Practice Questions Midterm 1

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ECON 3200 – Money & Banking ECON 3200 Mid Term #1 30 Practice Questions: 1. Holding the stock for one period, assuming a year-end dividend of $0.11, an expected sales price of $110, and required rate of return of 10%, the current price of the stock would be? Answer: $100.10 2. Which of the following of $1,000 face- value securities have the highest yield to maturity? a. A 5 percent coupon bond selling for $600 **correct answer b. A 5 percent coupon bond selling for $800 c. A 5 percent coupon bond selling for $1,000 d. A 5 percent coupon bond selling for $1,200 e. A 5 percent coupon bond selling for $1,500 3. What is the present value of $500.00 to be paid in two years if the annual interest rate is 5%? (Round up to the nearest integer – No decimal point). Answer: $453.51 4. If a $10,000 face value discount bond maturing in one year is selling for $6,000 then its yield to maturity is __. Answer: 67% 5. Financial markets have the basic function of: a. Assuring that governments need never resort to printing money b. Getting people with funds to lend together with people who want to borrow funds ** correct answer c. Assuring that the swings in the business cycle are less pronounced d. Both A and B of the above e. Both B and C of the above 6. An $8,000 coupon bond with an $400 coupon payment every year has a coupon rate of ___? Answer: 5.00% 7. The interest rate is 10%. There is a 2-year loan with two specific payments: $110 to be paid next year and $500.00 to be paid in two years. The current market value of this loan is $___. Answer: $513.22 8. True or False? The current interest rate on a 10-year coupon bond (with face value = $1000 and annual coupon rate = 2.125%) is 1.96%. This implies that the bond is traded on the market for more than $1,000. Answer: True 9. The current interest rate on a 10-year coupon bond (with face value = $1,000 and annual coupon rate = 3.25%) is 1.31%. The buyer of this bond will receive $__ payment from the bond issuer every year before maturity while holding the bond. Answer: $32.50 10. The “lemons problem” exists because of: pg. 1

ECON 3200 – Money & Banking a. Transactions costs b. Rational expectations c. Economies of scales d. Asymmetric information ** correct answer 11. If expectations of the future inflation rate are formed solely based on a weighted average of past inflation rates, then economics would say that expectation formation is a. Irrational b. Rational c. Monetarism d. Adaptive ** correct answer 12. True or False? U.S. Treasury bills, U.S savings bonds, and so- called zero coupon bonds are examples of discount bonds. Answer: True 13. If a $10,000 face value two years bond with a 10% coupon rate is selling for $10,000, then its interest rate is __. Answer: 10% 14. With an interest rate of 10 percent, the present value of a security that pays $1,100 next year and $1,460 four years from now is $__. Answer: $1997 +/- 15. Well- functioning financial markets a. Promote political instability b. Cause inflation c. Eliminate the need for indirect finance d. Cause financial crises e. Produce an efficient allocation of capital ** correct answer 16. A three-year bond with $1,000 face value and 10% coupon rate is sold for $1,000 today. If one year later, the market interest rate decreases by 5 percentage points, then this bond will have a market price of $__ next year. (Round of to the nearest integer). Answer: $1093 +/- 17. Which of the following are depositary institutions? a. Mutual savings banks b. Credit unions c. Mutual funds d. All the above e. Only A and B of the above ** correct answer 18. True or False? The current interest rate on a 10-year treasury security (with face value = $100 and annual coupon rate = 2.125%) is 1.96%. If the price of this treasury note goes up, its interest rate drops below 1.96%. Answer: True pg. 2

ECON 3200 – Money & Banking 19. With an interest rate of 5 percent, the present value of $100 next year approximately __. Answer: $95 20. If a $6,000 coupon bond has a coupon rate of 8 percent, then the coupon payment every year is __. Answer: $480 21. Holding the stock for one period, assuming a year-end dividend of $11.00, an expected sales price of $110, and required rate of return of 10%, the current price of the stock would be? Answer: $110 22. True or False? If the expected sales price is in the distant future, it does not affect the stock price. Answer: True 23. What is the rate of return on a 5 percent coupon bond that initially sells at par for $1,000 and sells for $1,200 next year? Answer: 25 percent 24. If a $5,000 face value discount bond maturing in one year is selling for $5,000, then its yield to maturity is ___. Answer: 0 percent 25. What is the rate of return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year? Answer: -5 percent 26. A two-year bond with $1,000 face value and 10% coupon rate is sold for $1,000 today. If one year later, the market interest rate increases by 5 percentage points, then this bond will have a market price of $__ next year. (Round off to the nearest integer). Answer: $957.00 +/- 27. A __ pays the owner a fixed coupon payment every year until the maturity date, when the __ value is repaid. a. Coupon bond; discount b. Discount bond; discount c. Coupon bond; face ** correct answer d. Discount bond face 28. True or False? The current interest rate on a 10-year treasury security (with face value = $100 and annual coupon rate = 2.125%) is 1.96%. If the price of this treasury note goes up, its interest rate rises above 1.96%. Answer: False 29. An increase in the required return a. Reduces the current price of stock ** correct answer b. Increases the current prices of stock c. Reduces the dividend payment d. Increases the expected sales price of stock e. Reduces the expected sales price of stock pg. 3

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ECON 3200 – Money & Banking 30. True or False? If expectations are formed rationally, then individuals will have a forecast that is 100% accurate all the time. Answer: False pg. 4

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