Capital And Financial Markets Chapter 16 Full Test Bank - Principles of Macroeconomics -Complete Test Bank by Taylor. DOCX document preview.
Chapter 16
Capital and Financial Markets
Multiple Choice
1. The stock of physical capital in the economy consists of all of the
a. | buildings and equipment used by private firms and the government, plus residential housing. |
b. | buildings and equipment used by private firms. |
c. | buildings, equipment, and financial assets of private firms. |
d. | buildings and equipment used by private firms and the government. |
e. | buildings and equipment used by private firms and the government, not including schools and the military. |
OBJ: factual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Physical Capital
MSC: Bloom's: Knowledge
2. Which of the following is not an example of physical capital?
a. | Building |
b. | Office furniture |
c. | Delivery trucks |
d. | Money |
e. | Computer |
OBJ: conceptual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Physical Capital
MSC: Bloom's: Knowledge
3. The stock of physical capital in the economy
a. | depends only on the level of investment by private firms and the government, and the number of residential housing units. |
b. | None of these answers is correct. |
c. | depends only on the level of investment by private firms and the government. |
d. | depends only on the level of investment by private firms and the number of residential housing units. |
e. | depends only on the level of investment by private firms. |
OBJ: factual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Physical Capital
MSC: Bloom's: Knowledge
4. Which of the following is an example of physical capital?
a. | A checking deposit |
b. | A car loan |
c. | A firm's stock shares |
d. | A firm's bond |
e. | A new truck |
OBJ: conceptual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Physical Capital
MSC: Bloom's: Knowledge | AACSB: Analytic
5. Depreciation of physical capital occurs because it
a. | is no longer wanted. |
b. | cannot be fixed. |
c. | is not made well. |
d. | gets old. |
e. | wears out. |
OBJ: factual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Depreciation
MSC: Bloom's: Knowledge
6. When capital loses value over time because of use and wear, we call this
a. | depreciation. |
b. | wear and tear. |
c. | creative destruction. |
d. | capital utilization. |
e. | decapitalization. |
OBJ: factual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Depreciation
MSC: Bloom's: Knowledge
7. Depreciation occurs when
a. | machines wear out. |
b. | factories get old. |
c. | capital is abandoned. |
d. | production lines are shut down. |
e. | capital is sold. |
OBJ: factual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Depreciation
MSC: Bloom's: Knowledge
or 0
8. Physical capital is a good used to produce other goods.
Basic
OBJ: factual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Physical Capital
MSC: Bloom's: Knowledge
9. Residential housing is considered physical capital only if it is used for business purposes.
Moderate
OBJ: factual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Physical Capital
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
10. A difference between financial capital and physical capital is that
a. | financial capital is not necessary. |
b. | financial capital never loses its value. |
c. | physical capital cannot be traded. |
d. | physical capital does not lose its value. |
e. | financial capital cannot be used to produce goods or services. |
OBJ: factual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Financial Capital
MSC: Bloom's: Analysis | AACSB: Analytic
11. Which of the following is not an example of financial capital?
a. | General Motors bonds |
b. | Google stocks |
c. | Computer equipment |
d. | Government bonds |
e. | Corporate cash balances |
OBJ: conceptual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Financial Capital
MSC: Bloom's: Application | AACSB: Analytic
12. Which of the following is the best example of a debt contract?
a. | Bank loans and stocks |
b. | Bank loans |
c. | Bank loans and bonds |
d. | Bank loans, bonds, and stocks |
e. | Stocks |
OBJ: conceptual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Financial Capital
MSC: Bloom's: Application | AACSB: Analytic
13. Which of the following is an example of financial capital?
a. | A new factory |
b. | Office furniture |
c. | A company bond |
d. | Computer equipment |
e. | A new truck |
OBJ: conceptual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Financial Capital
MSC: Bloom's: Application | AACSB: Analytic
14. A debt contract usually specifies
a. | that only the original lender can collect the payments. |
b. | how much of a company is owned by the lender. |
c. | which assets a lender will receive if a company defaults. |
d. | a specific amount of money owed and the rate of interest. |
e. | the rights that the lender has to a company. |
OBJ: factual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Debt Contract
MSC: Bloom's: Knowledge | AACSB: Analytic
15. Equity contracts of a corporation represent
a. | ownership. |
b. | debt. |
c. | loans. |
d. | the amount of market power. |
e. | how much the corporation owes the government. |
OBJ: factual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Equity Contract
MSC: Bloom's: Knowledge
16. Which of the following is an example of an equity contract?
a. | Mortgage |
b. | Dividends |
c. | Stocks |
d. | Interest |
e. | Bonds |
OBJ: factual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Equity Contract
MSC: Bloom's: Application
or
17. In economics, physical capital is the same as financial capital.
Moderate
OBJ: conceptual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Physical Capital
MSC: Bloom's: Knowledge
18. Equity and debt are two different names for the same thing.
Basic
OBJ: factual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Equity versus Debt
MSC: Bloom's: Knowledge
19. From 1987 to 2010, the U.S. stock market has delivered positive annual returns every year.
Moderate
OBJ: factual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Stock Market MSC: Bloom's: Knowledge
MSC: Bloom's: Knowledge
20. The federal government borrows funds by obtaining bank loans.
Basic
OBJ: factual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Government Borrowing
MSC: Bloom's: Knowledge | AACSB: Analytic
Short Answer
21. What is the difference between financial capital and physical capital?
OBJ: conceptual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Capital
MSC: Bloom's: Analysis | AACSB: Analytic
22. What is the difference between a debt contract and an equity contract?
OBJ: conceptual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Financial Capital
MSC: Bloom's: Analysis | AACSB: Analytic
23. A firm needs to raise financial capital in order to purchase some new physical capital to increase production. Name three ways in which the firm could raise the financial capital. Which is the best choice?
OBJ: factual
SEC: 1. The Distinction Between Physical Capital and Financial Capital
TOP: Financial Capital
MSC: Bloom's: Knowledge | AACSB: Communication
Multiple Choice
24. The demand for capital is
a. | a final demand because it is determined by market supply and demand. |
b. | a final demand because it is unrelated to any other market. |
c. | a derived demand because it is financially funded by other markets. |
d. | a derived demand because it depends on the production of goods. |
e. | the same as the demand in any other market. |
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Derived Demand
MSC: Bloom's: Knowledge | AACSB: Analytic
25. In a competitive market, the rental price of capital
a. | is more than the marginal revenue product of capital. |
b. | is less than the marginal revenue product of capital. |
c. | equals the marginal revenue product of capital. |
d. | equals the average cost of capital. |
e. | is more than the marginal cost of capital. |
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Rental Price of Capital
MSC: Bloom's: Knowledge | AACSB: Analytic
26. The marginal revenue product of capital is the
a. | marginal product of capital multiplied by the price of capital. |
b. | amount revenue changes when one more unit of capital is used. |
c. | total cost of capital divided by the quantity of capital. |
d. | amount profit is reduced by capital purchases. |
e. | product of the price of capital and the quantity of capital. |
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Marginal Revenue Product of Capital
MSC: Bloom's: Knowledge
Exhibit 16-1
27. Refer to Exhibit 16-1. The marginal revenue product for the sixth unit of tools is
a. | $0. |
b. | $16. |
c. | $32. |
d. | $64. |
e. | $240. |
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Marginal Revenue Product of Capital
MSC: Bloom's: Application | AACSB: Analytic
28. Refer to Exhibit 16-1. Suppose that the price of tools is $32. Then a profit-maximizing firm will buy a total of
a. | 1 unit. |
b. | 2 units. |
c. | 3 units. |
d. | 4 units. |
e. | 5 units. |
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Demand for Capital
MSC: Bloom's: Application | AACSB: Analytic
29. A profit-maximizing firm will rent or purchase a quantity of capital such that the
a. | marginal revenue product of labor is equal to the price of capital. |
b. | marginal revenue product of capital is greater than the price of capital. |
c. | marginal revenue product of capital is equal to the price of capital. |
d. | marginal revenue is equal to the marginal cost. |
e. | marginal revenue product of capital is greater than or equal to the price of capital. |
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Profit Maximization
MSC: Bloom's: Application | AACSB: Analytic
30. If the marginal revenue product of capital for a profit-maximizing firm is $800 and the price of capital is $600, then the firm
a. | has just the right amount of capital. |
b. | should decrease the amount of other inputs its production process requires. |
c. | should increase the amount of other inputs its production process requires. |
d. | should purchase or rent more capital. |
e. | should reduce the amount of capital. |
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Marginal Revenue Product of Capital
MSC: Bloom's: Application | AACSB: Analytic
31. If the marginal revenue product of capital for a profit-maximizing firm is $500 and the price of capital is $300, then
a. | the firm will need to hire more capital in order to maximize profit. |
b. | the firm is not maximizing profit. |
c. | Not enough information is given to support the any of the choices. |
d. | the firm will need to hire less capital in order to maximize profit. |
e. | the firm is maximizing profit. |
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Profit Maximizing Level of Capital
MSC: Bloom's: Application | AACSB: Analytic
32. The demand curve for capital shows
a. | the total quantity of capital demanded at each price of the good produced. |
b. | marginal revenue product of capital increasing as more capital is used. |
c. | marginal revenue product of capital increasing as the price of capital increases. |
d. | the marginal revenue product at each price of the good produced. |
e. | the total quantity of capital demanded at each price of capital. |
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Demand Curve for Capital
MSC: Bloom's: Application | AACSB: Analytic
33. The demand curve for capital shows that when the price of capital falls,
a. | the quantity of capital demanded does not change. |
b. | the quantity of capital demanded decreases. |
c. | the quantity of capital demanded increases. |
d. | marginal revenue product of capital increases. |
e. | marginal revenue falls. |
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Demand for Capital
MSC: Bloom's: Application | AACSB: Analytic
34. The profit-maximizing principle that marginal revenue product equals the price of the input applies
a. | to any factor of production. |
b. | only in the short run. |
c. | to capital only. |
d. | to labor and capital only. |
e. | to labor only. |
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Profit Maximization
MSC: Bloom's: Knowledge | AACSB: Analytic
35. The equilibrium rental price of capital is determined by the
a. | market's marginal revenue product of capital. |
b. | firm's marginal revenue product of capital. |
c. | firm's demand for capital. |
d. | market's demand for and supply of capital. |
e. | market's demand for capital. |
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Demand and Supply of Capital
MSC: Bloom's: Knowledge
36. The equilibrium price of capital
a. | is not affected by a government subsidy on the rental of capital by firms. |
b. | decreases if the government subsidizes the rental of capital by firms because the demand curve for capital shifts to the left. |
c. | increases if the government subsidizes the rental of capital by firms because the demand curve for capital shifts to the right. |
d. | increases if the government subsidizes the rental of capital by firms because the supply curve for capital shifts to the left. |
e. | decreases if the government subsidizes the rental of capital by firms because the supply curve for capital shifts to the right. |
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Demand and Supply of Capital
