Question 1

Suppose a perpetuity bond with a face value of $1,000 has a 10% coupon rate. If market interest rates fall to 8%, the price of the bond:
A) rises to $1,250.
B) falls to $750.
C) rises to $1,080.
D) stays at $1,000.

Accepted Answer

The price of a perpetuity bond is calculated as the annual coupon payment divided by the market interest rate. The annual coupon payment is $1,000 * 10% = $100. When the market interest rate falls to 8%, the bond price is $100 / 0.08 = $1,250.

Question 2

Which of these is NOT involved in regulating financial markets?
A) Federal Reserve System
B) Federal Deposit Insurance Corporation
C) Securities and Exchange Commission
D) New York Stock Exchange

Accepted Answer

The New York Stock Exchange is not involved in regulating financial markets. It is a stock exchange that facilitates buying and selling of securities. The other options listed are all regulatory bodies involved in overseeing various aspects of financial markets.

Question 3

A bond has a face value of $1,000 and an annual interest payment of $44. What is its coupon rate and what would its yield be if the bond sold for $1,100 in the secondary bond market?
A) 44% and 4.4%, respectively
B) 4.4% and 4.0%, respectively
C) 4.0% and 4.4%, respectively
D) 4.4% and 10%, respectively

Accepted Answer

The coupon rate is calculated as the annual interest payment divided by the face value, which is $44/$1,000 = 4.4%. The yield is calculated as the annual interest payment divided by the current market price, which is $44/$1,100 = 4.0%.

Question 4

Student loans funded by the government typically offer _____ interest rates than similar bank loans and _____.
A) higher; can be paid back later
B) higher; must be paid back earlier
C) lower; can be paid back later
D) lower; must be paid back earlier

Accepted Answer

Student loans funded by the government typically offer lower interest rates than similar bank loans and can be paid back later. This is one of the advantages of taking out a government-funded student loan.

Question 5

Which of these is NOT a financial intermediary?
A) Citibank
B) Schwab mutual funds
C) Hartford Insurance
D) Federal Reserve Bank

Accepted Answer

The Federal Reserve Bank is not considered a financial intermediary as it is the central bank of the United States and operates within the banking system, but does not provide financial services to individuals or businesses directly. Citibank, Schwab mutual funds, and Hartford Insurance all serve as financial intermediaries by providing financial services and connecting borrowers and lenders.

Question 6

Entities that acquire funds from savers and then lend these funds to borrowers are called:
A) Federal Reserve banks.
B) Treasury banks.
C) governmental agencies.
D) financial intermediaries.

Accepted Answer

Financial intermediaries, such as banks, credit unions, and other loan providers, collect funds from savers and then lend those funds to borrowers. They earn profits from the difference between the interest rates earned on loans and the interest rates paid on savings accounts or other deposits. The Federal Reserve and Treasury banks are government institutions, and while governmental agencies may lend funds, they are not necessarily intermediaries.

Question 7

What is the yield on a bond sold for $1,850 that pays $25.50 in interest annually?
A) 13.8%
B) 72.54%
C) 1.38%
D) 7.25%

Accepted Answer

The yield is calculated by dividing the annual interest payment by the bond's price. $25.50 / $1,850 = 0.01378, or 1.38%.

Question 8

Alco Electronics needs to borrow money to pay for a large capital investment. It is deciding between getting a bank loan and issuing bonds. Which statement is true about the options Alco is considering?
A) A bank loan is part of a loanable funds market, but issuing bonds is not.
B) A bank loan is borrowing from many savers, while issuing bonds is not.
C) A bank loan is borrowing a large amount from one lender, while issuing bonds is borrowing small amounts from many lenders.
D) Issuing bonds is part of the loanable funds market, but a bank loan is not.

Accepted Answer

A bank loan typically involves borrowing a large amount from a single lender (the bank), whereas issuing bonds involves borrowing smaller amounts from many individual investors or institutions.

