Question 1

What is the difference between a debt contract and an equity contract?

Accepted Answer

A debt contract represents money loaned to a company, whereas an equity contract represents part ownership in a company.

Question 2

Suppose a bond with a face value of $1,000 pays a coupon of $200, and the bond matures in 50 years. If the interest rate is currently 15 percent, calculate the approximate price of the bond.

Accepted Answer

For a very long maturity, bond price is approximately equal to coupon/i.
Bond price = $200/0.15 = $1,333.33

Question 3

Firms use physical capital markets to raise funds for expansion.

Accepted Answer

A) True 
 B)False  False

Question 4

The equilibrium risk-return curve for a risk-loving individual is

Accepted Answer

A)  negatively sloped. 
B)  positively sloped. 
C)  vertical. 
D)  horizontal. 
E)  a 45-degree line. 
A)  negatively sloped. 
B)  positively sloped. 
C)  vertical. 
D)  horizontal. 
E)  a 45-degree line.

Question 5

Many experts think a major reason for the housing boom during the years leading up to the housing bust in 2006 was that mortgage interest rates were very low.

Accepted Answer

A) True 
 B)False

Question 6

A bond that matures in one year has a $500 face value and a $60 coupon What is the price of the bond if the interest rate is 6 percent and the bond was purchased by the present owner for $450?

Accepted Answer

A)  $103.77 
B)  $481.13 
C)  $528.30 
D)  $500 
E)  $1,000 
A)  $103.77 
B)  $481.13 
C)  $528.30 
D)  $500 
E)  $1,000

Question 7

If the price of a stock is $50, the dividend is $5, and the stock price has risen $2 in the past year, the dividend yield is

Accepted Answer

A)  $5. 
B)  10 percent. 
C)  4 percent. 
D)  7 percent. 
E)  $7. 
A)  $5. 
B)  10 percent. 
C)  4 percent. 
D)  7 percent. 
E)  $7.

Question 8

Exhibit 16-1  
-Refer to Exhibit 16-1. Suppose that the price of tools is $32. Then a profit-maximizing firm will buy a total of

Accepted Answer

A)  1 unit. 
B)  2 units. 
C)  3 units. 
D)  4 units. 
E)  5 units. 
A)  1 unit. 
B)  2 units. 
C)  3 units. 
D)  4 units. 
E)  5 units.

Question 9

A construction firm can buy a bulldozer for $200,000. Gasoline costs $500 per month, the interest rate is 15 percent, and depreciation is $25,000 per year. If the bulldozer is purchased, the monthly implicit rent will be

Accepted Answer

A)  $2,500. 
B)  $4,583. 
C)  $32,083. 
D)  $5,083. 
E)  $32,583. 
A)  $2,500. 
B)  $4,583. 
C)  $32,083. 
D)  $5,083. 
E)  $32,583.

Question 10

One way in which problems of moral hazard and adverse selection can be limited is through the use of profit sharing agreements, whereby managers and employees are given a share of the profits earned by the firm. That way the agents of the firms have a financial stake in the firm's success, and hence have their interests aligned with the principals.

Accepted Answer

A) True 
 B)False

Question 11

The price-earnings ratio is the price of a good divided by the average profit per unit.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is an example of an equity contract?

Accepted Answer

A)  Mortgage 
B)  Dividends 
C)  Stocks 
D)  Interest 
E)  Bonds 
A)  Mortgage 
B)  Dividends 
C)  Stocks 
D)  Interest 
E)  Bonds

Question 13

Economists generally believe that as risk increases, investment becomes more interesting and people require lower rates of return.

Accepted Answer

A) True 
 B)False

Question 14

A firm has been making relatively large profits lately and has an extra $20,000 to invest. The firm is choosing among three investment options: improving the training of store employees, buying new computer equipment, or saving the $20,000 in a bank account and using it at a later date. How should the firm decide which option to choose? Which option is least risky? Most risky?

Accepted Answer

The firm should compare the expected rat

Question 15

Portfolio diversification

Accepted Answer

A)  means that one should own at least 10 different stocks. 
B)  means that one should own at least two different stocks whose prices do not always move in the same direction. 
C)  means that one should own at least two different stocks. 
D)  is something that can be achieved only by the very wealthy. 
E)  means that one should own at least five different stocks whose prices do not always move in the same direction. 
A)  means that one should own at least 10 different stocks. 
B)  means that one should own at least two different stocks whose prices do not always move in the same direction. 
C)  means that one should own at least two different stocks. 
D)  is something that can be achieved only by the very wealthy. 
E)  means that one should own at least five different stocks whose prices do not always move in the same direction.

