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Homework (1) Spring 2013
Money and Banking
Name & ID:
Rawan Sameer Al-Hulaisi
200800114
Money & Banking
202
Homework (1)
Dr. Rashida Sharmin
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Homework (1) Spring 2013
Money and Banking
1. Financial markets promote economic efficiency by
A) channeling funds from investors to savers.
B) creating inflation.
C) channeling funds from savers to investors.
D) reducing investment.
2. Well-functioning financial markets promote
A) inflation.
B) deflation.
C) unemployment.
D) growth.
3. Financial markets improve economic welfare because
A) they channel funds from investors to savers.
B) they allow consumers to time their purchase better.
C) they weed out inefficient firms.
D) eliminate the need for indirect finance.
4. Which of the following can be described as involving direct finance?
A) A corporation takes out loans from a bank.
B) People buy shares in a mutual fund.
C) A corporation buys a short-term corporate security in a secondary market.
D) People buy shares of common stock in the primary markets.
5. With direct finance, funds are channeled through the financial market from the
________ directly to the ________.
A) savers, spenders
B) spenders, investors
C) borrowers, savers
D) investors, savers
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Money and Banking
6. Which of the following statements about the characteristics of debt and equity is
false?
A) They can both be long-term financial instruments.
B) They can both be short-term financial instruments.
C) They both involve a claim on the issuer's income.
D) They both enable a corporation to raise funds.
7. When I purchase ________, I own a portion of a firm and have the right to vote on
issues important to the firm and to elect its directors.
A) bonds
B) bills
C) notes
D) stock
8. An important financial institution that assists in the initial sale of securities in the
primary market is the
A) investment bank.
B) commercial bank.
C) stock exchange.
D) brokerage house.
9. A corporation acquires new funds only when its securities are sold in the
A) secondary market by an investment bank.
B) primary market by an investment bank.
C) secondary market by a stock exchange broker.
D) secondary market by a commercial bank.
10. The higher a security's price in the secondary market the ________ funds a firm can
raise by selling securities in the ________ market.
A) more; primary
B) more; secondary
C) less; primary
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Homework (1) Spring 2013
Money and Banking
D) less; secondary
11. _______ are short-term loans in which Treasury bills serve as collateral.
A) Repurchase agreements
B) Negotiable certificates of deposit
C) Federal funds
D) U.S. government agency securities
12. Bonds that are sold in a foreign country and are denominated in a currency other
than that of the country in which it is sold are known as
A) foreign bonds.
B) Eurobonds.
C) equity bonds.
D) country bonds.
13. When secondary market buyers and sellers of securities meet in one central location
to conduct trades the market is called a(n)
A) exchange.
B) over-the-counter market.
C) common market.
D) barter market.
14. To an economist, ________ is anything that is generally accepted in payment for
goods and services or in the repayment of debt.
A) wealth
B) income
C) money
D) credit
15. As a store of value, money
A) does not earn interest.
B) cannot be a durable asset.
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Homework (1) Spring 2013
Money and Banking
C) must be currency.
D) is a way of saving for future purchases.
16. Although ________ currency is lighter than coins made of metals, a disadvantage
arising from modern technology is the ease of ________.
A) paper; transport
B) commodity; counterfeiting
C) fiat; transport
D) paper; counterfeiting
17. Which of the following are true of fixed payment loans?
A) The borrower repays both the principal and interest at the maturity date.
B) Installment loans and mortgages are frequently of the fixed payment type.
C) The borrower pays interest periodically and the principal at the maturity date.
D) Commercial loans to businesses are often of this type.
18. A credit market instrument that pays the owner a fixed coupon payment every year
until the maturity date and then repays the face value is called a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
19. 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
D) discount bond; face
20. If a $1000 face value coupon bond has a coupon rate of 3.75 percent, then the
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Homework (1) Spring 2013
Money and Banking
coupon payment every year is
A) $37.50.
B) $3.75.
C) $375.00.
D) $13.75
21. An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate
of
A) 5 percent.
B) 8 percent.
C) 10 percent.
D) 40 percent.
22. A ________ is bought at a price below its face value, and the ________ value is
repaid at the maturity date.
A) coupon bond; discount
B) discount bond; discount
C) coupon bond; face
D) discount bond; face
23. If the amount payable in two years is $2420 for a simple loan at 10 percent interest,
the loan amount is
A) $1000.
B) $1210.
C) $2000.
D) $2200.
24. A credit market instrument that requires the borrower to make the same payment
every period until the maturity date is known as a
A) simple loan.
B) fixed-payment loan.
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Homework (1) Spring 2013
Money and Banking
C) coupon bond.
D) discount bond.
