Question 1

The higher the standard deviation of returns on an asset,the ________ the asset's ________.
A) greater; risk
B) smaller; risk
C) greater; expected return
D) smaller; expected return

Accepted Answer

Standard deviation measures the volatility of returns, which reflects the uncertainty or risk associated with an asset. Therefore, the higher the standard deviation, the greater the asset's risk.

Question 2

The supply curve for bonds has the usual upward slope,indicating that as the price ________,ceteris paribus,the ________ increases.
A) falls; supply
B) falls; quantity supplied
C) rises; supply
D) rises; quantity supplied

Accepted Answer

The supply curve for bonds, like most goods, slopes upward, indicating that as the price rises, the quantity supplied (not the supply itself) increases, ceteris paribus. This is because suppliers are willing to provide more of a good when they can sell it at a higher price.

Question 3

When the price of a bond is ________ the equilibrium price,there is an excess supply of bonds and the price will ________.
A) above; rise
B) above; fall
C) below; fall
D) below; rise

Accepted Answer

When the price of a bond is above the equilibrium price, there is an excess supply of bonds, leading to downward pressure on the price, causing it to fall.

Question 4

When the interest rate on a bond is below the equilibrium interest rate,there is excess ________ in the bond market and the interest rate will ________.
A) demand; rise
B) demand; fall
C) supply; fall
D) supply; rise

Accepted Answer

The answer of When the interest rate on a bond...

Question 5

Factors that determine the demand for an asset include changes in the
A) wealth of investors.
B) liquidity of bonds relative to alternative assets.
C) expected returns on bonds relative to alternative assets.
D) risk of bonds relative to alternative assets.
E) all of the above.

Accepted Answer

All of the factors listed play a role in determining the demand for an asset. A change in investor wealth can affect the amount of assets they are willing and able to purchase, liquidity and risk can impact investor preference for a particular asset, and expected returns on an asset are a key consideration for investors when deciding whether to invest or divest.

Question 6

When the price of a bond is above the equilibrium price,there is excess ________ in the bond market and the price will ________.
A) demand; rise
B) demand; fall
C) supply; fall
D) supply; rise

Accepted Answer

When the price of a bond is above the equilibrium price, there is excess supply in the bond market, and the price will fall to reach equilibrium.

Question 7

Diversification benefits an investor by
A) increasing wealth.
B) increasing expected return.
C) reducing risk.
D) increasing liquidity.

Accepted Answer

Diversification reduces risk by spreading investments across different asset classes or securities, which can help to offset losses in one area with gains in another. While diversification may also impact wealth and expected returns, its primary benefit is risk reduction. Liquidity is not directly impacted by diversification.

Question 8

When the interest rate on a bond is above the equilibrium interest rate,there is excess ________ in the bond market and the interest rate will ________.
A) demand; rise
B) demand; fall
C) supply; fall
D) supply; rise

Accepted Answer

The answer of When the interest rate on a bond...

Question 9

When the demand for bonds ________ or the supply of bonds ________,interest rates rise.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases

Accepted Answer

When the demand for bonds decreases, it means fewer people want to buy them, so sellers might have to lower the price, which effectively raises the interest rate (since bond prices and yields move inversely). Conversely, when the supply of bonds increases, there are more bonds available than people want to buy, which can also lead to lower prices and thus higher interest rates.

Question 10

When the interest rate on a bond is ________ the equilibrium interest rate,there is excess ________ in the bond market and the interest rate will ________.
A) above; demand; fall
B) above; demand; rise
C) below; supply; fall
D) above; supply; rise

Accepted Answer

When the interest rate on a bond is above the equilibrium interest rate, there is excess demand in the bond market because the higher returns attract more buyers. As a result, the interest rate will fall to reach equilibrium.

Question 11

As the price of a bond ________ and the expected return ________,bonds become more attractive to investors and the quantity demanded rises.
A) falls; rises
B) falls; falls
C) rises; rises
D) rises; falls

Accepted Answer

When the price of a bond falls, its expected return or yield rises. This happens because the bond's fixed interest payments represent a higher percentage of the bond's current price. As a result, investors find the bond more attractive, as they can earn a higher return for the same investment. Therefore, the quantity demanded of the bond would increase.

Question 12

The demand for an asset rises if ________ falls.
A) risk relative to other assets
B) expected return relative to other assets
C) liquidity relative to other assets
D) wealth

Accepted Answer

When the risk of an asset falls relative to other assets, it becomes more attractive to investors, leading to an increase in demand for that asset.

