Question 1

"Default" occurs when

Accepted Answer

A)  bond issuers fail to make promised payments. 
B)  corporations go bankrupt and stock becomes worthless. 
C)  bond purchasers fail to pay full price for a bond. 
D)  stocks are not federally insured. 
A)  bond issuers fail to make promised payments. 
B)  corporations go bankrupt and stock becomes worthless. 
C)  bond purchasers fail to pay full price for a bond. 
D)  stocks are not federally insured.

Question 2

The limited liability rule means that if a corporation goes bankrupt,

Accepted Answer

A)  shareholders are responsible for all the debts of the ﬁrm. 
B)  bondholders are responsible for all the debts of the ﬁrm. 
C)  shareholders can only lose the amount they invested. 
D)  bondholders only lose the face value of the bond. 
A)  shareholders are responsible for all the debts of the ﬁrm. 
B)  bondholders are responsible for all the debts of the ﬁrm. 
C)  shareholders can only lose the amount they invested. 
D)  bondholders only lose the face value of the bond.

Question 3

The vertical intercept of the Security Market Line is determined by the

Accepted Answer

A)  beta of the market portfolio. 
B)  discount rate. 
C)  risk-free interest rate. 
D)  risk premium. 
A)  beta of the market portfolio. 
B)  discount rate. 
C)  risk-free interest rate. 
D)  risk premium.

Question 4

Which of the following is a difference between stocks and bonds?

Accepted Answer

A)  Bonds may be issued by corporations or government; stock is only issued by corporations. 
B)  Stock may be issued by corporations or government; bonds are only issued by corporations. 
C)  Bonds are only issued by government; stock is only issued by corporations. 
D)  There is no difference in terms of who issues stocks and bonds. 
A)  Bonds may be issued by corporations or government; stock is only issued by corporations. 
B)  Stock may be issued by corporations or government; bonds are only issued by corporations. 
C)  Bonds are only issued by government; stock is only issued by corporations. 
D)  There is no difference in terms of who issues stocks and bonds.

Question 5

Rupert recently purchased a nonmaturing bond for $10,000 that pays $350 semiannual coupons. His expected rate of return per year on the bond is

Accepted Answer

A)  4 percent. 
B)  7 percent. 
C)  10 percent. 
D)  12 percent. 
A)  4 percent. 
B)  7 percent. 
C)  10 percent. 
D)  12 percent.

Question 6

You would like to have $50,000 for a new car in six years. If you deposit money today in a bank CD that pays 4 percent per year, how much must your deposit be?

Accepted Answer

A)  $38,050 
B)  $39,516 
C)  $40,323 
D)  $42,108 
A)  $38,050 
B)  $39,516 
C)  $40,323 
D)  $42,108

Question 7

The present value of a future amount of money will be greater the

Accepted Answer

A)  greater the interest rate. 
B)  less the amount of time before the future payment is received. 
C)  more the amount of time before the future payment is received. 
D)  greater the expected rate of inﬂation. 
A)  greater the interest rate. 
B)  less the amount of time before the future payment is received. 
C)  more the amount of time before the future payment is received. 
D)  greater the expected rate of inﬂation.

Question 8

What are the distinguishing features of a stock? What happens to stockholders if the corporation
fails?

Accepted Answer

Stock is an ownership share in a corpora

Question 9

Distinguish between the two main kinds of mutual funds.

Accepted Answer

The two main kinds of mutual funds are a

Question 10

The largest mutual fund, as of March 2019, held approximately _____ billion in assets under management.

Accepted Answer

A)  $170 
B)  $90 
C)  $47 
D)  $260 
A)  $170 
B)  $90 
C)  $47 
D)  $260

Question 11

Arbitrage equates rates of return across assets of all risk levels.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is both an economic and a ﬁnancial investment?

Accepted Answer

A)  government building a new road 
B)  Boeing Corporation building a new factory 
C)  a private citizen buying corporate stock 
D)  the Federal Reserve buying bonds from commercial banks 
A)  government building a new road 
B)  Boeing Corporation building a new factory 
C)  a private citizen buying corporate stock 
D)  the Federal Reserve buying bonds from commercial banks

Question 13

When the Security Market Line shifts up, the average expected rate of return on investment assets
with given risk levels is increasing.

