Q&A Hero

Q: Equilibrium in the money market would be expressed by which of the following? A. Ms = (1/V)YB. Ms = MdC. Ms = (1/V)PD. Md = (1/V)P

Q: Consider the bond market to be in equilibrium according to our complete theory of the term structure of interest rates. You observe the following interest rates available today on bonds with differing times to maturity. (You may ignore transactions costs.)Time to maturity Yield to maturity1 year 5.0%2 years 7.0%3 years 7.5%The term premium for the two-year bond is the extra yield to maturity paid on a two-year bond compared with buying two separate one-year bonds (one today and another after one year). You believe that the term premium on the two-year bond is 5 percent.The term premium for the three-year bond is the extra yield to maturity paid on a three-year bond compared with buying three separate one-year bonds (one today, another after one year, and another after two years). You believe that the term premium on the three-year bond is 0 percent.Given your beliefs about the term premiums on two-year and three-year bonds, calculate the interest rates on one- year bonds that you expect to prevail one year from now and two years from now. In other words, what do you expect to be the yield to maturity on a one-year bond one year from now and what do you expect to be the yield to maturity on a one-year bond two years from now? Explain and show all your work.

Q: If we let Md reflect money demand, then we can write the equation for money demand as: A. Md = VY.B. Md = PY.C. Md = (1/V) PY.D. Md = V(Y/P).

Q: Suppose that a risk-neutral investor has a choice between buying a one-year bond paying 5 percent today, a two- year bond paying 4 percent today, a three-year bond paying 8 percent today, or a four-year bond paying 2 percent today, if a one-year bond purchased one year from now is expected to have an interest rate of 6 percent, a one-year bond purchased two years from now is expected to have an interest rate of 7 percent, and a one-year bond purchased three years from now is expected to have an interest rate of 8 percent. Explain with the help of suitable calculations, which of the following would the investor decide to do?a. The investor will purchase a one-year bond today, followed by three successive one-year bonds. b. The investor will purchase a two-year bond today, followed by two successive one-year bonds. c. The investor will purchase a three-year bond today, followed by a one-year bond.d. The investor will purchase a four-year bond today.

Q: Milton Friedman's assertion that "inflation is a monetary phenomenon" is based on: A. the quantity theory of money.B. the assumption of constant nominal GDP growth.C. the assumption that the price level grows at the same rate as real GDP.D. the assumption that the central bank increases the money supply by a constant rate every year.

Q: Compare a two-year bond with two successive one-year bonds, in which an investor buys a one-year bond today, then another one-year bond when the first matures. Suppose the two-year bond has an annual interest rate of 4 percent.Consider the pattern of interest rates on the one-year bonds listed below and explain whether an investor should buy the two-year bond or the one-year bond today, assuming that the only thing that matters to the investor is the amount of money she has at the end of the two years; that is, she is risk neutral. In each case, how much would an investor have at the end of two years if she invested $1,000 today? Show your work. Round to the nearest penny ($0.01). In each case be sure to say which bond the investor would buy today.a. The interest rate on a one-year bond today is 1 percent, and the interest rate on a one-year bond purchased in one year from now is 8 percent.b. The interest rate on a one-year bond today is 2 percent; and the interest rate on a one-year bond purchased one-year from now is 6 percent.c. The interest rate on a one-year bond today is 3 percent; and the interest rate on a one-year bond purchased one-year from now is 5 percent.d. The interest rate on a one-year bond today is 5 percent; nd the interest rate on a one-year bond purchased one-year from now is 3 percent.

Q: Key assumptions behind the quantity theory of money include: A. the money supply is fixed.B. the velocity of money is constant.C. the percentage change in the price level equals the percentage change in real GDP.D. the change in nominal GDP is zero.

Q: Put the following securities in order according to their after-tax interest rates, from lowest to highest. The federal tax rate on interest income is 30 percent. Show your work.A: A corporate bond that pays an interest rate of 6 percent. B: A corporate bond that pays an interest rate of 7 percent.C: A local government bond identical that pays an interest rate of 5 percent.

Q: Based on the analysis of the equation of exchange, Irving Fisher, derived the quantity theory of money which states that: A. velocity changes always offset changes in the supply of money.B. changes in the aggregate price level are caused solely by changes in velocity.C. changes in the aggregate price level are caused solely by changes in the quantity of money.D. none of the answers given is correct.

Q: What is the reason for a low rated security to generate a high yield to maturity?

