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Financial Markets and Institutions (FIN310) Problem Set I (Chapter 3) Take your time to work through the questions presented below to make sure you have a solid understanding of the concepts and ideas presented. You will submit your problems sets for grading by entering your answers to these questions in quiz format in Canvas. Please note: the question numbers should remain the same, however, questions and answer choices may be scrambled. Be sure to carefully read your selections as you will not be able to make changes once the quiz has been submitted. You will receive your grade immediately after submission. Once the quiz has closed, the correct answers will be made available to aid you in studying for the exam. No late submissions will be accepted under any circumstances, so plan accordingly!!!!! 22. Securities that offer ____ liquidity will need to offer a ____ yield. a. lower; higher b. lower; lower c. higher; higher d. B and C 23. If all other characteristics are similar, ____ would have to offer ____. a. taxable securities; a higher after-tax yield than tax-exempt securities b. taxable securities; a higher before-tax yield than tax-exempt securities c. tax-exempt securities; a higher after-tax yield than taxable securities d. tax-exempt securities; a higher before-tax yield than taxable securities 24. Assume an investor's tax rate is 25 percent. The before-tax yield on a security is 12 percent. What is the after-tax yield? a. 16.00 percent b. 9.25 percent c. 9.00 percent d. 3.00 percent e. none of the above 25. A firm in the 35 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7 percent. To match this yield, taxable securities must offer a before-tax yield of a. 7.0 percent. b. 10.8 percent. c. 20.0 percent. d. none of the above 26. Holding other factors such as risk constant, the relationship between the maturity and annualized yield of securities is called the a. term structure of interest rates. b. default structure of interest rates. c. liquidity structure of interest rates. d. tax structure of interest rates. e. none of the above 27. Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to a. become inverted. b. become flat. c. become upward sloping. d. be unaffected. 28. According to pure expectations theory, if interest rates are expected to decrease, there will be ____ pressure on the demand for short-term funds by borrowers and ____ pressure on the demand for long-term funds issued by borrowers. a. upward; upward b. downward; downward c. upward; downward d. downward; upward 29. According to the liquidity premium theory, the expected yield on a two-year security will ____ the expected yield from consecutive investments in one-year securities. a. equal b. be less than c. be greater than d. B and C are possible, depending on the size of the liquidity premium 30. The theory of the term structure of interest rates, which states that investors and borrowers choose securities with maturities that satisfy their forecasted cash needs, is the a. pure expectations theory. b. liquidity premium theory. c. segmented markets theory. d. liquidity habitat theory. 31. Vaughn Corporation is considering the issue of commercial paper and would like to know the yield it should offer on its commercial paper. The corporation believes that a 0.2 percent default risk premium, a 0.1 percent liquidity premium, and a 0.3 percent tax adjustment are necessary to sell its commercial paper to investors. Furthermore, annualized T-bill rates are 7 percent. Based on this information, Vaughn should offer ____ percent on its commercial paper. a. 8.0 b. 7.6 c. 7.5 d. 7.9 e. none of the above 32. The graphic comparison of maturities and annualized yields is known as the interest rate curve. a. True b. False 33. If a security can easily be converted to cash without a loss in value, it a. is liquid. b. has a high after-tax yield. c. has high default risk. d. is illiquid. 34. The term structure of interest rates defines the relationship a. between risk and return. b. between risk and maturity. c. between maturity and yield. d. between default risk ratings and maturity. 35. Assume the yield curve is flat. If investors flood the short-term market and avoid the longterm market, they may cause the yield curve to a. remain flat. b. become upward sloping. c. become downward sloping. d. none of the above Financial Markets and Institutions (FIN310) Problem Set I (Chapter 4) Take your time to work through the questions presented below to make sure you have a solid understanding of the concepts and ideas presented. You will submit your problems sets for grading by entering your answers to these questions in quiz format in Canvas. Please note: the question numbers should remain the same, however, questions and answer choices may be scrambled. Be sure to carefully read your selections as you will not be able to make changes once the quiz has been submitted. You will receive your grade immediately after submission. Once the quiz has closed, the correct answers will be made available to aid you in studying for the exam. No late submissions will be accepted under any circumstances, so plan accordingly!!!!! 