Question 1

The fundamental value of a share of stock is equal to which of the following?

Accepted Answer

A)  The sum of coupon payments. 
B)  The present value of expected dividends. 
C)  The present value of coupon payments. 
D)  The present value of the expected yield. 
E)  The sum of expected dividends. 
A)  The sum of coupon payments. 
B)  The present value of expected dividends. 
C)  The present value of coupon payments. 
D)  The present value of the expected yield. 
E)  The sum of expected dividends. B

Question 2

Suppose the central bank, as expected, increases the money supply as the result of a decision for monetary expansion. Which of the following will occur as a result?

Accepted Answer

A)  Stock prices increase only if goods prices increase. 
B)  A decrease in stock prices. 
C)  No change in stock prices. 
D)  An increase in stock prices. 
E)  An ambiguous effect on stock prices. 
A)  Stock prices increase only if goods prices increase. 
B)  A decrease in stock prices. 
C)  No change in stock prices. 
D)  An increase in stock prices. 
E)  An ambiguous effect on stock prices. C

Question 3

Suppose the current one- year interest rate is 6%, and financial markets expect the one- year interest rate next year to be 7%, and expect the one- year rate to be 8% the year after that. Given this information, the yield to maturity on a three- year bond will be:

Accepted Answer

A)  22%. 
B)  18%. 
C)  10%. 
D)  7%. 
E)  12%. 
A)  22%. 
B)  18%. 
C)  10%. 
D)  7%. 
E)  12%. D

Question 4

Suppose a bond promises to make a single payment at maturity. These types of bond are called:

Accepted Answer

A)  discount bonds. 
B)  corporate bonds. 
C)  indexed bonds. 
D)  junk bonds. 
E)  government bonds. 
A)  discount bonds. 
B)  corporate bonds. 
C)  indexed bonds. 
D)  junk bonds. 
E)  government bonds.

Question 5

As the LM curve becomes steeper, an unexpected increase in consumer confidence:

Accepted Answer

A)  is more likely to cause stock prices to rise. 
B)  is more likely to keep stock prices constant. 
C)  will cause a relatively small increase in output and relatively small increase in the interest rate. 
D)  will cause a relatively large increase in output and relatively large increase in the interest rate. 
E)  is more likely to cause stock prices to fall. 
A)  is more likely to cause stock prices to rise. 
B)  is more likely to keep stock prices constant. 
C)  will cause a relatively small increase in output and relatively small increase in the interest rate. 
D)  will cause a relatively large increase in output and relatively large increase in the interest rate. 
E)  is more likely to cause stock prices to fall.

Question 6

A bond has a face value of $1,200, a price of $1,500, and coupon payments of $300 for two years. The "current yield" of this bond is:

Accepted Answer

A)  6%. 
B)  24%. 
C)  12%. 
D)  16%. 
E)  20%. 
A)  6%. 
B)  24%. 
C)  12%. 
D)  16%. 
E)  20%.

Question 7

Suppose that financial market participants now expect a future tax cut and that the yield curve is initially upward sloping. Given this information, we would expect which of the following to occur?

Accepted Answer

A)  The yield curve will become vertical. 
B)  The yield curve will become steeper. 
C)  The yield curve will become U- shaped. 
D)  The yield curve will become horizontal. 
E)  The yield curve will become flatter. 
A)  The yield curve will become vertical. 
B)  The yield curve will become steeper. 
C)  The yield curve will become U- shaped. 
D)  The yield curve will become horizontal. 
E)  The yield curve will become flatter.

Question 8

Which of the following best explains why the long- term interest rate will generally change by less than 1% when the short- term interest changes by 1%?

Accepted Answer

A)  The mathematical calculations are more difficult for analysts in the case of long- term bonds. 
B)  Financial market participants will not expect this increase in the short- term interest rate to persist fully in the future. 
C)  Long- term rates are always lower than short- term rates, so there is less room for them to change. 
D)  Financial markets are often swept up by bubbles and fads. 
E)  Financial markets assume that the central bank will be passive as interest rates rise or fall. 
A)  The mathematical calculations are more difficult for analysts in the case of long- term bonds. 
B)  Financial market participants will not expect this increase in the short- term interest rate to persist fully in the future. 
C)  Long- term rates are always lower than short- term rates, so there is less room for them to change. 
D)  Financial markets are often swept up by bubbles and fads. 
E)  Financial markets assume that the central bank will be passive as interest rates rise or fall.

