| Explanation | Terms |
| The interest rate that economists consider to be the most accurate measure is the | yield to maturity |
| The interest rate that equates the present value of payments received from a debt instrument with its value | Yield to maturity. |
| The concept of _____ is based on the common-sense notion that a dollar paid to you in the future is less | present value |
| To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million | discounting the future. |
| With an interest rate of 5 percent, the present value of $100 next year is approximately | $95. |
| If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200? | 10 percent |
| A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a | simple loan. |
| If $1102.50 is the amount payable in two years for a $1000 simple loan made today, the interest rate is | 5% |
| A loan that requires the borrower to make the same payment every period until the maturity date is called | ) fixed-payment loan. |
| A coupon bond pays the owner of the bond | a fixed-interest payment every period and repays the face value at the maturity date. |
| What is true for a coupon bond? | (a) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. (b) The price of a coupon bond and the yield to maturity are negatively related. (c) The yield to maturity is greater than the coupon rate when the bond price is below the par value. |
| An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of | 5 percent. |
| A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of | 8 percent. |
| If a $20,000 coupon bond has a coupon rate of 4 percent, then the coupon payment every year is | $800. |
| A bond that is bought at a price below its face value and the face value is repaid at a maturity date is | discount bond. |
| If a $10,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity | 100 percent. |
| The return on a 10 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year is | 30 percent. |
| The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is | 0 percent. |
| Interest-rate risk is | the riskiness of an asset's returns due to interest-rate changes. |
| Prices and returns for _____ bonds are more volatile than those for _____ bonds. | long-term; short-term |
| The Fisher equation states that | The nominal interest rate equals the real interest rate plus the expected rate of inflation. The real interest rate equals the nominal interest rate less the expected rate of inflation. |
| If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is | 8 percent. |
| In which of the situations would you prefer to be the lender? | When the interest rate is greater than the inflation rate |
| In which situations would you prefer to be borrowing? | When the interest rate is far lower the the inflation rate. |
| If wealth increases, the demand for stocks _____ and that of long-term bonds _____. | increases; increases |
| If the expected return on ABC stockstock is rises from 5 to 10 percent and the expected return on CBS unchanged, then the expected return of holding CBS stock _____ relative to ABC stock and the demand for CBS stock _____. | falls, falls |
| If housing prices are suddenly expected to shoot up, then, other things equal, the demand for houses will _____ and that of Treasury bills will _____. | increase; decrease |
| As the price of a bond _____ and the expected return _____, bonds become more attractive to investors and the quantity demanded rises. | falls; rises |
| When stock prices become more volatile, the demand curve for bonds shifts to the _____ and the interest rate _____. | right; falls |
| When bonds become more widely traded, and as a consequence the market becomes more liquid, the demand curve for bonds shifts to the _____ and the interest rate _____. | right; falls |
| Factors that decrease the demand for bonds include | Wealth, Risk, Expected Return, Inflation |
| In an expanding economy with growing wealth, the demand for bonds _____ and the demand curve for bonds shifts to the _____. | rises; right |
| The risk structure of interest rates is | the relationship among interest rates of different bonds with the same maturity. |
| Bonds with no default risk are called | default-free bonds. |
| The spread between the interest rates on bonds with default risk and default-free bonds is called the | risk premium. |
| The theory of asset demand predicts that as the possibility of a default on a corporate bond increases, theexpected return on the bond _____ while its relative riskiness _____. | falls; rises |
| When the default risk in corporate bonds increases, other things equal, the demand curve for corporate bonds shifts to the _____ and the demand curve for Treasury bonds shifts to the _____. | left; right |
| A plot of the interest rates on default-free government bonds with different terms to maturity is called | a yield curve. |
| When yield curves are downward sloping, | short-term interest rates are above long-term interest rates. |
| If the expected path of 1-year interest rates over the next four years is 5 percent, 4 percent, 2 percent, and 1 percent, then the expectations theory predicts that today's interest rate on the four-year bond is | 3% |
| According to the segmented markets theory of the term structure | interest rates on bonds of different maturities do not move together over time. |
| Which of the following theories of the term structure is (are) able to explain the fact that interest rates on bonds of different maturities tend to move together over time? | Expectations Theory and Liquidity premium theory |
| Which of the following are reported as liabilities on a bank's balance sheet? | Checkable deposits |
| Everything else equal, a bank will hold less excess reserves when | it expects to have a deposit inflow in the near future. |
| The First National Bank gains reserves when | a check written on an account at another bank is deposited in First National. |
| The purpose of regulation of financial markets is to | promote the provision of information to shareholders, depositors and the public. |
| Which of the following is not one of the eight basic puzzles about financial structure? | Direct finance, in which businesses raise funds directly from lenders in financial markets, is many times more important than indirect finance, which involves the activities of financial intermediaries. |
| The benefits financial intermediaries provide their customers include | increased diversification, reduced risk, reduced transaction costs |
| The presence of _____ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets. | asymmetric information |
| Due to the problem of adverse selection, lenders | may lend only to those "who do not need the money." may be reluctant to make loans not secured by collateral. |
| Stoped at | number 55 |
| Barter | Trade of one good for another without the use of money. |
| Double Coincidence of Wants | Makes barter difficult because both parties to a trade must be accepting of items offered in trade. |
