Deck 23: Financial Markets and International Capital Flows

Question 1

A bond is a(n):

A)regular payment made to owners of a firm.
B)claim to partial ownership of a firm.
C)agreement issued by a financial intermediary linking savers and investors.
D)legal promise to repay a debt.

Answer 1

legal promise to repay a debt.

Question 2

Each of the following is an example of a financial intermediary EXCEPT a:

A)commercial bank.
B)credit union.
C)bond market.
D)savings and loan association.

Answer 2

bond market.

Question 3

Regular interest payments made to bondholders are called ________ payments.

A)diversification
B)reserve
C)coupon
D)dividend

Answer 3

coupon

Question 4

A legal promise to repay a debt is called:

A)equity.
B)a stock.
C)a bond.
D)a dividend.

Question 5

Firms that extend credit to borrowers using funds raised from savers are called:

A)bond dealers.
B)stock brokers.
C)central banks.
D)financial intermediaries.

Question 6

The financial system consists of financial ________, such as commercial banks, and financial markets, such as the stock market.

A)corporations
B)allocations
C)intermediaries
D)brokers

Question 7

Two reasons savers keep deposits at banks are to:

A)secure mortgages and to purchase stocks.
B)earn a return on their savings and to facilitate making payments.
C)lower interest rates and to increase the money supply.
D)equalize loan supply and demand and to earn interest.

Question 8

Banks help savers find productive uses for their funds because banks are specialized in:

A)gathering information about and evaluating potential borrowers.
B)obtaining preferential tax treatment for savers.
C)securing government guarantees for loans.
D)evaluating the riskiness of stocks.

Question 9

Financial intermediaries, such as commercial banks, help borrowers, particularly small borrowers, by:

A)providing information to evaluate financial investments.
B)offering tax-preferred borrowing opportunities.
C)eliminating the risk of borrowing.
D)providing credit that might otherwise not be available.

Question 10

Decentralized market-based financial systems improve the allocation of saving by:

A)ensuring capital gains exceed dividend payments.
B)eliminating the need for commercial banks or other financial intermediaries.
C)matching net capital inflows to net capital outflows.
D)providing information and risk-sharing services.

Question 11

The amount originally lent by a bondholder is called the:

A)coupon payment.
B)dividend.
C)principle amount.
D)risk premium.

Question 12

Privately-owned firms that accept deposits from individuals and businesses and use those deposits to make loans are called:

A)mortgage banks.
B)brokerage firms.
C)commercial banks.
D)investment banks.

Question 13

The interest rate promised when a bond is issued is called the:

A)coupon rate.
B)real rate of interest.
C)dividend rate.
D)discount rate.

Question 14

The principal amount of a bond is the amount:

A)originally lent.
B)of interest agreed upon when the bond was originally issued.
C)paid to the bondholders on a regular basis.
D)of interest the bondholder is entitled to when the bond matures.

Question 15

Savers may prefer to use financial intermediaries rather than lending directly to borrowers because financial intermediaries:

A)reduce the cost of gathering information about borrowers.
B)have a monopoly on lending.
C)increase the risk of lending.
D)offer higher rates of return than available elsewhere.

Question 16

The coupon rate is the:

A)amount originally lent.
B)regular payment of interest to a bondholder.
C)interest rate promised when a bond is issued.
D)maximum interest rate that can be paid on a bond.

Question 17

Financial systems in market economies improve the allocation of saving in each of the following ways EXCEPT by:

A)providing information about which potential use of funds will be most productive.
B)helping savers to share the risk of individual investment projects.
C)evaluating the potential productivity of alternative capital investments.
D)allowing potential favoritism to determine which projects are funded.

Question 18

In the United States saving is allocated to its most productive use by:

A)the Federal Reserve.
B)the federal, state, and local governments.
C)regulations and laws designed to improve productivity.
D)a decentralized, market-oriented financial system.

Question 19

The specialized information-gathering activities that banks use to evaluate borrowers are an example of the:

A)cost-benefit principle.
B)principle of comparative advantage.
C)scarcity principle.
D)principle of increasing opportunity cost.

Question 20

Financial intermediaries, such as commercial banks, provide benefits to:

A)savers only.
B)borrowers only.
C)the government only.
D)both savers and borrowers.

Question 21

Pat pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 6 percent coupon rate. One year later, after receiving the first coupon payment, Pat sells the bond. If the current one-year interest rate on government bonds is 5 percent, then the price Pat receives is:

A)$10,000.
B)$500.
C)greater than $10,000.
D)less than $10,000.