Question 9

Suppose that financial market participants expect that the central bank will pursue a monetary expansion in the future. Also assume that the yield curve is initially upward sloping. Given this information, we would expect which of the following to occur?

Accepted Answer

A)  The yield curve will become steeper. 
B)  i2t will increase. 
C)  i2t will decrease. 
D)  The yield curve will become vertical. 
E)  The yield curve will become horizontal. 
A)  The yield curve will become steeper. 
B)  i2t will increase. 
C)  i2t will decrease. 
D)  The yield curve will become vertical. 
E)  The yield curve will become horizontal.

Question 10

When interpreting bond prices as present values, discuss what factors determine the price of a two- year discount bond. Include in your answer an explanation of how changes in each of these factors affect the price of a two- year discount bond.

Accepted Answer

The price of the two- year bond will be

Question 11

For this question, assume that one- year and two- year bonds have the same risk; therefore, you can ignore risk here. Assume that there is arbitrage between one- year bonds and two- year bonds, we know that the expected rate of return on two- year bonds:

Accepted Answer

A)  will be exactly half the rate of return on one- year bonds. 
B)  will equal the expected rate of return from holding a one- year bond for two years. 
C)  will equal the expected rate of return from holding a one- year bond for one year. 
D)  will be smaller than the expected rate of return from holding a one- year bond for one year. 
E)  will be larger than the expected rate of return from holding a one- year bond for one year. 
A)  will be exactly half the rate of return on one- year bonds. 
B)  will equal the expected rate of return from holding a one- year bond for two years. 
C)  will equal the expected rate of return from holding a one- year bond for one year. 
D)  will be smaller than the expected rate of return from holding a one- year bond for one year. 
E)  will be larger than the expected rate of return from holding a one- year bond for one year.

Question 12

Equity finance is represented by which of the following?

Accepted Answer

A)  When a firm sells bonds. 
B)  When a firm borrows money from banks. 
C)  When a firm draws down retained earnings. 
D)  When a firm sells shares of stock. 
E)  When a firm sells off part of its capital stock. 
A)  When a firm sells bonds. 
B)  When a firm borrows money from banks. 
C)  When a firm draws down retained earnings. 
D)  When a firm sells shares of stock. 
E)  When a firm sells off part of its capital stock.

Question 13

A bond has a face value of $12,000, a price of $15,000, and coupon payments of $3000 for two years. The coupon rate of this bond is:

Accepted Answer

A)  15%. 
B)  20%. 
C)  10%. 
D)  25%. 
E)  30%. 
A)  15%. 
B)  20%. 
C)  10%. 
D)  25%. 
E)  30%.

Question 14

Which of the following describes the attribute of a risk neutral investor?

Accepted Answer

A)  An investor that makes decisions based on the expected return and the degree of risk of assets. 
B)  An investor that makes decisions based on the credit rating of assets. 
C)  An investor that makes decisions based on the popularity of assets. 
D)  An investor that makes decisions based on the advice of financial planners. 
E)  An investor that makes decisions based on the expected return of assets. 
A)  An investor that makes decisions based on the expected return and the degree of risk of assets. 
B)  An investor that makes decisions based on the credit rating of assets. 
C)  An investor that makes decisions based on the popularity of assets. 
D)  An investor that makes decisions based on the advice of financial planners. 
E)  An investor that makes decisions based on the expected return of assets.

Question 15

An upward- sloping yield curve suggests that financial market participants expect short- term interest rates will:

Accepted Answer

A)  be equal to zero in the future. 
B)  not change in the future. 
C)  rise in the future. 
D)  be unstable in the future. 
E)  fall in the future. 
A)  be equal to zero in the future. 
B)  not change in the future. 
C)  rise in the future. 
D)  be unstable in the future. 
E)  fall in the future.

Question 16

A "junk bond" is a bond with a:

Accepted Answer

A)  value of zero. 
B)  very low maturity. 
C)  low yield to maturity. 
D)  low face value, but high coupon rate. 
E)  high default risk. 
A)  value of zero. 
B)  very low maturity. 
C)  low yield to maturity. 
D)  low face value, but high coupon rate. 
E)  high default risk.

