BUS-G 345 Midterm Exam Graded A+
Adverse selection is a problem associated with equity and debt contracts arising from: -
ANSWER-The lender's relative lack of information about the borrower's potential returns
and risks of his investment activities
All else equal, the ______ the coupon rate on a bond, the ______ the bond's duration -
ANSWER-Higher; shorter
An increase in the riskiness of corporate bonds will ______ the yield on corporate bonds
and ______ the yield on Treasury securities, everything else held constant - ANSWER-
Increase; reduce
Assuming the same coupon rate and maturity length, when the interest rate on a
Treasury Inflation Protected Security is 3 percent, and the yield on a non indexed
Treasury bond is 8 percent, the expected rate of inflation is: - ANSWER-5 percent
Bank capital has both benefits and costs for the bank owners. Higher bank capital
________ the likelihood of bankruptcy, but higher bank capital ________ the return on
equity for a given return on assets - ANSWER-Reduces; reduces
Countries that experience very high rates of inflation may also have: - ANSWER-
Rapidly growing money supplies
During President Reagan's administration, his supporters argued that higher real
interest rates were the result of policies increasing the profitability of investment.
Reagan's critics argued that the high interest rates were the result of high budget
deficits. In theory: - ANSWER-Both increasing profitability and higher budget deficits
increase the supply of bonds. Both arguments are valid
Everything else held constant, if the federal government were to guarantee today that it
will pay creditors if a corporation goes bankrupt in the future, the interest rate on
corporate bonds will _______ and the interest rate on Treasury securities will ______ -
ANSWER-Decrease; increase
Everything else held constant, if the tax-exempt status of municipal bonds were
eliminated, then: - ANSWER-The interest rate on municipal bonds would exceed the
rate on Treasury bonds
Federal funds are: - ANSWER-Loans made by banks to each other
For a given return on assets, the lower the bank capital: - ANSWER-The higher is the
return for the owners of the bank
Adverse selection is a problem associated with equity and debt contracts arising from: -
ANSWER-The lender's relative lack of information about the borrower's potential returns
and risks of his investment activities
All else equal, the ______ the coupon rate on a bond, the ______ the bond's duration -
ANSWER-Higher; shorter
An increase in the riskiness of corporate bonds will ______ the yield on corporate bonds
and ______ the yield on Treasury securities, everything else held constant - ANSWER-
Increase; reduce
Assuming the same coupon rate and maturity length, when the interest rate on a
Treasury Inflation Protected Security is 3 percent, and the yield on a non indexed
Treasury bond is 8 percent, the expected rate of inflation is: - ANSWER-5 percent
Bank capital has both benefits and costs for the bank owners. Higher bank capital
________ the likelihood of bankruptcy, but higher bank capital ________ the return on
equity for a given return on assets - ANSWER-Reduces; reduces
Countries that experience very high rates of inflation may also have: - ANSWER-
Rapidly growing money supplies
During President Reagan's administration, his supporters argued that higher real
interest rates were the result of policies increasing the profitability of investment.
Reagan's critics argued that the high interest rates were the result of high budget
deficits. In theory: - ANSWER-Both increasing profitability and higher budget deficits
increase the supply of bonds. Both arguments are valid
Everything else held constant, if the federal government were to guarantee today that it
will pay creditors if a corporation goes bankrupt in the future, the interest rate on
corporate bonds will _______ and the interest rate on Treasury securities will ______ -
ANSWER-Decrease; increase
Everything else held constant, if the tax-exempt status of municipal bonds were
eliminated, then: - ANSWER-The interest rate on municipal bonds would exceed the
rate on Treasury bonds
Federal funds are: - ANSWER-Loans made by banks to each other
For a given return on assets, the lower the bank capital: - ANSWER-The higher is the
return for the owners of the bank