Accepted Answer

A) True 
 B)False

Question 14

Stock investors can earn a return from stocks only in the form of dividends.

Accepted Answer

A) True 
 B)False

Question 15

When a company declares bankruptcy, stockholders are the ﬁrst to be paid when company assets
are sold.

Accepted Answer

A) True 
 B)False

Question 16

(Last Word) Before being adjusted for costs,

Accepted Answer

A)  actively managed funds outperform index funds. 
B)  actively managed funds and index funds perform about the same. 
C)  index funds outperform actively managed funds. 
D)  arbitrage equalizes the average expected rates of return and beta levels on index and actively managed funds. 
A)  actively managed funds outperform index funds. 
B)  actively managed funds and index funds perform about the same. 
C)  index funds outperform actively managed funds. 
D)  arbitrage equalizes the average expected rates of return and beta levels on index and actively managed funds.

Question 17

The steeper the Security Market Line,

Accepted Answer

A)  the lower the risk premium. 
B)  the more investors dislike risk. 
C)  the less investors are concerned about risk. 
D)  the greater the risk-free interest rate. 
A)  the lower the risk premium. 
B)  the more investors dislike risk. 
C)  the less investors are concerned about risk. 
D)  the greater the risk-free interest rate.

Question 18

Short-term U.S. government bonds are considered to be risk-free.

Accepted Answer

A) True 
 B)False

Question 19

If i is the interest rate and X is the number of dollars to be received after t years, the formula to calculate the present value of a future payment is

Accepted Answer

A)  $( 1 + i ) ^ { t } X$ 
B)  $X / ( 1 + i ) ^ { t }$ 
C)  $i ^ { t } / ( 1 + X )$ 
D)  $( X /i ) t$ 
A)  $( 1 + i ) ^ { t } X$ 
B)  $X / ( 1 + i ) ^ { t }$ 
C)  $i ^ { t } / ( 1 + X )$ 
D)  $( X /i ) t$

Question 20

Which of the following is an economic investment?

Accepted Answer

A)  shares of corporate stock 
B)  U.S. savings bonds 
C)  newly built houses 
D)  bonds issued by private corporations 
A)  shares of corporate stock 
B)  U.S. savings bonds 
C)  newly built houses 
D)  bonds issued by private corporations

Exam 17: Financial Economics

"Default" occurs when

The limited liability rule means that if a corporation goes bankrupt,

The vertical intercept of the Security Market Line is determined by the

Which of the following is a difference between stocks and bonds?

Rupert recently purchased a nonmaturing bond for $10,000 that pays $350 semiannual coupons. His expected rate of return per year on the bond is

You would like to have $50,000 for a new car in six years. If you deposit money today in a bank CD that pays 4 percent per year, how much must your deposit be?

The present value of a future amount of money will be greater the

What are the distinguishing features of a stock? What happens to stockholders if the corporation fails?

Distinguish between the two main kinds of mutual funds.

The largest mutual fund, as of March 2019, held approximately _____ billion in assets under management.

Arbitrage equates rates of return across assets of all risk levels.

Which of the following is both an economic and a ﬁnancial investment?

When the Security Market Line shifts up, the average expected rate of return on investment assets with given risk levels is increasing.

Stock investors can earn a return from stocks only in the form of dividends.

When a company declares bankruptcy, stockholders are the ﬁrst to be paid when company assets are sold.

(Last Word) Before being adjusted for costs,

The steeper the Security Market Line,

Short-term U.S. government bonds are considered to be risk-free.

If i is the interest rate and X is the number of dollars to be received after t years, the formula to calculate the present value of a future payment is

Which of the following is an economic investment?

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures Caused by Externalities Asymmetric Information

Public Goods, Public Choice, and Government Failure

An Introduction to Macroeconomics

Measuring Domestic Output and National Income

Economic Growth

Business Cycles, Unemployment, and Inflation

Basic Macroeconomic Relationships

The Aggregate Expenditures Model

Aggregate Demand and Aggregate Supply

Fiscal Policy, Deficits, and Debt

Money, Banking, and Financial Institutions

Money Creation

Interest Rates and Monetary Policy

Extending the Analysis of Aggregate Supply

Current Issues in Macro Theory and Policy

International Trade

The Balance of Payments, Exchange Rates, and Trade Deficits

The Economics of Developing Countries

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