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Q:
(I) Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation. (II) General obligation bonds do not have specific assets pledged as security or a specific source of revenue allocated for their repayment.A)(I) is true, (II) false.B)(I) is false, (II) true.C)Both are true.D)Both are false.
Q:
The interest rates on government agency bonds areA)almost identical to those available on Treasury securities since it is unlikely that the federal government would permit its agencies to default on their obligations.B)significantly higher than those available on Treasury securities due to their low liquidity.C)significantly lower than those available on Treasury securities because agency interest payments are tax exempt.D)significantly lower than those available on Treasury securities because the interest-rate risk on agency securities is lower than that on Treasury securities.
Q:
Which of the following statements about Treasury inflation-indexed bonds is not true?A)The principal amount used to compute the interest payment varies with the consumer price index.B)The interest payment rises when inflation occurs.C)The interest rate rises when inflation occurs.D)At maturity the securities pay the greater of face-value or inflation-adjusted principal.
Q:
(I) Because interest rates on Treasury bills are more volatile than rates on long-term securities, the return on short-term Treasury securities is usually above that on longer-term Treasury securities.(II) A Treasury STRIP separates the periodic interest payments from the final principal repayment.A)(I) is true, (II) false.B)(I) is false, (II) true.C)Both are true.D)Both are false.
Q:
(I) In most years the rate of return on short-term Treasury bills is below that on the 20-year Treasury bond. (II) Interest rates on Treasury bills are more volatile than rates on long-term Treasury securities.A)(I) is true, (II) false.B)(I) is false, (II) true.C)Both are true.D)Both are false.
Q:
Most of the time, the interest rate on Treasury notes and bonds is _________ that on money market securities because of _________ risk.A)above; interest-rateB)above; defaultC)below; interest-rateD)below; default
Q:
To sell an old bond when interest rates have _________, the holder will have to _________ the price of the bond until the yield to the buyer is the same as the market rate.A)risen; lowerB)risen; raiseC)fallen; lowerD)risen; inflate
Q:
(I) To sell an old bond when interest rates have risen, the holder will have to discount the bond until the yield to the buyer is the same as the market rate. (II) The risk that the value of a bond will fall when market interest rates rise is called interest-rate risk.A)(I) is true, (II) false.B)(I) is false, (II) true.C)Both are true.D)Both are false.
Q:
The security with the longest maturity is a TreasuryA)note.B)bond.C)acceptance.D)bill.
Q:
The prices of Treasury notes, bonds, and bills are quotedA)as a percentage of the coupon rate.B)as a percentage of the previous day's closing value.C)as a percentage of $100 face value.D)as a multiple of the annual interest paid.
Q:
Treasury bonds are subject to _________ risk but are free of _________ risk.A)default; interest-rateB)default; underwritingC)interest-rate; defaultD)interest-rate; underwriting
Q:
(I) The coupon rate is the rate of interest that the issuer of the bond must pay. (II) The coupon rate on old bonds fluctuates with market interest rates so they will remain attractive to investors.A)(I) is true, (II) false.B)(I) is false, (II) true.C)Both are true.D)Both are false.
Q:
(I) The coupon rate is the rate of interest that the issuer of the bond must pay.(II) The coupon rate is usually fixed for the duration of the bond and does not fluctuate with market interest rates.A)(I) is true, (II) false.B)(I) is false, (II) true.C)Both are true.D)Both are false.
Q:
The _________ rate is the rate of interest that the issuer must pay.A)marketB)couponC)discountD)funds
Q:
Fed policy since 1982 suggests thatA)monetary aggregates continue to be rejected as its intermediate target.B)it is pursuing a policy of interest rate smoothing.C)it is now more concerned with exchange rates than with interest rates.D)all of the above are true.E)only A and B of the above are true.
Q:
Monetary policy since 1982 suggests that the Fed isA)finally using a monetary aggregate as its intermediate target.B)less concerned with fluctuations in the federal funds rate than in the 1979-1982 period.C)more concerned with exchange rates than with interest rates.D)none of the above.
Q:
The fluctuations in both money supply growth and the federal funds rate during 1979-1982 suggest that the FedA)never intended to target monetary aggregates.B)used the announced strategy of targeting nonborrowed reserves as a smoke screen to fight inflation.C)had shifted to the monetary base as an operating target.D)both A and B of the above.