36. Which of the following is not a major component of the Federal Reserve System? a. member banks b. Federal Open Market Committee c. Securities and Exchange Commission d. Board of Governors 37. The ____ rate is the interest rate charged on Fed district bank loans to depository institutions. a. federal funds b. prime c. discount d. real 38. The purchase of government securities by someone other than the Fed results in a. an overall increase in funds among commercial banks. b. an overall decrease in funds among commercial banks. c. offsetting changes in funds at commercial banks. d. an increase in securities maintained by the Fed. 39. When open market operations are used to ____ bank funds, the yield on debt instruments ____. a. reduce; decreases b. reduce; increases c. increase; increases d. none of the above 40. Assume that the reserve requirement ratio is 12 percent and that the Fed uses open market operations by buying $200 million worth of Treasury securities. Assuming that banks use all funds except required reserves to make loans and that the public does not store any cash, the money supply should ____ by about ____. a. increase; $200 million b. increase; $1.67 billion c. decrease; $200 million d. decrease; $1.67 billion Financial Markets and Institutions (FIN310) Problem Set I (Chapter 5) Take your time to work through the questions presented below to make sure you have a solid understanding of the concepts and ideas presented. You will submit your problems sets for grading by entering your answers to these questions in quiz format in Canvas. Please note: the question numbers should remain the same, however, questions and answer choices may be scrambled. Be sure to carefully read your selections as you will not be able to make changes once the quiz has been submitted. You will receive your grade immediately after submission. Once the quiz has closed, the correct answers will be made available to aid you in studying for the exam. No late submissions will be accepted under any circumstances, so plan accordingly!!!!! 41. According to the theory of rational expectations, if the Fed uses open market operations in order to increase the supply of loanable funds, the ultimate effect on interest rates is definitely a. a reduction in interest rates. b. an increase in interest rates. c. no effect on the interest rates. d. the impact on interest rates cannot be determined. 42. The Fed can ____ the level of spending as a means of stimulating the economy by ____ the money supply. a. increase; decreasing b. decrease; increasing c. decrease; decreasing d. increase; increasing 43. If the Fed attempts to reduce inflation, it would likely increase money supply growth. a. True b. False 44. When the Fed uses open market operations by selling some of its Treasury securities to investors in the U.S., there will be a. an outward shift in the supply schedule of loanable funds. b. an inward shift in the supply schedule of loanable funds. c. no shift in the supply schedule of loanable funds. d. an outward shift in the demand schedule for loanable funds. 45. ____ serves as the most direct indicator of economic growth in the United States. a. Gross domestic product (GDP) b. National income c. The unemployment rate d. The industrial production index 46. The ____ indicators tend to occur before a business cycle. a. leading b. lagging c. coincident d. none of the above 47. In general, there is: a. a positive relationship between unemployment and inflation. b. an inverse relationship between unemployment and inflation. c. an inverse relationship between GNP and inflation. d. a positive relationship between GNP and unemployment. 48. The Fed can affect the interaction between the demand for money and the supply of money to influence interest rates, the aggregate level of spending, and therefore economic growth. a. True b. False 49. A high budget deficit tends to place ____ pressure on interest rates; the Fed's tightening of the money supply tends to place ____ pressure on interest rates. a. upward; upward b. upward; downward c. downward; downward d. downward; upward 50. It is possible to have a substantial reduction in unemployment during a period of weak economic growth. a. True b. False Financial Markets and Institutions (FIN310) Problem Set I (Chapter 1) Take your time to work through the questions presented below to make sure you have a solid understanding of the concepts and ideas presented. You will submit your problems sets for grading by entering your answers to these questions in quiz format in Canvas. Please note: the question numbers should remain the same, however, questions and answer choices may be scrambled. Be sure to carefully read your selections as you will not be able to make changes once the quiz has been submitted. You will receive your grade immediately after submission. Once the quiz has closed, the correct answers will be made available to aid you in studying for the exam. No late submissions will be accepted under any circumstances, so plan accordingly!!!!! 1. Financial market participants who provide funds are called a. deficit units. b. surplus units. c. primary units. d. secondary units. 