MSC: Bloom's: Analysis | AACSB: Analytic
37. The price of a good with a vertical market supply is called
a. | pure profit. |
b. | economic rent. |
c. | pure price. |
d. | fixed-supply price. |
e. | gouged price. |
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Economic Rent
MSC: Bloom's: Knowledge
38. If a new tax is placed on a good with a vertical supply curve, the price paid by demanders
a. | does not change. |
b. | decreases by the amount of the tax. |
c. | decreases by an uncertain amount. |
d. | increases by the amount of the tax. |
e. | increases by an uncertain amount. |
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Vertical Supply
MSC: Bloom's: Analysis | AACSB: Analytic
or
39. The demand for capital is a derived demand, as is the demand for labor.
Basic
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Capital Demand
MSC: Bloom's: Knowledge
40. In a competitive market, the rental price of capital equals its marginal revenue product.
Moderate
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Rental Price of Capital
MSC: Bloom's: Knowledge | AACSB: Analytic
41. The equilibrium rental price of capital is determined by the supply of and demand for capital goods.
Basic
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Capital Demand
MSC: Bloom's: Knowledge
42. Because capital is a fixed input, the marginal revenue product of capital remains fixed as capital changes.
Basic
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Marginal Revenue Product of Capital
MSC: Bloom's: Knowledge
43. If the marginal revenue product is less than the price of an input, then a profit-maximizing firm will increase the amount of the input.
Moderate
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Capital Demand
MSC: Bloom's: Analysis | AACSB: Analytic
44. A profit-maximizing firm will select all inputs so that the marginal revenue product is equal to the price of the input.
Basic
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Demand for Capital
MSC: Bloom's: Knowledge
45. A tax on renting capital equipment will always decrease the quantity of capital supplied.
Moderate
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Economic Rent
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
46. When a firm owns its capital,
a. | depreciation is the only capital cost. |
b. | the marginal product of capital must be zero. |
c. | it still pays an implicit rent. |
d. | firms that must rent capital cannot compete. |
e. | the capital is considered free. |
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Implicit Rental Price
MSC: Bloom's: Knowledge | AACSB: Analytic
47. If the interest rate at which a firm can borrow or lend is 10 percent, then the firm will own
a. | all units of capital with a marginal revenue product below 10 percent. |
b. | all units of capital with a marginal revenue product above 10 percent. |
c. | all units of capital with an average revenue product below 10 percent. |
d. | all units of capital with an average revenue product above 10 percent. |
e. | no capital at all. |
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Implicit Rental Price
MSC: Bloom's: Application | AACSB: Analytic
48. A construction firm can buy a bulldozer for $200,000. Gasoline costs $500 per month, the interest rate is 15 percent, and depreciation is $25,000 per year. If the bulldozer is purchased, the monthly implicit rent will be
a. | $2,500. |
b. | $4,583. |
c. | $32,083. |
d. | $5,083. |
e. | $32,583. |
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Implicit Rental Price
MSC: Bloom's: Application | AACSB: Analytic
49. If the implicit rental price of an airliner is $200,000 per year, the interest rate is 5 percent, and depreciation is $60,000 per year, then the purchase price of the airliner is
a. | $1,300,000. |
b. | $4,000,000. |
c. | $2,800,000. |
d. | $4,060,000. |
e. | $5,200,000. |
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Implicit Rental Price
MSC: Bloom's: Application | AACSB: Analytic
50. The implicit rental price of a piece of capital
a. | depends on the interest rate only if the firm must borrow money. |
b. | depends on the interest rate and depreciation. |
c. | is the same as the rental price of a piece of capital. |
d. | depends on the interest rate only. |
e. | depends on the opportunity cost of the purchase if the firm must borrow money. |
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Implicit Rental Price
MSC: Bloom's: Knowledge
51. Firms use physical capital markets to raise funds for expansion.
Basic
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Capital Demand
MSC: Bloom's: Knowledge
52. A higher interest rate implies a higher implicit rental price.
Basic
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Implicit Rental Price
MSC: Bloom's: Knowledge
53. When a firm pays cash for a piece of equipment, the implicit rental price is zero.
Basic
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Implicit Rental Price
MSC: Bloom's: Knowledge
Short Answer
54. Draw a diagram of a market in which economic rent occurs. Be sure to label the rent in the diagram.
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Economic Rent
MSC: Bloom's: Knowledge | AACSB: Analytic
55. Why do economists say that firms that own capital pay rent?
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Implicit Rental Price
MSC: Bloom's: Knowledge | AACSB: Analytic
56. Explain how a firm decides how much capital to hire or purchase.
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Demand for Capital
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice
57. The table below contains information about a firm's marginal revenue product of capital.
Suppose the rental price of capital is $425,000. How many units should the firm hire to maximize profit?
