1 If the risk on foreign government bonds increases relative to U S government bonds the price of U S government bonds should A not change since U S government bonds are free of default risk B decrease since people will bail out of all government bonds C increase as the demand for these bonds increases D not be affected because the two types of bonds are traded in different markets 2 Tom obtains a car loan from Old Town Bank A The car loan is Tom s asset and the bank s liability B The car loan is Tom s asset but the liability belongs to the bank s depositors C The car loan is Tom s liability and an asset for Old Town Bank D The car loan is Tom s liability and a liability of the bank until Tom pays it off 3 A borrower who makes a 1000 loan for one year and earns interest in the amount of 75 earns what nominal interest rate and what real interest rate if inflation is two percent A A nominal rate of 5 5 and a real rate of 2 0 B A nominal rate of 7 5 and a real rate of 5 0 C A nominal rate of 7 5 and a real rate of 9 5 D A nominal rate of 7 5 and a real rate of 5 5 4 If a consol is offering an annual coupon of 50 and the annual interest rate is 6 the price of the consol is A 47 17 B 813 00 C 833 33 D 8333 33 5 A coupon bond is a bond that A always sells at a price that is less than the face value B provides the owner with regular payments C pays the owner the sum of the coupons at the bond s maturity D pays a variable coupon rate depending on the bond s price 6 In comparing money to a share of Microsoft stock held by an individual we can say A the share of stock is an asset but money is a liability B only the money is a means of payment but both are stores of value C only the money is a means of payment but both are units of account D both the Microsoft stock and the money are liabilities 7 If a bond s purchase price equals the face value the A coupon rate equals the current yield which is less than the yield to maturity B current yield equals the yield to maturity which exceeds the coupon rate C coupon rate equals the yield to maturity which equals the current yield D coupon rate does not equal the current yield which does not equal the yield to maturity 8 Which of the following assigns widely followed bond ratings A The Federal Reserve B The Wall Street Journal C Moody s Investor Service D The Nasdaq 9 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 A 2 7 B 4 C 4 3 D 8 10 The store of value characteristic of money refers to the fact that A people save most of their money B money allows people to shift purchasing power into the future C money is not valuable unless it is stored D money is the only way people have to store value 11 The price of a coupon bond is determined by A taking the present value of the bond s final payment and subtracting the coupon payments B taking the present value of the coupon payments and adding this to the face value C taking the present value of all of the bond s payments D estimating its future value 12 The money aggregate M2 includes A large denomination time deposits B stock and bond mutual fund shares C savings deposits but not money market deposit accounts D M1 13 The risk structure of interest rates says A the interest rates on a variety of bonds will move independently of each other B lower rated bonds will have higher yields C U S Treasury bond yields always change by more than other bonds D interest rates only compensate for risk during recessions 14 A share of Microsoft stock would best be described as which of the following A A derivative instrument B A means of payment C An underlying instrument D A debt instrument 15 Consider a zero coupon bond with a 1 100 payment in one year Suppose the interest rate decreases from 10 to 8 The price of this bond A increases from 1 000 to 1 018 B increases from 1 000 to 1 375 C decreases from 110 to 88 D decreases from 1 210 to 1 188 16 A 1 000 face value bond with an annual coupon of 40 one year to maturity and a purchase price of 980 has a A current yield that equals 4 00 B coupon rate that equals 4 08 C current yield that equals 4 08 and a yield to maturity that equals 6 12 D current yield that equals 4 08 and a yield to maturity that equals 4 0 17 The value of fiat money A comes from its intrinsic value B is worth more as a commodity than its value as money C comes from government decree D means that it is more desirable than currency 18 Considering the value of a financial instrument the more likely it is the payment will be made A the more valuable the financial instrument B the less valuable is the instrument because risk is lower C the less valuable is the financial instrument because it is highly liquid D the greater the uncertainty therefore the less valuable is the financial instrument 19 Holding liquidity and default risk constant an investor earning 4 from a tax exempt bond who is in a 20 tax bracket would be indifferent between that bond and a taxable bone with a n A 7 5 yield B 8 0 yield C 5 yield D 6 yield 20 Which of the following is not a financial intermediary A A bank B An insurance company C The New York Stock Exchange D A mutual fund 21 The value of 100 left in a certificate of deposit for four years that earns 4 5 annually will be A 120 00 B 119 25 C 117 00 D 145 00 22 If interest rates are expected to fall bond prices will A fall as the demand for bonds decreases B remain constant until interest rates actually change C fall as people fear capital losses in the future D increase due to the demand for bonds increasing 23 Suppose the economy has an inverted yield curve According to the Liquidity Premium Theory which of the following interpretations could be used to explain this A Interest rates are expected to rise in the future B Investors expect an economic slowdown C Investors are indifferent between bonds …