Q&A Hero

Q: How would the impact on the exchange rate differ if the Fed were to sell U.S. Treasury securities instead of selling an equal amount (in $ terms) of euros?

Q: A basis point equalsa. one hundredth of a percentage point.b. one tenth of a percentage point.c. one half of a percentage point.d. ten percentage points.

Q: Forward transactions A) allow savers and borrowers to conduct a transaction now and settle in the future. B) allow savers and borrowers to postpone a transaction from now to the future. C) always involve increased risk compared with spot transactions. D) may not be conducted on organized exchanges.

Q: Forward contracts are often illiquid because A) any capital gains on them are heavily taxed, making investors reluctant to sell them. B) government regulation has not provided for a secondary market in them. C) they generally contain terms specific to the particular buyer and seller. D) the brokerage fees involved in buying and selling them are very high.

Q: What are the cost and benefits to a country instituting capital controls?

Q: An on-the-run ten-year Treasury security isa. a ten-year government bond that is in greatest demand by investors who want to hold it until it matures. b. a ten-year government bond that can be used to pay estate taxes, also known as a flower bond.c. a non-taxable ten-year government bond.d. a ten-year government bond that was the most recently issued.

Q: Forward transactions A) provide little risk sharing. B) are very liquid. C) have information problems. D) are widely used by sellers of commodities, but rarely used by buyers of commodities.

Q: Spot transactions A) involve immediate settlement. B) may only take place in face-to-face trading. C) take place on-the-spot, rather than on an organized exchange. D) are relatively unimportant in financial markets.

Q: Could a country be open to international capital flows, control its domestic interest rate and fix its exchange rate? Explain.

Q: Which of the following securities has the highest yield to maturity?a. An on-the-run Treasury bond with ten years to maturityb. An on-the-run Treasury bond with twenty years to maturityc. An off­the­run Treasury bond with twenty­four years to maturityd. An off-the-run Treasury bond with twelve years to maturity

Q: Forward transactions originated in the market for A) common stock. B) corporate bonds. C) government bonds. D) agricultural and other commodities.

Q: Using forward transactions allows A) holders of common stock to lock in future dividend payments. B) the federal government to stabilize fluctuations in tax receipts. C) corporations to reduce problems arising from future fluctuations in their dividend payments. D) both buyers and sellers to reduce risks associated with price fluctuations.

Q: If the exchange rate between the Canadian dollar and the American dollar was fixed at 1.30 Canadian dollars per U.S. dollar and investors perceived Canadian bonds to be equal in value and risk to U.S. bonds, if the U.S. bonds are selling for $1,000 and have a 5 percent interest rate, assuming capital flows freely between the two countries what will be the price and the interest rate of the Canadian bonds?

Q: You borrow $30,000 for 10 years to pay tuition and fees. The annual interest rate is 12 percent. What monthly payment would be required to pay off the loan?

Q: The U.S. Treasury security that was issued most recently, in the primary market, is known as the a. off-the-run security.b. on-the-run security.c. in-the-money security.d. out-of-the-money security.

Q: Forward transactions would be useful to A) a government wanting to know the size of its future debt. B) a household wanting to reduce its future tax liability. C) a business wanting to know the cost of its funds on future loans. D) a business wanting to expand its operations in overseas markets.

Q: Describe two useful purposes served by speculators in derivatives markets.

Q: While it is true that central banks of many countries intervene in the foreign exchange market, why wouldn't it be correct to say that central banks of these countries fix the exchange rates?

Q: Capital flows freely between two countries and the countries have fixed exchange rates. The treasury bonds of each country have similar maturities but different expected returns. What can you deduce from this information?

Q: Consider a coupon bond that pays $350 every year and repays its principal amount of $5,000 at the end of four years. If the annual rate of discount is 6 percent, what is the present value of the bond?

Q: Which of the following securities is likely to have the highest yield to maturity?a. A corporate bond with a Baa ratingb. A corporate bond with AAA ratingc. A government bond exempted from federal income taxd. A certificate of deposit with a three months to maturity

Q: Which of the following is NOT a result of the ability of investors to hedge? A) increased access to funds by firms and households B) investors are more willing to invest C) increased risk aversion D) slower economic growth

Q: Monetary union, in comparison to dollarization, means that: A. countries forgo revenues from seignorage.B. countries share in monetary policy decisions.C. the central bank no longer has the ability to be the lender of last resort.D. all of the answers given are correct.

Q: Assuming the free flow of capital, explain why the central bank of a country that has fixed its exchange rate would not find discussions of inflation on the agenda of its policy meetings.

Q: Consider a coupon bond that pays $150 every year and repays its principal amount of $2,000 at the end of six years.If the annual rate of discount is 5 percent, what is the present value of the bond?