Question 13

When the demand for bonds ________ or the supply of bonds ________,interest rates fall.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases

Accepted Answer

When the demand for bonds increases, it means more people want to buy them, which typically leads to higher bond prices and lower yields (interest rates). Conversely, when the supply of bonds decreases, there are fewer bonds available for purchase, which can also lead to higher prices and lower yields due to the scarcity of available bonds.

Question 14

When the demand for bonds ________ or the supply of bonds ________,bond prices fall.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases

Accepted Answer

When the demand for bonds decreases, it means investors are not interested in buying bonds, and when the supply of bonds increases, it means there are more bonds available in the market. Both of these factors lead to a situation where there are more bonds available than investors want to buy, resulting in a decrease in the price of bonds.

Question 15

During business cycle expansions when income and wealth are rising,the demand for bonds ________ and the demand curve shifts to the ________.
A) falls; right
B) falls; left
C) rises; right
D) rises; left

Accepted Answer

During business cycle expansions, when income and wealth are rising, people have more money to invest, which increases the demand for bonds. This increased demand shifts the demand curve to the right.

Question 16

When the price of a bond is ________ the equilibrium price,there is an excess demand for bonds and the price will ________.
A) above; rise
B) above; fall
C) below; fall
D) below; rise

Accepted Answer

When the price of a bond is below the equilibrium price, there is an excess demand for bonds, which puts upward pressure on the price, causing it to rise.

Question 17

When the interest rate on a bond is ________ the equilibrium interest rate,there is excess ________ in the bond market and the interest rate will ________.
A) below; demand; rise
B) below; demand; fall
C) below; supply; rise
D) above; supply; fall

Accepted Answer

The answer of When the interest rate on a bond...

Question 18

When the demand for bonds ________ or the supply of bonds ________,bond prices rise.
A) increases; decreases
B) decreases; increases
C) decreases; decreases
D) increases; increases

Accepted Answer

When the demand for bonds increases, more people want to buy bonds, which drives up their prices. On the other hand, when the supply of bonds decreases, there are fewer bonds available for purchase, which also drives up prices. Therefore, when demand increases or supply decreases, bond prices rise.

Question 19

When the price of a bond is below the equilibrium price,there is excess ________ in the bond market and the price will ________.
A) demand; rise
B) demand; fall
C) supply; fall
D) supply; rise

Accepted Answer

When the price of a bond is below the equilibrium price, there is excess demand because more people want to buy the bond at its lower price than there are bonds available. This excess demand causes the price of the bond to rise as sellers can command higher prices due to the high demand.

Question 20

In a recession when income and wealth are falling,the demand for bonds ________ and the demand curve shifts to the ________.
A) falls; right
B) falls; left
C) rises; right
D) rises; left

Accepted Answer

In a recession, people have less disposable income and are more risk-averse, leading to a decrease in their demand for bonds. Hence, the demand for bonds falls, and the demand curve shifts to the left.

Quiz 4: Why Do Interest Rates Change?

The higher the standard deviation of returns on an asset,the the asset's .

The supply curve for bonds has the usual upward slope,indicating that as the price ,ceteris paribus,the increases.

When the price of a bond is the equilibrium price,there is an excess supply of bonds and the price will .

When the interest rate on a bond is below the equilibrium interest rate,there is excess in the bond market and the interest rate will .

Factors that determine the demand for an asset include changes in the

When the price of a bond is above the equilibrium price,there is excess in the bond market and the price will .

Diversification benefits an investor by

When the interest rate on a bond is above the equilibrium interest rate,there is excess in the bond market and the interest rate will .

When the demand for bonds or the supply of bonds ,interest rates rise.

When the interest rate on a bond is the equilibrium interest rate,there is excess in the bond market and the interest rate will .

As the price of a bond and the expected return ,bonds become more attractive to investors and the quantity demanded rises.

The demand for an asset rises if ________ falls.

When the demand for bonds or the supply of bonds ,interest rates fall.

When the demand for bonds or the supply of bonds ,bond prices fall.

During business cycle expansions when income and wealth are rising,the demand for bonds and the demand curve shifts to the .

When the price of a bond is the equilibrium price,there is an excess demand for bonds and the price will .

When the interest rate on a bond is the equilibrium interest rate,there is excess in the bond market and the interest rate will .

When the demand for bonds or the supply of bonds ,bond prices rise.

When the price of a bond is below the equilibrium price,there is excess in the bond market and the price will .

In a recession when income and wealth are falling,the demand for bonds and the demand curve shifts to the .