If a country’s potential output is $100 billion and the output gap is 5%, the country’s
actual output is
a. $500 billion.
b. $20 billion.
c. $95 billion.
d. $105 billion
Answer:
Which of the following is a factor considered by authorities in evaluating the mergers of
banks?
a. The level to which the new bank increases competition in the market
b. The number of employees in the new bank
c. The adequacy of the financial and managerial resources of the new bank
d. The value of the total assets owned by the new bank
Answer:
Consider a coupon bond that pays $100 every year and repays its principal amount of
$1,000 at the end of 10 years.
If the annual rate of discount is 10 percent, the present value of the bond is
approximately
a. $909.09.
b. $990.00.
c. $1,000.00.
d. $1,100.00.
Answer:
When stock prices are unpredictable, they are said to
a. be riskless.
b. follow a random walk.
c. lack a martingale.
d. be ex-dividend.
Answer:
The letter M, in the CAMELS rating system, which is used to assess the health of the
banks, stands for _____.
a. management
b. money market account
c. mortgage
d. maturity
Answer:
On September 1, 2012, Al buys a bond for $15,000 that makes coupon payments of
$750 after each of the following three years and returns its principal of $15,000 at the
end of the three years. In other words, it is a standard coupon bond with a 5 percent
annual interest rate making payments once each year.
On September 1, 2013, Al receives his first coupon payment of $750. At that time, the
market interest rate on bonds like Al’s has risen to 6 percent. Al sells his bond to Biff at
that time, for a price equal to the present value of the bond’s payments.
a. How much does Biff pay Al for the bond?
b. Calculate Al’s current yield, capital-gains yield, and total return for the year.
On September 1, 2014, Biff receives a coupon payment of $750. The market interest
rate on bonds like his remains 6 percent. Biff sells his bond to Cass at that time, for a
price equal to the present value of the bond’s payments.
c. How much does Cass pay Biff for the bond?
d. Calculate Biff’s current yield, capital-gains yield, and total return for the year.
On September 1, 2015, Cass receives a coupon payment of $750 and the principal of
$15,000. Over the course of the year (between September 1, 2014, and September 1,
2015), the market interest rate on bonds like his rose to 7 percent. But Cass decided to
keep the bond.
e. What is Cass’s total return for the year?
Explain and show allyour work for each part.
Answer:
Consider a perpetuity making one payment each year that has a
present value of $1,500. If the annual rate of discount is 3 percent, the annual payment
is
a. $15.00.
b. $45.00.
c. $500.00.
d. $1,500.00.
Answer:
The present value of a twoyear bond with a future payment of $1,345.50 and the yield
to maturity of 3.6 percent is
a. $1,300
b. $1,500.50
c. $1,253.62
d. $1,246.72
Answer:
From 1970 to 2000, the U.S. dollar
a. appreciated against the U.K. pound and depreciated against the Canadian dollar.
b. depreciated against the U.K. pound and appreciated against the Canadian dollar.
c. appreciated against both the U.K. pound and the Canadian dollar.
d. depreciated against both the U.K. pound and the Canadian dollar.
Answer:
According to the theory underlying the present-value formula, would a rational
individual prefer to receive (a) $75 one year from now, (b) $85 two years from now, or
(c) $90 three years from now, or would he be indifferent between all three choices?
Assume that the relevant annual market interest rate is 10 percent and will remain at 10
percent for the next three years?
a. He will prefer $75 one year from now.
b. He will prefer $85 two years from now.
c. He will prefer $90 three years from now.
d. He will be indifferent between all three choices.
Answer:
Which of the following securities has the highest yield to maturity?
a. An on-the-run Treasury bond with ten years to maturity
b. An on-the-run Treasury bond with twenty years to maturity
c. An offtherun Treasury bond with twentyfour years to maturity
d. An off-the-run Treasury bond with twelve years to maturity
Answer:
Joe E. Conomist purchased 100 shares of IBM corporation in 2011 for $10,000. In
2014, Joe sold these shares to Sally Forth for $15,000. How would this sale of stock in
2014 affect IBM corporation?
a. IBM makes $5,000 in profit.
b. IBM invests $5,000 in capital equipment.
c. IBM suffers a loss of $5,000.
d. IBM is unaffected.
Answer:
In the 1950s, the number of failures (of commercial banks and thrifts) per year averaged
a. near zero.
b. about fifty.
c. about
d. in the hundreds.
