Deck 32: Financial Markets

Question 1

The function of financial intermediaries is to transfer purchasing power from

A)Dissavers to consumers.
B)Consumers to savers.
C)Savers to dissavers.

Answer 1

Savers to dissavers.

Question 2

Higher interest rates

A)Reflect a higher opportunity cost of money.
B)Raise the present value of future payments.
C)Lower the future value of current dollars.

Answer 2

Reflect a higher opportunity cost of money.

Question 3

Present discounted value refers to the

A)Future value of today's dollars.
B)Value today of future payments adjusted for inflation.
C)Value today of future payments adjusted for interest accrual.

Answer 3

Value today of future payments adjusted for interest accrual.

Question 4

As long as interest-earning opportunities exist,present dollars are worth

A)More than future dollars.
B)Less than future dollars.
C)More than previous periods' dollars.

Question 5

If the interest rate is 8 percent,then the present discounted value of $100 to be received two years from now is closest to

A)$128.00.
B)$116.00.
C)$86.00.

Question 6

The risk premium is the

A)Interest rate paid to savers.
B)Interest rate charged to borrowers.
C)Difference in rates of return on safe and risky investments.

Question 7

Financial intermediaries make the allocation of resources more efficient by

A)Transferring purchasing power from savers to dissavers.
B)Lending or investing the savings they hold.
C)Reducing search and information costs for savers and investors.

Question 8

The present discounted value of $100 to be received one year from now,if the interest rate is 2.5 percent,is closest to

A)$98.
B)$100.
C)$103.

Question 9

The present discounted value of a future payment will decrease when the

A)Interest rate increases.
B)Future payment is closer to the present.
C)Risk of nonpayment increases.

Question 10

Market participants are likely to save a portion of current income if they

A)Place a higher value on future consumption than on current consumption.
B)Place a higher value on current consumption than on future consumption.
C)Believe that banks might fail.

Question 11

Risk premiums do all of the following except

A)Help explain why banks charge different customers different interest rates.
B)Allocate limited resources only to the safest investors.
C)Are the difference in the rates of return on risky and safe investments.

Question 12

Financial intermediaries

A)Increase search and information costs for savers and investors.
B)Transfer purchasing power from spenders to savers.
C)Spread the risk of investment failure over many individuals.

Question 13

The present discounted value of a future payment will increase when the

A)Interest rate decreases.
B)Future payment is moved further into the future.
C)Risk of nonpayment increases.

Question 14

The supply of loanable funds is determined by all of the following except

A)Time preferences.
B)Demand for loanable funds.
C)Interest rates.

Question 15

Higher interest rates

A)Decrease the quantity of loanable funds.
B)Decrease the level of risk.
C)Increase the quantity of loanable funds.

Question 16

The present discounted value of $60,000 to be received at the end of three years when the interest rate is 10 percent is closest to

A)$45,079.
B)$49,587.
C)$60,000.

Question 17

An institution that makes savings available to investors is known as

A)A financial repository.
B)An independent financial association.
C)A financial intermediary.

Question 18

Which of the following is an example of a financial intermediary?

A)Banks.
B)The Federal Reserve.
C)The U.S.Treasury.

Question 19

Lower interest rates

A)Lower the present value of future payments.
B)Raise the future value of current dollars.
C)Reflect a lower opportunity cost of money.

Question 20

Which of the following is an example of a financial intermediary?

A)Stock markets.
B)Flea markets.
C)Real estate markets.

Question 21

The owners of which type of firm have the most liability?

A)Corporation.
B)Partnership.
C)Proprietorship.

Question 22

If the expected rate of return decreases

A)The demand for loanable funds will increase.
B)The demand for loanable funds will decrease.
C)Market participants will save less money.

Question 23

The price paid for the use of money is defined as the

A)Rental rate.
B)Interest rate.
C)Profit rate.

Question 24

The intersection of the demand for loanable funds and the supply of loanable funds determines the

A)Real interest rate.
B)Par value.
C)Prevailing interest rate.

Question 25

As the interest rate increases,ceteris paribus,the trade-off between present and future consumption

A)Makes it more appealing to sacrifice current consumption.
B)Is not affected.
C)Encourages less saving.

Question 26

In which form of business is a single individual responsible for the repayment of any debts?

A)Proprietorship.
B)Corporation.
C)Partnership.

Question 27

Figure 32.1 represents the market for loanable funds.Which of the following is true at the equilibrium interest rate?

A)The rate of return on capital equals the interest rate.
B)The rate of return on capital is less than the interest rate.
C)The rate of return on capital is greater than the interest rate.