Question 22

Shares of stock are:

A)legal promises to repay a debt.
B)claims to partial ownership of a firm.
C)regular payments made to owners of a firm.
D)legal promises to make regular payments to the stockholder.

Question 23

Fred purchases a bond, newly issued by the Big Time Corporation, for $10,000. The bond pays $400 to its holder at the end of the first, second, and third years and pays $10,400 upon its maturity at the end of four years. The principal amount of this bond is ________, the coupon rate is ________, and the term of this bond is ________.

A)$400; 40 percent; four years
B)$10,000; 4 percent; four years
C)$10,000; $400; 4 percent
D)$10,400; 4 percent; four years

Question 24

The rate of return that financial investors require to hold a risky asset minus the rate of return on a safe asset is called the:

A)real interest rate.
B)nominal interest rate.
C)risk premium.
D)discount rate.

Question 25

A regular payment received by stockholders for each share they own is called a:

A)coupon payment.
B)dividend.
C)bond.
D)capital gain.

Question 26

The coupon rate on newly issued bonds is usually higher for bonds with ________ terms and ________ risk that the borrower will go bankrupt.

A)shorter; greater
B)shorter; smaller
C)longer; greater
D)longer; smaller

Question 27

Sydney purchases a newly issued, two-year government bond with a principal amount of $10,000 and a coupon rate of 6 percent paid annually. One year before the bonds matures (and after receiving the coupon payment for the first year), Sydney sells the bond in the bond market. What price (rounded to the nearest dollar)will Sydney receive for his bond if newly issued one-year government bonds are paying a 5 percent coupon rate?

A)$9,906
B)$10,000
C)$10,095
D)$10,600

Question 28

If the principal amount of a bond is $10,000,000, the coupon rate is 7 percent, and the inflation rate is 4 percent, then the annual coupon payment made to the holder of the bond is:

A)$70,000.
B)$300,000.
C)$400,000.
D)$700,000.

Question 29

The coupon rate on newly issued bonds is usually ________ for bonds with favorable tax treatment, such as municipal bonds, and ________ for bonds that are very risky, such as junk bonds.

A)higher; lower
B)higher; higher
C)lower; lower
D)lower; higher

Question 30

An increase in the perceived riskiness of Company A stock ________ the risk premium investors require to purchase Company A stock and ________ the price of Company A stock.

A)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; decreases

Question 31

The market value of a particular bond at any given point in time is called the bond's:

A)coupon rate.
B)principal.
C)term.
D)price.

Question 32

When the interest rate on newly issued bonds increases, the price of existing bonds:

A)increases.
B)decreases.
C)increases only if the coupon rate is below the new rate.
D)may either increase or decrease.

Question 33

Stockholders receive returns on their financial investment in the form of ________ and ________.

A)interest payments; dividends
B)capital gains; dividends
C)coupon payments; capital gains
D)capital gains; interest payments

Question 34

Fred purchases a bond, newly issued by the Big Time Corporation, for $20,000. The bond pays $1,000 to its holder at the end of the first, second, and third years and pays $21,000 upon its maturity at the end of four years. The principal amount of this bond is ________, the coupon rate is ________, and the term of this bond is ________.

A)$1,000; 5 percent; four years
B)$20,000; 5 percent; four years
C)$20,000; $1,000; 50 percent
D)$21,400; 5 percent; four years

Question 35

Chris pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 6 percent coupon rate. One year later, after receiving the first coupon payment, Chris sells the bond. If the current one-year interest rate on government bonds is 7 percent, then the price Chris receives is:

A)$10,000.
B)$700.
C)greater than $10,000.
D)less than $10,000.

Question 36

One year before maturity, the price of a bond with a principal amount of $1,000 and a coupon rate of 5 percent paid annually rose to $1,019. The one-year interest rate must be:

A)6 percent.
B)5 percent.
C)3 percent.
D)2 percent.

Question 37

One year before maturity, the price of a bond with a principal amount of $1,000 and a coupon rate of 5 percent paid annually fell to $981. The one-year interest rate must be:

A)8.5 percent.
B)7 percent.
C)5 percent.
D)1.9 percent.

Question 38

When the coupon rate on newly issued bonds increases from 5 percent to 6 percent, the prices of existing bonds:

A)increase.
B)decrease.
C)remain unchanged.
D)increase only if the coupon rate is less than 6 percent.