Answer:
The extra collateral the Fed requires above the value of a discount loan is known as
a. the term premium.
b. a haircut.
c. a covenant.
d. secondary credit.
Answer:
Suppose you have a 20 percent probability of having your cash lost or stolen, and you
spend $25 each day. Your total cost of holding cash is (182.50/T) + (3.75 × T).
a. What is your cost of going to the ATM?
b. What is the nominal interest rate?
c. How often will you go to the ATM to minimize your costs?
Answer:
A commercial bank that gets a charter from the federal government is called a bank.
a. charter
b. state
c. national
d. federal reserve
Answer:
An investor buys a stock for $10,000 and earns dividends of $250 during the course of
the year. At the end of the year, the stock is worth $9,300. The capital-gains yield for
the year is
a. 2.5 percent.
b. −2.5 percent.
c. −4.5 percent.
d. −7.0 percent.
Answer:
Consider a three-year fixed-payment security that has a present value of $1,000. If the
annual rate of discount is 7 percent, the payment made at the end of each year is
a. $70.00.
b. $107.00.
c. $142.86.
d. $381.05.
Answer:
A model that allows variables to change over time is referred to as a
a. static model.
b. dynamic model.
c. partial-equilibrium model.
d. general-equilibrium model.
Answer:
If the interest rate on three-month Treasury securities is 6 percent and the interest rate
on ten-year Treasury securities is 4 percent, then
a. the economy has probably just emerged from a recession.
b. the yield curve slopes upward steeply.
c. a recession is likely to occur.
d. the economy is probably in the middle of an economic expansion.
Answer:
If your after-tax expected real interest rate is 3 percent on a one-year bond that pays 4
percent interest, what is the expected inflation rate if you face a tax rate of 20 percent?
a. 0.0 percent
b. 0.2 percent
c. 2.0 percent
d. 20.0 percent
Answer:
Taylor originally picked as the weight on the output gap and as the weight on the
inflation gap in his rule.
a. 1; 1
b. 1; 1/2
c. 1/2; 1/2
d. 1/2; 1
Answer:
If actual inflation was 4 percent over the past year and you owned a one-year bond that
paid 6 percent interest, what was your after-tax realized real interest rate if your tax rate
was 15 percent?
a. −0.6 percent
b. 0.0 percent
c. 1.1 percent
d. 2.0 percent
Answer:
An observation that does not fit a model is called
a. a martingale.
b. an anomaly.
c. a random walk.
d. a beta coefficient.
Answer:
A mutual fund is
a. a hedge fund that only wealthy people may invest in.
b. a company that buys a share of each stock in the entire stock market.
c. an investment company that buys stocks in companies that are not growing strongly.
d. an investment company that pools the funds of many investors and buys a large
number of different stocks.
Answer:
If you expect inflation to be 2 percent next year and you buy a one-year bond paying 5
percent interest, what is your after-tax expected real interest income if the price of the
bond is $200 and your tax rate is 40 percent?
a. $0.20
b. $20
c. $10
d. $2
Answer:
In the liquidity-preference model, if the nominal interest rate is higher than the
equilibrium interest rate
a. both bond prices and nominal interest rate will eventually fall.
b. both bond prices and nominal interest rate will eventually rise further
c. bond prices will fall and nominal interest rate will eventually rise further
d. bond prices will rise and nominal interest rate will eventually fall.
Answer:
A rise in the incomes of domestic consumers causes net exports to
a. decline.
b. not change.
c. rise.
d. rise at first, then decline later.
Answer:
Money that has value in large part by the government’s proclamation is known as
a. fiat money.
b. M1.
c. full-bodied money.
d. inside money.
Answer:
Suppose the inflation rate in Canada is 1 percent and the inflation rate in Mexico is 3
percent. If the nominal exchange rate in terms of Mexican pesos per Canadian dollar
falls by 4 percent, by how much will the real exchange rate (in terms of Mexican goods
per Canadian good) change?
a. +6 percent
b. +2 percent
c. −2 percent
d. −6 percent
Answer:
A graph plotting the real value of a mortgage payment over time when the inflation rate
is positive and the mortgage is a standard nominal-rate loan illustrates the
a. present-value formula.
b. securitization issue.
c. real-interest rate conundrum.
d. mortgage-tilt problem.
Answer:
If the price of a share of Aqua Inc. increased from $40 to $44 over a year, the
capital-gains yield per share was_____.
a. 10 percent
b. 4 percent
c. 11 percent
d. 0.4 percent
Answer: