Exam 1 Example Questions
1) The medium of exchange function of money improves a society's welfare by a) b) c) d) increasing the likelihood of achieving the double coincidence of wants reducing the number of prices one needs to know to make efficient choices acting as an efficient store of value all of the above
Reducing the number of prices needed to make efficient decisions is a service provided by the unit of account function. Most mediums of exchange, like dollars, are poor stores of value because they don't earn interest. 2) If the yield to maturity of a bond increases, then a) b) c) d) 3) the price of the bond decreases the present value of the income stream from the bond increases the coupon rate increases the current yield on the bond decreases
A Treasury bill, which is a discount bond, with a face value of $100 that matures in 2 months sells for $99.50. Which of the following is the closest to this bill's annualized yield to maturity a) b) c) d) 2% 3% 4% 5%
4)
If people expect inflation over the coming year to be 3% and the yield to maturity on a one year Treasury bond is 7%, then a) b) c) d) the nominal rate of interest is about 4% the nominal rate of interest is about 10% the real interest rate is about 4% the real interest rate is about 10%
5)
In 1981 the federal funds rate reached its highest level, 21.70%. At this rate the interest payment on an overnight federal funds loan of $10,000,000 was nearest to a) b) c) d) 2,170,000 5,400 165,000 6,000
6)
An interest rate is a _______________ that is almost always quoted ____________. a) b) c) d) rate of growth, as an annual rate relative price, in real terms factor that affects consumption, in terms of utility all of the above are correct
7)
Consider a coupon bond with a face value of $200,000 and a maturity date three years from today. Suppose the seller takes the coupons off the bond and sells you only the claim to the face value. If you purchase this claim to the face value for $190,000, what is the yield to maturity on your asset? a) b) c) d) 1.67% 1.72% 1.60% 1.83%
8)
An increase in the expected rate of capital gain a) b) c) d) increases the yield to maturity is caused by a fall in the price of an asset increases the expected rate of return on the asset will increase the current yield
9)
Suppose you borrow $1,300 to install a new floor in your kitchen. You take out a fixed payment loan with three equally spaced annual payments that begin in one year. The interest rate is 5%. Each of your three payments will be nearest to a) b) c) d) $477 $923 $340 $455
11) Suppose the price of gold is $35/oz. In a commodity money system, how much gold must there be a $5 gold piece? 1/7th of an ounce of gold 12) What are the desirable physical characteristics of money? durable, divisible, recognizable, portable
13) I heard a student say Why do we have to learn about present value and yields to maturity? A coupon bond will have the coupon rate written right on it! Explain to this student why the coupon rate is an inadequate measure of yield or return. 14) Argentina has historically had a very high inflation rate. Use the government budget constraint to discuss the likely cause(s) of this very high inflation. 15) An angry student shouted Why in the world were there ever mortgage backed securities? Their only use is to steal from the nave. Briefly explain the origin of mbs and their economic function. 16) What is regulation Q, and how and why did it induce financial innovation? Provide an example.