Question 16

In the United States, one of the agencies that regulates financial institutions is

Accepted Answer

A)  the Office of the Comptroller of the Currency. 
B)  a municipal government. 
C)  the Central Intelligence Agency. 
D)  the Internal Revenue Services. 
E)  the White House. 
A)  the Office of the Comptroller of the Currency. 
B)  a municipal government. 
C)  the Central Intelligence Agency. 
D)  the Internal Revenue Services. 
E)  the White House.

Question 17

If the price of a stock rises from $80 to $100 over the course of a year and the dividend paid is $5, the capital gain is

Accepted Answer

A)  15 percent. 
B)  31.25 percent. 
C)  $25. 
D)  $20. 
E)  6.25 percent. 
A)  15 percent. 
B)  31.25 percent. 
C)  $25. 
D)  $20. 
E)  6.25 percent.

Question 18

The price of a good with a vertical market supply is called

Accepted Answer

A)  pure profit. 
B)  economic rent. 
C)  pure price. 
D)  fixed-supply price. 
E)  gouged price. 
A)  pure profit. 
B)  economic rent. 
C)  pure price. 
D)  fixed-supply price. 
E)  gouged price.

Question 19

In insurance and other markets, adverse selection is known as a situation in which the people who choose to buy insurance will be the riskiest group in the population.

Accepted Answer

A) True 
 B)False

Question 20

A bond's yield is the fixed amount that the borrower agrees to pay the bondholder each year.

Accepted Answer

A) True 
 B)False

Exam 16: Capital and Financial Markets

What is the difference between a debt contract and an equity contract?

Suppose a bond with a face value of $1,000 pays a coupon of $200, and the bond matures in 50 years. If the interest rate is currently 15 percent, calculate the approximate price of the bond.

Firms use physical capital markets to raise funds for expansion.

The equilibrium risk-return curve for a risk-loving individual is

Many experts think a major reason for the housing boom during the years leading up to the housing bust in 2006 was that mortgage interest rates were very low.

A bond that matures in one year has a $500 face value and a $60 coupon What is the price of the bond if the interest rate is 6 percent and the bond was purchased by the present owner for $450?

If the price of a stock is $50, the dividend is $5, and the stock price has risen $2 in the past year, the dividend yield is

Exhibit 16-1 -Refer to Exhibit 16-1. Suppose that the price of tools is $32. Then a profit-maximizing firm will buy a total of

A construction firm can buy a bulldozer for $200,000. Gasoline costs $500 per month, the interest rate is 15 percent, and depreciation is $25,000 per year. If the bulldozer is purchased, the monthly implicit rent will be

The price-earnings ratio is the price of a good divided by the average profit per unit.

Which of the following is an example of an equity contract?

Economists generally believe that as risk increases, investment becomes more interesting and people require lower rates of return.

Portfolio diversification

In the United States, one of the agencies that regulates financial institutions is

If the price of a stock rises from $80 to $100 over the course of a year and the dividend paid is $5, the capital gain is

The price of a good with a vertical market supply is called

In insurance and other markets, adverse selection is known as a situation in which the people who choose to buy insurance will be the riskiest group in the population.

A bond's yield is the fixed amount that the borrower agrees to pay the bondholder each year.

The Central Idea

Observing and Explaining the Economy

The Supply and Demand Model

Subtleties of the Supply and Demand Model: Price Floors, Price Ceilings, and Elasticity

Macroeconomics: the Big Picture

Measuring the Production, Income, and Spending of Nations

The Spending Allocation Model

Unemployment and Employment

Productivity and Economic Growth

Money and Inflation

The Nature and Causes of Economic Fluctuations

Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model

The Economic Fluctuations Model

Using the Economic Fluctuations Model

Fiscal Policy

Monetary Policy

Economic Growth and Globalization

International Trade

International Finance

Reading, Understanding, and Creating Graphs

the Miracle of Compound Growth

Present Discounted Value

Deriving the Growth Accounting Formula

Filters