Econ 3229 1 SP2016 Midterm 1 Name MULTIPLE CHOICE Choose the one alternative that best completes the statement or answers the question 1 Which of the following can be described as involving indirect finance A You buy shares in a mutual fund B You make a loan to your neighbor C You purchase shares in an initial public offering by a corporation in the primary market D You buy a U S Treasury bill from the U S Treasury at Treasury Direct gov 2 Everything else held constant when households save less wealth and the demand for bonds and the bond demand curve shifts A increase left B decrease right C decrease left D increase right 3 If an individual moves money from a small denomination time deposit to a demand deposit account A M1 stays the same and M2 stays the same B M1 increases and M2 stays the same C M1 increases and M2 decreases D M1 stays the same and M2 increases 4 Which of the following financial intermediaries is NOT a depository institution A a commercial bank B a credit union C a savings and loan association D a finance company 5 If the federal government decreases its spending and doesn t decrease taxes the bond supply shifts to the A left and the equilibrium interest rate rises B right and the equilibrium interest rate falls C left and the equilibrium interest rate falls D right and the equilibrium interest rate rises 6 If the nominal rate of interest is 2 percent and the expected inflation rate is 10 percent the real rate of interest is A 2 percent B 8 percent C 10 percent D 12 percent 7 Currently a three year Treasury note pays 4 75 Assuming that your tax rate is 20 what is the minimum interest rate that you would you need to earn on a tax free three year municipal bond in order to buy it instead ignoring the default risk A 3 8 B 0 95 C 15 25 D 5 7 8 Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called money A electronic B fiat C funny D commodity 9 Every financial market has the following characteristic A It determines the level of interest rates B It allows loans to be made C It channels funds from lenders savers to borrowers spenders D It allows common stock to be traded 10 If expected inflation declines by 2 what should happen to nominal interest rates according to the Fisher effect A fall by 2 B be cut in half C double in size D rise by 2 11 When money prices are used to facilitate comparisons of value money is said to function as a A medium of exchange B payments system ruler C store of value D unit of account 12 Bonds with relatively high risk of default are called A junk bonds C investment grade bonds B zero coupon bonds D Brady bonds 13 Which of the following bonds would have the highest default risk A junk bonds B municipal bonds C U S Treasury bonds D investment grade bonds 14 The bond demand curve is sloping indicating a n relationship between the price and quantity demanded of bonds everything else equal A upward inverse B upward direct C downward direct D downward inverse 15 A person s house is part of her A income B liabilities C money D wealth 16 When compared to exchange systems that rely on money disadvantages of the barter system include A lowering the cost of exchange to those who would specialize B encouraging specialization and the division of labor C the requirement of a double coincidence of wants D lowering the cost of exchanging goods over time 17 The spread between the interest rates on bonds with default risk and default free bonds is called the A risk premium B bond margin C junk margin D default premium 18 Which of the following is NOT included in the monetary aggregate M2 A savings bonds B checking deposits C currency D traveler s checks 19 The risk that interest payments will not be made or that the face value of a bond is not repaid when a bond matures is A inflation risk B interest rate risk C liquidity risk D default risk 20 The time and money spent in carrying out financial transactions are called A economies of scale B liquidity services C financial intermediation D transaction costs 21 A financial market in which previously issued securities can be resold is called a market A tertiary B used securities C secondary D primary 22 Which of the following 5 000 face value securities has the highest yield to maturity A a 12 percent coupon bond selling for 4 500 B a 10 percent coupon bond selling for 5 000 C a 6 percent coupon bond selling for 5 500 D a 6 percent coupon bond selling for 5 000 23 Everything else held constant if income tax rates were lowered then A the interest rate on Treasury bonds would rise B the interest rate on municipal bonds would rise C the interest rate on municipal bonds would fall D the price of Treasury bonds would fall 24 In a n market dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices A over the counter B barter C exchange D common 25 If a 5 000 coupon bond has a coupon rate of 13 percent then the coupon payment every year is A 1 300 B 650 C 130 D 13 26 If brokerage commissions on bond sales decrease then other things equal the demand for bonds will and the demand for stocks will A increase decrease B increase increase C decrease increase D decrease decrease 27 Other things being equal a decrease in the default risk of corporate bonds shifts the demand curve for corporate bonds to the and the demand curve for Treasury bonds to the A left left B left right C right left D right right 28 If stock prices are expected to drop dramatically then other things equal the demand for stocks will and that of Treasury bills will A increase decrease B decrease decrease C increase increase D decrease increase 29 The yield to maturity is than the rate when the bond price is its face value A greater coupon above B greater perpetuity above C greater coupon below D less perpetuity below 30 Factors that can cause the supply curve for bonds to shift to the right include A a decrease in government deficits B an expansion in overall economic activity C a business cycle recession D a decrease in expected inflation 31 Money is A the total collection of pieces of property that are a store of value B always based on a precious metal like gold or silver C a flow of earnings per unit of time D anything that is generally accepted in payment for goods and services or in the repayment of debt 32 If a consol bond …