Q:
The fluctuations in both money supply growth and the federal funds rate during 1979-1982 suggest that the FedA)had shifted to borrowed reserves as an operating target.B)had shifted to nonborrowed reserves as an operating target.C)had shifted to the monetary base as an operating target.D)never intended to target monetary aggregates.
Q:
Explanations for the Fed's poor monetary control during 1979-1982 includeA)the acceleration of financial deregulation.B)the suspension of credit controls in mid-1979.C)the Fed's desire to fight inflation without taking all the criticism for the high interest rate policy.D)only A and B of the above.E)only A and C of the above.
Q:
The Fed's operating procedures employed between 1979 and 1982 resulted in _________ swings in the federal funds rate and _________ swings in the M1 growth rate.A)increased; increasedB)increased; decreasedC)decreased; decreasedD)decreased; increased
Q:
The Fed's use of the federal funds rate as an operating target in the 1970s resulted inA)countercyclical monetary policy.B)too slow growth in M1 throughout the decade.C)procyclical monetary policy.D)too rapid growth in M1 throughout the decade.E)none of the above.
Q:
Although the Fed professed employment of a monetary aggregate targeting strategy during the 1970s, its behavior suggests that it emphasizedA)free reserve targeting.B)interest rate targeting.C)a real bills doctrine.D)price index targeting.
Q:
In practice, the Fed's policy of targeting _________ in the 1960s proved to be _________, destabilizing the economy.A)money market conditions; countercyclicalB)money market conditions; procyclicalC)monetary aggregates; countercyclicalD)monetary aggregates; procyclical
Q:
A policy of targeting free reserves is likely to beA)procyclical.B)stabilizing.C)too difficult to implement practically.D)none of the above.
Q:
A procyclical monetary policy causes the money supply to _________ during recessions and to _________ when the economy is growing.A)increase; increaseB)decrease; decreaseC)increase; decreaseD)decrease; increase
Q:
Which of the following are true statements?A)The FOMC usually meets every six weeks to set monetary policy.B)The FOMC issues directives to the trading desk at the New York Fed.C)Designers of the Federal Reserve Act did not envision the use of discount lending as a monetary policy tool.D)All of the above are true statements.E)Only A and B of the above are true statements.
Q:
The Federal Reserve entity that determines monetary policy strategy is theA)board of governors.B)Federal Open Market Committee.C)Chairman of the board of governors.D)Shadow Open Market Committee.
Q:
The Federal Open Market Committee consists ofA)the five senior members of the seven-member board of governors.B)the seven members of the board of governors and seven presidents of the regional Fed banks.C)the seven members of the board of governors and five presidents of the regional Fed banks.D)the twelve regional Fed bank presidents and the chairman of the board of governors.
Q:
Which of the following are true statements?A)The FOMC usually meets every six weeks to set monetary policy.B)The FOMC issues directives to the trading desk at the New York Fed.C)Designers of the Federal Reserve Act did not envision the use of open market operations as a monetary policy tool.D)All of the above are true statements.E)Only A and B of the above are true statements.
Q:
Although the Federal Open Market Committee does not have formal authority to set _________ and the _________, it does possess the authority in practice.A)margin requirements; discount rateB)margin requirements; federal funds rateC)reserve requirements; discount rateD)reserve requirements; federal funds rate
Q:
Although neither _________ nor the _________ is officially set by the Federal Open Market Committee, decisions concerning these policy tools are effectively made by the committee.A)margin requirements; discount rateB)margin requirements; federal funds rateC)reserve requirements; discount rateD)reserve requirements; federal funds rate
Q:
The board of governorsA)establishes, within limits, reserve requirements.B)effectively sets the discount rate.C)sets margin requirements.D)does all of the above.E)does only A and B of the above.
Q:
Each member of the seven-member board of governors is appointed by the president and confirmed by the Senate to serveA)4-year terms.B)6-year terms.C)14-year terms.D)as long as the appointing president remains in office.
Q:
Members of the board of governors areA)chosen by the Federal Reserve Bank presidents.B)appointed by the newly elected President of the United States, as are cabinet positions.C)appointed by the President of the United States and confirmed by the Senate as members resign.D)never allowed to serve more than seven-year terms.
