Question

1. In the United States, the economic agent responsible for providing the 2nd most surplus to the indirect financial market for transfer to the borrower/spenders is normally

a. governments

b. households

c. business firms

d. commercial banks

2. A 10% fall in all bond prices will cause short-term interest rates to

a. fall more than long-term bond interest rates

b. fall less than long-term interest rates

c. rise less than long-term interest rates

d. rise more than long-term interest rates

3. When calculating the expected return on financial assets, people consider all of the following except

a. actual inflation

b. tax payments

c. expected changes in the value of a dollar

d. economy's ability to adjust to expected inflation

4. A non-negotiable security is one that

a. must be accepted at face value

b. is not widely advertised

c. has no maturity date

d. cannot be resold in a secondary market

e. has only a current yield and not a capital gain or loss

Answer 1

1. The correct answer to 1st part is c. Business firms

(Answer as per data from online sources)

2. c. Rise less than long-term interest rates.

Now, since we are aware of the fact that there is an inverse relationship between the bond prices and interest rate, this means if the bond prices fall as in the above situation (10%) there will be a rise in the interest rate.

So, a fall in bond prices causes short term interest rate to rise less than long-term interest rate because of the shorter time span as compared to the long run which offers a longer time span to absorb the fall in bond prices and thus increase the interest rates by a greater value.

3. b. Tax payments

The expected return is the expected value of the probability distribution of possible returns an asset can provide to investors.

Expected return is calculated by multiplying potential outcomes (returns) by the chances of each outcome occurring, and then calculating the sum of those results.

Thus, from the formula we can directly see that tax payments play no role in deciding the expected return on financial assets.

Also, tax is something that is a result of returns and not a factor for determining the amounts of returns a company wishes to earn. Tax is simply a payment made to government for earning those returns.

4. a. Must be accepted at face value

As per the definition,

Non-negotiable describes the price of a good or security that is firmly established and cannot be adjusted, or a part of a contract or deal that is considered a requirement by one or both involved parties.

So, it is clear from the definition only that part a. is correct as since the price of the security cannot be adjusted this means that it must and can only be accepted at face value and no other value.