25. Which of the following are true for a coupon bond?
A) When the coupon bond is priced at its face value, the yield to maturity equals the
coupon rate.
B) The price of a coupon bond and the yield to maturity are positively related.
C) The yield to maturity is greater than the coupon rate when the bond price is above the
par value.
D) The yield is less than the coupon rate when the bond price is below the par value.
26. 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) positively; rises; rises
B) negatively; falls; falls
C) positively; rises; falls
D) negatively; rises; falls
27. The interest rate that describes how well a lender has done in real terms after the
fact is called the
A) ex post real interest rate.
B) ex ante real interest rate.
C) ex post nominal interest rate.
D) ex ante nominal interest rate.
28. A financial institution that assists in the initial sale of securities in primary market is
the ---------A) Investment bank
B) Underwriter bank
C) Broker
D) Dealer
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Homework (1) Spring 2013
Money and Banking
29. Brokers primarily
A) Match buyers with sellers of securities
B) Link buyers and sellers by buying and selling securities at stated price
C) Underwrite securities
D) Provide loans to investors
30. Which one is a money market instrument?
A) Treasury bond
B) Mortgages
C) Corporate bond
D) Treasury Bill
31. Bond owners are owners of a firm.
A) True
B) False
32. Foreign bonds are
A) Sold in a foreign country and denominated in that country’s currency
B) Sold in a foreign country and denominated in own country’s currency
C) Same as foreign currency
D) None of the above
33. --------- is fiat money.
A) Paper money
B) Gold
C) Check
D) All of the above
34. If nominal interest rate is 7%, expected inflation is 3%, then what is the real interest
rate?
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Homework (1) Spring 2013
Money and Banking
A) 7%
B) 4%
C) 5%
D) 3%
35. If inflation increases to 4% from 3% as stated in the previous problem, who will
benefit?
A) Borrower
B) Lender
C) Both
D) None of them
36. What are the functions of money? Give two examples of E-Money.
Medium of Exchange—promotes economic efficiency by minimizing the time spent in
exchanging goods and services.
1- Store of value Card
2- Debit Card
37. What is money? There are five criteria of money, write all of them.
Money (money supply)—anything that is generally accepted in payment for goods or services or
in the repayment of debts; a stock concept
38. Distinguish between direct finance and indirect finance?
Indirect finance is where borrowers borrow funds from the financial market through indirect
means, such as through a financial intermediary.
Direct finance where there is a direct connection to the financial markets as indicated by the
borrower issuing securities directly on the market.
39. Distinguish between a foreign bond and a Eurobond.
Foreign bond: sold in foreign countries and denominated in that country’s currency.
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Homework (1) Spring 2013
Money and Banking
Eurobond: bond denominated in a currency other that of the country in which sold.
40. What is the difference between primary and secondary market?
The primary market is direct from the company issuing the stock or bond to the buyer.
The secondary market is after the initial public offering, people buy and sell on the stock
exchange, NASDAQ or over the counter market.
41. Distinguish between money market and capital market. Give examples for each.
The money market refers to all institutions and procedures that provide for transactions in shortterm debt instruments generally issued by borrowers with very high credit ratings. Example, U.S.
Treasury bills.
The capital market refers to all institutions and procedures that provide for transactions in longterm financial instruments. Example, Corporation bonds.
42. Define YTM and interest rate.
YTM: The interest rate that equates the present value of cash flow payments received from a
debt instrument with its value today.
Interest rate: is the rate at which interest is paid by borrowers for the use of money that they
borrow from a lender.
43. Explain Fisher equation. You should define notations, if used in the equation.
It’s an economic theory that explains the relationship between interest rates and inflation. The
Fisher Equation is the real rate of interest + inflation rate = nominal rate of interest. In other
words, the equation clarifies that the real interest rate for a loan is equivalent to the posted, or
nominal, interest rate minus the rate of inflation. The Greek letter π is normally used to signify
the inflation rate. It should not be confused with the constant that π represents in geometry.
44. Would it make sense to buy a house when mortgage rates are 14% and expected
inflation is 15%? Explain your answer.
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Homework (1) Spring 2013
Money and Banking
If you mean that property values would be increased 15% per year, the answer would be yes
because you would be realize every penny of interest in equity, plus you would have a monster
tax deduction.
45. Simple loan: is a type of loan arrangement that applies the rate of interest on a daily
rather than a monthly basis.
A fixed-payment loan (amortized loan): An amortized loan is a loan where payments are the
same amount each month.
Coupon bond: An unregistered, negotiable bond on which interest and principal are payable to
the holder, regardless of whom it was originally issued to.
Discount bond: pays the bondholder the face value at maturity.
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