Monetary and Financial Theories Test 1
1. The Fisher effect states that
A) nominal interest rates equals the expected inflation rate plus the real rate of interest.
B) nominal interest rates equals the real interest rate of interest minus the expected inflation rate
C) real rate of interest equals the nominal interest rate plus the expected inflation rate.
D) expected inflation rate equals the nominal interest rate plus the real rate of interest.
2. If inflation is expected to decrease, then
A) savers will provide less funds at the existing equilibrium interest rate.
B) the equilibrium interest rate will increase.
C) the equilibrium interest rate will decrease.
D) borrowers will demand more funds at the existing equilibrium interest rate.
3. If the economy weakens, there is _______ pressure on interest rates. If the Federal Reserve increases the
money supply, there is _______ pressure on interest rates (assume that inflationary expectations are not
affected).
A) upward; upward
B) upward; downward
C) downward; upward
D) downward; downward
4. The real interest rate can be forecasted by subtracting the ____ from the ____ for that period.
A) nominal interest rate; expected inflation rate
B) prime rate; nominal interest rate
C) expected inflation rate; nominal interest rate
D) prime rate; expected inflation rate.
5. Coupon payments are equal to the
A) coupon rate on a bond multiplied by the face value of the bond.
B) par value on a bond divided by the face value of the bond.
C) par value on a bond minus the face value of the bond.
D) coupon rate on a bond minus the face value of the bond.
6. If a bond is sold at a discount from par, this
A) lowers the yield on the bond.
B) does not change the yield on the bond.

C) raises the yield on the bond.
D) None of the above
7. As market interest rates fall, what happens to the prices of existing bonds?
A) Prices of existing bonds fall.
B) Prices of existing bonds increase.
C) Prices of existing bonds remain the same.
D) Prices of existing bonds increase and the decrease.
8. In general, when income falls, the willingness and ability to borrow and spend will
A) increase
B) decrease
C) remain the same
D) be impossible to determine.
9. Given an interest rate of 5%, which has a higher present value: A payment of $80 at the present time, or $100
in 2 years?
A) The present amount ($80 now, has a higher present value because of a positive time preference.


B) The present amount ($100 in 2 years, has a higher present value, give an interest rate of 5%.
C) The present amount ($80 now, has a higher present value, give an interest rate of 5%.
D) The present amount ($80 now, has a higher compounded value.
10. If a bond has 10 years to go to maturity, a par value of $5,000, is paying a dividend of $300 annually, and
costs $6,000 today, the current yield is which of the following?
A) 6%
B) 5%
C)10%
D) impossible to deduce from the information given
11. If the nominal interest rate is 9% and expected inflation is 11%, then the real interest rate is
A) -2%
B) 2%
C) 20%

D) unknown
12. A consol with a coupon payment of $100 iss purchased for $1,000. When the consol is sold, the interest rate
is 20%. What has happended to the price of the consol?
A) The consol’s price remains at $1,000.
B) The consol’s price will have increased to $2,000.
C) The consol’s price will have decreased to $500.
D) It is impossible to determined from the information given what the price of the consol will be.
13. If a bank will pay 7% interest compounded annually on $2,500 deposited today, the depositor will receive
how much at the end of 8 years?
A) $3,900.00
B) $3,950.45
C) $4,267.63
D) $4,295.47
14. Which of the following $1,000 face – value securities has the highest yield to maturity?
A) A 5% coupon bond selling for $1,000.
B) A 10% coupon bond selling for $1,000.
C) A 12% coupon bond selling for $1,000.
D) A 12% coupon bond selling for $1,100.
15. If a $10,000 face – value discount bond maturing in one year is selling for $5,000, then its yield to maturity
is
A) 5 percent
B) 10 percent
C) 50 percent
D) 100 percent
16. The sum of the current yield and the rate of capital gain is called the
A) rate of return.
B) discount yield.
C) pertuity yield.

D) par value.


17. Financial markets ________
A) facilitate the flow of funds from deficit surplus units.
B) facilitate the flow of funds from surplus to
deficit units.
C) are markets in which financial assets such as stocks and bonds can be purchased and sold.
D) Only answers B and C are correct.
E) None of the above are true.
18. Financial markets facilitating the trading of existing securities are known as _______
A) money markets B) capital markets C) primary market
D) secondary markets
above
19._____ are not considered capital market securities.
A) Repurchase agreements
B) Municipal bonds
D) Equity securities
E) Mortgages

E) none of the

C) Coporate bonds

20. Long-term debt securities tend to have a ________ expected return and ________risk than money market
securities.
A) lower; lower
B) lower; higher
C) higher; lower
D) higher;



higher
21. When security prices fully reflect all available information, the markets for these securities are said to be
A) inefficient.
B) efficient
C) perfect
D) imperfect
E) none of the above
22.The time and money spent in carrying out financial transactions are called ____________.
A) economies of scale
B) financial intermediation
C) liquidity services
D) transaction
costs
23. Financial intermediaries prodive customers with liquidity services. Liquidity services ___________
A) make it easier for custumers to conduct transactions. B) allow customers to have coffee while waiting
in the lobby.
C) are a result of the asymmetric information problem
D) are another term for asset transformation
24. The primary liabilities of a commercial bank are ________
A) bonds
B) mortgages
C) deposits

D) commercial paper

25. Economies of scale enable financial institutios to
A) reduce transactions costs
B) avoid the asymmetric inromation problem.
C) avoid adverse selection problems.
D) reduce moral hazard.