Q: A corporate bond with a financial rating of is likely to have the lowest yield to maturity.a. Ccc b. Baa c. Aaa d. BBB

Q: If insurance is available on an activity: A) more of that activity will occur B) less of that activity will occur C) investors will be less likely to hedge D) it increases the risk of engaging in that activity

Q: Dollarization is associated with each of the following, except: A. slower integration into world markets.B. adopting the monetary policy of the country whose currency is being used.C. the central bank no longer has the ability to be the lender of last resort.D. the loss of revenue from printing currency.

Q: Consider the current peso/dollar exchange rate is 100 pesos per dollar and the current inflation rate in Mexico and the U.S. is 3 percent in each country. Assuming purchasing power parity, what will the exchange rate be if the inflation rate increases to 5 percent in Mexico and falls to 2 percent in the U.S.?

Q: Consider a fixed-payment security that pays $250 at the end of every year for eight years. If the annual rate of discount is 3 percent, calculate the present value of the bond.

Q: On September 1, 2012, Al buys a bond for $15,000 that makes coupon payments of $750 after each of the following three years and returns its principal of $15,000 at the end of the three years. In other words, it is a standard coupon bond with a 5 percent annual interest rate making payments once each year.On September 1, 2013, Al receives his first coupon payment of $750. At that time, the market interest rate on bonds like Al's has risen to 6 percent. Al sells his bond to Biff at that time, for a price equal to the present value of the bond's payments.a. How much does Biff pay Al for the bond?b. Calculate Al's current yield, capital-gains yield, and total return for the year.On September 1, 2014, Biff receives a coupon payment of $750. The market interest rate on bonds like his remains 6 percent. Biff sells his bond to Cass at that time, for a price equal to the present value of the bond's payments.c. How much does Cass pay Biff for the bond?d. Calculate Biff's current yield, capital-gains yield, and total return for the year.On September 1, 2015, Cass receives a coupon payment of $750 and the principal of $15,000. Over the course of the year (between September 1, 2014, and September 1, 2015), the market interest rate on bonds like his rose to 7 percent. But Cass decided to keep the bond.e. What is Cass's total return for the year?Explain and show all your work for each part.

Q: How does hedging affect the flow of funds in the financial system? A) It reduces it since it is a sign that investors do not like risk. B) It reduces it because it increases risk by encouraging speculation. C) It increases it because it reduces risk thus encouraging more people to make financial investments. D) It increases it by encouraging more speculation.

Q: The benefits to a country from dollarization include each of the following, except: A. a lower risk premium since inflationary finance is no longer a possibility.B. greater and faster integration into world markets, increasing trade and investment.C. no risk of an exchange rate crisis.D. increased revenue from seignorage.

Q: Imagine the exchange rate between the British pound (£) and the U.S. dollar ($) is fixed at $1.40/£ and capital flows freely between Great Britain and the U.S. Explain what the price of shares of stock in XYZ Inc. would be selling for in London if they are $80 per share in the U.S. and why.

Q: Consider a perpetuity that pays $300 every year. If the rate of discount is 6 percent, calculate the present value of the bond.

Q: Which best describes a credit default swap? A) It is designed to reduce interest-rate risk. B) The issuer receives payments from the buyer in return for agreeing to make payments to the buyer if the security goes into default. C) Issuers are taking out insurance in case of default. D) It represents a way for the issuer to establish its creditworthiness.

Q: Speculators in derivatives markets A) reduce the efficiency of these markets. B) are acting contrary to U.S. securities laws. C) accept risk transferred to them by hedgers. D) reduce the liquidity of these markets.

Q: Which of the following best defines dollarization? A. A country uses the U.S. dollar as well as its currency for all transactions.B. A country adopts a foreign currency for all transactions basically eliminating its own monetary policy.C. A country eliminates its own currency for international transactions and requires that all international transactions be conducted in U.S. dollars.D. The central bank of a country agrees to exchange its own currency for U.S. dollars at a fixed exchange rate.

Q: Consider a one-year discount bond that has a present value of $3,000. If the annual rate of discount is 5 percent, calculate the future value of the bond (the amount the bond pays in one year).

Q: All of the following are steps involved in basic currency swaps EXCEPT A) counterparties exchange the net interest at the end of the swap. B) the parties exchange principals in two currencies. C) the parties exchange periodic interest payments over the life of the agreement. D) the parties exchange the principal amount at the end of the agreement.

Q: Profits from speculation arise because of A) the spread between the bid and ask prices on bonds. B) the illiquidity of markets for derivative instruments. C) the high information costs in markets for derivative instruments. D) disagreements among traders about future prices of a commodity or financial instrument.

Q: A problem with currency boards is that the central bank loses: A. control over the government budget.B. a flexible exchange rate is always preferred to a pegged exchange rate.C. influence over interest rates.D. the ability to supervise banks.

Q: Consider a one-year discount bond that pays $2,000 one year from now. If the annual rate of discount is 3 percent, calculate the present value of the bond.

Q: A key reason that firms and financial institutions might participate in an interest rate swap is A) to transfer interest rate risk to parties that are more willing to bear it. B) the low information costs of swaps compared with other derivative contracts. C) the greater liquidity of swaps compared with other derivative contracts. D) the favorable tax implications of swaps compared with other derivative contracts.

Q: Speculators are primarily interested in A) betting on anticipated changes in prices. B) reducing their exposure to the risk of price fluctuations. C) increasing market liquidity. D) reducing the spread between bid and ask prices on bonds.

Q: A lesson that policymakers should learn from the Argentinean experience with currency boards is: A. poor fiscal policies can undermine any monetary policy regime.B. a flexible exchange rate is always preferred to a pegged exchange rate.C. the only fixed exchange rate that works is the gold standard.D. they never work

Q: According to the Truth-in-Savings Act, the interest rate that banks are required to report when you deposit money in an account is known asa. capital-gains yield.b. annual percentage yield. c. current yield.d. total return.

Q: An advantage of a swap over futures and options is that A) they can be written for long periods. B) they are more liquid. C) they carry less default risk. D) there is no need to assess the creditworthiness of participants.

Q: Suppose you take out a home equity loan of $100,000 for 5 years at an annual interest rate of 5 percent, with payments to be made monthly. What will the approximate monthly payments be? The relevant formula is: a. $1,320.71b. $1,887.12c. $1,924.79d. $5,282.82

Q: Hedgers are primarily interested in A) betting on anticipated changes in prices. B) reducing their exposure to the risk of price fluctuations. C) increasing market liquidity. D) reducing the spread between bid and ask prices on bonds.

Q: The failure of the Argentinean currency board can be attributed to many factors, including the: A. failure right from the start to lower inflation.B. pegging of the Argentine peso to the euro.C. pegging of the Argentine peso to the U.S. dollar, even though the countries' economies were not that highly integrated.D. prices of goods Argentine exported dropped significantly in the late 1990s hurting their economy.

Q: John spends $4,000 on a perpetuity that pays $150 each year. The yield to maturity of this perpetuity isa. 1.5%.b. 3.75%. c. 6.2 %. d. 15%.

Q: Only two exchange rate regimes can be considered hard pegs. These are: A. currency boards and dollarization.B. dollarization and managed floating.C. flexible exchange rates and currency boards.D. the gold standard and inflation targeting.

Q: Suppose you take out a car loan of $10,000 for 3 years at an annual interest rate of 8 percent, with payments to be made monthly. What will be the approximate monthly payments? The relevant formula is: a. $313.36.b. $323.36.c. $853.45.d. $3,880.34.

Q: An interest rate swap involving the exchange of floating-rate obligations for fixed-rate obligations is known as A) swaption. B) swap option. C) forward swaps. D) plain vanilla.

Q: In April 1991, Argentina adopted a currency board primarily to address the problem of: A. slow growth.B. high interest rates.C. large trade surpluses.D. triple-digit inflation.

Q: You are considering buying a discount bond that costs $1,000 today and pays you $1,200 in one year. However, there is a 10 percent chance that the company issuing the bond will go bankrupt and not pay you your interest or return your principal. What is the expected return on the bond?a. 20 percent. b. 10 percent. c. 8 percent. d. −4 percent.

Q: China has used its current account surplus to: A. buy stocks on the New York Stock Exchange.B. buy German government and agency securities.C. buy U.S. government and agency securities.D. make loans to foreigners.

Q: A shortcoming of swaps that has led to the domination of the swaps market by large firms and financial institutions is A) the lack of privacy. B) need to assess creditworthiness. C) desire for more flexibility. D) limited size of the market.

Q: A rise in the annual interest rates will cause a. the principal amount of a bond to increase. b. the principal amount of a bond to decrease. c. the present value of a bond to decrease.d. the present value of a bond to increase.

Q: When a country operates with a currency board, the central bank's sole objective is to: A. focus on domestic monetary policy.B. maintain the domestic interest rate.C. maintain the exchange rate.D. maintain the target inflation rate.

Q: Past return refers to thea. highest annual return that a security has produced in the past.b. mode of the annual returns that a security has produced in the past.c. average of the annual returns that a security has produced in the past. d. median of the annual returns that a security has produced in the past.

Q: For several years before the crisis of 2007-2009, people in U.S. business and government called for China to move away from its fixed-exchange rate regime because: A. hindering its own growth.B. building up inflation risks.C. adding to its current account deficit.D. exporting its inflation to the United States.

Q: Your favorite magazine, Fun with Present Value, offers you four different subscription deals for the next four years. It has guaranteed its current and future subscription rates, as shown below. Which will you take, if your annual rate of discount is 6 percent and you want to get the magazine for four years?a. A one-year subscription for $24, followed by a one-year renewal each year for $24 each year.b. A two-year subscription for $45, followed by a two-year renewal for $48.c. A three-year subscription for $72, followed by a one-year renewal for $24.d. A four-year subscription for $89.

Q: Swaps differ from futures and options in all of the following ways EXCEPT: A) intended to reduce the risk faced by participants. B) more flexibility. C) more privacy. D) less regulation.

Q: In Hong Kong, the monetary authority can only increase the monetary base if they accumulate more U.S. dollars because: A. the currency of Hong Kong is the U.S. dollar.B. the monetary authority in Hong Kong operates a currency board where its sole objective is to fix the exchange rate between its currency and the U.S. dollar.C. the IMF required Hong Kong to peg its currency to the U.S. dollar in order to obtain a loan.D. Hong Kong has received substantial funding from the U.S. Treasury and the loans were conditional on maintaining the value of the Hong Kong currency.

Q: For several years before the crisis of 2007-2009, people in U.S. business and government called for China to move away from its fixed-exchange rate regime because: A. its pegged value was far below purchasing power parity estimates.B. its pegged value was far above purchasing power parity estimates.C. it was adding to China's current account deficit.D. it was exporting its inflation to the United States.

Q: One benefit of a swap compared to futures and options is that they A) promote liquidity. B) reduce the risk for both the buyer and seller. C) can be better tailored to meet the needs of market participants. D) can involve financial instruments and not just commodities.

Q: According to the theory underlying the present-value formula, would a rational individual prefer to receive (a) $75 one year from now, (b) $85 two years from now, or (c) $90 three years from now, or would he be indifferent between all three choices? Assume that the relevant annual market interest rate is 20 percent and will remain at 20 percent for the next three years?a. He will prefer $75 one year from now. b. He will prefer $85 two years from now. c. He will prefer $90 three years from now.d. He will be indifferent between all three choices.

Q: The price at which an option may be exercised is called the A) market price. B) equilibrium price. C) strike price. D) fixed price.

Q: The International Monetary Fund's primary role under the Bretton Woods System was to be: A. the issuer of gold.B. the clearinghouse for international transactions.C. a short-term lender for countries with an excess of imports over exports.D. the arbiter of trade disputes.

Q: A swap is A) another name for a put option. B) another name for a call option. C) an agreement between two or more persons to exchange sets of cash flows over some future period. D) the name for the replacement of a futures contract by an options contract.

Q: According to the theory underlying the present-value formula, would a rational individual prefer to receive (a) $75 one year from now, (b) $85 two years from now, or (c) $90 three years from now, or would he be indifferent between all three choices? Assume that the relevant annual market interest rate is 10 percent and will remain at 10 percent for the next three years?a. He will prefer $75 one year from now.b. He will prefer $85 two years from now.c. He will prefer $90 three years from now.d. He will be indifferent between all three choices.

Q: In a put options contract, the A) seller has the obligation to receive the instrument at a specified time. B) buyer has the obligation to deliver the instrument at a specified time. C) buyer has the obligation to receive the instrument at a specified time. D) seller has the obligation to deliver the instrument at a specified time.

Q: The International Monetary Fund was created as a part of: A. the United Nations.B. the Bretton Woods System.C. the European Monetary Union.D. the Federal Reserve System.

Q: Suppose you purchase a call option with a strike price of $85 for an options price of $10 How much profit will you earn if you exercise it when the price is $100?

Q: Consider the returns on four investment options: A, B, C, and D. All four investment options require the same principal amount, and the returns on the investments are considered over the same time frame. The present value of the return on investment A is greater than the present value of the return on investment B, which is greater than the present value of the return on investment C. The present value of the return on investment D is the lowest. A rational investor will choose to invest in:a. option A. b. option B. c. option C. d. option D.

Q: In a call options contract, the A) seller has the obligation to deliver the instrument at a specified time. B) buyer has the obligation to receive the instrument at a specified time. C) seller may choose whether or not to deliver the instrument at a specified time. D) buyer will choose to exercise his option only if the value of the underlying security falls.

Q: The Bretton Woods System failed in 1971 due to: A. high rates of inflation in the U.S.B. greater mobility of capital across international borders.C. the desire on the part of participating countries to have an independent monetary policy.D. all of the reasons given are correct.

Q: If the annual rate of interest in a market is 12%, the monthly rate of discount will equal a. 1%.b. 12%. c. 24%. d. 144%.