14. Interest rates are important to financial institutions, like banks, since an increase in interest rates ________ the cost of acquiring funds and ________ the income from financial assets. A. decreases; decreases

    B. increases; increases C. decreases; increases D. increases; decreases

15. (I) Debt markets are often referred to generically and collectively as the bond market. (II) A bond is a security that is a claim on the residual earnings and assets of a corporation after contractual payments are made to stockholders. A. (I) is true | (II) false.

    B. (I) is false | (II) true. C. Both are true. D. Both are false.

16. Financial markets have the basic function of

    1. bringing together people with funds to lend and people who want to borrow

       funds.

    2. assuring that the swings in the business cycle are less pronounced.

    3. assuring that governments need never resort to printing money.

    4. both A and B of the above.

    5. both B and C of the above.

17. Which of the following securities would be classified as a money market instrument? A. Stock

    B. Long Term Bond C. Commercial Paper D. Mortgage Backed Security

18. IPOs are launched in the _________ market. A. Debt

    B. Residual C. Primary D. Secondary

19. The agency problem called Empire-Building occurs when

    1. A firms CEO is more interested in increasing the size of the corporation, rather than the

       size of its profits.

    2. The CEO increases the scope of a business in order to limit competition.

    3. The CEO is granted maximum compensation with a minimum "strings."

    4. The CEO expands the firms footprint in order to increase economies of scale.

20. When the lender and the borrower have different amounts of information regarding a transaction, ________ is said to exist. A. asymmetric information B. adverse selection

    C. moral hazard D. fraud

21. If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A. 7% B. 22%.

    C. -15% D. -8%

22. A decrease in the expected rate of inflation will ________ the expected return on bonds relative to returns on ________ assets. A. reduce | financial B. reduce | real

    C. increase | financial D. increase | real

23. The interest rate that is adjusted for actual changes in the price level is called the A. ex post real interest rate. B. expected interest rate. C. ex ante real interest rate.

    D. none of the above.

24. When the demand for bonds ________ or the supply of bonds ________, interest rates fall.

    1. Increases | increases

    2. Increases | decreases

    3. Decreases | decreases

    4. Decreases | increases

25. The demand for an asset rises if ________ falls. A. risk relative to other assets B. expected return relative to other assets C. liquidity relative to other assets

    D. wealth

If Moody's or Standard and Poor's downgrades its rating on a corporate bond, typically the demand for that bond ________ and its yield ________. A. Increases | decreases B. Decreases | increases

26. C. Increases | increases D. Decreases | decreases