Question 39

When the coupon rate on newly issued bonds decreases from 6 percent to 5 percent, the prices of existing bonds:

A)increase.
B)decrease.
C)remain unchanged.
D)decrease only if the coupon rate is less than 5 percent.

Question 40

If the principal amount of a bond is $2,000,000, the coupon rate is 6 percent , and the inflation rate is 4 percent, then the annual coupon payment made to the holder of the bond is:

A)$12,000.
B)$40,000.
C)$80,000.
D)$120,000.

Question 41

You own shares in a start-up internet company. If large swings in the stock market increase financial investors' concerns about market risk, then the price of your shares will ________, holding other factors constant.

A)increase
B)decrease
C)not change
D)either increase or decrease

Question 42

You own shares in a well-managed and diversified company. If a booming economy decreases investors' concerns about market risk, then the price of your shares will ________, holding other factors constant.

A)increase
B)decrease
C)not change
D)either increase or decrease

Question 43

The current price of a stock increases when:

A)expected future dividends decrease.
B)the expected future price of the stock decreases.
C)interest rates decrease.
D)the perceived riskiness of the stock increases.

Question 44

An increase in interest rates results in a(n)________ in the required rate of return to hold stocks and ________ current stock prices.

A)increase; reduces
B)increase; raises
C)decrease; raises
D)decrease; reduces

Question 45

You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $65.74 for one share of the stock today, and you require a return of 8 percent, what dividend payment must you expect to receive from the stock?

A)$4.46
B)$5.20
C)$6.00
D)$9.25

Question 46

A financial intermediary that sells shares in itself to the public, and then uses the funds to buy a wide variety of financial assets is called a:

A)commercial bank.
B)credit union.
C)stock exchange.
D)mutual fund.

Question 47

The ongoing search by savers for high returns leads the bond and stock markets to direct funds to the uses that appear:

A)most likely to be productive.
B)least likely to be productive.
C)to have the least risk.
D)to have no risk.

Question 48

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade. Each company's stock currently sells for $100 per share. If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change. If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change. There is a 50 percent chance that it will be colder than average next year, and a 25 percent chance that it will be warmer than average. If you purchase two shares of ABC stock and no shares of XYZ stock, your expected gain will be ________.

A)$0
B)$20
C)$30
D)$40

Question 49

You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $62.73 for one share of the stock today, and you expect a dividend payment of $4, what rate of return do you require?

A)3.6 percent
B)6.2 percent
C)6.4 percent
D)10 percent

Question 50

You own shares in a start-up internet company. If the company announces that it will not pay dividends next year as it has in the past, then the price of your shares will ________, holding other factors constant.

A)increase
B)decrease
C)not change
D)either increase or decrease

Question 51

You expect a share of EconNews.Com to sell for $65 a year from now and to pay a $2 dividend per share in one year. What should you pay (rounded to the nearest dollar)for the stock today if you require an 8 percent return?

A)$60
B)$62
C)$67
D)$70

Question 52

Stock prices increase when expected future dividends ________, interest rates ________, and/or the risk premium ________.

A)increase; increase; increases
B)increase; increase; decreases
C)decrease; decrease; increases
D)increase; decrease; decreases

Question 53

You originally required a risk premium of 6 percent in addition to the rate of return on safe assets before you would purchase shares of Techno Company stock. If you and other investors reduce the risk premium you require to 4 percent, the price of Techno Company stock will:

A)increase.
B)decrease.
C)equal the old risk premium plus the new risk premium.
D)equal the new risk premium plus the rate of return on safe assets.

Question 54

Your financial investments consist of U.S. government bonds maturing in twenty years and shares in a start-up internet company. If interest rates on newly-issued government bonds increase, then the price of your bonds will ________ and the price of the shares you own will ________.

A)increase; increase
B)decrease; decrease
C)increase; not change
D)decrease; not change

Question 55

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade. Each company's stock currently sells for $100 per share. If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change. If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change. There is a 50 percent chance that it will be colder than average next year, and a 25 percent chance that it will be warmer than average. If you purchase one share of ABC stock and one share of XYZ stock, your expected gain will be ________.

A)$0
B)$10
C)$15
D)$40

Question 56

A decrease in the perceived riskiness of Company A stock ________ the risk premium investors require to purchase Company A stock and ________ the price of Company A stock.

A)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; decreases

Question 57

You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $61.06 for one share of the stock today, you expect a dividend payment of $4, and the rate of return on safe assets is 5 percent, how much is your risk premium?

