Which one of the following would not be considered a characteristic of money?
it must have intrinsic value
When comparing the exchange of goods and services in a barter economy and an economy that uses money,
a double coincidence of wants is necessary in the barter economy.
While money is an asset, not all assets are money because
money must work as a means of payment
The money aggregate M2 includes
M1
Which one of the following is the largest category of M1?
currency in the hands of the public
With inflation,
you need less money to buy the same basket of goods you bought a month or a year ago
M1 is
less useful than M2 for understanding inflation
The Consumer Price Index (CPI)
tends to overstate the impact of price changes due to substitution bias
Rank the following assets from most liquid to least liquid:
a) common stock
b) houses
c) currency
d) art
e) savings accounts
f) checking account deposits.
(1) currency; (2) checking account deposits; (3) savings accounts; (4) common Stock; (5) houses; (6) art
Money aggregates can best be defined as a set of measures of the amount of
money that exists at a particular point in time.
a financial intermediary
is a third party that facilitates a transaction between a borrower and a lender
Susie buys a share of Alphabet stock through her broker, Mr. Diaz, who works for Acme Investing and purchases the stock at the New York Stock Exchange. In this transaction, __________ is a financial instrument, __________ is a financial institution, and _
Alphabet stock is a financial instrument.
Acme Investing is a financial institution.
New York Stock Exchange is a financial market.
A share of Microsoft stock would best be described as which one of the following?
an underlying instrument
The primary use of derivative contracts is
to shift risk among investors
Financial markets contribute to all of the following except which one?
elimination of risk
Financial instruments used primarily to transfer risk would not include
a bank loan
The value of a financial instrument rises as
a. the promised payment is made sooner rather than later.
The fundamental characteristics influencing the value of a financial instrument include each of the following except
where the instrument is traded
Considering the value of a financial instrument, the more likely it is the payment will be made the
more valuable the financial instrument
Any entity on the other side of a financial transaction is
the counterparty
The future value of $100 at a 5% per year interest rate at the end of one year is
$105.00
The shorter the time until a payment the
higher the present value
A change in the interest rate
a. has a larger impact on the present value of a payment to be made far into the future than on one to be made sooner.
A promise of a $100 payment to be received one year from today is
a. equally valuable as a payment received today if the interest rate is zero.
What links the present to the future in financial markets?
interest rates
If the interest rate is zero, a promise to receive a $100 payment one year from now is
a. equal in value to receiving $100 today.
If a saver has a positive rate of time preference then the present value of $100 to be received 1 year from today is
less than 100
At any fixed interest rate, an increase in time, n, until a payment is made
reduces the present value.
How does compound interest make your money "work for you"?
You earn interest on interest in addition to interest on principal.
Ceteris paribus, which increases as interest rates rise�present value or future value?
only future value
In 2003, ratings agencies downgraded bonds issued by the State of California several times. How will this affect the market for these bonds?
yields on these bonds will increase
The bond rating of a security reflects the
likelihood the lender/borrower will be repaid by the borrower/issuer.
What is the highest bond rating assigned by Standard & Poor's?
AAA
Which one of the following would be most likely to earn an AAA rating from Standard & Poor's?
a 10-year bond issued by Canada
Commercial paper refers to
unsecured short-term debt issued by corporations and governments.
Most commercial paper is
used exclusively for short-term financing needs.
If a bond's rating improves, it should cause the bond's price
to increase and its yield to decrease, all other factors constant.
Bonds issued by the U.S. Treasury are referred to as benchmark bonds because
they are highly liquid and virtually free of default risk.
the risk spread
is also known as the default-risk premium.
Tax-exempt bonds
are most beneficial to those who pay higher income tax rates.
As a global pandemic erupts and consumers isolate at home, we would expect the risk spread between Baa bonds and U.S. Treasury securities of the same maturities to
widen
According to the Expectations Theory of the term structure, if interest rates are expected to be 2%, 2%, 4%, and 5% over the next four years, which yield is the closest to the yield on a three-year bond today?
2.7%
(2 + 2 + 4)/3 = 2.666~2.7%
Which one of the following is true?
U.S. Treasury Bill yields are lower than the yields on commercial paper.
The expectations hypothesis suggests the
slope of the yield curve depends on the expectations for future short-term rates.
A flight to quality refers to a move by investors
away from low-quality bonds toward high-quality bonds.
Bonds with the same tax status and ratings
can have different yields due to different maturities.
Assume the expectation hypothesis regarding the term structure of interest rates is correct. Then, if the current one-year interest rate is 4% and the two-year interest rate is 6%, then investors are expecting the future one-year rate to be
8%
Suppose the economy has an inverted yield curve. According to the expectations hypothesis, which one of the following interpretations could be used to explain this?
Interest rates are expected to fall in the future.
An inverted yield curve is a valuable forecasting tool because
the yield curve seldom is inverted and can signal an economic slowdown.
Financial intermediation exists, in part, because
the transaction costs associated with direct finance can at times be prohibitive.
All of the following except which one are reasons why financial intermediaries play such an important role in economies?
composition of GDP
Financial intermediaries, through their ability to lower transaction costs,
reduce the opportunity cost of specialization.
The fact that financial intermediaries employ experts to carry out particular activities and, therefore, reduce transactions costs is an example of which one of the following economic concepts?
comparative advantage
A bank can usually offer a saver a higher return for the same risk for all of the following reasons except
savers do not have good enough information to know if the return is sufficient.
Mutual funds are attractive because they
provide the investor with greater diversification at a lower cost than what most investors could obtain individually.
Most individuals save at banks rather than lend directly because
banks can reduce the cost of information asymmetry.
Ping-Hsin is a 25-year-old woman who purchases health insurance after she begins to feel fatigued. It is soon discovered that she has an autoimmune disorder that will require expensive monitoring and medication for the rest of her life. If this informatio
adverse selection
Guillaume moves from an hourly job where he is paid per unit of output produced to a salaried position where his income is not dependent on his output. He begins to take longer breaks and skip unpleasant tasks. This is an example of what type of informati
moral hazard
Two problems that arise from asymmetric information are
moral hazard and adverse selection
Mary Jones is the president of a local bank. She knows that half of the loan applicants in town she would classify as high risk and the other half as low risk. She observes that the other banks in town charge two different interest rates, a lower rate for
will experience adverse selection and have a disproportionate number of high risk borrowers.
an unsecured loan is
a. a loan where the applicant does not post any collateral.
Unsecured loans
generally involve very high interest rates as a result of adverse selection.
The moral hazard that can result from debt financing is mainly due to the borrower
taking greater risk in hopes of obtaining a larger return.
Which one of the following statements is false?
Credit card loans are secured
Requiring a home buyer to have a large down payment reduces risk to a mortgage lender because it means that
if the price of the house falls, the owner suffers the loss.
Financial intermediaries, through their ability to lower transaction costs,
increase the amount of trading that occurs in an economy.
A bank has 10,000 depositors, each of whom deposits $100 in the bank. If the bank makes 1000 loans for $1,000 each then each depositor has contributed
$0.10 to each loan.