Question 9

Suppose a perpetuity bond with a face value of $1,000 has a coupon rate of 8%. If market interest rates rise to 12%, the price of the bond:
A) rises to $1,120.
B) rises to $1,080.
C) falls to $666.67.
D) falls to $880.

Accepted Answer

The price of a perpetuity bond is calculated by dividing the annual coupon payment by the market interest rate. The annual coupon payment is $1,000 * 8% = $80. When the market interest rate rises to 12%, the price of the bond is $80 / 0.12 = $666.67.

Question 10

Who will pay off a deferment on a college loan?
A) the federal government
B) the student's parents or relatives
C) the student at a later date
D) It will not have to be paid off at all.

Accepted Answer

A deferment allows the student to temporarily postpone payments, but the student is still responsible for paying off the loan at a later date.

Question 11

The most common type of short-term debt is:
A) college loans.
B) credit card debt.
C) mortgage debt.
D) car loans.

Accepted Answer

Credit card debt is the most common type of short-term debt as it is easy to obtain and can accumulate quickly. Car loans and mortgage debt are typically long-term debts, while college loans can be either short or long-term depending on the length of the program.

Question 12

A perpetuity bond is sold with the following terms: Coupon rate = 5% and face value = $1,000. Five years after the bond is issued, the market rate of interest on similar bonds is 6%. Which statement accurately describes the situation if the bond is sold in the secondary bond market at that time (5 years after its initial issue)?
A) The annual interest payment will rise from $50 to $60.
B) The face value will fall from $1,000 to $833.33.
C) The bond will sell for about $833.33 in the secondary market.
D) The annual interest rate will fall from 5% to 3%.

Accepted Answer

The bond will sell for about $833.33 in the secondary market because the present value of the perpetuity is calculated by dividing the annual coupon payment ($50) by the new market interest rate (6%), which equals approximately $833.33.

Question 13

Suppose Mary saves enough funds for a down payment on a house. When she buys her home, she withdraws the savings to make the down payment and borrows $200,000 on a mortgage loan. Which statement accurately describes Mary's interactions with her bank?
A) Mary is the intermediary or connection between the bank and her house.
B) Mary's house is the intermediary between Mary and the bank.
C) Mary is supplying loan funds and cash to the home owner and demanding savings from her bank.
D) Mary goes from being a supplier to demanding loanable funds with the bank acting as an intermediary.

Accepted Answer

Mary initially supplied loanable funds to the bank through her savings, but then demands loanable funds from the bank through her mortgage loan. The bank acts as an intermediary, connecting savers (like Mary) with borrowers (like the home owner).

Question 14

All of these illustrate roles of financial intermediaries, which create incentives for individuals to use financial intermediaries, EXCEPT:
A) a saver is able to get a return from his savings being loaned to others, yet is also able to withdraw funds when desired.
B) when savers can compare the terms of savings accounts across financial institutions, they are able to get lower interest rates than would be possible otherwise.
C) a bank makes so many loans it becomes skilled at predicting which loan applicants are trustworthy.
D) by offering standardized savings and loan products, a financial institution has fewer costs than negotiating each saving and loan agreements individually.

Accepted Answer

Option B does not illustrate a role of financial intermediaries that creates incentives for individuals to use them. Instead, it suggests that individuals can compare the terms of savings accounts across financial institutions, and get lower interest rates than would be possible otherwise. The other options all illustrate how financial intermediaries create incentives for individuals to use them, by offering returns on savings, predicting creditworthiness, and reducing transaction costs.

Question 15

How much is a bond worth if it pays $55 per year in interest and the market interest rate is 8%?
A) $440
B) $687.50
C) $787.60
D) $1,250

Accepted Answer

The bond's worth is calculated using the formula for the present value of a perpetuity: PV = C / r, where C is the annual interest payment ($55) and r is the market interest rate (0.08). Thus, PV = $55 / 0.08 = $687.50.