Question 17

As the LM curve becomes flatter, an unexpected increase in consumer confidence:

Accepted Answer

A)  will cause a relatively small increase in output and relatively small increase in the interest rate. 
B)  is more likely to cause stock prices to fall. 
C)  is more likely to keep stock prices constant. 
D)  is more likely to cause stock prices to rise. 
E)  will cause a relatively large increase in output and relatively large increase in the interest rate. 
A)  will cause a relatively small increase in output and relatively small increase in the interest rate. 
B)  is more likely to cause stock prices to fall. 
C)  is more likely to keep stock prices constant. 
D)  is more likely to cause stock prices to rise. 
E)  will cause a relatively large increase in output and relatively large increase in the interest rate.

Question 18

Give two explanations why stock prices might deviate from their fundamental values.

Accepted Answer

First, investors may still choose to pur

Question 19

Suppose there is a report that the unemployment rate unexpectedly increased in the previous month. To what extent will the expected central bank response to this news affect how stock prices will respond to this report of a higher than expected unemployment rate? Explain.

Accepted Answer

An unexpected increase in unemployment m

Question 20

Suppose that financial market participants expect short- term rates to decrease in the future. Given this information, we would expect:

Accepted Answer

A)  a downward shifting yield curve. 
B)  a downward sloping yield curve. 
C)  an upward sloping yield curve. 
D)  a horizontal yield curve. 
E)  an upward shifting yield curve. 
A)  a downward shifting yield curve. 
B)  a downward sloping yield curve. 
C)  an upward sloping yield curve. 
D)  a horizontal yield curve. 
E)  an upward shifting yield curve.

Exam 15: Financial Markets and Expectations

The fundamental value of a share of stock is equal to which of the following?

Suppose the central bank, as expected, increases the money supply as the result of a decision for monetary expansion. Which of the following will occur as a result?

Suppose the current one- year interest rate is 6%, and financial markets expect the one- year interest rate next year to be 7%, and expect the one- year rate to be 8% the year after that. Given this information, the yield to maturity on a three- year bond will be:

Suppose a bond promises to make a single payment at maturity. These types of bond are called:

As the LM curve becomes steeper, an unexpected increase in consumer confidence:

A bond has a face value of $1,200, a price of $1,500, and coupon payments of $300 for two years. The "current yield" of this bond is:

Suppose that financial market participants now expect a future tax cut and that the yield curve is initially upward sloping. Given this information, we would expect which of the following to occur?

Which of the following best explains why the long- term interest rate will generally change by less than 1% when the short- term interest changes by 1%?

Suppose that financial market participants expect that the central bank will pursue a monetary expansion in the future. Also assume that the yield curve is initially upward sloping. Given this information, we would expect which of the following to occur?

When interpreting bond prices as present values, discuss what factors determine the price of a two- year discount bond. Include in your answer an explanation of how changes in each of these factors affect the price of a two- year discount bond.

For this question, assume that one- year and two- year bonds have the same risk; therefore, you can ignore risk here. Assume that there is arbitrage between one- year bonds and two- year bonds, we know that the expected rate of return on two- year bonds:

Equity finance is represented by which of the following?

A bond has a face value of $12,000, a price of $15,000, and coupon payments of $3000 for two years. The coupon rate of this bond is:

Which of the following describes the attribute of a risk neutral investor?

An upward- sloping yield curve suggests that financial market participants expect short- term interest rates will:

A "junk bond" is a bond with a:

As the LM curve becomes flatter, an unexpected increase in consumer confidence:

Give two explanations why stock prices might deviate from their fundamental values.

Suppose there is a report that the unemployment rate unexpectedly increased in the previous month. To what extent will the expected central bank response to this news affect how stock prices will respond to this report of a higher than expected unemployment rate? Explain.

Suppose that financial market participants expect short- term rates to decrease in the future. Given this information, we would expect:

A Tour of the World

A Tour of the Book

The Goods Market

Financial Markets

Goods and Financial Markets: the Islm Model

The Labour Market

Putting All Markets Together: the Asad Model

The Phillips Curve, the Natural Rate of Unemployment and Inflation

The Crisis

The Facts of Growth

Saving, Capital Accumulation and Output

Technological Progress and Growth

Technological Progress: the Short, the Medium and the Long Run

Expectations: the Basic Tools

Expectations, Consumption and Investment

Expectations, Output and Policy

Openness in Goods and Financial Markets

The Goods Market

Output, the Interest Rate and the Exchange Rate

Exchange Rate Regimes

Should Policy-Makers Be Restrained

Fiscal Policy: a Summing up

Monetary Policy: a Summing up

Epilogue: the Story of Macroeconomics

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