Question

In: Finance

Interest rates are important to financial institutions, like banks, since an increase in interest rates ________...

  1. Interest rates are important to financial institutions, like banks, since an increase in interest rates ________ the cost of acquiring funds and ________ the income from financial assets.
    A. decreases; decreases

    B. increases; increases C. decreases; increases D. increases; decreases

  2. (I) Debt markets are often referred to generically and collectively as the bond market. (II) A bond is a security that is a claim on the residual earnings and assets of a corporation after contractual payments are made to stockholders.
    A. (I) is true | (II) false.

    B. (I) is false | (II) true. C. Both are true.
    D. Both are false.

  3. Financial markets have the basic function of

    1. bringing together people with funds to lend and people who want to borrow

      funds.

    2. assuring that the swings in the business cycle are less pronounced.

    3. assuring that governments need never resort to printing money.

    4. both A and B of the above.

    5. both B and C of the above.

  4. Which of the following securities would be classified as a money market instrument? A. Stock

    B. Long Term Bond
    C. Commercial Paper
    D. Mortgage Backed Security

  5. IPOs are launched in the _________ market. A. Debt

    B. Residual C. Primary D. Secondary

  6. The agency problem called Empire-Building occurs when

    1. A firm’s CEO is more interested in increasing the size of the corporation, rather than the

      size of its profits.

    2. The CEO increases the scope of a business in order to limit competition.

    3. The CEO is granted maximum compensation with a minimum "strings."

    4. The CEO expands the firm’s footprint in order to increase economies of scale.

  7. When the lender and the borrower have different amounts of information regarding a transaction, ________ is said to exist.
    A. asymmetric information
    B. adverse selection

    C. moral hazard D. fraud

  8. 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
    A. 7%
    B. 22%.

    C. -15% D. -8%

  9. A decrease in the expected rate of inflation will ________ the expected return on bonds relative to returns on ________ assets.
    A. reduce | financial
    B. reduce | real

    C. increase | financial D. increase | real

  10. The interest rate that is adjusted for actual changes in the price level is called the A. ex post real interest rate.
    B. expected interest rate.
    C. ex ante real interest rate.

    D. none of the above.

  11. When the demand for bonds ________ or the supply of bonds ________, interest rates fall.

    1. Increases | increases

    2. Increases | decreases

    3. Decreases | decreases

    4. Decreases | increases

  12. The demand for an asset rises if ________ falls. A. risk relative to other assets
    B. expected return relative to other assets C. liquidity relative to other assets

    D. wealth

If Moody's or Standard and Poor's downgrades its rating on a corporate bond, typically the demand for that bond ________ and its yield ________.
A. Increases | decreases
B. Decreases | increases

  1. C. Increases | increases D. Decreases | decreases

Solutions

Expert Solution

1]

Interest rates are important to financial institutions, like banks, since an increase in interest rates increases the cost of acquiring funds and increases the income from financial assets.

An increase in interest rates increases the cost of acquiring funds because banks have to pay higher interest rates on their deposits. An increase in interest rates increases the income from financial assets because financial securities such as bonds will pay higher interest.

2]

A. (I) is true | (II) false.

The bond market and debt market are interchangeable terms, and refer to the same market.

Bondholders have preference over stockholders on the claim to a firm's assets.

3]

Both A and B of the above.

Financial markets provide an exchange market for lenders and borrowers to interact.

Financial markets smoothen the impact of business cycles by enabling risk management, risk transfer and organized medium of exchange.

Financial markets do not ensure that governments do not need to print money.

4]

C. Commercial Paper

Money market instruments are short-term debt instruments.

MBS and long-term bonds are long-term debt instruments. Stock is not a debt instrument.


Related Solutions

Interest rates are important to financial institutions since an increase in interest rate ________ the cost of acquiring funds, and an increase in interest rate ________ the income from assets.
Interest rates are important to financial institutions since an increase in interest rate ________ the cost of acquiring funds, and an increase in interest rate ________ the income from assets.A) decreases; decreasesB) increases; increasesC) decreases; increasesD) increases; decreases
"Declining interest rates are good for an economy, since interest sensitive spending will increase.
"Declining interest rates are good for an economy, since interest sensitive spending will increase.  Furthermore, since a decrease in a government budget deficit (by decreasing government spending and/or raising taxes) increases national savings, and thus, reduces the real interest rate, a deficit-reduction policy will have an expansionary effect in the economy due to the increase in interest sensitive spending."  Is this reasoning correct?  Use theIS-LM framework to explain your answer.
There are various types of financial institutions and intermediaries such as commercial banks, investment banks, mutual...
There are various types of financial institutions and intermediaries such as commercial banks, investment banks, mutual funds, hedge funds, pension funds, insurance companies, etc. Why are there so many different financial intermediaries other than commercial banks? How does an investor’s risk attitude and/or wealth play a role in his/her selection of a financial institution or intermediary? If you were an investor seeking moderate return for your investment, how would you select a financial institution or intermediary? Choose one and explain...
1. Since the expected inflation rate is one factor that affects interest rates, a large increase...
1. Since the expected inflation rate is one factor that affects interest rates, a large increase in expected inflation would normally lead to lower interest rates. A. True B. False 2. Assume that you are a consultant to a company, and you have the following information: expected dividend at the end of the current year (D1) = $0.67; current stock price = $45.00; and constant annual growth rate = 8.00%. What is the estimated cost of equity based on the...
Question 3: As financial institutions are important in the development of country. Financial institutions serve most...
Question 3: As financial institutions are important in the development of country. Financial institutions serve most people in some way, as financial operations are a critical part of any economy, with individuals and companies relying on financial institutions for transactions and investing. Governments consider it imperative to oversee and regulate banks and financial institutions because they do play such an integral part of the economy. As a student of financial management can you write five points regarding role and responsibilities...
What is the importance of banks and financial institutions in a consumer's life and for business...
What is the importance of banks and financial institutions in a consumer's life and for business entities? also comment on the importance of financial instruments such as currency, credit cards, checks, or a bank draft.
Report on the evolution, function and the essence of Islamic banks and financial institutions.
Report on the evolution, function and the essence of Islamic banks and financial institutions.
Briefly describe each of the following financial institutions: investment banks, commercial banks, financial services corporations, pension...
Briefly describe each of the following financial institutions: investment banks, commercial banks, financial services corporations, pension funds, mutual funds, exchange traded funds, hedge funds, and private equity companies
Banks sometimes quote interest rates in the form of “add-on interest.” In this case, if a...
Banks sometimes quote interest rates in the form of “add-on interest.” In this case, if a 1-year loan is quoted with an interest rate of 14.5% and you borrow $1,000, then you pay back $1,116. But you make these payments in monthly installments of $93 each. a. What is the true APR on this loan? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Use a financial calculator or Excel.) b. What is...
The recent collapse of some banks and financial institutions and the merger of others in ghana...
The recent collapse of some banks and financial institutions and the merger of others in ghana is proof that the financial system which consists of institutional units and markets that interact, typically in a complex manner, for the purpose of mobilizing funds for investment and providing facilities, including payment systems, for the financing of commercial activity remains unprotected in spite of the the presence of the Regulator and a solid legal system backing it. From the discussion in class and...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT