Which of the following best defines the term "Eurodollar"?

A. any dollar deposited by a European central bank in a New York bank

B. any European currency borrowed by American banks

C. dollars spent by European tourists in the U.S.

D. any U.S. dollar deposited in a bank outside the U.S. anywhere in the world

Which of the following describes a repurchase agreement (also called a"repo" or RP)?

A. a securities firm agreeing to buy back all stock purchases that cause an investor to lose money

B. buying back 1,000 shares of stock today that you sold for a higher price yesterday

C. a bank selling $1 million in Treasury securities today and agreeing to buy them back tomorrow at a slightly higher price

The problem of asymmetric information occurs in financial markets when

A. Borrowers may withhold vital information from lenders.

B. Market prices of stocks and bonds do not reflect all of the information available to company insiders.

C. Lenders monitor securities market information more carefully than do borrowers.

The largest percentage change in quantity of financial assets held by financial intermediaries between 1978 and 2003 occurred in

A. the growth in pension fund reserves

B. the growth in home mortgages

C. the growth in mutual fund shares

D. the growth in bank deposits

Which of the following would be considered a derivative financial asset?

A. bonds purchased in the secondary bond market

B. stock purchased from the New York Stock Exchange

C. any asset purchased in the cash securities market

D. a futures contract to deliver corn in 60 days

How does diversification reduce risk?

A. Diversification enables savers to invest in a single safe asset which is just one of many assets offered by a financial institution.

B. Diversification provides a way to invest in a variety of high-return assets without incurring any offsetting risk.

C. Diversification provides a means of investing in a variety of different assets so that the overall returns will average out.

D. Diversification enables the risks incurred by large investors to reduce the risks of small investors.

The largest group in the financial system in terms of the quantity of funds moved between savers and borrowers is

A. commercial banks

B. financial markets

C. financial intermediaries

D. the corporate bond market

Which of the following statements best explains the role of financial markets?

A. Financial markets issue claims (IOUs) on savers directly to borrowers.

B. Financial markets create assets for borrowers that become liabilities for lenders.

C. Financial markets issue claims (IOUs) on borrowers directly to savers.

D. Financial markets eliminate risk.

Which of the following represents the sale of securities in a secondary market?

A. the purchase of $1 million in 30-year corporate bonds from an investment banker

B. the purchase of a new issue of government Treasury bills directly from the Treasury

C. the sale of $1 million in 10-year Treasury notes by the Treasury to Zion's Bank

D. the purchase of 100 shares of IBM stock from a private investor

Which of the following financial assets would be purchased in a money market?

A. a 10-year Treasury note

B. a 30-year Treasury bond

C. shares of AT&T stock

D. a 60-day Treasury bill

The real interest rate can be obtained by

A. subtracting the expected rate of inflation from the nominal interest rate

B. adding the expected rate of inflation to the nominal interest rate

C. changes in supply and demand in the bond market

D. using the Fisher equation, adjusting the real interest rate on a point-for-point basis with increases in the expected rate of inflation

The yield to maturity gives us an interest rate that equates which of the following two sets of data?

A. the current price of an asset and the discounted value of the future income stream from that asset

B. the present value of an asset and its yield to maturity

C. the interest rate used to discount future income streams and the current yield

D. the yield on a discount basis and the bid price of a bond

Calculate the yield to maturity (YTM) for a one-year discount bond with a face value of $1,000 and a purchase price of $850

A. 0.015

B. 0.15

C. 0.176

D. 0.0176

A discount bond differs from a coupon bond in that

A. Buyers of discount bonds receive coupon interest payments during the life of the bond while buyers of coupon bonds receive only the face value at the maturity of the bond.

B. Buyers of discount bonds receive only the face value of the bond at maturity while buyers of coupon bonds receive periodic interest payments representing the coupon rate during the life of the bond in addition to receiving the face value of the bond at its maturity.

C. Market fluctuations may result in capital gains and losses for coupon bonds but not for discount bonds if the bonds are sold before their maturity date.

If a Fed watcher expects the fed funds rate to fall, he or she knows that the Fed will most likely

A. decrease the supply of fed funds

B. sell government bonds

C. buy government bonds

D. seek a slowdown in overall economic activity

The concept of present value is important because it

A. insures that a fall in interest rates will result in lower measures of present value

B. enables us to calculate present value of money market instruments but not capital market instruments

C. allows us to compare returns on different financial instruments with different maturities earning different interest rates

Which of the following is an incentive for buying a Treasury STRIP?

A. Investors can potentially earn a higher interest rate from STRIPS than they expected when they bought the instrument if they hold it until maturity.

B. Investors can gain the certainty of a known return if they hold the STRIP instruments until maturity.

C. Investors can buy the rights to a variable interest rate return if they hold the STRIP instrument until maturity.