Question 1

Suppose you are risk loving and you are deciding between two investments.One has a guaranteed return of 5% while the second has a 50% chance of a 10% return and a 50% chance of a 0% return.Which investment would you choose? Why?

Accepted Answer

The second investment has an expected re...

Question 2

The demand curve for bonds would be reduced by

Accepted Answer

A)   a decrease in expected returns on other assets.
B)   an increase in the information costs of bonds relative to other assets.
C)   an increase in wealth.
D)   an increase in the liquidity of bonds relative to other assets.E) None of the above
F) A) and B)

Question 3

Suppose that businesses in Japan reduce their spending on plant and equipment.What will be the effect on spending on plant and equipment by businesses in the United States?

Accepted Answer

Because Japan is a large open economy,th...

Question 4

How can diversification reduce idiosyncratic risk but not systematic risk?

Accepted Answer

Since the returns on most assets do not ...

Question 5

Investors value liquidity in an asset because

Accepted Answer

A)   liquid assets tend to have high rates of return.
B)   liquid assets incur lower selling costs.
C)   liquid assets incur lower tax liabilities.
D)   whereas liquid assets have high information costs, their low risk offsets this.E) A) and B)
F) All of the above

Question 6

When nominal interest rates fall on financial assets such as U.S.Treasury bills,the amount of interest that households and firms

Accepted Answer

A)   gain by holding money decreases.
B)   lose by holding money decreases.
C)   lose by holding money increases.
D)   lose or gain by holding money does not change.E) A) and B)
F) A) and C)

Question 7

If a government's income tax receipts exceed its expenditures,the government is running a

Accepted Answer

A)   surplus and is a net borrower of funds.
B)   surplus and is a net saver of funds.
C)   deficit and is a net borrower of funds.
D)   deficit and is a net saver of funds.E) C) and D)
F) A) and C)

Question 8

The supply curve for bonds would be shifted to the right by

Accepted Answer

A)   a decrease in expected profitability.
B)   a decrease in the corporate tax on profits.
C)   a decrease in tax subsidies for investment.
D)   a decrease in government borrowing.E) All of the above
F) C) and D)

Question 9

In November 2012,HP claimed that they had weak earnings due to questionable accounting by a company that they had taken over.This is an example of

Accepted Answer

A)   market risk.
B)   systemic risk.
C)   idiosyncratic risk.
D)   liquidity risk.E) B) and C)
F) A) and B)

Question 10

During 2000,the government repurchased $30 billion in U.S.Treasury bonds outstanding.This was the first time this had been done since the administration of Herbert Hoover in the early 1930s.Analyze the impact of this repurchase on the bond market.

Accepted Answer

The supply curve for...

Question 11

A decrease in expected inflation

Accepted Answer

A)   usually leads to falling nominal interest rates.
B)   results in increased nominal capital gains on physical assets.
C)   will shift the bond demand curve to the left.
D)   will shift the supply curve for loanable funds to the left.E) B) and D)
F) A) and B)

Question 12

An increase in expected inflation will

Accepted Answer

A)   increase the nominal interest rate on both short-term and long-term bonds.
B)   decrease the nominal interest rate on both short-term and long-term bonds.
C)   increase the nominal interest rate on short-term bonds but not affect the nominal interest rate on long-term bonds.
D)   increase the nominal interest rate on long-term bonds but not affect the nominal interest rate on short-term bonds.E) B) and C)
F) A) and D)

Question 13

Which of the following can best be characterized as a "Black Swan" event?

Accepted Answer

A)   decline in stock prices due to a recession
B)   rising market interest rates as the Fed tightens monetary policy
C)   a financial crisis causing credit to dry up
D)   an individual firm unexpectedly filing for bankruptcyE) A) and B)
F) None of the above

Question 14

During a period of economic expansion,when expected profitability is high

Accepted Answer

A)   the demand curve for bonds shifts to the left.
B)   the supply curve of bonds shifts to the right.
C)   the equilibrium interest rate falls.
D)   the equilibrium price of bonds rises.E) None of the above
F) A) and B)

Question 15

Consider an open economy that is a net borrower (like the United States) .What would be the impact of a shift to a closed economy?

