Question 1

Suppose it is perceived that a company is more likely to go into bankruptcy. What will happen in the market for its bonds?

Accepted Answer

A) It will have to pay a higher price on its bonds. 
B) The interest rate on its bonds will decline. 
C) The price of its bonds will decline. 
D) The coupon rate on its previously issued bonds will rise. 
A) It will have to pay a higher price on its bonds. 
B) The interest rate on its bonds will decline. 
C) The price of its bonds will decline. 
D) The coupon rate on its previously issued bonds will rise.

Question 2

An efficient financial market is one in which

Accepted Answer

A) transactions costs for trading securities are zero. 
B) all information available to market participants is reflected in market prices. 
C) all securities traded are very liquid. 
D) there are no taxes on the gains from trading securities. 
A) transactions costs for trading securities are zero. 
B) all information available to market participants is reflected in market prices. 
C) all securities traded are very liquid. 
D) there are no taxes on the gains from trading securities.

Question 3

Suppose Exxon-Mobil announces that its profits in the third quarter of 2006 were $35 billion. This will cause the price of Exxon-Mobil stock to

Accepted Answer

A) rise. 
B) fall. 
C) remain unchanged. 
D) rise, fall, or remain unchanged depending on the expectations of market participants before the announcement. 
A) rise. 
B) fall. 
C) remain unchanged. 
D) rise, fall, or remain unchanged depending on the expectations of market participants before the announcement.

Question 4

Significant skepticism has been expressed about which of the following being an efficient market?

Accepted Answer

A) The market for U.S. Treasury securities 
B) The stock market 
C) The market for financial futures 
D) The commercial paper market 
A) The market for U.S. Treasury securities 
B) The stock market 
C) The market for financial futures 
D) The commercial paper market

Question 5

Suppose a bond is expected to be selling for $110 one year from now, its coupon payment during the year will be $10.75, and the interest rate, adjusted for the bond's risk, is 5%. If the bond market is efficient, what will be the current market price of the bond?

Accepted Answer

A) $104.76 
B) $110 
C) $115 
D) $120.75 
A) $104.76 
B) $110 
C) $115 
D) $120.75

Question 6

According to the efficient markets hypothesis,

Accepted Answer

A) the equilibrium price of an asset equals the optimal forecast of fundamental value based on available information. 
B) the actual and expected prices of an asset will be equal. 
C) the actual price of an asset reflects only information on past returns on the asset. 
D) the expected price of an asset incorporates only information on past returns on the asset. 
A) the equilibrium price of an asset equals the optimal forecast of fundamental value based on available information. 
B) the actual and expected prices of an asset will be equal. 
C) the actual price of an asset reflects only information on past returns on the asset. 
D) the expected price of an asset incorporates only information on past returns on the asset.

Question 7

Above-normal returns on stock investments can be expected by investors who

Accepted Answer

A) possess insider information. 
B) are wealthy enough to hold the stock of many different companies in their portfolios. 
C) are reasonably cautious. 
D) concentrate their investments in one or two stocks. 
A) possess insider information. 
B) are wealthy enough to hold the stock of many different companies in their portfolios. 
C) are reasonably cautious. 
D) concentrate their investments in one or two stocks.

Question 8

Suppose a bond has a current market price of $110 one year from now, its coupon payment during the year will be $10 and the interest rate, adjusted for the bond's risk is 5%. If the bond market is efficient, what is the market price of the bond expected to be in one year?

Accepted Answer

$110 = ($1

Question 9

If the interest rate on a ten-year bond issued by GM is 7.8% while the interest rate on a ten-year treasury bond is 4.6%, the risk premium is

Accepted Answer

A) 1.70%. 
B) 3.2%. 
C) -3.2%. 
D) 12.4%. 
A) 1.70%. 
B) 3.2%. 
C) -3.2%. 
D) 12.4%.

Question 10

Which problems may exist for a new stock market?

Accepted Answer

A) lack of liquidity 
B) lack of efficient trading mechanisms 
C) little information about enterprise available 
D) all of the above 
A) lack of liquidity 
B) lack of efficient trading mechanisms 
C) little information about enterprise available 
D) all of the above

Question 11

Circuit breakers are

Accepted Answer

A) interventions designed to restore orderly markets. 
B) fines levied on noise traders. 
C) fines levied on inside traders. 
D) minimum inventory requirements imposed on specialists on the floor of the New York Stock Exchange. 
A) interventions designed to restore orderly markets. 
B) fines levied on noise traders. 
C) fines levied on inside traders. 
D) minimum inventory requirements imposed on specialists on the floor of the New York Stock Exchange.

Question 12

In an efficient market with rational expectations, the actual price of an asset

Accepted Answer

A) will equal its expected price. 
B) will often be below its expected price. 
C) will often be above its expected price. 
D) equals its expected price plus a random error term. 
A) will equal its expected price. 
B) will often be below its expected price. 
C) will often be above its expected price. 
D) equals its expected price plus a random error term.

Question 13

An asset's fundamental value equals

Accepted Answer

A) its face value. 
B) its maturity value. 
C) the market's best guess of the present value of the asset's expected future returns. 
D) the weighted sum of its market price over the previous seven trading periods. 
A) its face value. 
B) its maturity value. 
C) the market's best guess of the present value of the asset's expected future returns. 
D) the weighted sum of its market price over the previous seven trading periods.