26. The primary assets of a commercial bank are ________
A) securities
B) loans

C) cash and reserves

D) fixed assets

27. Typically, borrowers have superior information relative to lenders about the potential returns a risks
associated with an investment project. The difference in information is called
A) moral selection
B) risk sharing
C) asymmetric information
D) adverse hazard
28. The problem created by asymmetric information before the transaction occurs is called _______, while the
problem created after the transaction occurs is called _______.
A) adverse selection; moral hazard
B) moral hazard; adverse selection
C) costly state verification; free-riding
D) free-riding; costly state verification
29. Financial institutions that accept deposits and make loans are called _______ institutions.
A) investment
B) contractual savings
C) depository
D) underwriting
30. Which of the following are the investment intermediaries?
A) Life insurance companies
B) Mutual funds
C) Pension funds
D) State and local government retirement funds

31. Which of the following is a contractual savings institution?
A) A life insurance company
B) A credit union
C) A savings and loan association
mutual fund
32. An investment intermediary that lends funds to consumers is _________
A) a finance company.
B) an investment bank.
C) a finance fund.
company
33. The primary assets of a finance company are _________
A) municipal bonds.
B) corporate stocks and bonds
mortgages.

D) A

D) a consumer

C) consumer and business loans

D)


34. Contractual savings institutions include ________
A) mutual savings banks.
B) money market mutual funds
insurance companies
35. Which of the following can be described as direct finance?
A) You take out a mortgage from your local bank.

C) You buy shares of common stock in the secondary market.

C) commercial banks

D) life

B) You borrow $2500 from a friend.
D) You buy shares in a mutual fund.

36. Which of the following can be described as involving indirect finance ?
A) You make a loan to your neighbor.
B) You buy shares in a mutual fund.
C) You buy a U.S Treasury bill from the U.S Treasury.
D) A corporation buys a short-term security issued by another corporation in the primary market.
37. The stock market is important because it is _________A) where interest rates are determined.
B) the most widely followed financial market in the
United States.
C) where foreign exchange rates are determined.
D) the market where most borrowers get their funds.
38. The main source of funds for_______ is proceeds from selling securities to households and businesses,
while their main use of funds is providing loans to households and businesses.
A) saving institutions
B) commercial banks
C) mutual funds
D) finance companies.
E)
pension funds.
39. The market where one currency is converted into another currency is called the______market.
A) stock
B) bond

C) derivatives.
D) foreign exchange.
40. With direct finance funds are channeled through the financial market from the ______ directly to the _______
A) savers, spenders
B) spenders, investors
C) borrowers, savers
D) investors, savers
41. A corporation acquires new funds only when its securities are sold in the
A) primary market by an investment bank.
B) primary market by a stock exchange broker.
C) secondary market by a securities dealer.
D) secondary market by a commercial bank.
42. Secondary markets make financial instruments more
A) solid
B) vapid
C) liquid

D) risky

43. Which of the following statements about the characteristics of debt and equity is true?
A) They can both be long-term financial instruments.
B) Bond holders are residual
claimants.
C) The income from bonds is typically more variable than that from equities.
D) Bonds pay dividends
44. When secondary market buyers and sellers of securities meet in one central location to conduct trades the
market is called a(n) _________
A) exchange
B) over – the – counter market
C) common market

D) barter market
45. Equity instruments are traded in the _____market.
A) money
B) bond
C) captital
D) commodities
46. ________are financial intermediaries that acquire funds by selling shares to many individuals and using the
proceeds to purchase diversified portfolios of stocks and bonds.
A) Mutual funds
B) Investment banks
C) Finance companies
D) Credit unions
47. Transactions that involve currently produced goods and servides, including the balance of goods and
services and net unilateral transfers, are explicitly measured in the


A) current account

B) capital account

C) foreign exchange market

D) transfers account

48. As the dollar appreciates, holding all other factors constant, dollar prices of foreign goods
A) decrease B) increase
C) remain the same
D) increase, holding all foreign exchange
constant.
49. The exchange rate is best defined as

A) the number of units of domestic currency which can be acquired with one unit of foreign money.
B) the number of units of domestic currency which can be acquired with one units of domestic money.
C) the number of units of foreign currency which can be acquired with one units of domestic money.
D) the number of units of foreign currency which can be acquired with one units of foreign money.
50. The balance of payments for the U.S is the record of transactions between the U.S and
A) the United Nations.
B) the World Trading Orrganization.
C) its international trading partners.
D) countries that are members of the Federal Reserve System.