Personal Finance Quiz
MULTIPLE CHOICE. 2 marks each. Choose the one alternative that best completes the statement or answers the question. 1) A corporation acquires new funds only when its securities are sold in the ________.
1) _______
A) secondary market by a commercial bank
B) secondary market by a securities dealer
C) primary market by an investment bank
D) primary market by a stock exchange broker
2) A short-term debt instrument issued by well-known corporations is called ________.
2) _______
A) corporate bonds
B) municipal bonds
C) commercial paper
D) commercial mortgages
3) An example of economies of scale in the provision of financial services is ________.
3) _______ …show more content…
A) spreading the cost of borrowed funds over many customers
B) investing in a diversified collection of assets
C) spreading the cost of writing a standardized contract over many borrowers
D) providing depositors with a variety of savings certificates
4) In order to reduce risk and increase the safety of financial institutions, commercial banks and 4) _______ other depository institutions are prohibited from ________.
A) making real estate loans
B) making personal loans
C) owning corporate bonds
D) owning common stock
5) ________ is the narrowest monetary aggregate that the Bank of Canada reports.
5) _______
A) M2 B) M3 C) M1+ D) M0
6) A ________ pays the owner a fixed coupon payment every year until the maturity date, when the 6) _______
________ value is repaid.
A) coupon bond; face
B) discount bond; face
C) coupon bond; discount
D) discount bond; …show more content…
discount
7) Which of the following is true for a coupon bond?
7) _______
A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.
B) The yield is less than the coupon rate when the bond price is below the par value.
C) The yield to maturity is greater than the coupon rate when the bond price is above the par value.
D) The price of a coupon bond and the yield to maturity are positively related.
8) Which of the following $5,000 face-value securities has the highest yield-to maturity?
8) _______
A) A 6 percent coupon bond selling for $5,500
B) A 10 percent coupon bond selling for $5,000
C) A 6 percent coupon bond selling for $5,000
D) A 12 percent coupon bond selling for $4,500
9) A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to 9) _______ maturity of ________.
A) 25 percent
B) 33.3 percent
C) 20 percent
D) 3
percent
10) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year?
A) 10 percent
B) -5 percent
C) -10 percent
D) 5 percent
11) If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding?
A) A bond with one year to maturity
B) A bond with twenty years to maturity
C) A bond with ten years to maturity
D) A bond with five years to maturity
12) Everything else held constant, if the expected return on bonds falls from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected return of corporate bonds ________ relative to bonds and the demand for corporate bonds ________.
A) falls; falls
B) falls; rises
C) rises; rises
D) rises; falls
13) During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________, everything else held constant.
A) rises; right
B) falls; right
C) rises; left
D) falls; left
14) Everything else held constant, an increase in expected inflation, lowers the expected return on ________ compared to ________ assets.
A) bonds; real
B) physical; financial
C) bonds; financial
D) physical; real
15) When the inflation rate is expected to increase, the ________ for bonds falls, while the ________ curve shifts to the right, everything else held constant.
A) demand; demand
B) supply; supply
C) supply; demand
D) demand; supply
16) When the government has a surplus, as occurred in the late 1990s, the ________ curve of bonds shifts to the ________, everything else held constant.
A) supply; right
B) demand; left
C) demand; right
D) supply; left
17) Over the next three years, the expected path of 1-year interest rates is 4, 1, and 1 percent. The expectations theory of the term structure predicts that the current interest rate on 3-year bond is
________.
A) 3 percent
B) 2 percent
C) 1 percent
D) 4 percent
18) According to the segmented markets theory of the term structure ________.
A) because of the positive term premium, the yield curve will not be observed to be downward-sloping
B) bonds of one maturity are close substitutes for bonds of other maturities, therefore, interest rates on bonds of different maturities move together over time
C) investorsʹ strong preferences for short-term relative to long-term bonds explains why yield curves typically slope downward
D) the interest rate for each maturity bond is determined by supply and demand for that maturity bond
10) ______
11) ______
12) ______
13) ______
14) ______
15) ______
16) ______
17) ______
18) ______
19) If the yield curve slope is flat for short maturities and then slopes steeply upward for longer maturities, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting ________.