Question 14

According to the efficient markets hypothesis, the difference between today's price for a share of stock and tomorrow's price is

Accepted Answer

A) equal to today's price plus any dividends to be received between today and tomorrow. 
B) equal to tomorrow's price plus any dividends to be received tomorrow. 
C) unforecastable. 
D) zero. 
A) equal to today's price plus any dividends to be received between today and tomorrow. 
B) equal to tomorrow's price plus any dividends to be received tomorrow. 
C) unforecastable. 
D) zero.

Question 15

Noise traders

Accepted Answer

A) pursue trading strategies without superior information. 
B) make use of inside information. 
C) reduce the amount of risk in the market. 
D) help to ensure that asset prices reflect the fundamental values of the securities being traded. 
A) pursue trading strategies without superior information. 
B) make use of inside information. 
C) reduce the amount of risk in the market. 
D) help to ensure that asset prices reflect the fundamental values of the securities being traded.

Question 16

If the prices of financial assets follow a random walk, then

Accepted Answer

A) they should be easy to forecast, provided market participants have rational expectations. 
B) they should be easy to forecast, provided market participants have adaptive expectations. 
C) the change in price from one trading period to the next is not predictable. 
D) major traders in the market must not be making use of all available information about the assets. 
A) they should be easy to forecast, provided market participants have rational expectations. 
B) they should be easy to forecast, provided market participants have adaptive expectations. 
C) the change in price from one trading period to the next is not predictable. 
D) major traders in the market must not be making use of all available information about the assets.

Question 17

One implication of the efficient markets hypothesis is that investors should

Accepted Answer

A) concentrate their investments in just a few well-chosen assets. 
B) hold a diversified portfolio of assets. 
C) buy stocks rather than bonds. 
D) buy bonds rather than stocks. 
A) concentrate their investments in just a few well-chosen assets. 
B) hold a diversified portfolio of assets. 
C) buy stocks rather than bonds. 
D) buy bonds rather than stocks.

Question 18

Recent research indicates that

Accepted Answer

A) value investors may earn high returns over time by assuming greater risks. 
B) program trading adds significantly to stock price volatility. 
C) there's a consensus that stock prices always reflect their fundamental values. 
D) informed traders can profit at the expense of noise traders. 
A) value investors may earn high returns over time by assuming greater risks. 
B) program trading adds significantly to stock price volatility. 
C) there's a consensus that stock prices always reflect their fundamental values. 
D) informed traders can profit at the expense of noise traders.

Question 19

George is trying to forecast the future price of IBM's common stock. To do so he makes use only of past prices of IBM stock. George

Accepted Answer

A) has adaptive expectations. 
B) has rational expectations. 
C) is likely to rapidly adjust his forecast to news affecting the future profitability of IBM. 
D) is likely to make forecasts that reflect closely IBM stock's fundamental value. 
A) has adaptive expectations. 
B) has rational expectations. 
C) is likely to rapidly adjust his forecast to news affecting the future profitability of IBM. 
D) is likely to make forecasts that reflect closely IBM stock's fundamental value.

Question 20

An increase in expected future market interest rates

Accepted Answer

A) raises bond prices. 
B) raises long-term yields relative to short-term yields. 
C) raises short-term yields relative to long-term yields. 
D) results from forecasts of declining inflation. 
A) raises bond prices. 
B) raises long-term yields relative to short-term yields. 
C) raises short-term yields relative to long-term yields. 
D) results from forecasts of declining inflation.

Exam 10: Information and Financial Market Efficiency

Suppose it is perceived that a company is more likely to go into bankruptcy. What will happen in the market for its bonds?

An efficient financial market is one in which

Suppose Exxon-Mobil announces that its profits in the third quarter of 2006 were $35 billion. This will cause the price of Exxon-Mobil stock to

Significant skepticism has been expressed about which of the following being an efficient market?

Suppose a bond is expected to be selling for $110 one year from now, its coupon payment during the year will be $10.75, and the interest rate, adjusted for the bond's risk, is 5%. If the bond market is efficient, what will be the current market price of the bond?

According to the efficient markets hypothesis,

Above-normal returns on stock investments can be expected by investors who

Suppose a bond has a current market price of $110 one year from now, its coupon payment during the year will be $10 and the interest rate, adjusted for the bond's risk is 5%. If the bond market is efficient, what is the market price of the bond expected to be in one year?

If the interest rate on a ten-year bond issued by GM is 7.8% while the interest rate on a ten-year treasury bond is 4.6%, the risk premium is

Which problems may exist for a new stock market?

Circuit breakers are

In an efficient market with rational expectations, the actual price of an asset

An asset's fundamental value equals

According to the efficient markets hypothesis, the difference between today's price for a share of stock and tomorrow's price is

Noise traders

If the prices of financial assets follow a random walk, then

One implication of the efficient markets hypothesis is that investors should

Recent research indicates that

George is trying to forecast the future price of IBM's common stock. To do so he makes use only of past prices of IBM stock. George

An increase in expected future market interest rates

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

Filters