For a borrower, an increase in the real interest rate will lead to

For a borrower, an increase in the real interest rate will lead to 

(a) higher current consumption and less borrowing.
(b) higher current consumption and less saving.
(c) lower current consumption and less borrowing.
(d) lower current consumption and less saving.




Answer: C

The substitution effect of a decrease in real interest rates is to cause a consumer to

The substitution effect of a decrease in real interest rates is to cause a consumer to 

(a) increase future consumption and decrease current consumption.
(b) decrease future consumption and increase current consumption.
(c) increase current consumption and increase saving.
(d) decrease current consumption and increase saving.

Answer: B

If Claudette gets a permanent increase in her income of $1000 per year, she saves an extra $200 this year and consumes an extra $800 this year. If the increase in income had been temporary instead of permanent, she would have saved _____ of the extra income.

If Claudette gets a permanent increase in her income of $1000 per year, she saves an extra $200 this year and consumes an extra $800 this year. If the increase in income had been temporary instead of permanent, she would have saved _____ of the extra income. 

(a) More than $200
(b) Less than $200
(c) Exactly $200
(d) None




Answer: B

If Claudette gets a permanent increase in her income of $1000 per year, she saves an extra $200 this year and consumes an extra $800 this year. If the increase in income had been temporary instead of permanent, she would have saved _____ of the extra income.

If Claudette gets a permanent increase in her income of $1000 per year, she saves an extra $200 this year and consumes an extra $800 this year. If the increase in income had been temporary instead of permanent, she would have saved _____ of the extra income. 

(a) More than $200
(b) Less than $200
(c) Exactly $200
(d) None




Answer: A

A curve that connects all the consumption combinations that yield the same level of utility is known as

A curve that connects all the consumption combinations that yield the same level of utility is known as 

(a) an isoquant.
(b) a yield curve.
(c) a budget line.
(d) an indifference curve.




Answer: D

Rachel earns nothing during her learning period, 1100 during her working period, and nothing during her retirement period. She has initial assets of 300. The real interest rate is zero. Rachel is not allowed to borrow by the banks. Whenever possible,Rachel wants to smooth consumption between periods. How much will she save during her working period?

Rachel earns nothing during her learning period, 1100 during her working period, and nothing during her retirement period. She has initial assets of 300. The real interest rate is zero. Rachel is not allowed to borrow by the banks. Whenever possible,Rachel wants to smooth consumption between periods. How much will she save during her working period? 

(a) 400
(b) 550
(c) 700
(d) 950



Answer: B

David consumes 200 in the current period and 330 in the future period. The real interest rate is 10% per period. David's present value of lifetime consumption is

David consumes 200 in the current period and 330 in the future period. The real interest rate is 10% per period. David's present value of lifetime consumption is 

(a) 500.
(b) 530.
(c) 550.
(d) 563.

Answer: A

A temporary supply shock, such as a drought, would

A temporary supply shock, such as a drought, would 

(a) increase the marginal product of capital and increase desired investment.
(b) decrease the marginal product of capital and decrease desired investment.
(c) have little or no effect on desired investment.
(d) decrease both the marginal product of capital and the marginal product of labor in the long-term future.

Answer: C

An invention that raises the future marginal product of capital would cause an increase in desired investment, which would cause the investment curve to shift to the ________ and would cause the real interest rate to ________.

An invention that raises the future marginal product of capital would cause an increase in desired investment, which would cause the investment curve to shift to the ________ and would cause the real interest rate to ________. 

(a) right; increase
(b) right; decrease
(c) left; increase
(d) left; decrease



Answer: A

If consumers foresee future taxes completely, a reduction in taxes this year that is accompanied by an offsetting increase in future taxes would cause

If consumers foresee future taxes completely, a reduction in taxes this year that is accompanied by an offsetting increase in future taxes would cause 

(a) a rightward shift in the saving curve and a rightward shift in the investment curve.
(b) a shift in neither the saving nor the investment curve.
(c) a leftward shift in the saving curve,but no shift in the investment curve.
(d) no shift in the saving curve, but a rightward shift in the investment curve.

Answer: B

A temporary decrease in government purchases would cause

A temporary decrease in government purchases would cause 

(a) a rightward shift in the saving curve and a leftward shift in the investment curve.
(b) a rightward shift in the saving curve and a rightward shift in the investment curve.
(c) a rightward shift in the saving curve,but no shift in the investment curve.
(d) no shift in the saving curve, but a leftward shift in the investment curve.




