Question 1

Which of the following bonds (of equal maturity)would have the lowest risk premium?

Accepted Answer

U.S. government bonds are considered to have the lowest risk premium because they are backed by the full faith and credit of the U.S. government. This means that investors have a very low risk of default, making them less risky than other options on the list.

Question 2

Explain what is meant by the fundamental value of a share of stock.

Accepted Answer

The answer of Explain what is meant by the fundamental...

Question 3

Suppose the Fed implements a monetary expansion that is at least partially unexpected.Explain what effect this will have on stock prices.

Accepted Answer

The answer of Suppose the Fed implements a monetary expansion...

Question 4

A share of stock will pay a dividend of $20 in one year,and will be sold for an expected price of $500 at that time.If the current one-year interest rate is 5%,the current price of the stock will be approximately equal to

Accepted Answer

To calculate the current price of the stock, we need to discount the expected future cash flows back to the present using the one-year interest rateof 5%. 
The present value of the expected selling price of the stock is: $500/(1+0.05) = $476.19 
The present value of the expected dividend payment is: $20/(1+0.05) = $19.05 
Therefore, the current price of the stock is: $476.19 + $19.05 = $495.24 (rounding to the nearest cent) 
So, the closest option is B, $495.

Question 5

Suppose an increase in government spending occurs that is at least partially unexpected.Explain what effect this will have on stock prices.

Accepted Answer

The answer of Suppose an increase in government spending occurs...

Question 6

Suppose the central bank implements a monetary contraction in the current period and is not expected to continue this policy in the future.Explain what effect this policy will have on the shape of the yield curve and on stock prices.

Accepted Answer

The answer of Suppose the central bank implements a monetary...

Question 7

Suppose individuals expect a cut in future taxes.Explain what effect this expected reduction in future taxes will have on the yield curve and on stock prices in the current period.

Accepted Answer

The answer of Suppose individuals expect a cut in future...

Question 8

Some economists argue that there were good reasons for housing price to rise.Explain their argument.

Accepted Answer

The answer of Some economists argue that there were good...

Question 9

As the LM curve becomes steeper,an unexpected decrease in consumer confidence

Accepted Answer

The answer of As the LM curve becomes steeper,an unexpected...

Question 10

Suppose individuals expect an increase in future taxes.Explain what effect this expected increase in future taxes will have on the yield curve and on stock prices in the current period.

Accepted Answer

The answer of Suppose individuals expect an increase in future...

Question 11

Give two explanations why stock prices might deviate from their fundamental values.

Accepted Answer

The answer of Give two explanations why stock prices might...

Question 12

Suppose a cut in government spending occurs that is at least partially unexpected.Explain what effect this will have on stock prices.

Accepted Answer

The answer of Suppose a cut in government spending occurs...

Question 13

Suppose there is a report that the unemployment rate unexpectedly increased in the previous month.To what extent will the expected central bank response to this news affect how stock prices will respond to this report of a higher than expected unemployment rate? Explain.

Accepted Answer

The answer of Suppose there is a report that the...

Quiz 14: Financial Markets and Expectations

Which of the following bonds (of equal maturity) would have the lowest risk premium?