A) 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) constant short-term interest rates in the near future and a decline further out in the future
D) a decline in short-term interest rates in the near future and a rise further out in the future
20) If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of ________.
A) free-riding
B) adverse selection
C) costly state verification
D) moral hazard
21) The ________ problem helps to explain why the private production and sale of information cannot eliminate ________.
A) free-rider; moral hazard
B) free-rider; adverse selection
C) principal-agent; adverse selection
D) principal-agent; moral hazard
22) Because of the adverse selection problem, ________.
A) lenders will write debt contracts that restrict certain activities of borrowers
B) lenders are reluctant to make loans that are not secured by collateral
C) good credit risks are more likely to seek loans causing lenders to make a disproportionate amount of loans to good credit risks
D) lenders may refuse loans to individuals with high net worth, because of their greater proclivity to ʺskip townʺ 23) Factors that lead to worsening conditions in financial system include ________.
A) unanticipated increases in the price level
B) unanticipated declines in the value of the domestic currency
C) increases in net worth
D) unanticipated increases in the value of the domestic currency
24) The economy recovers quickly from most recessions, but the increase in adverse selection and moral hazard problems in the credit markets caused by ________ led to the severe economic contraction known as The Great Depression.
A) debt deflation
B) an improvement in banksʹ balance sheets
C) illiquidity
D) increases in bond prices
25) The mismanagement of financial liberalization in emerging market countries can be understood as a severe ________.
A) free-rider problem
B) asymmetric information problem
C) principal/agent problem
D) lemons problem
19) ______
20) ______
21) ______
22) ______
23) ______
24) ______
25) ______
1) C 2) C 3) C 4) D 5) C 6) A 7) A 8) D 9) B 10) B 11) A 12) A 13) A 14) A 15) D 16) D 17) B 18) D 19) D 20) B 21) B 22) B 23) B 24) A 25) C
1) _______
A) secondary market by a commercial bank
B) secondary market by a securities dealer
C) primary market by an investment bank
D) primary market by a stock exchange broker
2) A short-term debt instrument issued by well-known corporations is called ________.
2) _______
A) corporate bonds
B) municipal bonds
C) commercial paper
D) commercial mortgages
3) An example of economies of scale in the provision of financial services is ________.
3) _______ …show more content…
A) spreading the cost of borrowed funds over many customers
B) investing in a diversified collection of assets
C) spreading the cost of writing a standardized contract over many borrowers
D) providing depositors with a variety of savings certificates
4) In order to reduce risk and increase the safety of financial institutions, commercial banks and 4) _______ other depository institutions are prohibited from ________.
A) making real estate loans
B) making personal loans
C) owning corporate bonds
D) owning common stock
5) ________ is the narrowest monetary aggregate that the Bank of Canada reports.
5) _______
A) M2 B) M3 C) M1+ D) M0
6) A ________ pays the owner a fixed coupon payment every year until the maturity date, when the 6) _______
________ value is repaid.
A) coupon bond; face
B) discount bond; face
C) coupon bond; discount
D) discount bond; …show more content…
discount
7) Which of the following is true for a coupon bond?
7) _______
A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.
B) The yield is less than the coupon rate when the bond price is below the par value.
C) The yield to maturity is greater than the coupon rate when the bond price is above the par value.
D) The price of a coupon bond and the yield to maturity are positively related.
8) Which of the following $5,000 face-value securities has the highest yield-to maturity?
8) _______
A) A 6 percent coupon bond selling for $5,500
B) A 10 percent coupon bond selling for $5,000
C) A 6 percent coupon bond selling for $5,000
D) A 12 percent coupon bond selling for $4,500
9) A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to 9) _______ maturity of ________.
A) 25 percent
B) 33.3 percent
C) 20 percent
D) 3
percent
10) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year?