Q: If we look at the equation for money demand from Irving Fisher, which of the following statements is true? A. Velocity does not play any role in the equationB. Money demand is not a factor of nominal incomeC. The price level does not impact money demandD. There isn't an explicit role for the interest rate in the equation

Q: Which of the following is a possible outcome of a negative or low term spread?a. A low of negative spread may indicate higher short-term interest rates in the future. b. A low or negative spread may cause the yield curve to slope upward.c. A low or negative spread may reduce lending by banks.d. A low or negative spread may indicate the early stages of economic expansions.

Q: If on average, a dollar is spent 4 times each year to purchase real output, the velocity of money is: A. one-fourth.B. four.C. the money supply divided by 4.D. nominal GDP divided by four.

Q: Which of the following statements is true?a. The yield curve slopes downward when the term spread is positive.b. Researchers suggest that the smaller the term spread, the higher the chance is of a recession in the coming year.c. The yield curve slopes upward when the term spread is negatived. Researchers suggest that the larger the spread, the higher the chance is of a recession in the coming year.

Q: Using the equation of exchange, if inflation is 1%, the velocity of money grows by 1.0% and the growth rate of money is 3.0%; what is real growth? A. +3.0%B. 1%C. 4.0%D. -1.0%

Q: Assume that the bond market is in equilibrium. The current interest rate on one-year bonds is 5 percent, the interest rate on one-year bonds, one year from now is 6 percent, and in two years the interest rate on one-year bonds will be 6.5 percent. Assume that there is no term premium on a one-year bond. If the term premium equals 0.5 percent × the number of years to maturity, for two-year bonds and three-year bonds. The interest rate today on the two-year bond is and the interest rate today on a three-year bond is .a. 5.5 percent; 5.8 percent b. 6.0 percent; 6.3 percent c. 6.2 percent; 6.8 percent d. 6.5 percent; 7.3 percent

Q: Using the equation of exchange, if real GDP increases by 3.0%, the velocity of money grows by 1.0% and the growth rate of money is 3.0%; what is the rate of inflation? A. +1.0%B. It is constant or a 0% changeC. It is the same as the growth rate of money, or 3.0%D. -1.0%

Q: Which of the following bonds is likely to have the highest term premium?a. A one-year bond b. A five-year bond c. A ten-year bondd. A thirty-year bond

Q: Using the equation of exchange, if inflation is 1.5%, real output grows by 3.0%, and the growth rate of money is 5.0%, the change in the velocity of money is: A. Zero; velocity is constant.B. -0.5%.C. +4.5%.D. +0.5%.

Q: Which of the following bonds has the greatest interest-rate risk?a. A one-year bond b. A five-year bond c. A ten-year bondd. A thirty-year bond

Q: Which of the following expresses the equation of exchange? A. MY = PVB. MV = YC. MV = PYD. MP = VY

Q: According to the equation of exchange, if real output and the money supply stay the same and the price level increases: A. the velocity of money has to increase.B. the velocity of money has to decrease.C. the real GDP had to rise.D. nominal GDP remains constant.

Q: Consider the following hypothetical situation. The interest rate on a two-year bond today is 7.5 percent and the interest rates on two one-year bonds are 3 percent and 4 percent respectively. The term premium earned by the investors isa. 5 percent. b. 4 percent.c. 4.25 percent. d. 6 percent.

Q: If M2 is four times larger than M1, the velocity of M1 should be: A. one-fourth of the velocity of M2.B. equal to the velocity of M2.C. equal to four.D. four times larger than the velocity of M2.

Q: Consider the bond market to be in equilibrium according to our complete theory of the term structure of interest rates. The current interest rate on one-year bonds is 3.0 percent, and you believe, as does everyone in the market, that in one year the interest rate on one-year bonds will be 3.5 percent. Assume that there is no term premium on a one-year bond. Suppose there is a term premium equals 0.75 percent × the number of years to maturity, for the two- year bond. The interest rate today on the two-year bond isa. 3.25 percent. b. 4.00 percent. c. 4.75 percent. d. 5.00 percent.

Q: Term premium refers toa. the interest rate on a long-term bond minus the average interest rate on future short-term bonds. b. the interest rate on a long-term bond plus the average interest rate on future short-term bonds.c. the average interest rate on future short-term bonds.d. the standard deviation of the interest rate on long-term bonds.

Q: If the equation of exchange is MV = PY the Y represents: A. nominal GDP.B. real GDP.C. potential output.D. economic growth.

