Deck 9: Saving and Capital Formation

Question 1

The maturation date of a bond is the date at which:

A) coupon payments will be made.
B) the principal will be repaid.
C) dividend payments will be made.
D) taxes on the bond are due.

Answer 1

B

Question 2

Savers may prefer to use financial intermediaries rather than lending directly to borrowers because financial intermediaries:

A) reduce the cost of gathering information about borrowers.
B) have a monopoly on lending.
C) increase the risk of lending.
D) offer higher rates of return than available elsewhere.

Answer 2

A

Question 3

Fred purchases a bond, newly issued by the Big Time Corporation, for $10,000. The bond pays $400 to its holder at the end of the first, second, and third years and pays $10,400 upon its maturity at the end of four years. The principal amount of this bond is ___, the coupon rate is ____, and the term of this bond is _____.

A) $400; 40%; four years
B) $10,000; 4%; four years
C) $10,000; $400; 4%
D) $10,400; 4%; four years

Answer 3

B

Question 4

Firms that extend credit to borrowers using funds from savers are called:

A) bond dealers.
B) stock brokers.
C) central banks.
D) financial intermediaries.

Question 5

The financial system consists of financial _____, such as commercial banks, and financial _____, such as the stock market.

A) markets; intermediaries
B) allocations; investments
C) intermediaries; markets
D) markets; institutions

Question 6

The coupon rate on newly issued bonds is usually higher for bonds with ______ terms and ______ risk that the borrower will go bankrupt.

A) shorter; greater
B) shorter; smaller
C) longer; greater
D) longer; smaller

Question 7

Regular interest payments made to bondholders are called ______ payments.

A) diversification
B) reserve
C) coupon
D) dividend

Question 8

Privately-owned firms that accept deposits from individuals and businesses and use those deposits to make loans are called:

A) mortgage banks.
B) brokerage firms.
C) commercial banks.
D) investment banks.

Question 9

The principal amount of a bond is the amount:

A) originally lent.
B) of interest agreed upon when the bond was originally issued.
C) paid to the bondholders on a regular basis.
D) of interest the bondholder is entitled to when the bond matures.

Question 10

If the principal amount of a bond is $10,000,000, the coupon rate is 7%, and the inflation rate is 4%, then the annual coupon payment made to the holder of the bond is:

A) $70,000.
B) $300,000.
C) $400,000.
D) $700,000.

Question 11

In the United States saving is allocated to its most productive use by:

A) the Federal Reserve.
B) the Federal, state, and local governments.
C) regulations and laws designed to improve productivity.
D) a decentralized, market-oriented financial system.

Question 12

Two reasons savers keep deposits at banks are to:

A) secure mortgages and to purchase stocks.
B) earn a return on their savings and to facilitate making payments.
C) lower interest rates and to increase the money supply.
D) equalize loan supply and demand and to earn interest.

Question 13

Decentralized market-based financial systems improve the allocation of saving by:

A) insuring capital gains exceed dividend payments.
B) eliminating the need for commercial banks or other financial intermediaries.
C) matching net capital inflows to net capital outflows.
D) providing information and risk-sharing services.

Question 14

Financial intermediaries, such as commercial banks, help borrowers, particularly small borrowers, by:

A) providing information to evaluate potential lenders.
B) offering tax-preferred borrowing opportunities.
C) eliminating the risk of borrowing.
D) providing credit that might otherwise not be available.

Question 15

A bond is a(n):

A) regular payment made to owners of a firm.
B) claim to partial ownership of a firm.
C) agreement issued by a financial intermediary linking savers and investors.
D) legal promise to repay a debt.

Question 16

The specialized information-gathering activities that banks use to evaluate borrowers are an example of the:

A) cost-benefit principle.
B) principle of comparative advantage.
C) scarcity principle.
D) principle of increasing opportunity cost.

Question 17

The coupon rate on newly issued bonds is usually ______ for bonds with favorable tax treatment, such as municipal bonds, and ______ for bonds that are very risky, such as junk bonds.

A) higher; lower
B) higher; higher
C) lower; lower
D) lower; higher

Question 18

The market value of a particular bond at any given point in time is called the bond's:

A) coupon rate.
B) principal.
C) term.
D) price.

Question 19

Banks help savers find productive uses for their funds because banks have specialized in:

A) gathering information about and evaluating potential borrowers.
B) obtaining preferential tax treatment for savers.
C) securing government guarantees for loans.
D) evaluating the riskiness of stocks.

Question 20

The coupon rate is the:

A) amount originally lent.
B) regular payment of interest to a bondholder.
C) interest rate promised when a bond is issued.
D) maximum interest rate that can be paid on a bond.

