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ECN 506 Study Guide - Quiz Guide: Business Cycle, Monetary Base, United States Treasury Security

Course Code
ECN 506
Rameshwar Bhardwaj
Study Guide

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Assignment 1. (This assignment covers modules 1-5)
Note: Each Multiple Choice Question Carries 1 mark. For short answer and numerical questions, marks
are mentioned by the side of the question. Weight=15% in total marks. Total Marks 47
Q1 Which of the following statement is not true?
(a) A bond is a debt security that promises fixed payments (coupon payment at specified
intervals) at future dates.
(b) Well-functioning financial markets assure high and riskless returns to the investors.
(c) Adverse selection is a problem that occurs prior to a transaction, while Moral hazard occurs
after the transaction.
(d) Banks are able to reduce adverse selection by screening potential borrowers.
(e) Fiat money has no intrinsic value but has been declared money by government decree or
Q2 Select a wrong statement from the following:
(a) When a bank makes a loan, it sometimes requires borrowers to maintain a checking account
at the bank until the loan is paid off. The purpose of this requirement is to reduce moral hazard
(b) A major difference between stocks and bonds is that bonds pay their owners interest while
stocks pay dividends.
(c) Securities which have original maturities of less than one year are called the capital market
(d) Commercial paper represents the short-term liabilities of the most creditworthy business
firms and finance companies.
Q3 The following statements are correct except
(a)If you withdraw $500 out of your checking account, M1 would decrease
(b) Banks channel funds from savers and direct these funds to the most valuable and profitable
activities at the lowest transactions cost.
(c) Rational expectations refers to people’s expectations of future variables are the best
possible forecasts based on all available information.
(d) An example of Rational Expectations: during periods of accelerating inflation, people will
anticipate stricter credit controls accompanied by high interest rates. Therefore they will attempt
to borrow up to their credit capability now, thus largely nullifying the controls. This is an example
of policy ineffectiveness situation under rational expectations
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Q4 The following 10 questions are Multiple Choice Question. Mark (Select) the appropriate
answer(each carries) 1 mark each
(i) The concept of ________ is based on the common-sense notion that a dollar paid to you in
the future is less valuable to you than a dollar today.
A) future value
B) present value
C) interest
D) deflation
(ii) The present value of an expected future payment ________ as the interest rate increases.
A) rises
B) falls
C) is constant
D) is unaffected
(iii) If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every
year is
A) $1,300.
B) $650.
C) $130.
D) $13.
(1v) The price of a coupon bond and the yield to maturity are ________ related; that is, as the
yield to maturity ________, the price of the bond ________.
A) negatively; rises; falls
B) positively; rises; rises
C) negatively; falls; falls
D) positively; rises; falls
(V) Which of the following bonds would you prefer to be buying?
A) A $10,000 face-value security with a 10 percent coupon selling for $9,000
B) A $10,000 face-value security with a 7 percent coupon selling for $10,000
C) A $10,000 face-value security with a 9 percent coupon selling for $10,000
D) A $10,000 face-value security with a 10 percent coupon selling for $10,000
(vi) As the price of a bond _________ and the expected return _________, bonds become
more attractive to investors and the quantity demanded rises.
(a) falls; rises
(b) falls; falls
(c) rises; rises
(d) rises; falls
(V11)There is a bond with a face value of $1000, and we are given the following expression
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In the above expression, r is the YTM. We can say that r<7.5%
(v111) Look at the following expression:
Market Price
We can say that in the above case, the bond is selling at a discount
(1x) The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100
one year later is
(a) 5 percent.
(b) 10 percent.
(c) 14 percent.
(d) 15 percent
(X) What would be the rate of return on a bond bought for $1000 and sold one year later for
$800? The bond has a face value of $1000 and a coupon rate of 8%.
(a) -12%
(d)None of the above
Q 4 Which of the following is wrong
(a)The yield to maturity on a bond is the rate of discount that makes the sum of present values
for all future payments equal to the market price of the bond.
(b)Suppose a bond has a face value of $100, annual coupon payments of $4, a maturity of 5
years, and a market price of the bond $90. In the following equation,
$90= $4/(1+i) + $4/(1+i)2 + $4/(1+i)3 + $4/(1+i)4 +$4(1+i)5
i=Yield to maturity
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