Question 1

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

Accepted Answer

The Census Bureau is not involved in regulating financial institutions. The other three entities listed are all involved in regulating financial institutions to increase the level of safety in the financial system. The Securities and Exchange Commission regulates securities markets and protects investors. The Federal Deposit Insurance Corporation insures deposits made by individuals and organizations in banks and thrift institutions. The Federal Reserve System supervises and regulates banks and other financial institutions, and is also responsible for implementing monetary policy.

Question 2

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 (the price)is:

Accepted Answer

The formula for the present value of a perpetuity is: 
PV = Payment / Required Yield 
PV = $80 / 0.10 
PV = $800 
Therefore, the most you would be willing to pay for the bond is $800.

Question 3

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

Accepted Answer

Pooling funds and investing in a diversified portfolio spreads risk among multiple financial instruments, which is the basis of the concept of diversification. This reduces the overall risk of the portfolio and provides a potential for higher returns.

Question 4

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:

Accepted Answer

When market interest rates fall, the value of existing bonds with higher interest rates increases. In this case, since the coupon payment of $60 is fixed, the bond with a 6% interest rate becomes more valuable with a market interest rate of 4%. Using the formula for bond price, we get: 
Bond price = (Coupon payment / Market interest rate) x (1 - 1 / (1 + Market interest rate)^Number of periods) + Face value / (1 + Market interest rate)^Number of periods
With a market interest rate of 6%, the bond price is:
Bond price = ($60 / 0.06) x (1 - 1 / 1.06^1) + $1,000 / 1.06^1 = $1,060.38
With a market interest rate of 4%, the bond price is:
Bond price = ($60 / 0.04) x (1 - 1 / 1.04^1) + $1,000 / 1.04^1 = $1,500
Therefore, the correct choice is D.

Question 5

Which of the following is NOT true?

Accepted Answer

The supply of funds to the loanable funds market is directly related to the interest rate, not inversely. As interest rates increase, the incentive to save increases, leading to a higher supply of loanable funds.

Question 6

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

Accepted Answer

Financial institutions are able to decrease information costs by gathering and analyzing information on potential borrowers, which allows them to make more informed lending decisions. By decreasing these costs, financial institutions are able to increase the flow of funds to the economy through loans and other forms of financial intermediation. Increasing transaction costs or lending to whoever wants to borrow would actually decrease the flow of funds to the economy, while assuming all of the risk of lending funds would be unsustainable for financial institutions.

Question 7

Which is NOT a way financial institutions reduce risk?

Accepted Answer

Financial institutions cannot guarantee a high rate of return for all lenders as returns are dependent on market performance and the risks associated with investments.

Question 8

If during booming times in the economy saving falls,then the equilibrium real interest rate _____ and the quantity of loanable funds ________.

Accepted Answer

When saving falls during booming times, people tend to spend more and save less. This leads to a decrease in the supply of loanable funds, causing the equilibrium real interest rate to rise. At the same time, the quantity of loanable funds demanded by borrowers decreases due to higher interest rates, resulting in a fall in the quantity of loanable funds.

Question 9

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:

Accepted Answer

The answer of Assume initially that market interest rates are...

Question 10

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

Accepted Answer

The formula for calculating the yield on a perpetuity bond is: Yield = Annual Interest Payment / Price
In this case, the annual interest payment is $60 and the price is $1,200. Plugging those values into the formula gives: Yield = $60 / $1,200 = 0.05 or 5%. Therefore, the correct answer is A) 5%.

Question 11

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

Accepted Answer

Collecting taxes on financial transactions is not a primary role of financial intermediaries in the market for funds. Their primary role is to reduce transaction costs, spread risk, and reduce information costs.

Question 12

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

Accepted Answer

The yield is calculated as the coupon payment divided by the bond price. 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 13

Financial intermediaries include all of the following EXCEPT:

Accepted Answer

The other options (commercial banks, insurance companies, and pension funds) are all examples of financial intermediaries, as they act as middlemen between borrowers and lenders by pooling and investing funds on behalf of individuals and institutions. Check cashing centers, on the other hand, do not engage in the same activities and are not considered financial intermediaries.

Question 14

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

Accepted Answer

Standardized financial products such as mortgages reduce transaction costs for both the financial institution and the borrower. By having a standard product, the institution can streamline its processes and lower its costs, while borrowers can easily compare products and shop around for the best deal.

Question 15

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

Accepted Answer

Jody's purchase of a stock directly from Acme Corporation is an example of direct finance, where funds flow directly from savers/investors to the borrowers/firms. This is because Jody is providing funds directly to the company in exchange for a share of ownership, rather than going through an intermediary, such as a bank or mutual fund (indirect finance). The purchase is also not related to regulation or investing in a general sense, so options A) unregulated and D) investor are not the best choices.

Question 16

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

Accepted Answer

Financial intermediaries are institutions that act as intermediaries between savers and borrowers. They collect funds from savers, pool them together, and then lend them to borrowers. Examples of financial intermediaries include commercial banks, credit unions, and pension funds. State banks and Federal Reserve banks are types of banks, but not all banks are financial intermediaries. Monetary mediums refer to the physical or digital means by which money can be exchanged, such as cash or credit cards, but are not relevant to the question at hand.

Question 17

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

Accepted Answer

The goal of the agencies that regulate financial institutions is to increase transparency and the flow of information to investors. This helps to protect investors and promote a more efficient and stable financial system. It is not their goal to ensure the profitability of the institutions, maintain a high rate of return for investors, or minimize changes in interest rates.

Question 18

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

Accepted Answer

The coupon payment of a bond is fixed, so when market interest rates rise, new bonds are issued with higher rates, making existing bonds with lower rates less attractive, thus decreasing their price.

Question 19

Suppose while households are deciding to increase saving,the demand by firms for investment funds falls.In the market for loanable funds the real interest rate will ___ and the quantity of loanable funds will _____.

Accepted Answer

When households increase savings, the supply of loanable funds increases, which tends to lower the real interest rate. If firms demand less investment funds simultaneously, the demand for loanable funds decreases, reinforcing the downward pressure on the real interest rate. The quantity of loanable funds could rise, fall, or stay the same depending on the relative shifts in supply and demand.

Question 20

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

Accepted Answer

As interest rates rise, the opportunity cost of holding money increases, which means people will hold less money for transactional purposes and instead will invest it to earn interest. This leads to a decrease in the demand for money, which results in a movement downward along the demand curve for money.

Quiz 11: Saving, Investment, and the Financial System