Midterm 1 Key Version 1 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 AACSB Reflective Thinking BLOOMS Analyze Cecchetti Chapter 06 86 Difficulty Medium Topic The Bond Market and the Determination of Interest Rates 2 How do financial institutions evaluate the creditworthiness of potential borrowers A They offer high interest rates because only the best borrowers will be able to afford them B They gather information regarding the borrowers finances C They do not evaluate creditworthiness because everyone is treated the same D They do not evaluate the creditworthiness because they know the borrower will honor his her obligation to repay the loan AACSB Reflective Thinking BLOOMS Understand Cecchetti Chapter 01 17 Difficulty Medium Topic The Five Core Principles of Money and Banking 3 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 AACSB Reflective Thinking BLOOMS Analyze Cecchetti Chapter 06 84 Difficulty Medium Topic The Bond Market and the Determination of Interest Rates 4 Financial instruments are used to channel funds from A Savers to borrowers in financial markets and via financial institutions B Savers to borrowers in financial markets but not through financial institutions C Borrowers to savers in financial markets but not through financial institutions D Borrowers to savers through financial institutions but not in financial markets AACSB Analytic BLOOMS Understand Cecchetti Chapter 03 7 Difficulty Medium Topic Financial Instruments 5 In the United States control of the money supply is given to A The President B The Federal Reserve System C The Bureau of Printing and Engraving D The Department of the Treasury AACSB Analytic BLOOMS Remember Cecchetti Chapter 01 11 Difficulty Easy Topic The Six Parts of the Financial System 6 Which of the following assigns widely followed bond ratings A The Federal Reserve B The U S Treasury C The New York Stock Exchange D Standard Poor s AACSB Analytic BLOOMS Remember Cecchetti Chapter 07 4 Difficulty Medium Topic Ratings and the Risk Structure of Interest Rates 7 The money aggregate M1 includes each of the following except A Currency in the hands of the public B Travelers checks that have been issued C Currency in the vaults of commercial banks D Demand deposits at commercial banks AACSB Analytic BLOOMS Remember Cecchetti Chapter 02 48 Difficulty Easy Topic Measuring Money AACSB Reflective Thinking BLOOMS Understand Cecchetti Chapter 03 47 Difficulty Medium Topic Financial Instruments 8 Considering the value of a financial instrument the sooner the promised payment is made A The less valuable is the promise to make it since time is valuable B The greater the risk therefore the promise has greater value C The more valuable is the promise to make it D The less relevant is the likelihood that the payment will be made 9 Identify which of the following is not one of the five core principles of money and banking A Risk requires compensation B Controlling money supply creates inflation C Information is the basis for decisions D Time has value AACSB Analytic BLOOMS Remember Cecchetti Chapter 01 3 Difficulty Easy Topic The Five Core Principles of Money and Banking 10 The introduction of money market substitutes for basic checking accounts was fueled partially by A The relatively high rates of inflation that existed in the late 1970s and early 1980s B The reluctance of many retailers to accept checks C The high number of bank failures that were occurring in the 1970s D The higher interest rates banks had to pay on checking accounts 11 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 3 then investors are expecting A The future one year rate to be 7 B The future one year rate to be 2 C The future one year rate to be 3 5 D The future one year rate to be 4 AACSB Reflective Thinking BLOOMS Remember Cecchetti Chapter 02 63 Difficulty Medium Topic Money and How We Use It AACSB Reflective Thinking BLOOMS Apply Cecchetti Chapter 07 60 Difficulty Hard Topic The Term Structure of Interest Rates 12 The amount of information an individual would seek before making a decision A Is about the same across all individuals B Varies directly with the importance of the decision C Is the same across all decisions but varies across individuals D Depends on how much time it will take to get the information regardless of the decision AACSB Reflective Thinking BLOOMS Understand Cecchetti Chapter 01 6 Difficulty Medium Topic The Five Core Principles of Money and Banking 13 Suppose you buy a 30 year 1 000 face value 60 coupon payment Treasury bond at a price of 1 2000 Assume the price of this bond decreases to 1 050 over the next year when you are planning to sell it The one year holding period return is equal to A 5 00 B 12 50 C 7 50 D 3 79 14 If a one year bond currently yields 4 and is expected to yield 2 next year the Liquidity Premium Theory suggests the yield today on a two year bond will be A More than 3 B 3 C 2 D More than 2 but less than 3 AACSB Reflective Thinking BLOOMS Apply Cecchetti Chapter 06 34 Difficulty Medium Topic Bond Yields AACSB Analytic BLOOMS Apply Cecchetti Chapter 07 72 Difficulty Hard Topic The Term Structure of Interest Rates 15 Microsoft issues 100 face value ten year 5 25 coupon bonds The current yield on ten year U S government bonds is 3 5 If the Microsoft bonds are selling for 100 what is the risk premium for these bonds A 3 25 B 1 75 C 5 25 D Impossible to tell AACSB Analytic BLOOMS Apply Cecchetti Chapter 06 90 Difficulty Hard Topic Why Bonds are Risky AACSB Analytic BLOOMS Remember Cecchetti Chapter 02 19 Difficulty Easy Topic Money and How We Use It AACSB Reflective Thinking BLOOMS Understand Cecchetti Chapter 06 12 Difficulty Easy Topic Bond Prices 16 Money as a means of payments refers only to A Actual currency B Coins and currency C Coins currency and credit cards D Anything that