CHAPTER 1

2) Financial markets promote greater economic efficiency by channeling funds from ________ to ________.
investors; savers
borrowers; savers
savers; borrowers
savers; lenders
Answer: C
5) Markets in which funds are transferred from those who have excess funds available to those who have a
shortage of available funds are called
commodity markets.
fund-available markets.
derivative exchange markets.
financial markets.
Answer: D
8) The bond markets are important because they are
easily the most widely followed financial markets in the United States.
the markets where foreign exchange rates are determined.
the markets where interest rates are determined.
the markets where all borrowers get their funds.
Answer: C
9) The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per
year) is commonly referred to as the
inflation rate.
exchange rate.
interest rate.
aggregate price level.
Answer: C
12) Everything else held constant, a decline in interest rates will cause spending on housing to
fall.
remain unchanged.
either rise, fall, or remain the same.
rise.
Answer: D
14) An increase in interest rates might ________ saving because more can be earned in interest income.
encourage
discourage
disallow
invalidate
Answer: A
19) A rising stock market index due to higher share prices
increases people's wealth, but is unlikely to increase their willingness to spend.

increases people's wealth and as a result may increase their willingness to spend.
decreases the amount of funds that business firms can raise by selling newly-issued stock.
decreases people's wealth, but is unlikely to increase their willingness to spend.
Answer: B
21) Changes in stock prices
do not affect people's wealth and their willingness to spend.
affect firms' decisions to sell stock to finance investment spending.
occur in regular patterns.
are unimportant to decision makers.
Answer: B
25) A share of common stock is a claim on a corporation's
debt.
liabilities.
expenses.
earnings and assets.
Answer: D
27) The decline in stock prices from 2000 through 2002
increased individuals' willingness to spend.
had no effect on individual spending.
reduced individuals' willingness to spend.
increased individual wealth.
Answer: C
28) The Dow reached a peak of over 11,000 before the collapse of the ________ bubble in 2000.
housing
manufacturing
high-tech
banking
Answer: C
4) During a recession, output declines result in
lower unemployment in the economy.
higher unemployment in the economy.
no impact on the unemployment in the economy.
higher wages for the workers.
Answer: B
CHAPTER 2
8) Assume that you borrow $2000 at 10% annual interest to finance a new business project. For this loan to be
profitable, the minimum amount this project must generate in annual earnings is
$400.
$201.
$200.

$199.
Answer: B
9) You can borrow $5000 to finance a new business venture. This new venture will generate annual earnings of
$251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is
25%.
12.5%.
10%.
5%.
Answer: D
14) Securities are ________ for the person who buys them, but are ________ for the individual or firm that
issues them.
assets; liabilities
liabilities; assets
negotiable; nonnegotiable
nonnegotiable; negotiable
Answer: A
16) With direct finance, funds are channeled through the financial market from the ________ directly to the
________.
savers, spenders
spenders, investors
borrowers, savers
investors, savers
Answer: A
5) If the maturity of a debt instrument is less than one year, the debt is called
short-term.
intermediate-term.
long-term.
prima-term.
Answer: A
8) Equity holders are a corporation's ________. That means the corporation must pay all of its debt holders
before it pays its equity holders.
debtors
brokers
residual claimants
underwriters
Answer: C
16) A corporation acquires new funds only when its securities are sold in the
secondary market by an investment bank.
primary market by an investment bank.
secondary market by a stock exchange broker.
secondary market by a commercial bank.

Answer: B
18) Secondary markets make financial instruments more
solid.
vapid.
liquid.
risky.
Answer: C
1) The process of indirect finance using financial intermediaries is called
direct lending.
financial intermediation.
resource allocation.
financial liquidation.
Answer: B
16) An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to
fund corporate expansion to pay for Caribbean cruises for all of its employees and their families.
adverse selection
moral hazard
risk sharing
credit risk
Answer: B

7) The primary liabilities of a commercial bank are

bonds.
mortgages.
deposits.
commercial paper.
Answer: C
11) The agency that restricts insider trading is the
Federal Reserve System.
Securities and Exchange Commission.
Office of the Comptroller of the Currency.
Federal Deposit Insurance Corporation.
Answer: B
CHAPTER 3

