Question 1

Longview Corporation has a stock price of $60, has issued 1,000,000 shares of stock, has retained earnings of $3 million dollars, and a dividend yield of 5 percent. The price-earnings ratio for Longview stock is

Accepted Answer

A)  20, which is high compared to historical standards of the market. 
B)  20, which is low compared to historical standards of the market. 
C)  10, which is low compared to historical standards of the market. 
D)  10, which is high compared to historical standards of the market.

Question 2

A government reduces its budget deficit, but at the same time people become concerned that the outlook for future government expenditures and revenues increase the chance it will default. Which of the following is correct?

Accepted Answer

A)  The reduced budget deficit will raise interest rates in general. The increased risk of default will raise interest rates on government bonds. 
B)  The reduced budget deficit will raise interest rates in general. The increased risk of default will reduce interest rates on government bonds. 
C)  The reduced budget deficit will reduce interest rates in general. The increased risk of default will raise interest rates on government bonds. 
D)  The reduced budget deficit will reduce interest rates in general. The increased risk of default will reduce interest rates on government bonds.

Question 3

Which of the following is true concerning interest rates on bonds?

Accepted Answer

A)  The tax treatment of interest earned on municipals bonds makes the interest rate on them higher than otherwise. High default risk makes the interest rate on a bond higher than otherwise. 
B)  The tax treatment of interest earned on municipals bonds makes the interest rate on them higher than otherwise. High default risk makes the interest rate on a bond lower than otherwise. 
C)  The tax treatment of interest earned on municipals bonds makes the interest rate on them lower than otherwise. High default risk makes the interest rate on a bond higher than otherwise. 
D)  The tax treatment of interest earned on municipals bonds makes the interest rate on them lower than otherwise. High default risk makes the interest rate on a bond lower than otherwise.

Question 4

The first three elements of a financial crisis are correctly represented as taking place in the following order:

Accepted Answer

A)  large decline in some asset prices → insolvencies at financial institutions → decline in confidence in financial institutions 
B)  insolvencies at financial institutions → decline in confidence in financial institutions → large decline in some asset prices 
C)  insolvencies at financial institutions → economic downturn → credit crunch 
D)  insolvencies at financial institutions → credit crunch → economic downturn

Question 5

Which of the following is a certificate of indebtedness?

Accepted Answer

A)  stocks and bonds 
B)  stocks but not bonds 
C)  bonds but not stocks 
D)  neither stocks nor bonds

Question 6

Concerns about the bankruptcy of an appliance manufacturer diminish after a new CEO is appointed and some of the company's less productive factories are sold. What type of risk for bondholders falls? What happens to the interest rate on this company's bonds?

Accepted Answer

The answer of Concerns about the bankruptcy of an appliance...

Question 7

On which of these bonds is the prospect of default least likely?

Accepted Answer

A)  a junk bond 
B)  a bond issued by the state of Arizona 
C)  a bond issued by the federal government 
D)  a bond issued by General Electric Corporation

Question 8

Melinda buys new equipment for her dental office with funds she borrowed from a bank that raised funds from depositors. Which of the following is correct?

Accepted Answer

A)  Melinda is an investor. 
B)  The depositors are investors. 
C)  Both Melinda and the depositors are investors. 
D)  Neither Melinda nor the depositors are investors.

Question 9

When tax code changes reduce saving incentives, the interest rate will _____ and investment will _____.

Accepted Answer

The answer of When tax code changes reduce saving incentives,...

Question 10

Which of the following people purchased the correct asset to meet his or her objective?

Accepted Answer

A)  Michelle wanted to be a part owner of Mamma Rosa's Pizza, so she purchased a bond issued by Mamma Rosa's Pizza. 
B)  Tim wanted a high return, even if it meant taking some risk, so he purchased stock issued by Specific Electric instead of bonds issued by Specific Electric. 
C)  Jennifer wanted to buy equity in Honda, so she purchased bonds sold by Honda. 
D)  All of the above are correct.

Question 11

At the broadest level, the financial system moves the economy's scarce resources from

Accepted Answer

A)  the rich to the poor. 
B)  financial institutions to business firms and government. 
C)  households to financial institutions. 
D)  savers to borrowers.

Question 12

For an imaginary economy, when the real interest rate is 7 percent, the quantity of loanable funds demanded is $500 and the quantity of loanable funds supplied is $500. Currently, the nominal interest rate is 9 percent and the inflation rate is 4 percent. Currently,

Accepted Answer

A)  the market for loanable funds is in equilibrium. 
B)  the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will rise. 
C)  the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will fall. 
D)  the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, and as a result the real interest rate will rise.

Question 13

Which of the following is not correct?

Accepted Answer

A)  American families save a larger fraction of their incomes than their counterparts in many other countries such as Germany and Japan. 
B)  Saving is an important long-run determinant of a nation's standard of living. 
C)  A change in tax laws that encouraged greater saving would lower interest rates. 
D)  Taxes on interest income can substantially decrease the future value of current saving.

Question 14

Figure 26-3. The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves. 
-Refer to Figure 26-3. A shift of the supply curve from S1 to S2 is called

Accepted Answer

A)  an increase in the supply of loanable funds. 
B)  an increase in the quantity of loanable funds supplied. 
C)  a decrease in the supply of loanable funds. 
D)  a decrease in the quantity of loanable funds supplied.

Question 15

In the Coen Brothers' movie The Hudsucker Proxy the board of directors picks someone to run the company who they believe will make poor decisions. If things turn out as they plan,

Accepted Answer

A)  the price of a share of stock in the Hudsucker corporation should decline as the demand for shares falls. 
B)  the price of a share of stock in the Hudsucker corporation should rise as the demand for shares rises. 
C)  the price of a share of stock in the Hudsucker corporation should decline as the supply of existing shares falls. 
D)  the price of a share of stock in the Hudsucker corporation should rise as the supply of existing shares rises.

Question 16

What does the maturity of a bond indicate?

Accepted Answer

The answer of What does the maturity of a bond...

Question 17

The length of time until a bond matures is called the

Accepted Answer

A)  perpetuity. 
B)  term. 
C)  maturity. 
D)  intermediation.

Question 18

Generally, if people begin to expect a company to have higher future profits, the price of the company's stock will begin to decrease.

Accepted Answer

A) True 
 B)False

Question 19

If an economy is closed and if it has no government, then

Accepted Answer

A)  national saving = private saving. 
B)  total income = consumption + investment. 
C)  saving = total income - consumption. 
D)  All of the above are correct.

Question 20

We interpret the term loanable funds to mean the flow of resources available to fund private investment.

Accepted Answer