a. | The firm should hire 3,000 units or, if fractional units are possible, less than 4,000 but more than 3,000 units. |
b. | The firm should hire 4,000 units or, if fractional units are possible, less than 5,000 but more than 4,000 units. |
c. | The firm should hire 5,000 units. |
d. | The firm should hire 6,000 units or, if fractional units are possible, less than 7,000 but more than 6,000 units. |
e. | The firm should hire 7,000 units or, if fractional units are possible, less than 6,000 but more than 7,000 units. |
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Demand for Capital
MSC: Bloom's: Application | AACSB: Analytic
58. Which of the following situations would increase the demand for capital?
a. | An improvement in technology increases the marginal product of capital. |
b. | Capital wears out 50 percent faster than it used to. |
c. | The Fed increases the interest rate. |
d. | Sales are higher than anticipated, so the firm has enough cash on hand that it can afford to buy the new equipment outright. |
e. | The Fed decreases the interest rate. |
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Demand for Capital
MSC: Bloom's: Knowledge | AACSB: Analytic
59. Which of the following statements about the housing market is not ?
a. | The demand curve for housing is negatively sloped. |
b. | Many experts believe that one of the factors contributing to the housing bust of 2006 was that interest rates had been too high since the year 2000. |
c. | The quantity of housing demanded is negatively related to the rental price of housing. |
d. | For many people, the house they live in is the largest capital item they rent or own. |
e. | All of these are true. |
OBJ: conceptual | factual
SEC: 2. Markets for Physical Capital
TOP: Housing Market
MSC: Bloom's: Knowledge | AACSB: Analytic
60. Applied to the housing market, the implicit rental price concept states that
a. | it is always better to own than to rent a house. |
b. | it is always better to rent than to own a house. |
c. | the implicit rental price will equal the interest rates on the mortgage (the loan on the house) plus the amount of depreciation on the house during the year. |
d. | taxes will always be lower when renting a house. |
e. | None of these. |
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Housing Market
MSC: Bloom's: Application | AACSB: Analytic
/
61. The quantity of housing demanded is positively related to the rental price of housing.
Basic
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Housing Market and Demand
MSC: Bloom's: Knowledge
62. Many experts think a major reason for the housing boom during the years leading up to the housing bust in 2006 was that mortgage interest rates were very low.
Basic
OBJ: factual
SEC: 2. Markets for Physical Capital
TOP: Housing Market
MSC: Bloom's: Knowledge
63. The market demand for housing is the result of adding all of the relevant individual demand curves.
Basic
OBJ: conceptual
SEC: 2. Markets for Physical Capital
TOP: Housing Market and Demand
MSC: Bloom's: Knowledge
Multiple Choice
64. The annual return from holding a stock is the
a. | increase in the price of the stock for the year plus the dividends paid by the firm for the year. |
b. | dividends paid by the firm for the year minus the increase in the price of the stock for the year. |
c. | increase in the price of the stock for the year. |
d. | increase in the price of the stock for the year minus the dividends paid by the firm for the year. |
e. | dividends paid by the firm for the year. |
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Annual Return
MSC: Bloom's: Knowledge
65. If the price of a stock is $50, the dividend is $5, and the stock price has risen $2 in the past year, the dividend yield is
a. | $5. |
b. | 10 percent. |
c. | 4 percent. |
d. | 7 percent. |
e. | $7. |
OBJ: conceptual
SEC: 3. Markets for Financial Capital
TOP: Rate of Return
MSC: Bloom's: Application | AACSB: Analytic
66. An increase in stock price is called
a. | corporate earnings. |
b. | a capital gain. |
c. | basic income. |
d. | a rate of return. |
e. | a dividend yield. |
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Capital Gain
MSC: Bloom's: Knowledge
67. If the price of a stock rises from $80 to $100 over the course of a year and the dividend paid is $5, the capital gain is