Question 21

When the interest rate on newly issued bonds increases, the price of existing bonds:

A) increases.
B) decreases.
C) increases only if the coupon rate is below the new rate.
D) may either increase or decrease.

Question 22

Chris pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 6 percent coupon rate. One year later, after receiving the first coupon payment, Chris sells the bond. If the current one-year interest rate on government bonds is 7 percent, then the price Chris receives is:

A) $10,000.
B) $700.
C) greater than $10,000.
D) less than $10,000.

Question 23

Pat pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 6 percent coupon rate. One year later, after receiving the first coupon payment, Pat sells the bond. If the current one-year interest rate on government bonds is 5 percent, then the price Pat receives is:

A) $10,000.
B) $500.
C) greater than $10,000.
D) less than $10,000.

Question 24

The rate of return that financial investors require to hold a risky asset minus the rate of return on a safe asset is called the:

A) real interest rate.
B) nominal interest rate.
C) risk premium.
D) discount rate.

Question 25

A regular payment received by stockholders for each share they own is called a:

A) coupon payment.
B) dividend.
C) bond.
D) capital gain.

Question 26

Sydney purchases a newly-issued, two-year government bond with a principal amount of $10,000 and a coupon rate of 6% paid annually. One year before the bonds matures (and after receiving the coupon payment for the first year), Sydney sells the bond in the bond market. What price (rounded to the nearest dollar) will Sydney receive for his bond if newly-issued one-year government bonds are paying a 5% coupon rate?

A) $9,906
B) $10,000
C) $10,095
D) $10,600

Question 27

Stockholders receive returns on their financial investment in the form of ______ and _____.

A) interest payments; dividends
B) capital gains; dividends
C) coupon payments; capital gains
D) capital gains; interest payments

Question 28

You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $61.06 for one share of the stock today, you expect a dividend payment of $4, and the rate of return on safe assets is 5%, how much is your risk premium?

A) 1.5%
B) 6.5%
C) 8.0%
D) 13.0%

Question 29

The current price of a stock increases when:

A) expected future dividends decrease.
B) the expected future price of the stock decreases.
C) interest rates decrease.
D) the perceived riskiness of the stock increases.

Question 30

You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $65.74 for one share of the stock today, and you require a return of 8%, what dividend payment must you expect to receive from the stock?

A) $4.46
B) $5.20
C) $6.00
D) $9.25

Question 31

You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $62.73 for one share of the stock today, and you expect a dividend payment of $4, what rate of return do you require?

A) 3.6%
B) 6.2%
C) 6.4%
D) 10%

Question 32

You originally required a risk premium of 6 percent in addition to the rate of return on safe assets before you would purchase shares of Techno Company stock. If you and other investors reduce the risk premium you require to 4 percent, the price of Techno Company stock will:

A) increase.
B) decrease.
C) equal the old risk premium plus the new risk premium.
D) equal the new risk premium plus the rate of return on safe assets.

Question 33

One year before maturity the price of a bond with a principal amount of $1,000 and a coupon rate of 5% paid annually fell to $981. The one year interest rate must be:

A) 8.5%.
B) 7.0%.
C) 5.0%.
D) 1.9%.

Question 34

When the coupon rate on newly-issued bonds decreases from 6% to 5%, the prices of existing bonds:

A) increase.
B) decrease.
C) remain unchanged.
D) decrease only if the coupon rate is less than 5%.

Question 35

When the coupon rate on newly-issued bonds increases from 5% to 6%, the prices of existing bonds:

A) increase.
B) decrease.
C) remain unchanged.
D) increase only if the coupon rate is less than 6%.

Question 36

Shares of stock are:

A) legal promises to repay a debt.
B) claims to partial ownership of a firm.
C) regular payments made to owners of a firm.
D) legal promises to make regular payments to the stockholder.

Question 37

An increase in the perceived riskiness of the stock of Company A ______ the risk premium investors require to purchase Company A stock and ______ the price of Company A stock.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

Question 38

An increase in interest rates results in a(n) ______ in the required rate of return to hold stocks and ______ current stock prices.

A) increase; reduces
B) increase; raises
C) decrease; raises
D) decrease; reduces

Question 39

A decrease in the perceived riskiness of the stock of Company A ______ the risk premium investors require to purchase Company A stock and ______ the price of Company A stock.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

Question 40

You expect a share of EconNews.Com to sell for $65 a year from now and to pay a $2 dividend per share in one year. What should you pay (rounded to the nearest dollar) for the stock today if you require an 8% return?

A) $60
B) $62
C) $67
D) $70

Question 41

Finding both parties to a trade who have something the other party wishes to trade for is called a:

A) unit of account.
B) store of value.
C) medium of exchange.
D) double coincidence of wants.

