Intermediaries HW 1&2 Questions Flashcards
(30 cards)
Which of the following can be described as involving indirect finance?
A corporation take out loans from a bank, People buy shares in a mutual fund
Which of the following are secondary markets?
The NYSE, US gov. bond market, over-the-counter stock market, and the options market
Intermediaries who are agents of investors and match buyers with sellers of securities are called
Brokers
When the borrower engages in activities that make it less likely that the loan will be repaid, _______________ is said to exist.
Moral Hazard
The concept of adverse selection helps to explain
which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets, and why indirect finance is more important than direct finance as a source of business finance
True or False: (I) A simple loan requires the borrower to repay the principal at the maturity date along with an interest payment.
(II) A discount bond is bought at a price below its face value, and the face value is repaid at the maturity date.
Both are true
The concept of ________ is based on the notion that a dollar paid to you in the future is less valuable to you than a dollar today.
Present Value
The interest rate that equates the present value of the cash flow received from a debt instrument with its market price today is the
Yield to Maturity
A $10,000, 8 percent coupon bond that sells for $10,100 has a yield to maturity
Less than 8%
The nominal interest rate minus the expected rate of inflation
defines the real interest rate; is a better measure of the incentives to borrow and lend than the nominal interest rate; is a more accurate indicator of the tightness of credit market conditions than the nominal interest rate.
The demand for an asset rises if ______________ falls.
risk relative to other assets
When the price of a bond is above the equilibrium price, there is excess _______ in the bond market and the price will _________
supply; fall
When the inflation rate is expected to increase, the real cost of borrowing declines at any given interest rate; as a result, the ______ bonds increase and the ___________ curve shifts to the right.
supply of; supply
Factors that can cause the supply curve for bonds to shift to the right include
An expansion in overall economic activity
The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates ________ as the expected rate of inflation __________.
rise; increases
The risk premium on corporate bonds becomes smaller if
Either
- the liquidity of corporate bonds increases
- the riskiness of corporate bonds decreases.
When the default risk on corporate bonds decreases, other things equal, the demand curve for corporate bonds shifts to the __________ and the demand curve for Treasury bonds shifts to the ____________.
right; left
If a bond has a favorable tax treatment, its required interest rate (all else equal)
will be lower
A decrease in marginal tax rates would likely have the effect of ____________ the demand for municipal bonds and _____________ the demand for U.S. government bonds.
decreasing; increasing
According to the market segmentation theory of term structure,
- the interest rate for bonds of one maturity is determined by the supply and demand for bonds of that maturity.
- bonds of one maturity are not substitutes for bonds of other maturities; therefore, interest rates on bonds of different maturities do not move together over time.
- investors’ strong preference for short-term relative to long-term bonds explains why yield curves typically slope upward.
Each Fed bank president attends FOMC meetings; although only _____________ Fed bank presidents vote on policy, all ______________ provide input.
five; twelve
Banks subject to reserve requirements set by the Federal Reserve System include
all banks whether or not they are members of the Federal Reserve System.
Which of the following are not duties of the Board of Governors of the Federal Reserve System?
Setting the maximum interest rates payable on certain types of time deposits under Regulation Q.
What’s true about the FOMC? (3)
- The FOMC usually meets every six weeks to set monetary policy.
- The FOMC issues directives to the trading desk at the New York Fed.
- Designers of the Federal Reserve Act did not envision the use of open market operations as a monetary policy tool.