Answer: C

The saving-investment diagram shows that a higher real interest rate due to a leftward shift of the saving curve

The saving-investment diagram shows that a higher real interest rate due to a leftward shift of the saving curve 

(a) raises the profitability of investment for firms.
(b) causes the amount of firms'investment to increase.
(c) increases the total amount of saving because of the increase in the real interest rate.
(d) causes the total amounts of saving and investment to fall.




Answer: D

An increase in the expected real interest rate tends to

An increase in the expected real interest rate tends to 

(a) raise desired savings only.
(b) raise desired investment only.
(c) raise both desired savings and desired investment.
(d) raise desired savings, but lower desired investment.



Answer: D

Any change in the economy that raises desired national saving for a given value of the real interest rate will shift the desired national saving curve to

Any change in the economy that raises desired national saving for a given value of the real interest rate will shift the desired national saving curve to 

(a) the right and increase the real interest rate.
(b) the right and decrease the real interest rate.
(c) the left and increase the real interest rate.
(d) the left and decrease the real interest rate.



Answer: B

An economy has government purchases of 1000. Desired national saving and desired investment are given by

An economy has government purchases of 1000. Desired national saving and desired investment are given by 

S
d
=200 +5000r +0.10Y- 0.20G
I
d
=1000 - 4000r
When the full-employment level of output equals 5000, then the real interest rate that clears the
goods market will be


(a) 1.11%.
(b) 5.56%.
(c) 16.67%.
(d) 21.11%.




Answer: B

An economy has full-employment output of 5000. Government Purchases are 1000. Desired consumption and desired investment are given by

An economy has full-employment output of 5000. Government Purchases are 1000. Desired consumption and desired investment are given by 

C
d
=3000 - 2000r +0.10Y
I
d
=1000 - 4000r
where Yis output and ris the real interest rate. The real interest rate that clears the goods market is
equal to

(a) 1.25%.
(b) 2.50%.
(c) 8.33%.
(d) 25.00%.




Answer: C

When desired national saving equals desired national investment, what market is in equilibrium?

When desired national saving equals desired national investment, what market is in equilibrium? 

(a) The goods market
(b) The money market
(c) The foreign exchange market
(d) The stock market



Answer: A

Your firm has capital stock of $10 million and a depreciation rate of 15%. Gross investment is $3 million. How much is net investment?

Your firm has capital stock of $10 million and a depreciation rate of 15%. Gross investment is $3 million. How much is net investment? 

(a) $1.5 million
(b) $2.0 million
(c) $2.5 million
(d) $3.5 million




Answer: B

Your firm has capital stock of $10 million and a depreciation rate of 15%. Gross investment is $3 million. How much is net investment?

Your firm has capital stock of $10 million and a depreciation rate of 15%. Gross investment is $3 million. How much is net investment? 

(a) $1.5 million
(b) $2.0 million
(c) $2.5 million
(d) $3.5 million



Answer: A

In 2003, your firm's capital stock equaled $10 million, and in 2004 it equaled $15 million. The average depreciation rate on your capital stock was 20%. Net investment in 2004 equaled

In 2003, your firm's capital stock equaled $10 million, and in 2004 it equaled $15 million. The average depreciation rate on your capital stock was 20%. Net investment in 2004 equaled 

(a) $3 million.
(b) $4 million.
(c) $5 million.
(d) $7 million.




Answer: C

In 2003, your firm's capital stock equaled $100 million, and in 2004 it equaled $105 million. The average depreciation rate on your capital stock is 20%. Gross investment in 2004 equaled

In 2003, your firm's capital stock equaled $100 million, and in 2004 it equaled $105 million. The average depreciation rate on your capital stock is 20%. Gross investment in 2004 equaled 

(a) $1 million.
(b) $5 million.
(c) $7 million.
(d) $25 million.





Answer: D

What is the difference between gross investment and net investment?

What is the difference between gross investment and net investment? 

(a) Net investment =gross investment minus taxes
(b) Net investment =gross investment minus net factor payments
(c) Net investment =gross investment minusinventory accumulation
(d) Net investment =gross investment minus depreciation




Answer: D

Cummins, Hubbard, and Hassett studied the effects of taxes on investment by

Cummins, Hubbard, and Hassett studied the effects of taxes on investment by 

(a) seeing if investment spending is correlated with taxes on investment.
(b) examining what happened to investment when major tax reforms took place.
(c) raising tax rates on certain businesses and testing their reaction.
(d) raising tax rates on equipment and reducing tax rates on structures.




Answer: C

Cummins, Hubbard, and Hassett studied the effects of taxes on investment by

Cummins, Hubbard, and Hassett studied the effects of taxes on investment by 

(a) seeing if investment spending is correlated with taxes on investment.
(b) examining what happened to investment when major tax reforms took place.
(c) raising tax rates on certain businesses and testing their reaction.
(d) raising tax rates on equipment and reducing tax rates on structures.



Answer: B

Calculate the tax-adjusted user cost of capital of a machine that costs $10,000 and depreciates at a rate of 10%, when the real interest rate is 3% and the tax rate on revenue is 5%.

Calculate the tax-adjusted user cost of capital of a machine that costs $10,000 and depreciates at a rate of 10%, when the real interest rate is 3% and the tax rate on revenue is 5%. 

(a) $1238
(b) $1300
(c) $1368
(d) $1800




Answer: C

Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent increase in the depreciation rate now has what effect on your desired capital stock?

Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent increase in the depreciation rate now has what effect on your desired capital stock? 

(a) Raises it, because the future marginal productivity of capital is higher
(b) Lowers it, because the future marginal productivity of capital is lower
(c) Raises it, because the user cost of capital is now lower
(d) Lowers it, because the user cost of capital is now higher



Answer: D

Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent decline in the expected real interest rate now has what effect on your desired capital stock?

Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent decline in the expected real interest rate now has what effect on your desired capital stock? 

(a) Raises it, because the future marginal productivity of capital is higher
(b) Lowers it, because the future marginal productivity of capital is lower
(c) Raises it, because the user cost of capital is now lower
(d) Lowers it, because the user cost of capital is now higher

Answer: C

A technological improvement will

A technological improvement will 

(a) increase the desired capital stock.
(b) decrease the desired capital stock.
(c) have no effect on the desired capital stock.
(d) have the same effect on the desired capital stock as an increase in corporate taxes.

Answer: A

A firm should invest more if Tobin's q

A firm should invest more if Tobin's q

(a) equals zero.
(b) is less than one.
(c) equals one.
(d) is more than one.



Answer: D

If the stock market value of a firm is $10 million and the firm owns $15 million of capital, then Tobin's q equals

If the stock market value of a firm is $10 million and the firm owns $15 million of capital, then Tobin's q equals 

(a) 2/3.
(b) 1.
(c) 3/2.
(d) 4.



Answer: A

The relationship between stock prices and firms' investments in physical capital is captured by what theory?

The relationship between stock prices and firms' investments in physical capital is captured by what theory? 

(a) User-cost-of-capital theory
(b) q theory
(c) Yield-curve theory
(d) Keynesian theory


Answer: A

The relationship between stock prices and firms' investments in physical capital is captured by what theory?

The relationship between stock prices and firms' investments in physical capital is captured by what theory? 

(a) User-cost-of-capital theory
(b) qtheory
(c) Yield-curve theory
(d) Keynesian theory



Answer: B

You are trying to figure out how much capacity to add to your factory. You will increase capacity as long as

You are trying to figure out how much capacity to add to your factory. You will increase capacity as long as 

(a) the expected marginal product of capital is positive.
(b) the expected marginal product of capital is greater than or equal to the marginal product of capital.
(c) the expected marginal product of capital is greater than or equal to the expected marginal product of labor.
(d) the expected marginal product of capital is greater than or equal to the user cost of capital.

Answer: D

Calculate the user cost of capital of a machine that costs $100,000 and depreciates at a rate of 25%, when the nominal interest rate is 4% and the expected inflation rate is 1%.

Calculate the user cost of capital of a machine that costs $100,000 and depreciates at a rate of 25%, when the nominal interest rate is 4% and the expected inflation rate is 1%. 

(a) $3000
(b) $25,000
(c) $28,000
(d) $29,000




Answer: C

Calculate the user cost of capital of a machine that costs $5,000 and depreciates at a rate of 25%, when the nominal interest rate is 10% and the expected inflation rate is 5%.

