Question 1

Suppose the ZZZ Corporation sells a one-year coupon bond for $1,000 and its coupon payment is $100. In this example, the yield is _____. If instead the price of the bond is $500, the yield is _____.
A) 10%; 10%
B) 100%; 200%
C) 100%; 100%
D) 10%; 20%

Accepted Answer

The yield is calculated as the coupon payment divided by the price of the bond. For a $1,000 bond with a $100 coupon, the yield is 10% ($100/$1,000). If the bond price is $500, the yield is 20% ($100/$500).

Question 2

Financial institutions greatly increase the flow of funds to the economy by:
A) increasing transaction costs.
B) decreasing information costs.
C) assuming all of the risk of lending funds.
D) lending to whoever wants to borrow from them.

Accepted Answer

Financial institutions decrease information costs by providing valuable information about borrowers to lenders, making it easier for lenders to decide who to lend to. This increased flow of funds to borrowers stimulates economic growth. The other choices are incorrect. Increasing transaction costs would decrease the flow of funds to the economy. Financial institutions to not assume all of the risk of lending funds. Lastly, lending to whoever wants to borrow from them is not financially sound and is unlikely to happen.

Question 3

Which of these is a goal of the agencies that regulate financial institutions?
A) ensure the profitability of the institutions
B) increase transparency and the flow of information to investors
C) maintain a high rate of return for investors
D) minimize changes in interest rates

Accepted Answer

The goal of regulatory agencies is to protect investors and maintain a stable financial system. Increasing transparency and the flow of information to investors helps to achieve this goal by ensuring that investors have access to accurate and up-to-date information about financial institutions. The other options (A, C, and D) are not primary goals of regulatory agencies and may conflict with their mission of maintaining a stable and secure financial system.

Question 4

To say that interest rates represent the opportunity cost of holding money means that as interest rates rise:
A) the demand for money shifts to the left.
B) the demand for money shifts to the right.
C) there is a movement upward along the demand curve for money.
D) there is a movement downward along the demand curve for money.

Accepted Answer

As interest rates rise, the opportunity cost of holding money increases, leading to a movement upward along the demand curve for money, as people prefer to hold less money and invest more in interest-bearing assets.

Question 5

When a financial institution accepts funds from savers and pools this money into a portfolio of diversified financial instruments, it is:
A) reducing information costs.
B) reducing transaction costs.
C) spreading risk.
D) preventing fraud.

Accepted Answer

Accepting funds from savers and pooling them into diversified financial instruments allows the financial institution to spread risk across various types of investments, reducing overall risk. This is one of the primary benefits of investing in a portfolio rather than a single stock or bond.

Question 6

Which of these is NOT a way financial institutions reduce risk?
A) performing credit checks on borrowers
B) diversifying funds
C) collecting information helpful for risk assessment
D) guaranteeing a high rate of return for all lenders

Accepted Answer

Financial institutions cannot guarantee a high rate of return for all lenders as it is subject to market fluctuations and other factors beyond their control.

Question 7

To increase the level of safety in the financial system, financial institutions are regulated by all of these entities EXCEPT the:
A) Securities and Exchange Commission.
B) Federal Deposit Insurance Corporation.
C) Census Bureau.
D) Federal Reserve System.

Accepted Answer

The Census Bureau is not a regulatory body for financial institutions. The other entities listed, including the Securities and Exchange Commission, Federal Deposit Insurance Corporation, and Federal Reserve System, all have regulatory oversight over various aspects of the financial system.

Question 8

When a financial institution provides a standardized financial product such as a mortgage, it is:
A) reducing information costs.
B) reducing transaction costs.
C) spreading risk.
D) preventing fraud.

Accepted Answer

Providing a standardized financial product such as a mortgage reduces transaction costs as it allows for a more efficient and streamlined process for both the financial institution and the borrower. Standardization helps to reduce the amount of time, energy, and financial resources required to execute the transaction. It simplifies the process and makes it easier for borrowers to compare products and choose the one that best fits their needs.

Question 9

Institutions that acquire funds from savers and then lend those funds to borrowers are called:
A) state banks.
B) monetary mediums.
C) financial intermediaries.
D) Federal Reserve banks.

Accepted Answer

Financial intermediaries serve as the link between savers and borrowers. Examples of financial intermediaries include banks, credit unions, and insurance companies. They acquire funds from savers and then lend those funds to borrowers.

Question 10

If a perpetuity bond has an interest payment of $80 and your required yield is 10%, the most you would be willing to pay for the bond is:
A) $80.
B) $800.
C) $1,000.
D) $8,000.

Accepted Answer

The formula for calculating the price of a perpetuity bond is Price = Annual Interest Payment / Required Yield.

Using this formula, we get:

Price = $80 / 0.10 = $800

Therefore, if your required yield is 10%, the most you would be willing to pay for the bond is $800.

Question 11

The yield on a perpetuity bond that has an interest payment of $60 and a price of $1,200 is:
A) 5%.
B) 6%.
C) 12%.
D) 25%.

Accepted Answer

The yield on a perpetuity bond is calculated by dividing the interest payment by the price. In this case, the interest payment is $60 and the price is $1,200. Therefore, the yield is:

60 ÷ 1200 = 0.05 or 5%

Therefore, the answer is A) 5%.

Question 12

Kim recently purchased a perpetual bond for $1,000. The bond pays $50 in interest per year. If market interest rates rise to 7% after her purchase, the price of the bond:
A) falls to $700.
B) rises to $1,700.
C) falls to $714.
D) rises to $1,070.

Accepted Answer

The price of a perpetual bond is calculated as the annual interest payment divided by the market interest rate. If the market interest rate rises to 7%, the bond's price becomes $50 / 0.07 = $714.29, approximately $714.