a. | 15 percent. |
b. | 31.25 percent. |
c. | $25. |
d. | $20. |
e. | 6.25 percent. |
OBJ: conceptual
SEC: 3. Markets for Financial Capital
TOP: Capital Gain
MSC: Bloom's: Application | AACSB: Analytic
/
68. The price-earnings ratio is the price of a good divided by the average profit per unit.
Basic
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Price-Earnings Ratio
MSC: Bloom's: Knowledge
69. The returns on stocks is called interest.
Basic
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Annual Return
MSC: Bloom's: Knowledge
70. The return on a stock is equal to its dividend plus the change in stock price.
Basic
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Annual Return
MSC: Bloom's: Knowledge
71. The dividend yield for a stock is the dividend divided by the price of the stock.
Basic
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Dividend Yield
MSC: Bloom's: Knowledge
72. If a stock suffers a capital loss for the year, then the annual return from holding the stock will be negative.
Basic
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Annual Return
MSC: Bloom's: Knowledge
73. Firms can raise funds by issuing stocks and bonds.
Basic
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Stocks and Bonds
MSC: Bloom's: Knowledge
Multiple Choice
74. The amount of money the borrower agrees to pay the bondholder each year is called the
a. | interest rate. |
b. | coupon. |
c. | dividend. |
d. | yield. |
e. | face value. |
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Bond Coupon
MSC: Bloom's: Knowledge
75. The amount of principal that will be paid back when a bond matures is called the
a. | dividend. |
b. | yield. |
c. | coupon. |
d. | maturity value. |
e. | face value. |
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Face Value
MSC: Bloom's: Knowledge
76. The yield on a bond is
a. | the amount of money the borrower agrees to pay the bondholder each year divided by the face value of the bond. |
b. | the amount of money the borrower agrees to pay the bondholder each year. |
c. | the amount of money the borrower agrees to pay the bondholder each year divided by the current market price of the bond. |
d. | the amount of principal that will be paid back when the bond matures. |
e. | fixed for the life of the bond. |
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Yield on a Bond
MSC: Bloom's: Knowledge
77. On the maturity date, the firm or government that issued a bond must pay
a. | the face value of the bond as well as the coupon. |
b. | the face value of the bond, the coupon, and a dividend. |
c. | the face value of the bond only. |
d. | the coupon only. |
e. | a dividend. |
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Maturity Date
MSC: Bloom's: Knowledge
78. Which of the following is ?
a. | The bond yield is fixed for the life of the bond, but the bond price can vary. |
b. | The bond yield and bond price are positively related. |
c. | The bond price is fixed for the life of the bond, but the bond yield can vary. |
d. | The bond yield and the bond price are inversely related. |
e. | The bond yield and bond price are both fixed for the life of the bond. |
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Bond Yield and Price
MSC: Bloom's: Knowledge
79. The formula that gives the relationship between the price and the yield for long-term bonds, where P is the price of the bond, R is the bond coupon, and i is the yield, is
a. |
|
b. |
|
c. |
|
d. | P = R i |
e. | R = P + i |
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Bond Yield and Price
MSC: Bloom's: Knowledge | AACSB: Analytic
80. What happens to the price of a bond with a $100 face value and an infinite maturity date when interest rates rise from 5 percent to 10 percent and the coupon paid on the bond is $20?
a. | The price falls by $100. |
b. | The price rises by $200. |
c. | The price rises by $100. |
d. | The price falls by $1. |
e. | The price falls by $200. |
OBJ: conceptual
SEC: 3. Markets for Financial Capital
TOP: Bond Prices
MSC: Bloom's: Application | AACSB: Analytic
81. When the interest rate is 10 percent, what is the price of a bond that matures in one year, has a $300 face value, and has a coupon of $20 per year?
a. | $93.24 |
b. | $266.11 |
c. | $272.72 |
d. | $290.90 |
e. | $282.64 |
OBJ: conceptual
SEC: 3. Markets for Financial Capital
TOP: Bond Prices
MSC: Bloom's: Application | AACSB: Analytic
82. What is the yield on a very long-term bond with a $500 face value, a coupon of $35, and a current price of $650?
a. | 37 percent |
b. | 35 percent |
c. | 5.4 percent |
d. | 7 percent |
e. | 17.7 percent |
OBJ: conceptual
SEC: 3. Markets for Financial Capital
TOP: Bond Yield
MSC: Bloom's: Application | AACSB: Analytic
83. Suppose a coupon of $15 is paid on a bond that matures indefinitely and has a $200 face value. If the interest rate is 9 percent, what is the price of the bond?
a. | $183.49 |
b. | There is not enough information provided to answer this question. |
c. | $166.67 |
d. | $72.22 |
e. | $22.22 |
OBJ: conceptual
SEC: 3. Markets for Financial Capital
TOP: Bond Prices
MSC: Bloom's: Application | AACSB: Analytic
84. A bond that matures in one year has a $500 face value and a $60 coupon What is the price of the bond if the interest rate is 6 percent and the bond was purchased by the present owner for $450?
a. | $103.77 |
b. | $481.13 |
c. | $528.30 |
d. | $500 |
e. | $1,000 |
OBJ: conceptual
SEC: 3. Markets for Financial Capital
TOP: Bond Prices
MSC: Bloom's: Application | AACSB: Analytic
/
85. The face value of a bond is the principal that will be paid back when the bond matures.
Basic
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Coupon
MSC: Bloom's: Knowledge
86. For a bond, a higher yield means a lower face value.
Basic
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Face Value
MSC: Bloom's: Knowledge
87. Bond prices and bond yields are positively related.
Basic
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Bond Price versus Yield
MSC: Bloom's: Knowledge
88. A bond's yield is the fixed amount that the borrower agrees to pay the bondholder each year.
Basic
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Bond Yield
MSC: Bloom's: Knowledge
89. The rate of return on a bond is equal to the dividend plus the change in the price of the bond as a percentage of the price.
Basic
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Bond Yield
MSC: Bloom's: Knowledge
90. The yields on bonds tend to rise when firms have higher earnings.
Basic
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Bond Yield
MSC: Bloom's: Knowledge
Short Answer
91. A bond pays a fixed percent of its face value every year. Explain what happens to the price of the bond when interest rates in the economy increase.
OBJ: factual
SEC: 3. Markets for Financial Capital
TOP: Bond Yield and Price
MSC: Bloom's: Analysis | AACSB: Analytic
92. Suppose an investor buys a share of stock for $40 and sells it for $45 after one year. At the end of that year, the dividend per stock is $1. The company has 100,000 shares outstanding and a total profit for the year of $500,000. Calculate the price-earnings ratio for this firm at the time the stock was sold.