Q:
The chairman of the Board of Governors of the Federal Reserve System exercises a high degree of control over the boardA)through his ability to set the agenda of the board and the FOMC.B)through his role as spokesman for the Fed with the President and before Congress.C)because he can veto decisions made by a majority of the other board members.D)because of all of the above.E)because of only A and B of the above.
Q:
Which of the following are not duties of the Board of Governors of the Federal Reserve System?A)Setting margin requirements, the fraction of the purchase price of securities that has to be paid for with cash.B)Setting the maximum interest rates payable on certain types of time deposits under Regulation Q.C)Approving the discount rate "established" by the Federal Reserve banks.D)Representing the United States in negotiations with foreign governments on economic matters.
Q:
Of the four theories that explain how interest rates on bonds with different terms to maturity are related, the one that views long-term interest rates as equaling the average of future short-term rates expected to occur over the life of the bond is theA)pure expectations theory.B)preferred habitat theory.C)liquidity premium theory.D)segmented markets theory.
Q:
Which of the following theories of the term structure is (are) able to explain the fact that interest rates on bonds of different maturities tend to move together over time?A)The pure expectations hypothesisB)The segmented markets theoryC)The preferred habitat theoryD)Both A and B of the aboveE)Both A and C of the above
Q:
_________ cannot explain the empirical fact that interest rates on bonds of different maturities tend to move together.A)The market segmentation theoryB)The expectations theoryC)The liquidity premium theoryD)Both A and B of the aboveE)Both A and C of the above
Q:
Since yield curves are usually upward sloping, the _________ indicates that, on average, people tend to prefer holding short-term bonds to long-term bonds.A)market segmentation theoryB)expectations theoryC)liquidity premium theoryD)both A and B of the aboveE)both A and C of the above
Q:
Which theory of the term structure proposes that bonds of different maturities are not substitutes for one another?A)market segmentation theoryB)expectations theoryC)liquidity premium theoryD)separable markets theory
Q:
In actual practice, short-term interest rates are just as likely to fall as to rise; this is the major shortcoming of theA)market segmentation theory.B)expectations theory.C)liquidity premium theory.D)separable markets theory.
Q:
According to the liquidity premium theory of the term structure, when the yield curve has its usual slope, the market expectsA)short-term interest rates to rise sharply.B)short-term interest rates to drop sharply.C)short-term interest rates to stay near their current levels.D)none of the above.
Q:
According to the liquidity premium theory of the term structure, a downward-sloping yield curve indicates that short-term interest rates are expected toA)rise in the future.B)remain unchanged in the future.C)decline moderately in the future.D)decline sharply in the future.
Q:
If the yield curve has a mild upward slope, the liquidity premium theory indicates that the market is predictingA)a rise in short-term interest rates in the near future and a decline further out in the future.B)constant short-term interest rates in the near future and further out in the future.C)a decline in short-term interest rates in the near future and a rise further out in the future.D)a decline in short-term interest rates in the near future and an even steeper decline further out in the future.
Q:
If the yield curve slope is flat, the liquidity premium theory indicates that the market is predictingA)a mild rise in short-term interest rates in the near future and a mild decline further out in the future.B)constant short-term interest rates in the near future and further out in the future.C)a mild decline in short-term interest rates in the near future and a continuing mild decline further out in the future.D)constant short-term interest rates in the near future and a mild decline further out in the future.
Q:
According to the liquidity premium theory of the term structure,A)because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time.B)the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium.C)because of the positive term premium, the yield curve cannot be downward-sloping.D)all of the above.E)only A and B of the above.
Q:
When the price of a bond is _________ the equilibrium price, there is an excess supply of bonds and the price will _________.A)above; riseB)above; fallC)below; fallD)below; rise
Q:
When the price of a bond is below the equilibrium price, there is excess _________ in the bond market and the price will _________.A)demand; riseB)demand; fallC)supply; fallD)supply; rise
Q:
When the price of a bond is above the equilibrium price, there is excess _________ in the bond market and the price will _________.A)demand; riseB)demand; fallC)supply; fallD)supply; rise
Q:
The supply curve for bonds has the usual upward slope, indicating that as the price _________, ceteris paribus, the _________ increases.A)falls; supplyB)falls; quantity suppliedC)rises; supplyD)rises; quantity supplied
Q:
As the price of a bond _________ and the expected return _________, bonds become more attractive to investors and the quantity demanded rises.A)falls; risesB)falls; fallsC)rises; risesD)rises; falls
Q:
Bonds with a maturity that is longer than the holding period have no interest-rate risk.