Q: What does an upward-sloping yield curve imply, according to the expectations theory of the term structure of interest rates?a. Investors expect long-term interest rates to fall in the future.b. Investors expect future short-term interest rates to be lower than the current short-term interest rate. c. Investors expect future short-term interest rates to be the same as the current short-term interest rate. d. Investors expect future short-term interest rates to be higher than the current short-term interest rate.

Q: If M = the money supply; Y = real output, P = the price level, and V = velocity, which of the following equals the velocity of money? A. (Y × M)/PB. (P × M)/YC. (P × Y)/MD. (P × Y) + M

Q: What does a downward-sloping yield curve imply, according to the expectations theory of the term structure of interest rates?a. Investors expect long-term interest rates to rise in the future.b. Investors expect future short-term interest rates to be lower than the current short-term interest rate. c. Investors expect future short-term interest rates to be the same as the current short-term interest rate. d. Investors expect future short-term interest rates to be higher than the current short-term interest rate.

Q: The velocity of money equals: A. nominal GDP times the price level.B. nominal GDP times the money supply.C. nominal GDP divided by the price level.D. nominal GDP divided by the money supply.

Q: What does a flat yield curve imply, according to the expectations theory of the term structure of interest rates?a. The price level will not change in the future. b. Future long-term rates are expected to rise. c. Future long-term rates are expected to fall.d. Future short-term rates are not expected to change.

Q: The velocity of money increases if: A. each unit of money is used more frequently.B. each unit of money is used less frequently.C. more purchases are made.D. none of the above answers is correct; the velocity of money is constant.

Q: According to the expectations theory of the term structure of interest rates, if the interest rate on a one-year bond today is 3.0 percent, the expected interest rate on a one-year bond one year from now is 4.0 percent, and the expected interest rate on a one-year bond two years from now is 4.5 percent, then the interest rate on a two-year bond today isa. 3.00 percent. b. 3.50 percent. c. 3.83 percent. d. 4.00 percent.

Q: If we look at the value of money in terms of how many units of a good it takes to buy one dollar, then inflation means: A. it would take more goods to buy the same dollar.B. it would take fewer goods to buy the same dollar.C. the same number of goods would buy fewer dollars.D. it would take fewer dollars to buy the same goods.

Q: If the interest rate on a one-year bond today is 7.5 percent and the expected interest rate on a one-year bond one year from now is 5.6 percent, then the interest rate on a two­year bond will bea. 7 percentb. 12.5 percentc. 8.5 percentd. 6.55 percent

Q: Inflation can be thought of as: A. an increase in the price of money.B. a decrease in the price of money.C. no change in the price of money, just in the supply of money.D. no change in the price of money, just in the demand for money.

Q: The relationship between interest rates with differing times to maturity is known as the_____ _____ of interest rates. a. term structure b. term curvec. yield curved. yield structure

Q: If money were valued in terms of how many minutes a person needs to work to buy a dollar, an increase in the number of minutes of work needed would be: A. a decline in the price of money.B. an increase in the price of money.C. no change in the real price of money, just the nominal price increases.D. no change in the real or nominal price of money.

Q: Which of the following was an outcome of the announcement made by the U.S. government in October 2001 that it will stop selling 30-year bonds?a. There was a sharp fall in the price of the securities and an increase in the yield to maturity. b. There was a sharp rise in the price of the securities and a decline in the yield to maturity.c. There was a sharp rise in the price of the securities and an increase in the yield to maturity. d. There was a sharp fall in the price of the securities and a decline in the yield to maturity.

Q: For many of the countries that made up the Soviet Union, the period immediately following the collapse of the Soviet Union in 1990 found these countries experiencing extremely high rates of inflation. To solve this problem, a number of countries: A. turned the authority to print money over to an independent central bank.B. imposed price controls.C. devalued their currencies.D. returned to a gold standard.

Q: Which of the following is a possible outcome of a fall in the demand for a security?a. It will lead to an increase in the price and the yield to maturity of the security.b. It will lead to an increase in the price of the security and a fall in its yield to maturity.c. It will lead to a fall in the price of the security and a fall in its yield to maturity.d. It will lead to a fall in the price of the security and an increase in its yield to maturity.

Q: For many of the countries that made up the Soviet Union, the period immediately following the collapse of the Soviet Union in 1990 found these countries experiencing: A. rapid economic growth.B. severe deflation.C. rapid development of financial intermediaries.D. extremely high rates of inflation.

Q: Which of the following is true of a certificate of deposit?a. It is sold by large corporations to raise short-term funds.b. A fall in its demand will lead to an increase in the price of the security and a fall in its yield to maturity.c. Higher the term to maturity of a certificate of deposit, higher the yield to maturity.d. It is not a liquid security and cannot be transferred from one party to another.