A) 10 percent
B) -5 percent
C) -10 percent
D) 5 percent
11) If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding?
A) A bond with one year to maturity
B) A bond with twenty years to maturity
C) A bond with ten years to maturity
D) A bond with five years to maturity
12) Everything else held constant, if the expected return on bonds falls from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected return of corporate bonds ________ relative to bonds and the demand for corporate bonds ________.
A) falls; falls
B) falls; rises
C) rises; rises
D) rises; falls
13) During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________, everything else held constant.
A) rises; right
B) falls; right
C) rises; left
D) falls; left
14) Everything else held constant, an increase in expected inflation, lowers the expected return on ________ compared to ________ assets.
A) bonds; real
B) physical; financial
C) bonds; financial
D) physical; real
15) When the inflation rate is expected to increase, the ________ for bonds falls, while the ________ curve shifts to the right, everything else held constant.
A) demand; demand
B) supply; supply
C) supply; demand
D) demand; supply
16) When the government has a surplus, as occurred in the late 1990s, the ________ curve of bonds shifts to the ________, everything else held constant.
A) supply; right
B) demand; left
C) demand; right
D) supply; left
17) Over the next three years, the expected path of 1-year interest rates is 4, 1, and 1 percent. The expectations theory of the term structure predicts that the current interest rate on 3-year bond is
________.
A) 3 percent
B) 2 percent
C) 1 percent
D) 4 percent
18) According to the segmented markets theory of the term structure ________.
A) because of the positive term premium, the yield curve will not be observed to be downward-sloping
B) bonds of one maturity are close substitutes for bonds of other maturities, therefore, interest rates on bonds of different maturities move together over time
C) investorsʹ strong preferences for short-term relative to long-term bonds explains why yield curves typically slope downward
D) the interest rate for each maturity bond is determined by supply and demand for that maturity bond
10) ______
11) ______
12) ______
13) ______
14) ______
15) ______
16) ______
17) ______
18) ______
19) If the yield curve slope is flat for short maturities and then slopes steeply upward for longer maturities, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting ________.
A) 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) constant short-term interest rates in the near future and a decline further out in the future
D) a decline in short-term interest rates in the near future and a rise further out in the future
20) If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of ________.
A) free-riding
B) adverse selection
C) costly state verification
D) moral hazard
21) The ________ problem helps to explain why the private production and sale of information cannot eliminate ________.
A) free-rider; moral hazard
B) free-rider; adverse selection
C) principal-agent; adverse selection
D) principal-agent; moral hazard
22) Because of the adverse selection problem, ________.
A) lenders will write debt contracts that restrict certain activities of borrowers
B) lenders are reluctant to make loans that are not secured by collateral
C) good credit risks are more likely to seek loans causing lenders to make a disproportionate amount of loans to good credit risks
D) lenders may refuse loans to individuals with high net worth, because of their greater proclivity to ʺskip townʺ 23) Factors that lead to worsening conditions in financial system include ________.
A) unanticipated increases in the price level
B) unanticipated declines in the value of the domestic currency
C) increases in net worth
D) unanticipated increases in the value of the domestic currency
24) The economy recovers quickly from most recessions, but the increase in adverse selection and moral hazard problems in the credit markets caused by ________ led to the severe economic contraction known as The Great Depression.
A) debt deflation
B) an improvement in banksʹ balance sheets
C) illiquidity
D) increases in bond prices
25) The mismanagement of financial liberalization in emerging market countries can be understood as a severe ________.
A) free-rider problem
B) asymmetric information problem
C) principal/agent problem
D) lemons problem
19) ______
20) ______
21) ______
22) ______
23) ______
24) ______
25) ______
1) C 2) C 3) C 4) D 5) C 6) A 7) A 8) D 9) B 10) B 11) A 12) A 13) A 14) A 15) D 16) D 17) B 18) D 19) D 20) B 21) B 22) B 23) B 24) A 25) C