Question 1

Bond A and Bond B have identical characteristics except that Bond A has a higher interest rate. Which bond has a higher credit risk?

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Question 2

A _____ is a certificate of indebtedness and a _____ is a claim to partial ownership in a firm.

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Question 3

If federal tax rates increased, what would happen to the interest rate on municipal bonds?

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Question 4

What is a mutual fund?

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Question 5

The financial system is important because it helps to match one person's _____ with another person's _____.

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Question 6

_____ and _____ are the two most important financial intermediaries.

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Question 7

Stock in Frozen Dreams, an ice cream manufacturer, has a price to earnings ratio of 24. Is this comparatively high or low? What are two explanations for the size of this company's price to earnings ratio?

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Question 8

What does the maturity of a bond indicate?

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Question 9

List three characteristics of a bond that would make its interest rate higher than otherwise.

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Question 10

Bond A and Bond B are identical except Bond B has a longer term. Therefore, we expect Bond _____ to pay a higher rate of interest.

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Question 11

Bonds issued by state and local governments are called _____ bonds. Bonds issued by financially shaky corporations are called _____ bonds. Of these two, which type of bond usually pays a relatively higher interest rate?

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Question 12

The majority of economists believe that policies that reduce the saving rate will reduce long-run living standards.

Accepted Answer

The saving rate is closely tied to future economic growth, as it enables investment in capital and technology. Without adequate savings, long-term growth potential is limited, leading to lower living standards over time.

Question 13

A restaurant chain announces declining revenues. What's the name of the type of risk that this news raises for holders of this chain's bonds? What does this news to do the interest rate on this chain's bonds?

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Question 14

Taking out a mortgage to buy a condo, buying a mutual fund, and building a new factory are all examples of investment.

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Question 15

How do banks make profits?

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Question 16

What is the main function of the financial system?

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Question 17

Concerns about the bankruptcy of an appliance manufacturer diminish after a new CEO is appointed and some of the company's less productive factories are sold. What type of risk for bondholders falls? What happens to the interest rate on this company's bonds?

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Question 18

When someone borrows to purchase capital goods, he is using someone else's _____ to fund his _____.

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Question 19

Financial markets are important for bringing equilibrium to the loanable funds market, but do not affect the efficient allocation of scarce resources in the long-run.

Accepted Answer

Financial markets not only bring equilibrium to the loanable funds market, but they also facilitate the efficient allocation of scarce resources by channeling savings into productive investments, allowing firms to raise capital, and enabling investors to diversify their portfolios. Therefore, financial markets do affect the efficient allocation of scarce resources in the long-run.

Question 20

What is a bond buyer promised when she buys a bond?

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Quiz 26: Saving, Investment, and the Financial System