Question 1

We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that

Accepted Answer

A)   the credit risk associated with Bond A is lower than the credit risk associated with Bond B.
B)   Bond A was issued by the city of Philadelphia and Bond B was issued by Red Hat Corporation.
C)   Bond A has a term of 20 years and Bond B has a term of 2 years.
D)   All of the above are correct.E) B) and C)
F) A) and C)

Question 2

Which of the following statements is correct?

Accepted Answer

A)   A corporation receives a monetary payment every time its shares of stock are traded by stockholders on organized stock exchanges.
B)   When a corporation sells bonds as a means of raising funds it is engaging in debt finance.
C)   A share of stock is an IOU.
D)   The two most important financial markets in the economy are the stock market and financial intermediaries.E) A) and B)
F) All of the above

Question 3

An increase in the demand for loanable funds increases the equilibrium interest rate and increases the equilibrium level of saving.

Accepted Answer

A) True 
 B)False

Question 4

To state that public saving is equal to investment,for a closed economy,is to state an accounting identity.

Accepted Answer

A) True 
 B)False

Question 5

What are the basic differences between bonds and stocks?

Accepted Answer

A bond is a certificate of indebtedness ...

Question 6

Which of the following would both make the interest rate on a bond higher than otherwise?

Accepted Answer

A)   the interest it pays is taxed and it is long term
B)   the interest it pays is taxed and it is short term
C)   the interest it pays is tax exempt and it is long term
D)   the interest it pays is tax exempt and it is short termE) A) and B)
F) C) and D)

Question 7

After a corporation issues stock,the stock

Accepted Answer

A)   can not be resold.
B)   can be resold only if the corporation wants to buy it back.
C)   can be resold on exchanges; the resale will raise additional funds for the corporation.
D)   None of the above are correct.E) A) and B)
F) A) and C)

Question 8

Which of the following events could explain an increase in interest rates together with a decrease in investment?

Accepted Answer

A)   The government budget went from surplus to deficit.
B)   The government instituted an investment tax credit.
C)   The government reduced the tax rate on savings.
D)   None of the above is correct.E) B) and D)
F) B) and C)

Question 9

Skeptics of government policy to reduce taxes on saving argue that it would primarily benefit the rich.

Accepted Answer

A) True 
 B)False

Question 10

A bond buyer is a

Accepted Answer

A)   saver.Long term bonds have less risk than short term bonds.
B)   saver.Long term bonds have more risk than short term bonds.
C)   borrower.Long term bonds have less risk than short term bonds..
D)   borrower.Long term bonds have more risk than short term bonds.E) All of the above
F) A) and D)

Question 11

The conventions of national income accounting imply that saving and investment are equal for the economy as a whole and for individual households and firms.

Accepted Answer

A) True 
 B)False

Question 12

On which of these bonds is the prospect of default most likely?

Accepted Answer

A)   a junk bond
B)   a municipal bond
C)   a U.S.government bond
D)   a corporate bond issued by Proctor & Gamble CorporationE) B) and D)
F) B) and C)

Question 13

Short-term bonds are generally

Accepted Answer

A)   less risky than long-term bonds and so they feature higher interest rates.
B)   less risky than long-term bonds and so they feature lower interest rates.
C)   more risky than long-term bonds and so they feature higher interest rates.
D)   more risky than long-term bonds and so they feature lower interest rates.E) None of the above
F) A) and D)

Question 14

When the U.S.government is in debt during a given year,it follows that its budget is in deficit for that year.

Accepted Answer

A) True 
 B)False

Question 15

Municipal bonds pay a relatively

Accepted Answer

A)   low rate of interest because of their high default risk and because the interest they pay is subject to federal income tax.
B)   low rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax.
C)   high rate of interest because of their high default risk and because federal taxes must be paid on the interest they pay.
D)   high rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax.E) All of the above
F) A) and C)

Question 16

Which of the following is a financial intermediary?

Accepted Answer

A)   a mutual fund
B)   the stock market
C)   a U.S.government bond
D)   a wealthy individual who regularly buys and holds large quantities of government bondsE) A) and D)
F) B) and C)

Question 17

Which of the following statements is correct?

Accepted Answer

A)   The expected future profitability of a corporation influences the demand for that corporation's stock.
B)   When a corporation sells stock as a means of raising funds it is engaging in debt finance.
C)   The owners of bonds sold by the Microsoft Corporation are part owners of that corporation.
D)   All bonds are,by definition,perpetuities.E) A) and C)
F) A) and B)

Question 18

As an alternative to selling shares of stock as a means of raising funds,a large company could,instead,

Accepted Answer

A)   invest in physical capital.
B)   use equity finance.
C)   sell bonds.
D)   purchase bonds.E) A) and D)
F) All of the above

Question 19

Which of the following statements is correct?

Accepted Answer

A)   The interest rate that is usually reported is the interest rate that has been corrected for inflation.
B)   The supply of,and demand for,loanable funds depend on the real (rather than nominal) interest rate.
C)   If the nominal interest rate has decreased and the real interest rate has also decreased,then the inflation rate must have decreased as well.
D)   All of the above are correct.E) All of the above
F) B) and C)

Question 20

Lenders sell bonds and borrowers buy them.

Accepted Answer

A) True 
 B)False

Exam 18: Saving,investment,and the Financial System

The conventions of national income accounting imply that saving and investment are equal for the economy as a whole and for individual households and firms.

Correct AnswerverifiedShow Answer

To state that public saving is equal to investment,for a closed economy,is to state an accounting identity.

Correct AnswerverifiedShow Answer

A bond buyer is a

Correct AnswerverifiedShow Answer

We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Municipal bonds pay a relatively

Correct AnswerverifiedShow Answer

An increase in the demand for loanable funds increases the equilibrium interest rate and increases the equilibrium level of saving.

Correct AnswerverifiedShow Answer

What are the basic differences between bonds and stocks?

Correct AnswerverifiedA bond is a certificate of indebtedness ...View AnswerShow Answer

Which of the following would both make the interest rate on a bond higher than otherwise?

Correct AnswerverifiedShow Answer

When the U.S.government is in debt during a given year,it follows that its budget is in deficit for that year.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Which of the following events could explain an increase in interest rates together with a decrease in investment?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

As an alternative to selling shares of stock as a means of raising funds,a large company could,instead,

Correct AnswerverifiedShow Answer

On which of these bonds is the prospect of default most likely?

Correct AnswerverifiedShow Answer

Which of the following is a financial intermediary?

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Short-term bonds are generally

Correct AnswerverifiedShow Answer

Skeptics of government policy to reduce taxes on saving argue that it would primarily benefit the rich.

Correct AnswerverifiedShow Answer

Lenders sell bonds and borrowers buy them.

Correct AnswerverifiedShow Answer

After a corporation issues stock,the stock

Correct AnswerverifiedShow Answer

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A bond is a certificate of indebtedness ...
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