2. Those financial markets that facilitate the flow of short-term funds are known as a. money markets. b. capital markets. c. primary markets. d. secondary markets. 3. Funds are provided to the initial issuer of securities in the a. secondary market. b. primary market. c. deficit market. d. surplus market. 4. Which of the following is a capital market instrument? a. a six-month CD b. a three-month Treasury bill c. a ten-year bond d. an agreement for a bank to loan funds directly to a company for nine months Summer\t2016 5. Equity securities have a ____ expected return than most long-term debt securities, and they exhibit a ____ degree of risk. a. higher; higher b. lower; lower c. lower; higher d. higher; lower 6. Money market securities generally have ____. Capital market securities are typically expected to have a ____. a. less liquidity; higher annualized return b. more liquidity; lower annualized return c. less liquidity; lower annualized return d. more liquidity; higher annualized return 7. If security prices fully reflect all available information, the markets for these securities are a. efficient. b. primary. c. overvalued. d. undervalued. 8. The risk that financial problems could spread among financial institutions and across financial markets, causing a collapse of the financial system, is known as: a. a. systemic risk. b. a. leverage risk. c. a. financial meltdown risk. d. a. credit risk. 9. ____ are classified as a depository institution. a. Credit unions b. Pension funds c. Finance companies d. Securities firms 10. Valuing stocks is easier than valuing debt securities because stocks promise to provide investors with specific payments at regular intervals. a. True b. False Summer\t2016 Financial Markets and Institutions (FIN310) Problem Set I (Chapter 2) Take your time to work through the questions presented below to make sure you have a solid understanding of the concepts and ideas presented. You will submit your problems sets for grading by entering your answers to these questions in quiz format in Canvas. Please note: the question numbers should remain the same, however, questions and answer choices may be scrambled. Be sure to carefully read your selections as you will not be able to make changes once the quiz has been submitted. You will receive your grade immediately after submission. Once the quiz has closed, the correct answers will be made available to aid you in studying for the exam. No late submissions will be accepted under any circumstances, so plan accordingly!!!!! 11. The required return to implement a given business project will be ____ if interest rates are lower. This implies that businesses will demand a ____ quantity of loanable funds when interest rates are lower. a. greater; lower b. lower; greater c. lower; lower d. greater; greater 12. The federal government demand for loanable funds is ____. If the budget deficit was expected to increase, the federal government demand for loanable funds would ____. a. interest elastic; decrease b. interest elastic; increase c. interest inelastic; increase d. interest inelastic; decrease 13. Which of the following is likely to cause a decrease in the equilibrium U.S. interest rate, other things being equal? a. a decrease in savings by foreign savers b. an increase in inflation c. pessimistic economic projections that cause businesses to reduce expansion plans d. a decrease in savings by U.S. households 14. The Fisher effect states that the a. nominal interest rate equals the expected inflation rate plus the real rate of interest. b. nominal interest rate equals the real rate of interest minus the expected inflation rate. c. real rate of interest equals the nominal interest rate plus the expected inflation rate. d. expected inflation rate equals the nominal interest rate plus the real rate of interest. Summer\t2016 15. Other things being equal, a ____ quantity of U.S. funds would be demanded by foreign governments and corporations if their domestic interest rates were ____ relative to U.S. rates. a. smaller; high b. larger; high c. larger; low d. none of the above 16. The aggregate demand for loanable funds is positively related to interest rates at any point in time. a. True b. False 17. If the aggregate demand for loanable funds increases without a corresponding ____ in aggregate supply, there will be a ____ of loanable funds. a. increase; surplus b. increase; shortage c. decrease; surplus d. decrease; shortage 18. The ____ suggests that the market interest rate is determined by factors that control the supply of and demand for loanable funds. a. Fisher effect b. loanable funds theory c. real interest rate d. none of the above 19. If inflation turns out to be lower than expected a. savers benefit. b. borrowers benefit while savers are not affected. c. savers and borrowers are equally affected. d. savers are adversely affected but borrowers benefit. 20. If a strong economy allows for a large ____ in households income, the supply curve will shift ____. a. decrease; outward b. increase; inward c. increase; outward d. none of the above 21. The ____ sector is the largest supplier of loanable funds. Summer\t2016 a. household b. government c. business d. none of the above Summer\t2016