Price-earnings ratio | = stock price/earnings per share |
Earnings per share | = total profit/number of shares |
= $500,000/100,000 = $5 | |
Price-earnings ratio | = $45/$5 = 9 |
OBJ: conceptual
SEC: 3. Markets for Financial Capital
TOP: Earnings Per Share
MSC: Bloom's: Application | AACSB: Analytic
93. Suppose an investor buys a share of stock for $200 and sells it for $220 after one year. At the end of that year, the dividend per stock is $5. The company has 250,000 shares outstanding and a total profit for the year of $1,000,000. Calculate the rate of return on this stock for the investor.
Rate of return | = (capital gain + dividend)/purchase price |
= ($20 + $5)/$200 = 0.125 |
OBJ: conceptual
SEC: 3. Markets for Financial Capital
TOP: Earnings Per Share
MSC: Bloom's: Application | AACSB: Analytic
94. Suppose a share of stock was purchased 20 years ago for $20, and its current value is $300. Also suppose that the current dividend per share is $15 and that interest rates are 11.5 percent. Calculate the current dividend yield.
Dividend yield | = dividend/stock value (price) |
= $15/$300 = 0.05 |
OBJ: conceptual
SEC: 3. Markets for Financial Capital
TOP: Dividend Yield
MSC: Bloom's: Application | AACSB: Analytic
95. Suppose a share of stock was purchased 10 years ago for $10. One year ago it was worth $85 and today it is worth $81. A dividend of $.50 per share was paid by the corporation today. Calculate the rate of return for this stock.
Rate of return | = (cap. gain + dividend)/stock value the year before |
= ($4 + $.50)/$85 = 3.5/85 = 0.0418 |
OBJ: conceptual
SEC: 3. Markets for Financial Capital
TOP: Rate of Return
MSC: Bloom's: Application | AACSB: Analytic
96. Answer the questions below:
(A) | Suppose the current interest rate is 12 percent and a bond with a face value of $500 that pays a coupon rate of 15 percent is selling for $450. Calculate the yield on this bond. |
(B) | What will happen to bond prices? |
(A) | Coupon = coupon rate bond face value = 0.15 $500 = $75 |
Yield = coupon/bond price = $75/$450 = 0.17 | |
(B) | Bond prices will increase because the yield on the bond is higher than the interest rate. |
OBJ: conceptual
SEC: 3. Markets for Financial Capital
TOP: Bond Yield
MSC: Bloom's: Application | AACSB: Analytic
97. Calculate the maximum price that should be paid for a bond with a face value of $100, a coupon of $12, and a maturity date of three years from now if the prevailing interest rate is 15 percent.
OBJ: conceptual
SEC: 3. Markets for Financial Capital
TOP: Bond Prices
MSC: Bloom's: Application | AACSB: Analytic
98. Suppose a bond with a face value of $1,000 pays a coupon of $200, and the bond matures in 50 years. If the interest rate is currently 15 percent, calculate the approximate price of the bond.
OBJ: conceptual
SEC: 3. Markets for Financial Capital
TOP: Bond Prices
MSC: Bloom's: Application | AACSB: Analytic
99. Suppose a bond with a face value of $100 matures in two years. If the coupon is $8 and the current interest rate is 5 percent, what is the current price of the bond?
OBJ: conceptual
SEC: 3. Markets for Financial Capital
TOP: Bond Prices
MSC: Bloom's: Application | AACSB: Analytic
Multiple Choice
100. Which of the following best describes a risk-averse individual?
a. | He would rather spend all his money than risk it in investments. |
b. | He would rather put $100 in a bank account earning 10 percent than in a one-year government bond earning 10 percent. |
c. | He would rather have $10 in his pocket than gamble on a coin toss in which heads yields $20 and tails yields nothing. |
d. | He would rather put $100 in a bank at 10 percent interest than in a stock with a 10-percent dividend and 50-50 chance of a 25-percent increase or decrease in the value of the stock. |
e. | He does not trust banks. |
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Risk Aversion
MSC: Bloom's: Analysis | AACSB: Analytic
101. Calculate the expected return on a $6,000 bond that pays 6 percent of face value and whose price has a 30-percent chance of falling by $1,000 and a 70-percent chance of rising by $1,000.
a. | $360 |
b. | $760 |
c. | $650 |
d. | $950 |
e. | $40 |
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Expected Return
MSC: Bloom's: Application | AACSB: Analytic
102. What is the expected return on a stock with a guaranteed dividend of $3 if there is a 30-percent chance its price could rise by 50 percent, a 30-percent chance its price could fall by 50 percent, and a 40-percent chance its price could stay constant at the present price of $60 per share?
a. | $60 |
b. | $33 |
c. | $3 |
d. | $0 |
e. | $27 |
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Expected Return
MSC: Bloom's: Application | AACSB: Analytic
103. A risk-averse person will
a. | never take a risk. |
b. | always choose the investment option with the least risk. |
c. | always choose the investment option with the highest expected return. |
d. | choose a risky investment if the expected return is high enough. |
e. | never gamble. |
OBJ: factual
SEC: 4. The Trade-off between Risk and Returns
TOP: Risk Aversion
MSC: Bloom's: Knowledge | AACSB: Analytic
/
104. The possible return on an uncertain investment calculated by weighting different outcomes by their respective probabilities is called the expected return.
