Quiz FMT Chap 2 3 4 5 6

FMT Revision Quiz 1: Chapter 2, 3, 4, 5, 6
1. Everything else held constant, a decrease in wealth:
A) increases the demand for stocks

B) increases the demand for bonds
C) reduces the demand for silver
D) increases the demand for gold
2. If housing prices are expected to increase, then other things equal, the
demand for houses will______ and that of Treasury bills will_____.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
3. Everything else held constant, when bonds become less widely traded, and as
a consequence the market becomes less liquid, the demand curve shifts to the
____ and the interest rate _____
A) right; rises
B) right; falls
C) left; falls
D) left; rises
4. Everything else held constant, when the inflation rate is expected to rise,
interest rates will _____; this result has been termed the _____.
A) fall; Keynes effect
B) fall; Fisher effect
C) rise; Keynes effect
D) rise; Fisher effect
5. If Fed wants to permanently lower interest rates, then it should raise the rate
if money growth if
A) there is fast adjustment of expected inflation.

B) there is slow adjustment of expected inflation
C) the liquidity effect is smaller than the expected inflation effect.
D) the liquidity effect is larger than the other effects.
6. U.S. government bonds have no default risk because
A) they are backed by the full faith and credit of the federal government.
B) the federal government can increase taxes to pay its obligations.
C) they are backed with gold reserves.
D) they can be exchanged for silver any time.
7. The collapse of the subprime mortgage market increased the spread between
Baa and default free U.S. Treasury bonds. This ia due to
A) a reduction in risk.
B) a reduction in maturity.
C) a flight to quality.
D) a flight to liquidity.
8. Everything else held constant, an increase in marginal tax rates would likely
have the effects of _____the demand for municipal bonds, and _____ the
demand for U.S. government bonds.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing
9. If the expected path of one year interest rates over the next five years is 4
percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations
theory predicts that today's interest rate on the five year bond is
A) 4 percent.
B) 5 percent.
C) 6 percent
D) 7 percent.
10 If 1-year interest rates for the next three years are expected to be 4, 2, and 3
percent and the 3-year term premium is 1 percent, than the 3-year bond rate will
be
A) 1 percent.
B) 2 percent.
C) 3 percent.
D) 4 percent.
11. According to the liquidity premiun theory, a yield curve that is flat means
that
A) bond purchases expect interest rate to rise in the future.
B) bond purchases expect interest rates stay the same.
C) bond purchases expect interest rates to fall in the future.
D) The yield curve has nothing to do with expectations of bond purchases.
12. In actual practice, short-term interest rates and long-term interest rates
usually move together; this ia the major shortcoming of the
A) segmented markets theory.

B) expectation theory.
C) liquidity premium theory.
D) seperable markets theory.
13. Which of the following statements best explains how the use of money in an
economy increases economic efficiency?
A) Money increases economic efficiency because it is costless to produce.

B) Money increases economic efficiency because it discourages specialization.
C) Money increases economic efficiency because it decreases transactions costs.
D) Money cannot have an effect on economic efficiency.
14. For a commodity to function effectively as money it must be
A) easily standardized, making it easy to ascertain its value.

B) difficult to make change.
C) deteriorate quickly so that its supply does not become too large.
D) hard to carry around.
15. An electronic payments system has not completely replaced the paper
payments system because of all of the following reasons except
A) expensive equipment is necessary to set up the system.

B) security concerns.
C) privacy concerns.
D) transportation costs.
16. Monetary aggregates are
A) measures of the money supply reported by the Federal Reserve.

B) measures of the wealth of individuals.
C) never redefined since ʺmoneyʺ never changes.
D) reported by the Treasury Department annually.
17. Which of the following is included in both M1 and M2?
A) Currency
B) Savings deposits
C) Small-denomination time deposits
D) Money market deposit accounts
18. If an individual moves money from a small-denomination time deposit to a

demand deposit account,
A) M1 increases and M2 stays the same.

B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 decreases.
19. If an individual redeems a U.S. savings bond for currency
A) M1 stays the same and M2 decreases.