Question 16

Which statement is TRUE regarding various instruments in financial markets?
A) Compared with bonds, stocks provide equity and higher risk.
B) Compared with bonds, stocks provide higher risk and lower returns.
C) Compared with bonds, stocks provide lower risk and higher returns.
D) Compared with bonds, stocks provide less equity and lower risk.

Accepted Answer

Stocks provide equity ownership in a company, which typically comes with higher risk compared to bonds, which are debt instruments. Stocks have the potential for higher returns due to this risk, contrasting with the fixed income provided by bonds.

Question 17

If a $1,000 bond has a coupon rate of 11% and the market interest rate falls to 7%, what would a person expect to pay for that bond?
A) $1,000
B) $1,571.43
C) $636.36
D) $1,371.33

Accepted Answer

The correct answer is B because the bond's price will increase as the market interest rate falls. The bond's price is calculated as the present value of the future cash flows, which include the coupon payments and the face value. As the market interest rate falls, the present value of these cash flows increases, resulting in a higher bond price.

Question 18

A bond issued 10 years ago had a face value of $2,000, a coupon rate of 5%, and a yield of 6% when sold last month in the secondary bond market. At what price did the bond sell in the secondary market?
A) $1,666.67
B) $2,120.00
C) $1,880.00
D) $2,220.00

Accepted Answer

The bond sold at a discount because the yield (6%) was higher than the coupon rate (5%). The price can be calculated using the present value of future cash flows, which results in approximately $1,666.67.

Question 19

Which of these is NOT a financial intermediary in the market for loanable funds?
A) credit unions
B) mutual funds
C) an insurance company
D) a school

Accepted Answer

Schools are not typically considered financial intermediaries in the market for loanable funds. They do not facilitate the transfer of funds between savers and borrowers like credit unions, mutual funds, and insurance companies.

Question 20

The fixed rate of interest on the face value of a bond is known as the:
A) maturity date.
B) coupon rate.
C) face value interest rate.
D) price.

Accepted Answer

The fixed rate of interest on the face value of a bond is known as the coupon rate. Maturity date refers to the date when the principal amount is due to be paid back, face value interest rate is not a common term used in finance, and price is the current market value of the bond.

Quiz 11: Saving, Investment, and the Financial System

Suppose a perpetuity bond with a face value of $1,000 has a 10% coupon rate. If market interest rates fall to 8%, the price of the bond:

Which of these is NOT involved in regulating financial markets?

A bond has a face value of $1,000 and an annual interest payment of $44. What is its coupon rate and what would its yield be if the bond sold for $1,100 in the secondary bond market?

Student loans funded by the government typically offer _ interest rates than similar bank loans and _.

Which of these is NOT a financial intermediary?

Entities that acquire funds from savers and then lend these funds to borrowers are called:

What is the yield on a bond sold for $1,850 that pays $25.50 in interest annually?

Alco Electronics needs to borrow money to pay for a large capital investment. It is deciding between getting a bank loan and issuing bonds. Which statement is true about the options Alco is considering?

Suppose a perpetuity bond with a face value of $1,000 has a coupon rate of 8%. If market interest rates rise to 12%, the price of the bond:

Who will pay off a deferment on a college loan?

The most common type of short-term debt is:

Suppose Mary saves enough funds for a down payment on a house. When she buys her home, she withdraws the savings to make the down payment and borrows $200,000 on a mortgage loan. Which statement accurately describes Mary's interactions with her bank?

All of these illustrate roles of financial intermediaries, which create incentives for individuals to use financial intermediaries, EXCEPT:

How much is a bond worth if it pays $55 per year in interest and the market interest rate is 8%?

Which statement is TRUE regarding various instruments in financial markets?

If a $1,000 bond has a coupon rate of 11% and the market interest rate falls to 7%, what would a person expect to pay for that bond?

A bond issued 10 years ago had a face value of $2,000, a coupon rate of 5%, and a yield of 6% when sold last month in the secondary bond market. At what price did the bond sell in the secondary market?

Which of these is NOT a financial intermediary in the market for loanable funds?

The fixed rate of interest on the face value of a bond is known as the: