EC 202 EXAM 2 QUESTIONS & ANSWERS
Raising Funds for Investment: Retained Earnings - Answer -Rather than distributing
profits to owners, for-profit firms keep the profits
Raising Funds for Investment: Stock - Answer -The firm extends ownership to new
stock holders
Raising Funds for Investment: Debt - Answer -The firm or government borrows the
money either from a bank or, more commonly for govts, via the bond market
Stock - Answer -A financial security that represents partial ownership of a firm
Dividends - Answer -Profit earned by a corporation and distributed to its shareholders
Bond - Answer -A financial security that represents a promise (i.e. a debt) to repay a
fixed amount of funds, with a periodic interest payment referred to as "the coupon
payment."
In this class, we will focus on the bond market, rather than the stock market. Why? -
Answer -Because of the importance of US Treasury bonds to both fiscal and monetary
policy.
Face or Par Value - Answer -The dollar amount printed on the bond
Maturity Date - Answer -The date at which the bond is paid off
Interest Rate - Answer -The periodic cost of borrowing funds, usually expressed as a
percentage of the amount borrowed
Coupon Payment - Answer -The periodic interest payment on a bond
Coupon Payment Equation - Answer -(the interest rate) x (the "face" or "par" value of
the bond)
Nominal Figure: U.S. GDP= - Answer -$18.2 Trillion
Nominal Figure: U.S. Federal Budget = - Answer -$3.8 Trillion
Nominal Figure: State and Local Spending= - Answer -$3.0 Trillion
Nominal Figure: Federal Deficit= - Answer -$445 Billion
Nominal Figure: National Debt= - Answer -$18.9 Trillion
, Pricing Bonds: Yield Equation - Answer -Coupon Payment/Market Price
Pricing Bonds: Prices and Yields move ___________ - Answer -inversely
Pricing Bonds: Why would the price decrease or increase? - Answer -Because price is
a function of several variables
Pricing Bonds: Two Important Variables of Price - Answer -1. Credit or Default risks
2. Inflation Risk
Pricing Bonds: Using _______ ______ to Calculate Bond Prices - Answer -Present
Value
Pricing Bonds: Bond Price Equation - Answer -(Coupon 1)/(1+i) + (Coupon 2)/(1+i)^2
+...+ (Coupon n)/(1+i)^n + (Face Value)/(1+i)^n
Pricing Bonds: Bond Price i is referred to as ________ _______ - Answer -Discount
Rate
Pricing Bonds: Price and Yield depend on _____ - Answer -i
Why does the discount rate sometimes increase, thus decreasing the price of a bond? -
Answer -Because something - i.e. some economic variable - has changed
Default Risk - Answer -The event in which companies or individuals will be unable to
make the required payments on their debt obligations.
Inflation Risk - Answer -The chance that the cash flows from an investment won't be
worth as much in the future because of changes in purchasing power due to inflation
If the government does something to increase its default or inflation risk, then... -
Answer -When it goes into the market to borrow (i.e. sell bonds) in the future, its interest
payments will go up
What is the current concern about expanding the Treasury's debt limit? - Answer -
Because the discount rate goes up and the price goes down, forcing up the yield
Balance Sheet - Answer -A financial statement that sums up a firm's financial position
Stockholder Equity - Answer -Capital
Stockholder Equity Equation - Answer -Assets - Liabilities
Discount Rate Reflects Two Kinds of Risks: - Answer -1. Default Risk
2. Inflation Risk
Raising Funds for Investment: Retained Earnings - Answer -Rather than distributing
profits to owners, for-profit firms keep the profits
Raising Funds for Investment: Stock - Answer -The firm extends ownership to new
stock holders
Raising Funds for Investment: Debt - Answer -The firm or government borrows the
money either from a bank or, more commonly for govts, via the bond market
Stock - Answer -A financial security that represents partial ownership of a firm
Dividends - Answer -Profit earned by a corporation and distributed to its shareholders
Bond - Answer -A financial security that represents a promise (i.e. a debt) to repay a
fixed amount of funds, with a periodic interest payment referred to as "the coupon
payment."
In this class, we will focus on the bond market, rather than the stock market. Why? -
Answer -Because of the importance of US Treasury bonds to both fiscal and monetary
policy.
Face or Par Value - Answer -The dollar amount printed on the bond
Maturity Date - Answer -The date at which the bond is paid off
Interest Rate - Answer -The periodic cost of borrowing funds, usually expressed as a
percentage of the amount borrowed
Coupon Payment - Answer -The periodic interest payment on a bond
Coupon Payment Equation - Answer -(the interest rate) x (the "face" or "par" value of
the bond)
Nominal Figure: U.S. GDP= - Answer -$18.2 Trillion
Nominal Figure: U.S. Federal Budget = - Answer -$3.8 Trillion
Nominal Figure: State and Local Spending= - Answer -$3.0 Trillion
Nominal Figure: Federal Deficit= - Answer -$445 Billion
Nominal Figure: National Debt= - Answer -$18.9 Trillion
, Pricing Bonds: Yield Equation - Answer -Coupon Payment/Market Price
Pricing Bonds: Prices and Yields move ___________ - Answer -inversely
Pricing Bonds: Why would the price decrease or increase? - Answer -Because price is
a function of several variables
Pricing Bonds: Two Important Variables of Price - Answer -1. Credit or Default risks
2. Inflation Risk
Pricing Bonds: Using _______ ______ to Calculate Bond Prices - Answer -Present
Value
Pricing Bonds: Bond Price Equation - Answer -(Coupon 1)/(1+i) + (Coupon 2)/(1+i)^2
+...+ (Coupon n)/(1+i)^n + (Face Value)/(1+i)^n
Pricing Bonds: Bond Price i is referred to as ________ _______ - Answer -Discount
Rate
Pricing Bonds: Price and Yield depend on _____ - Answer -i
Why does the discount rate sometimes increase, thus decreasing the price of a bond? -
Answer -Because something - i.e. some economic variable - has changed
Default Risk - Answer -The event in which companies or individuals will be unable to
make the required payments on their debt obligations.
Inflation Risk - Answer -The chance that the cash flows from an investment won't be
worth as much in the future because of changes in purchasing power due to inflation
If the government does something to increase its default or inflation risk, then... -
Answer -When it goes into the market to borrow (i.e. sell bonds) in the future, its interest
payments will go up
What is the current concern about expanding the Treasury's debt limit? - Answer -
Because the discount rate goes up and the price goes down, forcing up the yield
Balance Sheet - Answer -A financial statement that sums up a firm's financial position
Stockholder Equity - Answer -Capital
Stockholder Equity Equation - Answer -Assets - Liabilities
Discount Rate Reflects Two Kinds of Risks: - Answer -1. Default Risk
2. Inflation Risk