Question 42

When a baker exchanges a pie for dollars, this is an example of dollars serving as:

A) barter.
B) a medium of exchange.
C) a unit of account.
D) a store of value.

Question 43

Your financial investments consist of U.S. government bonds maturing in twenty years and shares in a start-up internet company. If interest rates on newly issued government bonds increase, then the price of your bonds will ______ and the price of the shares you own will ____.

A) increase; increase
B) decrease; decrease
C) increase; not change
D) decrease; not change

Question 44

A financial intermediary that sells shares in itself to the public, and then uses the funds to buy a wide variety of financial assets is called a:

A) commercial bank.
B) credit union.
C) stock exchange.
D) mutual fund.

Question 45

Money serves as a medium of exchange when:

A) it is used to purchase goods and services.
B) there is direct trade of goods and services.
C) it is a basic measure of economic value.
D) it is a means of holding wealth.

Question 46

The ongoing search by savers for high returns leads the bond and stock markets to direct funds to the uses that appear:

A) most likely to be productive.
B) least likely to be productive.
C) to have the least risk.
D) to have no risk.

Question 47

When your grandfather keeps a bundle of $100 dollar bills behind a brick in the basement, this is an example of dollars serving as:

A) bank reserves.
B) a medium of exchange.
C) a unit of account.
D) a store of value.

Question 48

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade. Each company's stock currently sells for $100 per share. If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change. If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change. There is a 50% chance that it will be colder than average next year, and a 25% chance that it will be warmer than average. If you purchase two shares of XYZ stock and no shares of ABC stock, there is a ______ chance that your gain will be $40. Otherwise, your gain will be ______.

A) 50%; $30
B) 25%; $0
C) 75%; $20
D) 50%; $20

Question 49

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade. Each company's stock currently sells for $100 per share. If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change. If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change. There is a 50% chance that it will be colder than average next year, and a 25% chance that it will be warmer than average. If you purchase two shares of ABC stock and no shares of XYZ stock, there is a ______ chance that your gain will be $40. Otherwise, your gain will be ______.

A) 50%; $0
B) 25%; $20
C) 75%; $30
D) 50%; $20

Question 50

You own shares in a well-managed and diversified company. If a booming economy decreases investors' concerns about market risk, then the price of your shares will _____, holding other factors constant.

A) increase.
B) decrease.
C) not change.
D) either increase or decrease.

Question 51

The practice of spreading one's wealth over a variety of different financial investments in order to reduce overall risk is called:

A) allocation.
B) following the risk premium.
C) diversification.
D) risk reservation.

Question 52

Double coincidence of wants is avoided if money is used as a:

A) medium of exchange.
B) measure of value.
C) standard of deferred payment.
D) store of value.

Question 53

If you use $1,000 to purchase silver bullion, which you plan to keep in a safe, you are using money as:

A) bank reserves.
B) a medium of exchange.
C) a unit of account.
D) a store of value.

Question 54

You own shares in a start-up internet company. If large swings in the stock market increase financial investors' concerns about market risk, then the price of your shares will _____, holding other factors constant.

A) increase
B) decrease
C) not change
D) either increase or decrease

Question 55

If you post your car on eBay with a Buy-It-Now price of $1,800, you are using money as:

A) bank reserves.
B) a medium of exchange.
C) a unit of account.
D) a store of value.

Question 56

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade. Each company's stock currently sells for $100 per share. If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change. If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change. There is a 50% chance that it will be colder than average next year, and a 25% chance that it will be warmer than average. If you purchase one share of ABC stock and one shares of XYZ stock, there is a ______ chance that your gain will be $20. Otherwise, your gain will be ______.

A) 50%; $0
B) 25%; $30
C) 75%; $0
D) 50%; $40

Question 57

If you put a $20 bill in the pocket of your winter coat at the beginning of spring so that you will be surprised when you find it again next winter, you are using money as:

A) bank reserves.
B) a medium of exchange.
C) a unit of account.
D) a store of value.

Question 58

Stock prices increase when expected future dividends ____, interest rates _____, and/or the risk premium ______.

A) increase; increase; increases
B) increase; increase; decreases
C) decrease; decrease; increases
D) increase; decrease; decreases

Question 59

Money is:

A) the same as income.
B) all financial assets.
C) any asset used to make purchases.
D) the sum of assets minus debts.

Question 60

The direct trade of goods and services for other goods and services is called:

A) financial intermediation.
B) diversification.
C) barter.
D) using a medium of exchange.

Question 61

The amount of money in the United States is determined by:

A) the Federal Reserve.
B) the combined behavior of commercial banks and the public, as well as actions of the Federal Reserve.
C) the public.
D) the combined behavior of commercial banks and the public.

