ECO 029 “Money, Banking, and Financial Markets” Final Exam

ECO 029 “Money, Banking, and Financial Markets”

Final Exam

Spring 2013

Chapter 2

1) An important financial institution that assists in the initial sale of securities in the primary market is

the

A) investment bank.

B) commercial bank.

C) stock exchange.

D) brokerage house.

2) If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity

of 7 percent, then the real interest rate on this bond is

A) 7 percent.

B) 22 percent.

C) -15 percent.

D) -8 percent.

3) If the amount payable in two years is $2420 for a simple loan at 5 percent annual interest, the loan

amount, rounded to the nearest dollar, is

A) $1000.

B) $1210.

C) $2000.

D) $2195.

Chapter 4

4) To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20

million ignores the process of

A) face value.

B) par value.

C) deflation.

D) discounting the future.

5) With an interest rate of 6 percent, the present value of $100 next year is approximately

A) $106.

B) $100.

C) $94.

D) $92.

6) To pay for college, you have just taken out a $1,000 government loan that makes you pay $126 per

year for 25 years. However, you don’t have to start making these payments until you graduate from

college four years from now. Why is the yield to maturity necessarily less than 12% (this is the yield to

maturity on a normal $1,000 fixed-payment loan in which you pay $126 per year for 25 years)?

A). This is the case because the first payment due begins at a future date.

B). This is the case because market interest rates are less than 12%.

C). This is the case because of the known effects of inflation.

D). This is the case because the loan has a government guarantee.

7) Which of the following $1,000 face-value securities has the lowest yield to maturity?

A) A 5 percent coupon bond selling for $1,000

B) A 10 percent coupon bond selling for $1,000

C) A 15 percent coupon bond selling for $1,000

D) A 1 percent coupon bond selling for $900

Chapter 5

8) You would be more willing to buy Apple bonds (holding everything else constant) if

A) the brokerage commissions on bond sales become cheaper.

B) interest rates are expected to rise in the future.

C) your wealth has decreased.

D) you expect diamonds to appreciate in value.

9) If wealth increases, the demand for stocks ________ and that of long-term bonds ________,

everything else held constant.

A) increases; increases

B) increases; decreases

C) decreases; decreases

D) decreases; increases

10) In the figure below, the factor responsible for the decline in the interest rate is

A) a decline the price level.

B) a decline in income.

C) an increase in the money supply.

D) a decline in the expected inflation rate.

Chapter 6

11) In 2013, the government of Greece risked defaulting on its debt due to a severe budget crisis. Using

bond market graphs, determine how default would affect the risk premium between U.S. Treasury debt

and Greek debt with comparable maturity.

A). The risk premium would increase, which corresponds to segment C on the graphs above.

B). The risk premium would not change and therefore would be equal to segment B on the

graphs above.

C). The risk premium would not change and therefore would equal zero.

D). The risk premium would increase, which corresponds to segment B on the graphs above.

12) If the expected path of 1-year interest rates over the next five years is 2 percent, 4 percent, 1

percent, 4 percent, and 3 percent, the expectations theory predicts that the bond with the lowest

interest rate today is the one with a maturity of

A) one year.

B) two years.

C) three years.

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