Calculate the user cost of capital of a machine that costs $5,000 and depreciates at a rate of 25%, when the nominal interest rate is 10% and the expected inflation rate is 5%. 

(a) $150
(b) $500
(c) $1500
(d) $5000



Answer: C

Calculate the user cost of capital of a machine that costs $5,000 and depreciates at a rate of 25%, when the expected real interest rate is 5%.

Calculate the user cost of capital of a machine that costs $5,000 and depreciates at a rate of 25%, when the expected real interest rate is 5%. 

(a) $150
(b) $500
(c) $1500
(d) $5000




Answer: C

Which of the following machines has the lowest user cost? Machine A costs $15,000 and depreciates at a rate of 25%; machine B costs $10,000 and depreciates at a rate of 20%; machine C costs $20,000 and depreciates at a rate of 10%; and machine D costs $17,000 and depreciates at a rate of 11%. The expected real interest rate is 0%.

Which of the following machines has the lowest user cost? Machine A costs $15,000 and depreciates at a rate of 25%; machine B costs $10,000 and depreciates at a rate of 20%; machine C costs $20,000 and depreciates at a rate of 10%; and machine D costs $17,000 and depreciates at a rate of 11%. The expected real interest rate is 0%. 

(a) Machine A
(b) Machine B
(c) Machine C
(d) Machine D



Answer: D

Which of the following machines has the lowest user cost? Machine A costs $15,000 and depreciates at a rate of 25%; machine B costs $10,000 and depreciates at a rate of 20%; machine C costs $20,000 and depreciates at a rate of 10%; and machine D costs $17,000 and depreciates at a rate of 11%. The expected real interest rate is 5%.

Which of the following machines has the lowest user cost? Machine A costs $15,000 and depreciates at a rate of 25%; machine B costs $10,000 and depreciates at a rate of 20%; machine C costs $20,000 and depreciates at a rate of 10%; and machine D costs $17,000 and depreciates at a rate of 11%. The expected real interest rate is 5%. 

(a) Machine A
(b) Machine B
(c) Machine C
(d) Machine D



Answer: B

The user cost of capital is given by the following formula, where p K is the real price of capital goods, did the depreciation rate, and ris the expected real interest rate.

The user cost of capital is given by the following formula, where p K is the real price of capital goods, did the depreciation rate, and ris the expected real interest rate. 

(a) uc =(r + d)/p
K
(b) uc = p
K
/(r + d)
(c) uc = d p
K
/r
(d) uc =(r + d)p
K




Answer: D

Which of the factors listed below might cause the Ricardian equivalence proposition to be violated?

Which of the factors listed below might cause the Ricardian equivalence proposition to be violated? 

(a) There may be international capital inflows and outflows.
(b) Consumers may not understand that an increase in government borrowing today is likely to lead  to higher future taxes.
(c) There may be constraints on the level of government spending.
(d) There may be constraints on the level of government taxation.



Answer: B

If the government cuts taxes today, issuing debt today and repaying the debt plus interest next year, a rational taxpayer will

If the government cuts taxes today, issuing debt today and repaying the debt plus interest next year, a rational taxpayer will 

(a) spend the full amount of the tax cut today and reduce consumption next year.
(b) increase consumption today, before taxes go up next year.
(c) increase saving today, leaving consumption unchanged.
(d) leave a smaller gross bequest to her or his heirs.



Answer: C

The Ricardian equivalence proposition suggests that a government deficit caused by a tax cut

The Ricardian equivalence proposition suggests that a government deficit caused by a tax cut 

(a) causes inflation.
(b) causes a current account deficit.
(c) raises interest rates.
(d) doesn't affect consumption.



Answer: D

Desired national saving would increase unambiguously if there were

Desired national saving would increase unambiguously if there were 

(a) an increase in current outputand expected future output.
(b) an increase in expected future output and government purchases.
(c) an increase in expected future outputand the expected real interest rate.
(d) a fall in both government purchases and expected future output.




Answer: D

The yield curve shows

The yield curve shows 

(a) the yields on stocks of different maturities.
(b) the interest rates on bonds of different maturities.
(c) the yields on stocks with differing default risk.
(d) the yields on bonds with differing default risk.


Answer: B

If an investor has a tax rate on interest income of 25% and the inflation rate is 4%, which bond has the lowest expected after-tax real interest rate?

If an investor has a tax rate on interest income of 25% and the inflation rate is 4%, which bond has the lowest expected after-tax real interest rate? 

(a) A Treasury bond paying 9%
(b) A corporate bond paying 8%
(c) A Treasury bond paying 7%
(d) A municipal bond paying 6%

Answer: C

Three factors that cause interest rates among different financial instruments to vary are

Three factors that cause interest rates among different financial instruments to vary are 

(a) default risk, expected inflation, and taxability.
(b) default risk, current inflation, and taxability.
(c) default risk, maturity, and taxability.
(d) default risk, expected inflation, and maturity.



Answer: C

The nominal interest rate is 10%, the expected inflation rate is 5%, and the combined state-federal tax rate is 35%. The expected after-tax real interest rate is

The nominal interest rate is 10%, the expected inflation rate is 5%, and the combined state-federal tax rate is 35%. The expected after-tax real interest rate is 

(a) 1.50%.
(b) 3.25%.
(c) 5.00%.
(d) 6.50%.



Answer: A

With a nominal interest rate of 4%, an expected inflation rate of 1%, and interest income taxed at a rate of 25%, what is the expected after-tax real interest rate?

With a nominal interest rate of 4%, an expected inflation rate of 1%, and interest income taxed at a rate of 25%, what is the expected after-tax real interest rate? 

(a) 3%
(b) 2%
(c) 1%
(d) 0%




Answer: B

The stock market just crashed; the Dow Jones Industrial Average fell by 750 points. You would expect the effect on aggregate consumption to be the largest if which of the following facts was true?

The stock market just crashed; the Dow Jones Industrial Average fell by 750 points. You would expect the effect on aggregate consumption to be the largest if which of the following facts was true? 

(a) The crash had been preceded by a large run-up in the price of stocks.
(b) Most stocks were owned by insurance companies.
(c) Most stocks were owned by pension funds that invested in the market.
(d) Many individuals had invested in the stock market immediately prior to the crash.



Answer: D

The stock market just crashed; the Dow Jones Industrial Average fell by 750 points. You would expect the effect on aggregate consumption to be the largest if which of the following facts was true?

The stock market just crashed; the Dow Jones Industrial Average fell by 750 points. You would expect the effect on aggregate consumption to be the largest if which of the following facts was true? 

(a) The crash had been preceded by a large run-up in the price of stocks.
(b) Most stocks were owned by insurance companies.
(c) Most stocks were owned by pension funds that invested in the market.
(d) Many individuals had invested in the stock market immediately prior to the crash.



Answer: B

The stock market just crashed; the Dow Jones Industrial Average fell by 750 points. You would expect the effect on aggregate consumption to be the largest if which of the following facts was true?

The stock market just crashed; the Dow Jones Industrial Average fell by 750 points. You would expect the effect on aggregate consumption to be the largest if which of the following facts was true? 

(a) The crash had been preceded by a large run-up in the price of stocks.
(b) Most stocks were owned by insurance companies.
(c) Most stocks were owned by pension funds that invested in the market.
(d) Many individuals had invested in the stock market immediately prior to the crash.

Answer: D

Aunt Agatha has just left her nephew $5000. The most likely response is for her nephew to

Aunt Agatha has just left her nephew $5000. The most likely response is for her nephew to 

(a) increase current consumption, but not future consumption.
(b) decrease current consumption, but increase future consumption.
(c) increase future consumption, but not current consumption.
(d) increase both current consumption and future consumption.



Answer: D

When a person receives an increase in wealth, what is likely to happen to consumption and saving?

When a person receives an increase in wealth, what is likely to happen to consumption and saving? 

(a) Consumption increases and saving increases.
(b) Consumption increases and saving decreases.
(c) Consumption decreases and saving increases.
(d) Consumption decreases and saving decreases.

Answer: B

An increase in expected future output while holding today's output constant would

An increase in expected future output while holding today's output constant would 

(a) increase today's desired consumption and increase desired national saving.
(b) increase today's desired consumption and decrease desired national saving.
(c) decrease today's desired consumption and increase desired national saving.
(d) decrease today's desired consumption and decrease desired national saving
.


Answer: B

The fraction of additional current income that a person consumes in the current period is known as the

The fraction of additional current income that a person consumes in the current period is known as the 

(a) consumption-smoothing motive.
(b) consumption deficit.
(c) saving rate.
(d) marginal propensity to consume.



Answer: D

Last year, Linus earned a salary of $25,000 and he spent $24,000, thus saving $1000. At the end of the year, he received a bonus of $1000 and he spent $500 of it, saving the other $500. What was his marginal propensity to consume?

Last year, Linus earned a salary of $25,000 and he spent $24,000, thus saving $1000. At the end of the year, he received a bonus of $1000 and he spent $500 of it, saving the other $500. What was his marginal propensity to consume? 

(a) 0.96
(b) 0.50
(c) 0.04
(d) 0.02




Answer: B

When a person gets an increase in current income, what is likely to happen to consumption and saving?

When a person gets an increase in current income, what is likely to happen to consumption and  saving? 

(a) Consumption increases and saving increases.
(b) Consumption increases and saving decreases.
(c) Consumption decreases and saving increases.
(d) Consumption decreases and saving decreases




Answer: A

Suppose the current level of output is 5000 and the elasticity of output with respect to capital is 0.4. A 10% increase in capital would increase the current level of output to

Suppose the current level of output is 5000 and the elasticity of output with respect to capital is 0.4.  A 10% increase in capital would increase the current level of output to

(a) 5020.
(b) 5050.
(c) 5200.
(d) 5500.



Answer: C

The elasticity of output with respect to capital

The elasticity of output with respect to capital 

(a) is the increase in output resulting from an increase in the capital stock.
(b) is the percentage increase in output resulting from a 1% increase in the capital stock.
(c) is always greater than one.
(d) is the inverse of the elasticity of output with respect to labor.


Answer: B

Between 1870 and 1996, among the United States, Germany, Japan, and Australia, _____ grew at the fastest rate and _____ grew at the slowest rate.

Between 1870 and 1996, among the United States, Germany, Japan, and Australia, _____ grew at  the fastest rate and _____ grew at the slowest rate. 

(a) the United States; Germany
(b) Germany; the United States
(c) Australia; Japan
(d) Japan; Australia

Answer: D

A coupon bond which pays interest of $50 annually, has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The current yield on this bond is __________.

A coupon bond which pays interest of $50 annually, has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The current yield on this bond is __________. 

A) 5%
B) 5.46%
C) 5.94%
D) 6.00%

Answer: B

An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond?

An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond? 

A) 4.80%
B) 4.85%
C) 9.60%
D) 9.70%

Answer: B

The yield to maturity of an 8-year zero coupon bond, with a par value of $1,000 and a market price of $623.20, is ______.

The yield to maturity of an 8-year zero coupon bond, with a par value of $1,000 and a market price of $623.20, is ______. 

A) 6.09%
B) 8.8%
C) 10.1%
D) 13.4%

Answer: A

Consider the expectations theory of the term structure of interest rates. If the yield curve is downward sloping, this indicates that investors expect interest rates to __________ in the future.

Consider the expectations theory of the term structure of interest rates. If the yield curve is downward sloping, this indicates that investors expect interest rates to __________ in the future. 

A) increase
B) decrease
C) not change
D) change in an unpredictable manner

Answer: B

The bonds of Elbow Grease Dishwashing Company have received a rating of "D" by Moody's. The "D" rating indicates __________.

The bonds of Elbow Grease Dishwashing Company have received a rating of "D" by Moody's. The "D" rating indicates __________. 

A) the bonds are investment grade
B) the bonds are junk bonds
C) the financial manager of Elbow Grease Dishwashing flunked his Finance course
D) none of the above

Answer: B

Under the pure expectations hypothesis, an upward sloping yield curve would indicate ________

Under the pure expectations hypothesis, an upward sloping yield curve would indicate ___________________.

A) expected increases in inflation over time
B) expected decreases in inflation over time
C) the presence of a liquidity premium
D) that the equilibrium interest rate in the short term part of the market is lower than the equilibrium interest rate in the long-term part of the market

Answer: A

Consider a 7-year bond with a 9% coupon and a present yield to maturity of 12%. If interest rates remain constant, one year from now the price of this bond will be __________.

Consider a 7-year bond with a 9% coupon and a present yield to maturity of 12%. If interest rates remain constant, one year from now the price of this bond will be __________. 