Accepted Answer

A)   domestic interest rates would decline
B)   domestic savings would decline
C)   domestic investment would decline
D)   net borrowing would increaseE) A) and B)
F) All of the above

Question 16

A one-year discount bond with a face value of $1,000 has an interest rate of 4%.What is its price?

Accepted Answer

A)   $960
B)   $961.54
C)   $996
D)   $1,040E) B) and D)
F) A) and C)

Question 17

Which of the following will cause the money demand curve to shift to the left?

Accepted Answer

A)   a decrease in real GDP
B)   an increase in the price level
C)   a decrease in the nominal interest rate
D)   an increase in the supply of moneyE) A) and B)
F) B) and C)

Question 18

In 2012,many investors feared that Greece may default on its bonds.Make use of a graph of the bond market to show how this affected interest rates on Greek bonds.

Accepted Answer

Fear of default reduced the de...

Question 19

In the bond market,the buyer is considered to be

Accepted Answer

A)   the lender.
B)   the borrower.
C)   the lender or the borrower, depending upon the use to which the funds are put.
D)   the lender or the borrower, depending upon whether interest rates are rising or falling.E) C) and D)
F) None of the above

Question 20

How should a financial plan of an older saver differ from that of a younger saver?

Accepted Answer

The older saver has a shorter time horiz...

Exam 4: Determining Interest Rates

How should a financial plan of an older saver differ from that of a younger saver?

Correct AnswerverifiedThe older saver has a shorter time horiz...View AnswerShow Answer

During 2000,the government repurchased $30 billion in U.S.Treasury bonds outstanding.This was the first time this had been done since the administration of Herbert Hoover in the early 1930s.Analyze the impact of this repurchase on the bond market.

Correct AnswerverifiedThe supply curve for...View AnswerShow Answer

A decrease in expected inflation

Correct AnswerverifiedShow Answer

Investors value liquidity in an asset because

Correct AnswerverifiedShow Answer

During a period of economic expansion,when expected profitability is high

Correct AnswerverifiedShow Answer

The demand curve for bonds would be reduced by

Correct AnswerverifiedShow Answer

If a government's income tax receipts exceed its expenditures,the government is running a

Correct AnswerverifiedShow Answer

Suppose you are risk loving and you are deciding between two investments.One has a guaranteed return of 5% while the second has a 50% chance of a 10% return and a 50% chance of a 0% return.Which investment would you choose? Why?

Correct AnswerverifiedThe second investment has an expected re...View AnswerShow Answer

Consider an open economy that is a net borrower (like the United States) .What would be the impact of a shift to a closed economy?

Correct AnswerverifiedShow Answer

How can diversification reduce idiosyncratic risk but not systematic risk?

Correct AnswerverifiedSince the returns on most assets do not ...View AnswerShow Answer

In the bond market,the buyer is considered to be

Correct AnswerverifiedShow Answer

The supply curve for bonds would be shifted to the right by

Correct AnswerverifiedShow Answer

In November 2012,HP claimed that they had weak earnings due to questionable accounting by a company that they had taken over.This is an example of

Correct AnswerverifiedShow Answer

Which of the following can best be characterized as a "Black Swan" event?

Correct AnswerverifiedShow Answer

In 2012,many investors feared that Greece may default on its bonds.Make use of a graph of the bond market to show how this affected interest rates on Greek bonds.

Correct AnswerverifiedFear of default reduced the de...View AnswerShow Answer

When nominal interest rates fall on financial assets such as U.S.Treasury bills,the amount of interest that households and firms

Correct AnswerverifiedShow Answer

Suppose that businesses in Japan reduce their spending on plant and equipment.What will be the effect on spending on plant and equipment by businesses in the United States?

Correct AnswerverifiedBecause Japan is a large open economy,th...View AnswerShow Answer

An increase in expected inflation will

Correct AnswerverifiedShow Answer

Which of the following will cause the money demand curve to shift to the left?

Correct AnswerverifiedShow Answer

A one-year discount bond with a face value of $1,000 has an interest rate of 4%.What is its price?

Correct AnswerverifiedShow Answer

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The older saver has a shorter time horiz...
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Correct Answer
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The supply curve for...
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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The second investment has an expected re...
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Correct Answer
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Correct Answer
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Since the returns on most assets do not ...
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Fear of default reduced the de...
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Correct Answer
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Correct Answer
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Because Japan is a large open economy,th...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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