Basic
OBJ: factual
SEC: 4. The Trade-off between Risk and Returns
TOP: Expected Return
MSC: Bloom's: Knowledge
105. A risk-reverse person always chooses the investment option with the highest expected return.
Basic
OBJ: factual
SEC: 4. The Trade-off between Risk and Returns
TOP: Risk Aversion
MSC: Bloom's: Knowledge
Multiple Choice
106. Suppose a stock has the same expected rate of return as a bank account. Then
a. | individuals will choose indifferently between the stock and the bank account. |
b. | there will be an excess supply of the stock and its price will fall. |
c. | risk-averse individuals will prefer the stock. |
d. | there will be an excess supply of the stock and its price will rise. |
e. | there will be an excess demand for the stock and its price will rise. |
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Price of a Stock
MSC: Bloom's: Analysis | AACSB: Analytic
107. Suppose a stock has the same expected rate of return as a bank account. Then the price of the stock will
a. | rise and the expected rate of return will decrease. |
b. | fall and the interest rate will decrease. |
c. | rise and the expected rate of return will increase. |
d. | fall and the expected rate of return will increase. |
e. | fall and the expected rate of return will decrease. |
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Expected Rate of Return of a Stock
MSC: Bloom's: Analysis | AACSB: Analytic
108. Suppose a stock has a lower expected rate of return than a bank account. Then
a. | there will be an excess supply of the stock and its price will rise. |
b. | there will be an excess supply of the stock and its price will fall. |
c. | there will be an excess demand for the stock and its price will rise. |
d. | individuals will choose indifferently between the stock and the bank account. |
e. | risk-averse individuals will prefer the stock. |
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Price of a Stock
MSC: Bloom's: Analysis | AACSB: Analytic
109. Suppose a stock has a higher expected rate of return than a bank account. Then
a. | the price of the stock will rise and the expected rate of return will decrease. |
b. | the price of the stock will fall and the interest rate will decrease. |
c. | the price of the stock will fall and the expected rate of return will increase. |
d. | the price of the stock will fall and the expected rate of return will decrease. |
e. | Not enough information is given to determine the return on the stock. |
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Expected Rate of Return of a Stock
MSC: Bloom's: Analysis | AACSB: Analytic
110. The equilibrium risk-return relationship for a risk-averse individual shows
a. | a relationship between risk and expected rate of return which is first positive and then negative. |
b. | no relationship between risk and expected rate of return. |
c. | a relationship between risk and expected rate of return which is first negative and then positive. |
d. | a negative relationship between risk and expected rate of return. |
e. | a positive relationship between risk and expected rate of return. |
OBJ: factual
SEC: 4. The Trade-off between Risk and Returns
TOP: Price of a Stock
MSC: Bloom's: Knowledge
111. The equilibrium risk-return curve for a risk-neutral individual will be
a. | horizontal. |
b. | a 45-degree line. |
c. | positively sloped. |
d. | vertical. |
e. | negatively sloped. |
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Equilibrium Risk-Return Relationship
MSC: Bloom's: Analysis | AACSB: Analytic
112. The equilibrium risk-return curve for a risk-loving individual is
a. | negatively sloped. |
b. | positively sloped. |
c. | vertical. |
d. | horizontal. |
e. | a 45-degree line. |
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Equilibrium Risk-Return Relationship
MSC: Bloom's: Analysis | AACSB: Analytic
/
113. The price of a stock will decline if its expected rate of return is less than the interest on a bank account.
Moderate
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Price of a Stock
MSC: Bloom's: Analysis | AACSB: Analytic
114. As the risk of an investment increases, the expected return must also increase in order for risk-averse individuals to participate in the investment.
Basic
OBJ: factual
SEC: 4. The Trade-off between Risk and Returns
TOP: Risk and Return
MSC: Bloom's: Knowledge
115. Economists generally believe that as risk increases, investment becomes more interesting and people require lower rates of return.
Basic
OBJ: factual
SEC: 4. The Trade-off between Risk and Returns
TOP: Risk and Return
MSC: Bloom's: Knowledge
116. In the long run, the rate of return on a capital investment is, on average, directly related to its risk.
Basic
OBJ: factual
SEC: 4. The Trade-off between Risk and Returns
TOP: Risk and Return
MSC: Bloom's: Knowledge
117. The equilibrium risk-return curve for a risk-averse person is positively sloped.
Moderate
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Equilibrium Risk-Return Relationship
