increases. 0. reserves decrease. d. the monetary base decreases. 10 52. Which ofthe following is fixed on a coupon bond? Coupon rate I). Current yield c. Price _ d. Yield to maturity 53. Suppose that a coupon bond is listed in The Wall Street Journal as having a' coupon rate of 7.25% and a bid price of 110:18. Its current yield is ' @ 6.56%. b. 6.58%. c. 7.25%. (1. Not enough information has been provided to determine the answer. 54. If a bank has excess reserves of $10,000 and demand deposit liabilities of $80,000, and if the required reserve ratio is 20 percent, then the bank has actuai reserves of a. 81'5g000i' ' " ' c. $20,000. ®$26,000. e. $36,000. 55. ifthe required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply equals ' a. . $8,000. (£931,200. 2. $2,200. d. $8,400. 56. If the Fed executes an open—market purchase at the same time that it increases the required reserve ratio, the money supply will a. rise. ’0. fall. c. remain unchanged. _ . there is not enough information given to determine whether a, b., or c. will occur. 57. The interest rate charged on overnight loans of reserves between banks is the a. prime rate. 13. discount rate. c. federal fimds rate. . Treasury bill rate. 11 58. An article'in the Wall Street Journal noted that “[stock] valuations are falling to levels that would normally make companies attractive acquisition targets.” Ifthis statement is correct, then a. the value of Tobin’s q will be increasing. @ the value of Tobin’s (1 will he decreasing. c. long—term interest rates must be rising. d. long-term interest rates must be falling. 59. The current yield on a $5,000 10% coupon bond selling for $4,000 is a. 5%. b. 10%. 12.5%. . 15%. 6D. The intrinsic value of an option a. is equal to the price of the option. is the amount the option actually is worth if it is immediately exercised. cristheamonntthe opticri'is'exp’ected"to’he'Wortli'on'its expirationdate: " ' ' d is emai to zero at my time before the option’s expiration date. he. Ju.) hrs-1w u “u 61. If the money supply is $500 and nominal income is $3,000, the velocity of money is a. 1/60. E). 1/6. . 6. Q 60. 62. The view that velocity is constant in the short run transforms the equation of exchange into the quantity theory of money. According to the quantity theory of money, when the money supply doubles a. velocitv falls TN 50 percent J J I" ' ' E); velocity doubles. . nominal incomes falls by 50 percent. C - @ nominal income doubles. 63. Ifthe Fed wants to temporarily inject reserves into the banking system, it will 9 engage in a repurchase agreement. . engage in a matched sale-purchase transaction. c. raise the target for the federal funds rate. d. engage in an open market sale. 64. Money that would have value even if it was not used as money is called a. fiat money. commodity money. 0. legal tender. d- worthless. ; 65. The Fisher hypothesis holds that a. in the long run the nominal interest rate equals the real interest rate. b. the yield to maturity equals the real interest rate. c. the nominal interest rate equals the coupon rate if the bond is held to maturity. @ the nominal interest rate rises or falls point-for-point with expected inflation. 66- The current system of exchange rates is best described as a. a system of fixed exchange rates. h. a system of clean floating exchange rates. © a system of managed or dirty floating exchange rates. d. a modified version of the gold standard. 67. One key reason why South Korea pegged the value of won versus the dollar was to a. reverse the undervalnation of its currency. b. reduce the dependence of Korean businesses on foreign financial capital. c. raise domestic interest rates. rhelpiKereanehusinessessellingrintherU.Searnarket;mrrrr w r r r ~ 7 68. In the traditional Keynesian view, the main way in which an expansionary monetary policy increases output in the short run is by lowering the interest rate, which increases spending by households and firms. b. directly increasing the funds available for households and firms to spend. 0. increasing the ability of banks to make loans. (1. increasing the funds available for government spending. 69. In the bank lending channel, an important reason for output increases in the short run after an expansionary monetary policy is that a. the funds directly available for households and firms to spend will increase. b. prices will increase, making increased production more pffifiiai‘jie for firms. c. the increase in government spending fiom an expansionary monetary policy increases output through the multiplier effect. @the ability of banks to make loans will increase. 70. A decision by the Federal Reserve to rapidly bring down the inflation rate a. is very costly in terms of lost output in both the new classical and new Keynesian views. b. is virtually cosfless in terms of East output in both the new classical and new Keynesian views. 0. is very costly in terms of lost output in the new classical View, but virtually costless in the new Keynesian View. ' s very costly in terms of lost output in the new Keynesian view, but virtualiy costless in the new classical View. ' 12 ...
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This note was uploaded on 02/22/2011 for the course ECO 029 taught by Professor Anthonyp.o'brien during the Spring '08 term at Lehigh University .

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Spring 2009 Final_Key - Department of Economics Psofessor...

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