Question 62

M1 differs from M2 in that:

A) M1 includes currency and balances held in checking accounts, which are not included in M2.
B) M2 includes savings deposits, small-denomination time deposits, and money market mutual funds that are not included in M1.
C) M1 is a broader measure of the money supply than M2.
D) the assets in M2 are more liquid than the assets in M1.

Question 63

The M2 measure of money consists of the sum of:

A) savings deposits, small time deposits, and money market mutual funds.
B) currency, checking and savings deposits, and small time deposits.
C) currency, checking and savings deposits.
D) M1, savings deposits, small time deposits, and money market mutual funds.

Question 64

Commercial banks create new money:

A) when they increase their desired reserve/deposit ratio.
B) by issuing checks.
C) through multiple rounds of lending.
D) when they buy government bonds from the Federal Reserve.

Question 65

Money serves as a basic yardstick for measuring economic value (a unit of account), allowing:

A) people to hold their wealth in a liquid form.
B) governments to restrict the issuance of private monies.
C) easy comparison of the relative prices of goods and services.
D) goods and services to be exchanged with a double coincidence of wants.

Question 66

The main disadvantage of using money as a store of value is that:

A) other assets provide greater anonymity than cash.
B) barter is a more efficient way to conduct transactions than using money.
C) unlike other assets, money serves as a medium of exchange.
D) other assets pay relatively higher rates of interest than money.

Question 67

Based on the following information, the value of the M1 measure of the money supply is ______ and the value of the M2 measure of the money supply is ______. $\begin{array}{lr}{\text { Assets }} & \text { Billions of Dollars } \\\text { Currency } & 20 \\\text { Demand deposits } & 300 \\\text { Money market mutual funds } & 800 \\\text { Travelers' checks } & 10 \\\text { Savings deposits } & 1,800 \\\text { Other checkable deposits } & 200 \\\text { Small denomination time deposits } & 1,100\end{array}$

A) $530 billion; $3,700 billion
B) $330 billion; $4,230 billion
C) $520 billion; $4,320 billion
D) $530 billion; $4,230 billion

Question 68

Banks hold reserves:

A) to earn interest.
B) to increase profits.
C) only because the government requires them to hold reserves.
D) to meet depositor withdrawals and payments.

Question 69

Liabilities of the commercial banking system include:

A) reserves and loans.
B) deposits.
C) reserves and deposits.
D) loans and deposits.

Question 70

When the actual reserve/deposit ratio exceeds the desired reserve/deposit ratio banks:

A) do nothing because this is a profitable situation.
B) stop making loans.
C) send the extra reserves to the central bank.
D) make more loans.

Question 71

Savings deposits are ______ the M1 measure of money and ______ the M2 measure of money.

A) included in; excluded from
B) included in; included in
C) excluded from; excluded from
D) excluded from; included in

Question 72

Bank reserves are:

A) currency and customer checking deposits.
B) currency, customer checking and savings deposits.
C) any asset used to purchase goods and services.
D) cash and similar assets held to meet depositor withdrawals or payments.

Question 73

In a fractional-reserve banking system the reserve/deposit ratio equals:

A) more than 100 percent.
B) currency held by the public divided by deposits.
C) 100 percent.
D) less than 100 percent.

Question 74

Money market mutual funds are ______ the M1 measure of money and ______ the M2 measure of money.

A) included in; excluded from
B) included in; included in
C) excluded from; excluded from
D) excluded from; included in

Question 75

The three functions of money are:

A) spending for consumption, investment, and government purchases.
B) measuring balance of payments, exchange rates, and interest rates.
C) implementing monetary policy, fiscal policy, and structural policy.
D) serving as a medium of exchange, unit of account, and store of value.

Question 76

The M1 measure of money consists of the sum of:

A) currency, checking deposits, and travelers' checks.
B) currency and travelers' checks.
C) currency, checking deposits, and savings deposits.
D) checking deposits and travelers' checks.

Question 77

Assets of the commercial banking system include:

A) reserves and loans.
B) deposits.
C) reserves and deposits.
D) loans and deposits.

Question 78

The components of M2 that are not also in M1:

A) sum to an amount that is smaller than the sum of the components of M1.
B) pay lower rates of interest than do the components of M1.
C) are not usable for making payments.
D) are usable for making payments, but at a greater cost or inconvenience than currency or checks.

Question 79

Credit card balances are not considered to be money primarily because they:

A) are rarely used to make purchases.
B) are not part of people's wealth.
C) are an asset used in making transactions.
D) do not represent an obligation to pay someone else.

Question 80

When a bank makes a loan by crediting the borrower's checking account balance with an amount equal to the loan:

A) money is created.
B) the bank gains new reserves.
C) the bank immediately loses reserves.
D) the Fed has made an open-market purchase.