Question 13

Jody purchases a stock from her employer, Acme Corporation. This is an example of _____ finance.
A) unregulated
B) indirect
C) direct
D) investment

Accepted Answer

Jody purchasing a stock from her employer is an example of direct finance, as she is directly providing funds to the corporation through the purchase of their stock. Option A is incorrect because the finance is not unregulated (there are likely laws and regulations governing the purchase of stocks from employers). Option B is incorrect because there is no intermediary involved in this transaction. Option D is not the best choice because although it does involve investment, it does not accurately describe the specific type of finance in this scenario.

Question 14

The reason bond prices and interest rates are inversely related is because:
A) bond prices are fixed for the life of a bond.
B) market interest rates stay the same for the life of a bond.
C) the coupon payment is fixed for the life of a bond.
D) bonds are always perpetuities.

Accepted Answer

The coupon payment of a bond is fixed for its life, meaning if market interest rates rise, the fixed coupon payments become less attractive compared to new bonds issued at the higher rates, causing the price of the existing bond to fall to adjust for the yield difference. Conversely, if market rates fall, the existing bond's fixed coupons become more attractive, driving up the bond's price.

Question 15

Financial intermediaries include all of these EXCEPT:
A) commercial banks.
B) insurance companies.
C) pension funds.
D) check cashing centers.

Accepted Answer

Financial intermediaries are institutions that bring together borrowers and lenders in financial markets, facilitating the flow of funds between them. Commercial banks, insurance companies, and pension funds are all examples of financial intermediaries. Check cashing centers, on the other hand, do not facilitate the flow of funds between borrowers and lenders and are therefore not considered financial intermediaries.

Question 16

The price of a bond is equal to:
A) yield divided by interest payment.
B) interest payment divided by yield.
C) yield times interest payment.
D) yield times inflation rate.

Accepted Answer

The price of a bond is calculated as the present value of its future cash flows, which are the interest payments. Therefore, the price of a bond is equal to the interest payment divided by the yield (discount rate), as the yield represents the return investors demand for holding the bond.

Question 17

Which of these is NOT a primary role of financial intermediaries in the market for funds?
A) collecting taxes on financial transactions
B) reducing transaction costs
C) spreading risk
D) reducing information costs

Accepted Answer

Collecting taxes on financial transactions is not a primary role of financial intermediaries in the market for funds. The primary roles of financial intermediaries are reducing transaction costs, spreading risk, and reducing information costs.

Question 18

Assume initially that market interest rates are 7% and the bondholder is receiving a $70 coupon payment per year on a bond with a face value of $1,000. If market interest rates rise to 8%, the bond price:
A) falls to $875.
B) falls to $800.
C) rises to $1,125.
D) falls to $700.

Accepted Answer

When market interest rates rise, the price of existing bonds falls. The bond's coupon payment is fixed at $70, but new bonds are offering higher interest rates, making the existing bond less attractive. The bond price falls to $875 to adjust for the new market rate of 8%.

Question 19

Assume that market interest rates are 6% and the bondholder receives a $60 coupon payment per year on a bond with a face value of $1,000. If market interest rates fall to 4%, the bond price:
A) rises to $1,400.
B) rises to $2,000.
C) falls to $500.
D) rises to $1,500.

Accepted Answer

The answer of Assume that market interest rates are 6%...

Question 20

An economy is expected to produce higher profits for business owners at the same time that the country's stock market surges during the recovery phase in the country's business cycle. What changes can be expected in the country's market for loanable funds?
A) an increase in demand and a decrease in supply
B) a decrease in demand and an increase in supply
C) decreases in both demand and supply
D) increases in both demand and supply

Accepted Answer

The answer of An economy is expected to produce higher...

Quiz 11: Saving, Investment, and the Financial System

Suppose the ZZZ Corporation sells a one-year coupon bond for $1,000 and its coupon payment is $100. In this example, the yield is _. If instead the price of the bond is $500, the yield is _.

Financial institutions greatly increase the flow of funds to the economy by:

Which of these is a goal of the agencies that regulate financial institutions?

To say that interest rates represent the opportunity cost of holding money means that as interest rates rise:

When a financial institution accepts funds from savers and pools this money into a portfolio of diversified financial instruments, it is:

Which of these is NOT a way financial institutions reduce risk?

To increase the level of safety in the financial system, financial institutions are regulated by all of these entities EXCEPT the:

When a financial institution provides a standardized financial product such as a mortgage, it is:

Institutions that acquire funds from savers and then lend those funds to borrowers are called:

If a perpetuity bond has an interest payment of $80 and your required yield is 10%, the most you would be willing to pay for the bond is:

The yield on a perpetuity bond that has an interest payment of $60 and a price of $1,200 is:

Kim recently purchased a perpetual bond for $1,000. The bond pays $50 in interest per year. If market interest rates rise to 7% after her purchase, the price of the bond:

Jody purchases a stock from her employer, Acme Corporation. This is an example of _____ finance.

The reason bond prices and interest rates are inversely related is because:

Financial intermediaries include all of these EXCEPT:

The price of a bond is equal to:

Which of these is NOT a primary role of financial intermediaries in the market for funds?

Assume initially that market interest rates are 7% and the bondholder is receiving a $70 coupon payment per year on a bond with a face value of $1,000. If market interest rates rise to 8%, the bond price:

Assume that market interest rates are 6% and the bondholder receives a $60 coupon payment per year on a bond with a face value of $1,000. If market interest rates fall to 4%, the bond price:

An economy is expected to produce higher profits for business owners at the same time that the country's stock market surges during the recovery phase in the country's business cycle. What changes can be expected in the country's market for loanable funds?