Question 28

Which of the following is the equation for determining an expected value?

A)(1 - Risk factor)× PDV.
B)(Risk factor - 1)× PDV.
C)(1 - Risk factor)÷ PDV.

Question 29

If the present discounted value of a payment is $1,000,000 and there is a 40 percent chance that the payment will not occur,then the expected value is

A)$600,000.
B)$400,000.
C)$1,000,000.

Question 30

Suppose Carlos has a 60 percent chance of not collecting $100,000 when his rich uncle dies in 10 years.Juanita wants to buy the rights to this possible inheritance from Carlos.How much is the possible inheritance currently worth to Carlos? Assume the interest rate is 9 percent.

A)$94,695.
B)$25,345.
C)$16,896.

Question 31

Which of the following will cause the demand for loanable funds to increase?

A)The expected profitability of a project declines.
B)The cost of funds increases.
C)The expected rate of return increases.

Question 32

Suppose Regis has a 25 percent chance of not collecting $1,000 in one year.If the interest rate is 10 percent,what is the expected value of the future payment?

A)$750.
B)$682.
C)$227.

Question 33

The expected value of a future payment differs from the present discounted value in that the expected value

A)Takes into account the possibility of nonpayment.
B)Uses a lower interest rate in its calculation.
C)Uses a higher interest rate in its calculation.

Question 34

The owners of which type of firm have the least liability?

A)Corporation.
B)Partnership.
C)Proprietorship.

Question 35

Figure 32.1 represents the market for loanable funds.The equilibrium interest rate

A)Is less than the rate of return on capital.
B)Is greater than the rate of return on capital.
C)Represents the price paid for the use of money.

Question 36

In the loanable funds market,

A)The price is the interest rate.
B)The demand curve reflects the behavior of lenders.
C)The supply curve reflects the behavior of borrowers.

Question 37

The owners of a corporation are

A)Liable for its debts.
B)Those people who own the bonds issued by the corporation.
C)The shareholders of the corporation's stock.

Question 38

As the prevailing interest rate decreases,the opportunity cost of money

A)Increases for both lender and borrower.
B)Increases for the borrower and decreases for the lender.
C)Decreases for both lender and borrower.

Question 39

Expected value refers to the

A)Future value of a current payment.
B)Present value of a future payment.
C)Probable value of a future payment.

Question 40

As the uncertainty attached to a future payment _______,the expected value _______.

A)decreases;decreases
B)increases;stays the same
C)decreases;increases

Question 41

The price of a stock will increase,ceteris paribus,when

A)Future earnings expectations increase.
B)The interest rate increases.
C)The supply of the stock increases.

Question 42

Shares of ownership in a corporation are known as

A)Corporate stock.
B)Corporate bonds.
C)Retained earnings.

Question 43

The most important determinant of how much an individual will pay for a share of stock is

A)The average daily volume for the corporation's shares.
B)The expectation of future profit.
C)How well the CEO is compensated.

Question 44

The price of a stock will decrease,ceteris paribus,when

A)There is a shortage of the stock at the current price.
B)The interest rate increases.
C)The supply of the stock decreases.

Question 45

A corporation can elect to allocate corporate profits into either

A)Interest payments or dividends.
B)Bonds or stocks.
C)Dividends or retained earnings.

Question 46

The Dow Jones Industrial Average is an arithmetic average of _____ blue-chip industrial stocks.

A)30
B)50
C)75

Question 47

Dividends are

A)The amount of corporate profit paid out for each share of stock.
B)Profits used for investment in new plants and equipment.
C)An increase in the market value of an asset.

Question 48

An initial public offering

A)Allows a company to borrow funds for investment and growth.
B)Allows a company to raise money without increasing debt.
C)Indicates the demand for a company's new product.

Question 49

A motivation for holding stock is

A)To receive interest payments on the firm's debt.
B)The anticipation of capital gains.
C)To have a direct role in the operation of the corporation.

Question 50

Ceteris paribus,the price of a stock will definitely increase when the

A)Supply of the stock increases.
B)Prevailing interest rate increases.
C)Demand for the stock increases.

Question 51

Which of the following is not a reason to hold stock?

A)To receive payments on the firm's debt.
B)To receive potential capital gains.
C)To take part in the selection of the board of directors.

Question 52

The primary economic role of financial markets is to

A)Gain profits for investors.
B)Allocate resources to profitable businesses and away from businesses with losses.
C)Earn dividends for shareholders.

Question 53

The price of a stock will increase,ceteris paribus,when

A)Future earnings expectations decrease.
B)Consumer confidence increases.
C)The interest rate increases.