2) Money is
anything that is generally accepted in payment for goods and services or in the repayment of debt.
a flow of earnings per unit of time.
the total collection of pieces of property that are a store of value.
always based on a precious metal like gold or silver.
Answer: A

6) A person's house is part of her

money.
income.
liabilities.
wealth.
Answer: D
9) An individual's annual salary is her
money.
income.
wealth.
liabilities.
Answer: B
6) The conversion of a barter economy to one that uses money
increases efficiency by reducing the need to exchange goods and services.
increases efficiency by reducing the need to specialize.
increases efficiency by reducing transactions costs.
does not increase economic efficiency.
Answer: C
17) In a barter economy the number of prices in an economy with N goods is
[N(N - 1)]/2.
N(N/2).
2N.
N(N/2) - 1.
Answer: A
27) Of the following assets, the least liquid is
stocks.
traveler's checks.
checking deposits.
a house.
Answer: D
33) During hyperinflations
the value of money rises rapidly.
money no longer functions as a good store of value and people may resort to barter transactions on a
much larger scale.
middle-class savers benefit as prices rise.
money's value remains fixed to the price level; that is, if prices double so does the value of money.
Answer: B
10) Which of the following is NOT included in the M1 measure of money but is included in the M2 measure of
money?
currency
traveler's checks

demand deposits
small-denomination time deposits
Answer: D
11) Which of the following is included in both M1 and M2?
currency
savings deposits
small-denomination time deposits
money market deposit accounts
Answer: A
13) Which of the following is included in M2 but NOT in M1?
NOW accounts
demand deposits
currency
money market mutual fund shares (retail)
Answer: D
14) Of the following, the largest is
money market deposit accounts.
demand deposits.
M1.
M2.
Answer: D
22) Small-denomination time deposits refer to certificates of deposit with a denomination of less than
$1,000.
$10,000.
$100,000.
$1,000,000.
Answer: C
CHAPTER 4

6) If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is
5 percent.
10 percent.
12.5 percent.
15 percent.
Answer: B
5) What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent?
$453.51
$500.00
$476.25
$550.00
Answer: A
9) A credit market instrument that requires the borrower to make the same payment every period until the
maturity date is known as a

simple loan.
fixed-payment loan.
coupon bond.
discount bond.
Answer: B
12) A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date
and then repays the face value is called a
simple loan.
fixed-payment loan.
coupon bond.
discount bond.
Answer: C
15) When talking about a coupon bond, face value and ________ mean the same thing.
par value
coupon value
amortized value
discount value
Answer: A
18) If a $1000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon payment
every year is
$37.50.
$3.75.
$375.00.
$13.75
Answer: A
19) If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is
$650.
$1,300.
$130.
$13.
Answer: A
20) An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of
5 percent.
8 percent.
10 percent.
40 percent.
Answer: A
51) If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is
2.5 percent.
5 percent.
7.5 percent.
10 percent.

Answer: B
55) If a $5,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is
0 percent.
5 percent.
10 percent.
20 percent.
Answer: A
58) A discount bond is also called a ________ because the owner does not receive periodic
payments.
zero-coupon bond
municipal bond
corporate bond
consol
Answer: A
48) The sum of the current yield and the rate of capital gain is called the
rate of return.
discount yield.
perpetuity yield.
par value.
Answer: A
CHAPTER 5

4) Everything else held constant, a decrease in wealth

increases the demand for stocks.
increases the demand for bonds.
reduces the demand for silver.
increases the demand for gold.
Answer: C
10) Everything else held constant, if the expected return on RST stock declines from 12 to 9 percent and the
expected return on XYZ stock declines from 8 to 7 percent, then the expected return of holding RST stock
________ relative to XYZ stock and demand for XYZ stock ________.
rises; rises
rises; falls
falls; rises
falls; falls
Answer: C
2) The demand curve for bonds has the usual downward slope, indicating that at ________ prices of the bond,
everything else equal, the ________ is higher.
higher; demand
higher; quantity demanded
lower; demand
lower; quantity demanded
Answer: D