Q:
Changes in interest rates make investments in long-term bonds risky.
Q:
The current yield goes up as the price of a bond falls.
Q:
The real interest rate is equal to the nominal rate minus inflation.
Q:
Interest-rate risk is the uncertainty that an investor faces because the interest rate at which a bond's future coupon payments can be invested is unknown.
Q:
All else being equal, the greater the interest rate the greater is the duration.
Q:
Which of the following government regulations has the chief purpose of improving control of the money supply?A)deposit insuranceB)restrictions on entry into banking or insuranceC)reserve requirementsD)restrictions on the assets financial intermediaries can hold
Q:
The government regulates financial markets for three main reasons:A)to ensure soundness of the financial system, to improve control of monetary policy, and to increase the information available to investors.B)to improve control of monetary policy, to ensure that financial intermediaries earn a normal rate of return, and to increase the information available to investors.C)to ensure that financial intermediaries do not earn more than the normal rate of return, to ensure soundness of the financial system, and to improve control of monetary policy.D)to ensure soundness of financial intermediaries, to increase the information available to investors, and to prevent financial intermediaries from earning less than the normal rate of return.
Q:
Which of the following are investment intermediaries?A)Finance companiesB)Mutual fundsC)Pension fundsD)All of the aboveE)Only A and B of the above
Q:
Which of the following are not investment intermediaries?A)A life insurance companyB)A pension fundC)A mutual fundD)Only A and B of the above
Q:
Which of the following is a contractual savings institution?A)A life insurance companyB)A credit unionC)A savings and loan associationD)A mutual fund
Q:
Which of the following financial intermediaries are depository institutions?A)A savings and loan associationB)A commercial bankC)A credit unionD)All of the aboveE)Only A and C of the above
Q:
The largest depository institution at the end of 2004 wasA)life insurance companies.B)pension funds.C)state retirement funds.D)none of the above.
Q:
In financial markets, lenders typically have inferior information about potential returns and risks associated with any investment project. This difference in information is calledA)comparative informational disadvantage.B)asymmetric information.C)variant information.D)caveat venditor.
Q:
Successful financial intermediaries have higher earnings on their investments because they are better equipped than individuals to screen out good from bad risks, thereby reducing losses due toA)moral hazard.B)adverse selection.C)bad luck.D)financial panics.
Q:
Financial institutions expect thatA)moral hazard will occur, as the least desirable credit risks will be the ones most likely to seek out loans.B)opportunistic behavior will occur, as the least desirable credit risks will be the ones most likely to seek out loans.C)borrowers will commit moral hazard by taking on too much risk, and this is what drives financial institutions to take steps to limit moral hazard.D)none of the above will occur.
Q:
When the least desirable credit risks are the ones most likely to seek loans, lenders are subject to theA)moral hazard problem.B)adverse selection problem.C)shirking problem.D)free-rider problem.E)principal-agent problem.
Q:
In recent years, financial markets have become more stable and less risky.
Q:
Holding everything else constant, as the dollar weakens vacations abroad become less attractive.
Q:
Interest rates can be accurately described as the rental price of money.
Q:
The government organization responsible for the conduct of monetary policy in the United States is the U.S. Treasury.
Q:
Monetary policy affects interest rates but has little effect on inflation or business cycles.
Q:
A stock is a debt security that promises to make periodic payments for a specific period of time.
Q:
Interest rates are determined in the bond markets.
Q:
Money is anything accepted by anyone as payment for services or goods.
Q:
Monetary policy affectsA)interest rates.B)inflation.C)business cycles.D)all of the above.
Q:
____ are considered a financial institutions.A)BanksB)Insurance companiesC)Finance companiesD)Investment banks
Q:
A securityA)is a claim or price of property that is subject to ownership.B)promises that payments will be made periodically for a specified period of time.C)is the price paid for the usage of funds.D)is a claim on the issuer's future income.