Question 1

Investors with a _____ will demand a higher rate of return.

Accepted Answer

A)  higher time preference for consumption 
B)  lower exposure to economic risks 
C)  lower access to production opportunities 
D)  higher financial creditworthiness 
E)  lower default premium

Question 2

_____ is the chance that a financial asset will not earn the return promised.

Accepted Answer

A)  Maturity 
B)  Production opportunity 
C)  Time preference for consumption 
D)  Risk 
E)  Inflation

Question 3

A federal deficit occurs when:

Accepted Answer

A)  a government issues securities to the public. 
B)  stock prices of private companies decrease. 
C)  social security benefits given to citizens are reduced. 
D)  a government's expenses are more than its tax revenues. 
E)  money supply in the market is low.

Question 4

The existence of an upward sloping yield curve proves that the _____ is correct, because an upward sloping curve necessarily implies that lenders will lend short-term funds at lower rates than they lend long-term funds.

Accepted Answer

A)  liquidity preference theory 
B)  expectations theory 
C)  market segmentation theory 
D)  open market theory 
E)  reinvestment theory

Question 5

The higher the expected rate of inflation:

Accepted Answer

A)  the lower is the loss in purchasing power of investors. 
B)  the higher is the required rate of return on investment. 
C)  the lower is the maturity premium required by the investors. 
D)  the higher is the money supply in the economy. 
E)  the lower is the tax rate in the economy.

Question 6

Inflation leads to increase in purchasing power of investors.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following actions of the Federal Reserve will reduce federal deficit?

Accepted Answer

A)  Lending more money. 
B)  Purchase of securities. 
C)  Printing money. 
D)  Reduction of taxes. 
E)  Increase expenditures.

Question 8

If the Federal Reserve tightens the money supply, other things held constant, short-term interest rates will be pushed upward, and this increase will probably be greater than the increase in rates in the long-term market.

Accepted Answer

A) True 
 B)False

Question 9

Other things constant, the larger the federal deficit,:

Accepted Answer

A)  the lower the level of expenses of a country. 
B)  the higher the level of income of a country. 
C)  the lower the level of tax rates. 
D)  the lower the level of inflation rate. 
E)  the higher the level of interest rates.

Question 10

During _____, both the demand for money and the rate of inflation tend to fall, which prompts the Fed to increase the money supply, and as a result, interest rates decline.

Accepted Answer

A)  expansions 
B)  a fiscal deficit 
C)  recessions 
D)  economic booms 
E)  a foreign trade deficit

Question 11

During periods of _____, the general tendency is toward higher interest rates.

Accepted Answer

A)  inflation 
B)  recession 
C)  contraction 
D)  fiscal surplus 
E)  monetary deficit

Question 12

The higher the perceived risk, the higher the required rate of return.

Accepted Answer

A) True 
 B)False

Question 13

Assume that the current yield curve is upward sloping or normal. This implies that

Accepted Answer

A)  short-term interest rates are more volatile than long-term rates. 
B)  inflation is expected to subside in the future. 
C)  the economy is at the trough of a business cycle. 
D)  long-term bonds are less attractive to investors than short-term bonds. 
E)  short-term interest rates are lower than the long-term interest rates.

Question 14

When the economy is expanding too quickly and the Federal Reserve (Fed) wants to control future growth in the economy, the Fed will:

Accepted Answer

A)  decrease the money supply. 
B)  reduce the taxes levied on the public. 
C)  increase the expenditure incurred in social benefits. 
D)  purchase securities from the public. 
E)  provide subsidies to the corporations.

Question 15

You are given the following data:
$$\begin{array} { l c } 
r ^ { * } = \text { real risk-free rate } & 4 \% \
& \
\text { Constant inflation premium (IP) } & 7 \% \
\text { Maturity risk premium (MRP) } & 1 \% \
\text { Default risk premium for AAA bonds (DRP) } & 3 \% \
\text { Liquidity premium for long-term T-bonds (LP) } & 2 \%
\end{array}$$
Assume that a highly liquid market does not exist for long-term T-bonds, and the expected rate of inflation is a constant. Given these conditions, the rate on long-term Treasury bonds is _____.

Accepted Answer

A)  23% 
B)  11% 
C)  14% 
D)  19% 
E)  27%

Question 16

A corporate bond that yields 12% includes a risk-free rate of 7% and a default premium of 3%. The bond's maturity risk premium is _____.

Accepted Answer

A)  1% 
B)  10% 
C)  4% 
D)  2% 
E)  6%

Question 17

Which of the following factors will lead to an increase in interest rates?

Accepted Answer

A)  Deflation 
B)  Federal deficit 
C)  Contraction 
D)  Recession 
E)  Trade surplus

Question 18

If the Federal Reserve loosens money supply then:

Accepted Answer

A)  inflation will decrease. 
B)  interest rates will decrease. 
C)  sale of Treasury securities will increase. 
D)  credit supply will decrease. 
E)  economic activity will decrease.

Question 19

Assume that a 3-year Treasury note has no maturity premium, and that the real, risk-free rate of interest is 3 percent. If the T-note carries a yield to maturity of 13 percent, and if the expected average inflation rate over the next 2 years is 11 percent, what is the implied expected inflation rate during Year 3?

Accepted Answer

A)  7% 
B)  8% 
C)  9% 
D)  17% 
E)  18%

Question 20

The yield curve is downward sloping, or inverted, if the inflation rates are expected to increase.

Accepted Answer

A) True 
 B)False

Exam 5: The Cost of Money Interest Rates

Investors with a _____ will demand a higher rate of return.

_____ is the chance that a financial asset will not earn the return promised.

A federal deficit occurs when:

The existence of an upward sloping yield curve proves that the _____ is correct, because an upward sloping curve necessarily implies that lenders will lend short-term funds at lower rates than they lend long-term funds.

The higher the expected rate of inflation:

Inflation leads to increase in purchasing power of investors.

Which of the following actions of the Federal Reserve will reduce federal deficit?

If the Federal Reserve tightens the money supply, other things held constant, short-term interest rates will be pushed upward, and this increase will probably be greater than the increase in rates in the long-term market.

Other things constant, the larger the federal deficit,:

During _____, both the demand for money and the rate of inflation tend to fall, which prompts the Fed to increase the money supply, and as a result, interest rates decline.

During periods of _____, the general tendency is toward higher interest rates.

The higher the perceived risk, the higher the required rate of return.

Assume that the current yield curve is upward sloping or normal. This implies that

When the economy is expanding too quickly and the Federal Reserve (Fed) wants to control future growth in the economy, the Fed will:

A corporate bond that yields 12% includes a risk-free rate of 7% and a default premium of 3%. The bond's maturity risk premium is _____.

Which of the following factors will lead to an increase in interest rates?

If the Federal Reserve loosens money supply then:

The yield curve is downward sloping, or inverted, if the inflation rates are expected to increase.