B) M1 increases and M2 increases.
C) M1 increases and M2 stays the same.
D) M1 stays the same and M2 stays the same.
20. If a security pays $55 in one year and $133 in three years, its present value
is $150 if the interest rate is
A) 5 percent.
B) 10 percent.
C) 12.5 percent.
D) 15 percent.
21. Which of the following are true of fixed payment loans?
A) The borrower repays both the principal and interest at the maturity date.
B) Installment loans and mortgages are frequently of the fixed payment type.
C) The borrower pays interest periodically and the principal at the maturity
date.
D) Commercial loans to businesses are often of this type.
22. A credit market instrument that pays the owner a fixed coupon payment
every year until the maturity date and then repays the face value is called a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
23. Economists consider the ________ to be the most accurate measure of

interest rates.
A) simple interest rate.

B) current yield.
C) yield to maturity.
D) real interest rate.
24. For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid
is
A) $10,030.
B) $10,300.
C) $13,000.
D) $13,310.
25. A $10,000 8 percent coupon bond that sells for $10,000 has a yield to
maturity of
A) 8 percent.
B) 10 percent.
C) 12 percent.
D) 14 percent.
26. Which of the following $5,000 face-value securities has the highest to
maturity?
A) A 6 percent coupon bond selling for $5,000

B) A 6 percent coupon bond selling for $5,500
C) A 10 percent coupon bond selling for $5,000
D) A 12 percent coupon bond selling for $4,500
27. The return on a 5 percent coupon bond that initially sells for $1,000 and
sells for $950 next year is
A) -10 percent.
B) -5 percent.
C) 0 percent.
D) 5 percent.
28. Suppose you are holding a 5 percent coupon bond maturing in one year with
a yield to maturity of 15 percent. If the interest rate on one-year bonds rises
from 15 percent to 20 percent over the course of the year, what is the yearly
return on the bond you are holding?
A) 5 percent
B) 10 percent
C) 15 percent
D) 20 percent
29. Interest-rate risk is the riskiness of an assetʹs returns due to
A) interest-rate changes.
B) changes in the coupon rate.
C) default of the borrower.
D) changes in the assetʹs maturity.
30. Prices and returns for ________ bonds are more volatile than those for
________ bonds,everything else held constant.
A) long-term; long-term
B) long-term; short-term
C) short-term; long-term
D) short-term; short-term
31. Would it make sense to buy a house when mortgage rates are 14% and
expected inflation is 15%? Explain your answer.
Even though the nominal rate for the mortgage appears high, the real cost of
borrowing the funds is -1%. Yes, under this circumstance it would be
reasonable to make this purchase.
32. If the interest rate is 5%, what is the present value of a security that pays
you $1, 050 next year and $1,102.50 two years from now? If this security sold
for $2200, is the yield to maturity greater or less than 5%? Why?
PV = $1,050/(1. +.05) + $1,102.50/(1 + 0.5)^2

PV = $2,000
If this security sold for $2200, the yield to maturity is less than 5%. The lower
the interest rate the higher the present value

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FMT Revision Quiz 1: Chapter 2, 3, 4, 5, 6

1. Everything else held constant, a decrease in wealth:

A) increases the demand for stocks

A) there is fast adjustment of expected inflation.

6. U.S. government bonds have no default risk because

A) segmented markets theory.

A) Money increases economic efficiency because it is costless to produce.

14. For a commodity to function effectively as money it must be

A) easily standardized, making it easy to ascertain its value.

A) expensive equipment is necessary to set up the system.

16. Monetary aggregates are

A) measures of the money supply reported by the Federal Reserve.

17. Which of the following is included in both M1 and M2?

18. If an individual moves money from a small-denomination time deposit to a

A) M1 increases and M2 stays the same.

19. If an individual redeems a U.S. savings bond for currency

A) M1 stays the same and M2 decreases.

21. Which of the following are true of fixed payment loans?

23. Economists consider the ________ to be the most accurate measure of

A) simple interest rate.

A) A 6 percent coupon bond selling for $5,000

29. Interest-rate risk is the riskiness of an assetʹs returns due to

PV = $1,050/(1. +.05) + $1,102.50/(1 + 0.5)^2

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