A) higher
B) lower
C) the same
D) cannot be determined

Answer: A

Analysis of bond returns over a multiyear horizon, based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ___.

Analysis of bond returns over a multiyear horizon, based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ___. 

A) multiyear analysis
B) horizon analysis
C) maturity analysis
D) reinvestment analysis

Answer: B

A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today based on annual compound.

A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today based on annual compound. 

A) $458.11
B) $641.00
C) $789.00
D) $1,100.00

Answer: A

A bond with a 10% coupon, 10 years to maturity and a market price of 95 % of par has a yield to maturity of __________, assuming annual compound.

A bond with a 10% coupon, 10 years to maturity and a market price of 95 % of par has a yield to maturity of __________, assuming annual compound. 

A) over 14%
B) between 13% and 14%
C) between 12% and 13%
D) less than 12%

Answer: D

A coupon bond which pays interest annually, has a par value of $1,000, matures in 5 years and has a yield to maturity of 12%. If the coupon rate is 9%, the present value of the bond today should be __________.

A coupon bond which pays interest annually, has a par value of $1,000, matures in 5 years and has a yield to maturity of 12%. If the coupon rate is 9%, the present value of the bond today should be __________. 

A) $855.55
B) $891.86
C) $926.00
D) $1,000.

Answer: B

A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is __________.

A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is __________. 

A) 6.00%
B) 6.58%
C) 7.20%
D) 8.00%

Answer: A

A coupon bond which pays interest of $40 annually, has a par value of $1,000, matures in 5 years, and is selling today at a $159.71 discount from par value. The actual yield to maturity on this bond is __________.

A coupon bond which pays interest of $40 annually, has a par value of $1,000, matures in 5 years, and is selling today at a $159.71 discount from par value. The actual yield to maturity on this bond is __________. 

A) 5%
B) 6%
C) 7%
D) 8%

Answer: D

The average annual return of holding the bond until it is callable is called ___.

The average annual return of holding the bond until it is callable is called ___. 

A) yield to maturity
B) yield to call
C) current yield
D) after tax yield

Answer: B

A debenture is __________.

A debenture is __________. 

A) secured by other securities held by the firm
B) secured by equipment owned by the firm
C) secured by property owned by the firm
D) unsecured

Answer: D

A mortgage bond is ________.

A mortgage bond is ________. 

A) secured by other securities held by the firm
B) secured by equipment owned by the firm
C) secured by assets owned by the firm
D) unsecured

Answer: C

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12 percent, then you should __________.

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12 percent, then you should __________.

A) buy stock X because it is overpriced
B) buy stock X because it is underpriced
C) sell short stock X because it is overpriced
D) sell short stock X because it is underpriced

Answer: B

You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90. The beta of this formed portfolio is __________.

You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90. The beta of this formed portfolio is __________. 

A) 1.14
B) 1.20
C) 1.26
D) 2.40

Answer: C

Security X has an actual return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is 15%. According to the capital asset pricing model, security X is __________.

Security X has an actual return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is 15%. According to the capital asset pricing model, security X is __________. 

A) fairly priced
B) overpriced
C) underpriced

Answer: B

According to the capital asset pricing model, __________.

According to the capital asset pricing model, __________. 

A) all securities must lie on the capital market line
B) all securities must lie on the security market line
C) underpriced securities lie below the security market line
D) overpriced securities lie above the security market line

Answer: B

According to the capital asset pricing model, a well-diversified portfolio's rate of return is a function of __________.

According to the capital asset pricing model, a well-diversified portfolio's rate of return is a function of __________. 

A) market risk
B) unsystematic risk
C) unique risk
D) reinvestment risk

Answer: A

In a well diversified portfolio, __________ risk is negligible.

In a well diversified portfolio, __________ risk is negligible. 

A) nondiversifiable
B) market
C) systematic
D) unsystematic

Answer: D

The market portfolio has a beta of __________.

The market portfolio has a beta of __________. 

A) -1.0
B) 0
C) 0.5
D) 1.0

Answer: D

In the context of the capital asset pricing model, the systematic measure of risk is __________.

In the context of the capital asset pricing model, the systematic measure of risk is __________. 

A) unique risk
B) beta
C) standard deviation of returns
D) variance of returns

Answer: B