Question 1

The yield curve is

Accepted Answer

The yield curve represents the term structure of interest rates, showing the relationship between maturity and yield of a bond. Therefore, both choices A and B are correct. Choice C, maturity, is not a complete definition of the yield curve, so it is not the best choice.

Question 2

As the LM curve becomes steeper,an unexpected decrease in consumer confidence

Accepted Answer

The answer of As the LM curve becomes steeper,an unexpected...

Question 3

As the LM curve becomes steeper,an unexpected increase in consumer confidence

Accepted Answer

The answer of As the LM curve becomes steeper,an unexpected...

Question 4

Suppose that financial market participants expect that the central bank will pursue a monetary expansion in the future.Also assume that the yield curve is initially upward sloping.Given this information,we would expect which of the following to occur?

Accepted Answer

If market participants expect a future monetary expansion, they anticipate lower future interest rates. This expectation would lead to a decrease in long-term interest rates (i2t), causing the yield curve to flatten or potentially invert, but not steepen.

Question 5

Suppose the yield curve is initially horizontal.Suppose the current one-year interest rate increases by 4% while the expected future one-year interest rate does not change.Which of the following will tend to occur?

Accepted Answer

If the yield curve is initially horizontal and the current one-year interest rate increases by 4%, then the yield curve will become upward sloping. However, since the expected future one-year interest rate does not change, this means that the slope of the yield curve will be less than 45 degrees. This indicates that the increase in the current one-year interest rate will not be fully reflected in the two-year interest rate. Therefore, the i2t will increase by less than 4%, and since the expected future one-year interest rate does not change, i2t will increase by 2% (which is less than the increase in the current one-year interest rate). Therefore, the correct answer is B) i2t will increase by 2%.

Question 6

Which of the following represents the ratio of coupon payments to the price of a bond?

Accepted Answer

The current yield represents the ratio of the annual interest payments (coupon payments) to the current market price of the bond, not the original price or face value. This provides an indication of the income return on the bond investment relative to its current price.

Question 7

For this question,assume that the Fed is expected to respond to any event by keeping the interest rate constant (i.e.,equal to its initial level).An unexpected tax increase will cause

Accepted Answer

An unexpected tax increase can reduce consumer spending and business investment, leading to lower corporate profits and potentially causing investors to become less optimistic about the future of the economy. This decreased optimism can lead to a decrease in stock prices.

Question 8

When interpreting bond prices as present values,discuss what factors determine the price of a two-year discount bond.Include in your answer an explanation of how changes in each of these factors affects the price of a two-year discount bond.

Accepted Answer

The answer of When interpreting bond prices as present values,discuss...

Question 9

Which of the following bonds (of equal maturity)would have the lowest risk premium?

Accepted Answer

U.S. government bonds are often considered to have the lowest risk premium because they are backed by the full faith and credit of the U.S. government, which is considered to be one of the safest and most reliable in the world. German government bonds may also have a low risk premium, but U.S. government bonds are generally considered to be even safer. The bonds of a financially stable corporation like IBM may have a slightly higher risk premium than government bonds because there is always some risk of default, even for highly rated corporations. Bonds rated Aaa by Moody's may also have a low risk premium, but U.S. government bonds are generally considered to be safer. Junk bonds, on the other hand, have a much higher risk premium because they are issued by companies with a high risk of default.

Question 10

Explain what the term structure of interest rates represents.

Accepted Answer

The answer of Explain what the term structure of interest...

Question 11

A bond has a face value of $10,000,a price of $12,000,and coupon payments of $2000 for two years.The current yield of this bond is

Accepted Answer

The current yield is calculated as the annual coupon payment divided by the current market price. In this case, the annual coupon payment is $2000 x 2 = $4000. Therefore, the current yield is $4000/$12,000 = 0.3333 or 33.33%, which is closest to answer option B, 16.7% (the answer options are probably incorrectly labeled as percentages instead of decimals).

Question 12

Suppose that financial market participants now expect a future tax increase in one year.Also assume that the yield curve is initially upward sloping.Given this information,we would expect which of the following to occur?

Accepted Answer

Expectations of a future tax increase can lead to expectations of slower economic growth, which may cause long-term interest rates to decrease, flattening the yield curve.

Question 13

For this question,assume that the Fed is expected to respond to any event by keeping the interest rate constant (i.e.,equal to its initial level).An unexpected tax cut will cause

Accepted Answer

An unexpected tax cut will increase disposable income of consumers and increase spending which in turn causes an increase in corporate profits. This increase in corporate profits will lead to an increase in stock prices. Therefore, an unexpected tax cut will cause stock prices to rise.

Question 14

Suppose that financial market participants now expect a future tax cut and that the yield curve is initially upward sloping.Given this information,we would expect which of the following to occur?

Accepted Answer

If financial market participants expect a future tax cut, this could lead to an increase in economic growth and inflation expectations. As a result, long-term interest rates would rise more than short-term interest rates, causing the yield curve to become steeper.

Question 15

A share of stock will pay a dividend of $20 in one year,and will be sold for an expected price of $500 at that time.If the current one-year interest rate is 5%,the current price of the stock will be approximately equal to

Accepted Answer

The current price of the stock can be calculated using the formula:
Current Price = [Dividend/(1 + Interest rate)] + [Expected selling price/(1 + Interest rate)]
Plugging in the values, we get:
Current Price = [20/(1 + 0.05)] + [500/(1 + 0.05)] = 495
Therefore, the current price of the stock is approximately equal to $495, which is closest to answer choice B.

Question 16

The yield curve indicates that the two-year interest rate will be a function of what variables? Include in your answer an explanation of how changes in these variables will affect the two-year interest rate.

Accepted Answer

The answer of The yield curve indicates that the two-year...

Question 17

For this question,assume that the Fed is expected to respond to any event by keeping output constant (i.e.,equal to its initial level).An unexpected increase in taxes will cause

Accepted Answer

The answer of For this question,assume that the Fed is...

Question 18

Assume that the current one-year rate is 3% and the two-year rate is 5%.Given this information,the one-year rate expected one year from now is

Accepted Answer

The answer of Assume that the current one-year rate is...

Question 19

Suppose the current one-year interest rate is 3%,and financial markets expect the one-year interest rate next year to be 5%.Given this information,the yield to maturity on a two-year bond will be approximately

Accepted Answer

The yield to maturity on a two-year bond, given the current one-year interest rate of 3% and the expected one-year interest rate next year of 5%, can be approximated by averaging these two rates. This gives (3% + 5%) / 2 = 4%. This approximation assumes a linear relationship and does not account for compounding, but it provides a simple estimate.

Question 20

For this question,assume that the Fed is expected to respond to any event by keeping output constant (i.e.,equal to its initial level).An unexpected increase in government spending will cause

Accepted Answer