A)1.5 percent
B)6.5 percent
C)8.0 percent
D)13.0 percent

Question 58

The practice of spreading one's wealth over a variety of different financial investments in order to reduce overall risk is called:

A)allocation.
B)following the risk premium.
C)diversification.
D)risk reservation.

Question 59

International capital flows are:

A)purchases of foreign goods or services.
B)sales of domestic goods or services to foreigners.
C)exports plus imports.
D)purchases or sales of real and financial assets across international borders.

Question 60

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade. Each company's stock currently sells for $100 per share. If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change. If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change. There is a 50 percent chance that it will be colder than average next year, and a 25 percent chance that it will be warmer than average. If you purchase two shares of XYZ stock and no shares of ABC stock, your expected gain will be ________.

A)$0
B)$10
C)$20
D)$30

Question 61

From the point of view of a particular country, capital inflows are:

A)purchases of domestic goods or services by foreigners.
B)purchases of domestic assets by foreigners.
C)purchases of foreign goods or services by domestic households or firms.
D)purchases of foreign assets by domestic households or firms.

Question 62

When the Chinese government buys U.S. government bonds, from the perspective of China, this is a(n):

A)import.
B)export.
C)capital outflow.
D)capital inflow.

Question 63

A trade surplus occurs when:

A)exports exceed imports.
B)imports exceed exports.
C)tariffs exceed quotas.
D)quotas exceed tariffs.

Question 64

When an American buys stock in a French company, from the perspective of the United States, this is a(n):

A)import.
B)export.
C)capital outflow.
D)capital inflow.

Question 65

Purchases of domestic assets by foreign firms or households is called a:

A)trade surplus.
B)trade deficit.
C)capital outflow.
D)capital inflow.

Question 66

When an American buys stock in a French company, from the perspective of France, this is a(n):

A)import.
B)export.
C)capital outflow.
D)capital inflow.

Question 67

When a U.S. oil company purchases oil from Saudi Arabia and the Saudi Arabian firm uses the proceeds from the sale to buy transportation services from the U.S., U.S. net exports ________ and the capital inflow to the United States ________.

A)are positive; is negative
B)are negative; is positive
C)are negative; is negative
D)are unchanged; is unchanged

Question 68

When a Peruvian buys a U.S. government bond, from the perspective of Peru, this is a(n):

A)import.
B)export.
C)capital outflow.
D)capital inflow.

Question 69

If the United States has a $300 billion trade deficit, then there must be:

A)net capital inflows of $300 billion.
B)net capital inflows of -$300 billion.
C)no capital inflows or capital outflows.
D)net capital outflows of $300 billion.

Question 70

If the United States has a $300 billion net capital inflow, then there must be a:

A)trade surplus of $300 billion.
B)trade deficit of $300 billion.
C)trade surplus of $600 billion.
D)net capital outflow of $300 billion.

Question 71

A trade deficit occurs when:

A)exports exceed imports.
B)imports exceed exports.
C)tariffs exceed quotas.
D)quotas exceed tariffs.

Question 72

Net capital inflows equal:

A)capital inflows minus capital outflows.
B)capital outflows minus capital inflows.
C)international production.
D)domestic production.

Question 73

Net exports plus net capital inflows equal:

A)net capital outflows.
B)the international trade gap.
C)zero.
D)the trade balance.

Question 74

From the point of view of a particular country, capital outflows are:

A)purchases of domestic goods or services by foreigners.
B)purchases of domestic assets by foreigners.
C)purchases of foreign goods or services by domestic households or firms.
D)purchases of foreign assets by domestic households or firms.

Question 75

When imports exceed exports there is a(n):

A)output gap.
B)trade balance.
C)trade surplus.
D)trade deficit.

Question 76

Purchases of foreign assets by domestic firms or households is called a:

A)trade surplus.
B)trade deficit.
C)capital outflow.
D)capital inflow.

Question 77

When a U.S. restaurant purchases French wine and the French wine company uses the proceeds to buy U.S. government debt, U.S. ________ and there is a capital ________ the United States.

A)imports increase; outflow from
B)imports decrease; inflow to
C)imports increase; inflow to
D)exports increase; outflow from

Question 78

When the Chinese government buys U.S. government bonds, from the perspective of the United States, this is a(n):

A)import.
B)export.
C)capital outflow.
D)capital inflow.

Question 79

The value of exports minus the value of imports in a period is called the:

A)budget balance.
B)trade balance.
C)trade gap.
D)international equilibrium.

Question 80

When exports exceed imports there is a(n):

A)output gap.
B)trade balance.
C)trade surplus.
D)trade deficit.