Question 54

Bonds may be issued by the U.S.

A)Congress.
B)Treasury.
C)Federal Reserve Bank.

Question 55

Large swings in stock prices are usually caused by

A)A decrease in interest rates.
B)Widespread changes in expectations.
C)A decrease in the supply of stocks.

Question 56

An increase in the value of an asset,such as a stock,is called

A)Interest.
B)Profit.
C)A capital gain.

Question 57

The amount of corporate profits not paid out in dividends is known as

A)The par value.
B)Retained earnings.
C)The price/earnings ratio.

Question 58

The price of a stock will decrease,ceteris paribus,when

A)Future earnings expectations increase.
B)People move money out of the bond market and look for other options.
C)Terrorists cause people to be fearful.

Question 59

Capital gains are

A)The only motive for purchasing stock.
B)Profits used for investment in new plants and equipment.
C)An increase in the market value of an asset.

Question 60

The first sale to the general public of stock in a corporation is referred to as

A)An original public sale.
B)An initial public offering.
C)A public bond offering.

Question 61

An In the News article is titled "Where Do Start-ups Get Their Money?" Venture capital is important to an economy because it

A)Slows the pace of innovation and economic growth.
B)Increases the pace of innovation and economic growth.
C)Slows the growth of technology,which serves as an important correction for the economy.

Question 62

As the price of an existing bond increases,

A)The current yield decreases.
B)The par value decreases.
C)The coupon rate decreases.

Question 63

Treasury bonds typically have lower coupon rates than corporate bonds because

A)The U.S.Treasury does not earn profits.
B)There is a lower risk that the U.S.Treasury will default.
C)Government regulations keep interest rates on Treasury bonds below market rates.

Question 64

Par value is the

A)Face value of a bond.
B)Increase in the market value of an asset.
C)Rate of return on a share of stock.

Question 65

Suppose a company's bond sold for $100 last month and this month the price is $90.The annual interest payment is $18.The current yield on this bond is

A)20 percent.
B)18 percent.
C)1.8 percent.

Question 66

How does a recession impact the financial markets?

A)It decreases loanable funds.
B)It increases loanable funds.
C)It decreases risk.

Question 67

Liquidity is

A)The ability of an asset to be converted to cash.
B)Directly affected by the coupon rate.
C)Not important for bondholders.

Question 68

Changes in expectations or opportunity costs

A)Shift the bond supply and demand curves.
B)Shift the bond supply curve but not the bond demand curve.
C)Shift the bond demand curve but not the bond supply curve.

Question 69

Which of the following is true if investors expect greater future profits from a company?

A)The demand for the company's bonds decreases.
B)The price of the company's bonds decreases.
C)The current yield on the company's bonds decreases.

Question 70

If a corporation issues bonds that it cannot sell,this is an indication that

A)Expectations of future sales are low.
B)Dividends are too low.
C)The coupon rate is too low.

Question 71

Venture capitalists

A)Share in the risks but not the rewards of entrepreneurial ideas.
B)Provide entrepreneurial ideas.
C)Are a critical link between entrepreneurial ideas and market reality.

Question 72

When a corporation issues a bond,it is

A)Issuing dividends to shareholders.
B)Lending money to the owners of the corporation.
C)Borrowing funds from the initial buyer of the bond.

Question 73

The interest rate set for a bond at the time of issuance is the

A)Coupon rate.
B)Par value.
C)Liquidity rate.

Question 74

In return for their financial backing,venture capitalists

A)Are exempt from risk.
B)Share in the profits that may result.
C)Are guaranteed a return on their investment.

Question 75

Default refers to the

A)Rate of interest to be paid on a bond.
B)Amount to be repaid when the bond is due.
C)Failure to make interest or principal payments on a bond.

Question 76

An increased willingness to lend money to a company can be shown by the

A)Demand for loanable funds shifting to the right.
B)Demand for loanable funds shifting to the left.
C)Supply of loanable funds shifting to the right.

Question 77

The annual interest payment divided by the bond's price is the

A)Market price.
B)Current yield.
C)Default value.

Question 78

Par value is the

A)Rate of interest to be paid on a bond.
B)Increase in the market value of an asset.
C)Amount to be repaid when the bond is due.

Question 79

The initial bond purchaser

A)Earns par value on the bond.
B)Borrows funds directly from the bond issuer.
C)Lends funds directly to the bond issuer.

Question 80

The advantage to a corporation of issuing bonds instead of stock is that

A)The owners keep control of the company.
B)Bond prices do not fluctuate.
C)The owners do not have to make interest payments on the loan.