Q: Consider the following ratio: the average annual inflation rate/the average annual money growth rate. If a country's rate of money growth consistently exceeds the rate of inflation the ratio would be: A. less than one.B. greater than one.C. that is infinite.D. exactly one.

Q: Consider the following ratio: the average annual inflation rate/the average annual money growth rate. A country with a ratio less than one would have: A. an average inflation rate greater than the average rate of money growth.B. an average inflation rate less than the average rate of money growth.C. to have a high unemployment rate.D. an economy suffering from a recession.

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: 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: Which of the following statements is most correct? A. The current rate of inflation is the result of money growth.B. Money growth is the result of inflation.C. There is no clear link between high, sustained inflation and the monetary aggregates.D. It is impossible to have high, sustained inflation without monetary accommodation.

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: Over the long run if central banks want to avoid high rates of inflation, they need to be concerned with the: A. unemployment rate.B. money growth rate.C. real economic growth rate.D. productivity of labor.

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: When the currency loses value, causing people to spend it more quickly, this: A. has the same effect on inflation as an increase in money growth.B. has the same effect on inflation as a decrease in money growth.C. causes higher inflation but not as much as an increase in money growth would.D. causes even higher inflation than an increase in money growth would.

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: Economic researchers have found: A. no examples of countries with high rates of money growth and low inflation rates.B. many examples of countries with low rates of money growth and high inflation rates.C. many examples of countries with high rates of money growth and low inflation rates.D. no relationship between rates of money growth and inflation rates.

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: History shows that: A. countries with low rates of money growth have high rates of inflation.B. money growth and inflation are not related.C. countries with high rates of money growth have high rates of inflation.D. money growth rates equal inflation rates.

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: If a U.S. dollar currently purchases 1.3 Canadian dollars and the inflation rate in Canada over the next year is 5 percent while it is 2 percent in the U.S., we should expect a U.S. dollar to purchase: A. 1.365 Canadian dollars.B. 1.262 Canadian dollars.C. 1.300 Canadian dollars.D. 1.339 Canadian dollars.

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: If the inflation rate in country A is 3.5% and the inflation rate in country B is 3.0%, we should expect the percentage change in the number of units of country A's currency per unit of country B's currency to be: A. +0.5%.B. -0.5%.C. +16.7%.D. +6.5%.

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: If inflation in country A exceeds inflation in country B, we can express the percentage change in the units of currency of country A per unit of currency of country B as: A. the inflation rate in country B - the inflation rate in country A.B. the inflation rate in country A - the inflation rate in country B.C. the inflation rate in country A times the inflation rate in country B.D. the inflation rate in country A divided by the inflation rate in country B.

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: If inflation in country A exceeds inflation in country B, purchasing power parity implies that: A. the currency of country B should depreciate relative to the currency of country A.B. the inflation rate in country B will rise to match the inflation rate in country A.C. the currency of country A will depreciate relative to the currency of country B.D. the inflation rate in country A will fall to match the inflation rate in country B.

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: Purchasing power parity implies: A. a basket of goods should sell for the same price in all countries, even if trade barriers exist.B. a basket of goods will sell for the same price in all countries as long as there are no trade barriers is a free flow of capital across borders.C. a basket of goods cannot sell for the same price in different countries due to the different wage rates.D. as long as all goods and services are traded freely across international boundaries, one unit of domestic currency should buy the same basket of goods anywhere in the world.

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: If capital flows freely between countries and a country has a fixed exchange rate, one thing you know is that the country: A. exports more than it imports.B. must have ample gold reserves.C. cannot have a discretionary monetary policy.D. must be running large trade deficits

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: Within the United States, every city has: A. a fixed exchange rate with every other city.B. a floating exchange rate with every other city.C. an independent monetary policy.D. their own currency board.

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: Compare the monetary policy of the 50 states that make up the United States to the exchange rate regime of dollarization.

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: What were the contributing factors that led to Argentina's initial adoption of a currency board and then its subsequent failure?

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: Completely flexible exchange rates are fairly self-explanatory, and hard pegs include dollarization and currency boards. These seem to be the extremes. Assuming free flow of capital, why do you think soft pegs are never used?

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: You live in a small country that suffers constantly from high and variable rates of inflation. You are quite sure it has something to do with the fact that the head of the central bank is the President's brother. A rival presidential candidate is advocating fixing the exchange rate between your country's currency and the dollar. What are the advantages to this proposal and how do you think the current head of the central bank will respond?

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.