| Money | Anything generally accepted in exchange for goods and services that acts as a medium of exhange, a measure of value, and a store of value. |
| Desirable Characteristics of Money | Durable, portable, divisible, recognizable, stable, and identical (homogenous.) |
| Functions of Money | Medium of exhange, a measure of value, and a store of value. |
| Medium of Exchange | Generally accepted as a means of payment - pays for goods and services. Using money to buy your groceries. |
| Measure of Value | A tool by which to measure the "worth" of an item. A 2-karat "diamond" costing $275 is probably not a "real" diamond. |
| Store of Value | A way to hold wealth for the future. Saving your money for use at a later date. |
| Gresham's Law | "Bad money drives out good money." As money of different quality circulates, people tend to trade away inferior quality money and keep superior quality money. |
| Fiduciary Money | Exchangeable for full value in gold or silver. |
| Fractional Reserve Money | Money that is only partially backed by gold or silver. |
| Fiat Money | Money that is deemed legal or tender by the government, and it is not based on or convertible into a commodity. |
| Legal Tender | Declared by law for the retirement of all debt, either public or private. |
| Value of Money | Value of money is reflected in its purchasing power. |
| Currency | Coins and paper money. |
| Federal Reserve Notes | Paper money used in the United States that is issued by the Federal Reserve System. |
| Liquidity | The degree to which an assest is easliy converted into or exhanged for money. |
| Money Supply | The supply of M1 - currency, checking account funds, and traveler's checks. These items are counted as money because they are used as the means of payment for purchases. |
| M1 | Most immediate form of money which includes currency, demand deposits, and traveler's checks. |
| M2 | All of M1 + less immediate (liquid) forms of money to include savings, money market mutual funds, and small denomination time deposits. |
| M3 | All of M1 + M2 + large denomination time deposits and large-denomination repurchase agreements. |
| Demand Deposits | Another name for checkable accounts. |
| Near Money | U S Savings Bonds and Corporate Bonds are financial assets or near monies. |
| Credit Cards | Instruments of debt - credit cards are NOT money. |
| Velocity of Money | The average number of times a dollar is used to purchase final goods and services during a year. It is equal to GDP divided by the stock of money. |
| Equation of Exchange | MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of output of goods and services produced in an economy. |
| Quantity Theory of Money | P = MV/Q A theory that hypothesizes that a change in the money supply will cause a proportional change in the price level because velocity and real output are unaffected by the quantity of money. |
| Transactions Demand for Money | The amount of money demanded by houses and businesses to conduct their transactions - the buying and selling of goods and services. |
| debt | money which is owed to someone |
| salary | regular payment, typically paid on a monthly basis by an employer to an employee |
| lend | to let someone use something (often money) on the understanding that it will be returned |
| earn | receive money in return for work or services |
| borrow | take something belonging to someone else (often money) with the understanding it will be returned |
| bill | a document with details of an amount of money owed for goods or services supplied |
| rent | a tenant's regular payment to a landlord for the use of property or land |
| currency | a system of money in use in a country |
| standing order | instruction to a bank to pay a fixed sum of money from your account on a regular basis to a specified person |
| direct debit | instruction to a bank to make a one-off payment or regular payments of varying amounts of money from your account to a specified person |
| loan | money lent: a sum of money that is expected to be paid back |
| interest | money earned from investments, or money paid at a particular rate for the use of money lent |
| current account | account used for day-to-day banking |
| deposit | put money into a bank account |
| mortgage | loan to buy property (real estate) |
| withdraw | take money out of a bank account |
| overdraft | short-term loan that allows a bank account holder to spend more than is in the account |
| transaction | a business deal done, or any transfer of money in or out of a bank account |
| payment card | a card issued by a bank allowing the holder to transfer money electronically to another bank account when making a purchase |
| direct debit | a payment system whereby creditors are authorized to debit a customer's bank account directly at regular intervals |
| Money | anything that is generally accepted as payment for goods and services; that is, it is anything that performs the medium of exchange function. |
| bank | a private business firm whose defining functions are holding deposits for the public, and making loans to the public. |
| financial intermediary | a private business firm whose defining function is to gather relatively small amounts of money from a large group of people, bundle that money into large amounts, and lend it to a relatively small group of people. This is known as financial intermediation. |
| Federal Reserve | the central bank of the U.S. economy. The primary function of any central bank, including the Federal Reserve, is to control and limit the growth of the money stock. All banks in the U.S. are subject to a special set of rules, regulations, requirements, and restrictions, including special rules of the Federal Reserve. The Fed does not create money directly (with one small exception), but is able to control the ability of the banking system to expand the money stock using the tools of monetary policy. |
| Monetary policy | the use of the government's power to control the money stock in order to stabilize the economy at high production and employment with stable prices. It is part of the stabilization function of the federal government, along with fiscal policy and commercial policy. |
| discount rate | is the interest rate the Fed charges banks for short-term (one or two day) loans of reserves. |
| federal funds rate | the interest rate banks charge one another for short-term loans of reserves. |
| Reserves | special deposits banks have with the regional federal reserve bank in their district. Each bank in the U.S. are required to have a reserve account in the regional federal reserve bank of the district in which it is located. |
| required reserve ratio | determines amount banks must have in reserve |
| excess reserves | the amount over the minimum required reserves |
| Expansionary monetary policy actions | lower discount rate, lower federal funds rate, lower required reserve ratio, and open market purchases. |
| Contractionary monetary policy actions | higher discount rate and federal funds rate, higher required reserve ratio, and open market sales. |