2) When the price of a bond decreases, all else equal, the bond demand curve
shifts right.
shifts left.
does not shift.
inverts.
Answer: C
12) Everything else held constant, an increase in the liquidity of bonds results in a ________ in demand for
bonds and the demand curve shifts to the ________.
rise; right
rise; left
fall; right
fall; left
Answer: A
17) In a business cycle expansion, the ________ of bonds increases and the ________ curve shifts to the
________ as business investments are expected to be more profitable.
supply; supply; right
supply; supply; left
demand; demand; right
demand; demand; left
Answer: A
22) When the inflation rate is expected to increase, the ________ for bonds falls, while the ________ curve
shifts to the right, everything else held constant.
demand; demand
demand; supply
supply; demand
supply; supply
Answer: B
39) Everything else held constant, when the government has higher budget deficits
the demand curve for bonds shifts to the left and the interest rate rises.
the demand curve for bonds shifts to the left and the interest rate falls.
the supply curve for bonds shifts to the right and the interest rate falls.
the supply curve for bonds shifts to the right and the interest rate rises.
Answer: D
1) In Keynes's liquidity preference framework, individuals are assumed to hold their wealth in two forms

real assets and financial assets.

stocks and bonds.
money and bonds.
money and gold.
Answer: C
8) The opportunity cost of holding money is
the level of income.
the price level.
the interest rate.
the discount rate.

Answer: C
4) Of the four effects on interest rates from an increase in the money supply, the one that works in the opposite
direction of the other three is the
liquidity effect.
income effect.
price level effect.
expected inflation effect.
Answer: A
60) When the growth rate of the money supply is increased, interest rates will fall immediately if the liquidity
effect is ________ than the other money supply effects and there is ________ adjustment of expected inflation.
larger; fast
larger; slow
smaller; slow
smaller; fast
Answer: B
CHAPTER 6

2) The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond
matures is
interest rate risk.
inflation risk.
liquidity risk.
default risk.
Answer: D

5) U.S. government bonds have no default risk because

they are issued in strictly limited quantities.
the federal government can increase taxes or print money to pay its obligations.
they are backed with gold reserves.
they can be exchanged for silver at any time.
Answer: B
6) The spread between the interest rates on bonds with default risk and default-free bonds is called the
risk premium.
junk margin.
bond margin.
default premium.
Answer: A
10) If the possibility of a default increases because corporations begin to suffer losses, then the default risk on
corporate bonds will ________, and the bonds' returns will become ________ uncertain, meaning that the
expected return on these bonds will decrease, everything else held constant.
increase; less
increase; more
decrease; less
decrease; more
Answer: B

14) An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________
the price of Treasury bonds, everything else held constant.
increase; increase
reduce; reduce
reduce; increase
increase; reduce
Answer: C
15) A decrease in the riskiness of corporate bonds will ________ the price of corporate bonds and
________ the price of Treasury bonds, everything else held constant.
increase; increase
reduce; reduce
reduce; increase
increase; reduce
Answer: D
16) An increase in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________
the yield on Treasury securities, everything else held constant.
increase; increase
reduce; reduce
increase; reduce
reduce; increase
Answer: C
26) Junk bonds, bonds with a low bond rating, are also known as
high-yield bonds.
investment grade bonds.
high quality bonds.
zero-coupon bonds.
Answer: A
36) During a "flight to quality"
the spread between Treasury bonds and Baa bonds increases.
the spread between Treasury bonds and Baa bonds decreases.
the spread between Treasury bonds and Baa bonds is not affected.
the change in the spread between Treasury bonds and Baa bonds cannot be predicted.
Answer: A
42) A decrease in the liquidity of corporate bonds, other things being equal, shifts the demand curve for
corporate bonds to the ________ and the demand curve for Treasury bonds shifts to the ________.
right; right
right; left
left; left
left; right
Answer: D
50) When short-term interest rates are expected to fall sharply in the future, the yield curve will
A) slope up.
B) be flat.

C) be inverted.
D) be an inverted U shape.
Answer: C
51) If investors expect interest rates to fall significantly in the future, the yield curve will be inverted. This
means that the yield curve has a ________ slope.
A) steep upward
B) slight upward
C) flat
D) downward
Answer: D
52) When the yield curve is flat or downward-sloping, it suggest that the economy is more likely to enter
A) a recession.
B) an expansion.
C) a boom time.
D) a period of increasing output.
Answer: A