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
118. Which of the following investments is most risky?
a. | Large-company stocks |
b. | Long-term corporate bonds |
c. | U.S. Treasury bills |
d. | Small-company stocks |
e. | Time deposits |
OBJ: factual
SEC: 4. The Trade-off between Risk and Returns
TOP: Actual Risk
MSC: Bloom's: Knowledge
119. Which of the following investments offer the highest rate of return?
a. | U.S. Treasury bills |
b. | Long-term corporate bonds |
c. | Large-company stocks |
d. | Small-company stocks |
e. | Time deposits |
OBJ: factual
SEC: 4. The Trade-off between Risk and Returns
TOP: Actual Return
MSC: Bloom's: Knowledge
/
120. In reality, it has been confirmed that riskier investments yield higher average rates of return.
Basic
OBJ: factual
SEC: 4. The Trade-off between Risk and Returns
TOP: Risk and Return
MSC: Bloom's: Knowledge
Multiple Choice
121. Portfolio diversification
a. | means that one should own at least 10 different stocks. |
b. | means that one should own at least two different stocks whose prices do not always move in the same direction. |
c. | means that one should own at least two different stocks. |
d. | is something that can be achieved only by the very wealthy. |
e. | means that one should own at least five different stocks whose prices do not always move in the same direction. |
OBJ: factual
SEC: 4. The Trade-off between Risk and Returns
TOP: Portfolio Diversification
MSC: Bloom's: Knowledge
122. Which of the following asset markets offers the least systematic risk?
a. | U.S. banking industry |
b. | U.S. oil industry |
c. | Worldwide market in all marketable securities |
d. | U.S. market in corporate bonds |
e. | U.S. stock market |
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Systematic Risk
MSC: Bloom's: Knowledge | AACSB: Analytic
123. Some risk is inherent in a market and cannot be avoided by diversifying within the market. This risk is called
a. | natural risk. |
b. | systematic risk. |
c. | market risk. |
d. | unavoidable risk. |
e. | inevitable risk. |
OBJ: factual
SEC: 4. The Trade-off between Risk and Returns
TOP: Systematic Risk
MSC: Bloom's: Knowledge
124. Seeking to own assets of many different kinds in many markets is an example of
a. | portfolio diversification. |
b. | portfolio rearrangement. |
c. | risk aversion. |
d. | risk neutrality. |
e. | investment confusion. |
OBJ: factual
SEC: 4. The Trade-off between Risk and Returns
TOP: Portfolio Diversification
MSC: Bloom's: Knowledge
125. Which of the following is ?
a. | Risk declines at a constant rate with diversification. |
b. | Risk declines sharply with diversification and then increases as the number of stocks held increases. |
c. | Risk declines sharply with diversification and then levels out as the number of stocks held increases. |
d. | Risk declines sharply with the number of shares of a stock held. |
e. | Risk increases at a constant rate with the number of stocks held. |
OBJ: factual
SEC: 4. The Trade-off between Risk and Returns
TOP: Portfolio Diversification
MSC: Bloom's: Knowledge
/
126. Investors diversify because they are risk-averse.
Basic
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Diversification
MSC: Bloom's: Knowledge
127. Systematic risk is reduced to zero as the number of different stocks in a portfolio increases.
Moderate
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Systematic Risk
MSC: Bloom's: Analysis | AACSB: Analytic
128. Portfolio diversification generally increases risk for an investor.
Basic
OBJ: factual
SEC: 4. The Trade-off between Risk and Returns
TOP: Portfolio Diversification
MSC: Bloom's: Knowledge
Multiple Choice
129. If the stock market is efficient, then stockholders
a. | learn new information slowly. |
b. | never understand the market. |
c. | use up all available information to predict stock prices. |
d. | always speculate on stock prices. |
e. | are always correct about future stock movements. |
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Efficient Markets
MSC: Bloom's: Knowledge | AACSB: Analytic
130. For economists, the quick response of the stock market to new information about economic fundamentals is an example of
a. | perfect information. |
b. | market manipulation. |
c. | market efficiency. |
d. | market foolishness. |
e. | amateurs running the market. |
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Efficient Markets
MSC: Bloom's: Application | AACSB: Analytic
131. If BP develops a fuel that eliminates noxious emissions but costs the same as gasoline, the efficient market hypothesis predicts that
a. | the stock prices of companies building emissions-testing equipment will rise. |
b. | all fuel company stock prices will rise. |
c. | the prices of all fuel company stocks except BP stocks will rise. |
d. | BP's stock price will rise immediately. |
e. | BP's stock price will not change. |
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Efficient Markets
MSC: Bloom's: Application | AACSB: Analytic
/
132. The fact that investors in the stock market feel they have to act quickly in order to take advantage of a possible profit opportunity is evidence that the efficient market hypothesis probably holds
Moderate
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Efficient Market Hypothesis
MSC: Bloom's: Analysis | AACSB: Analytic
133. The efficient market hypothesis implies that some stockholders always can earn excessive returns on the stock market.
Moderate
OBJ: conceptual
SEC: 4. The Trade-off between Risk and Returns
TOP: Efficient Market Hypothesis
MSC: Bloom's: Analysis | AACSB: Analytic
134. The efficient market hypothesis is simply the idea that there are unexploited profit opportunities in the stock market in the short run but not in the long run.
Challenging
OBJ: factual
SEC: 4. The Trade-off between Risk and Returns
TOP: Efficient Market Hypothesis
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
135. A problem can be created when there are different levels of information available to different people in an economic interaction or exchange. This is known in economic and financial theory as
a. | information advantage. |
b. | unwarranted information advantage. |
c. | unfair trade. |
d. | asymmetric information. |
e. | None of these. |
OBJ: conceptual
SEC: 5. Corporate Governance Problems
TOP: Corporate Governance Problems
MSC: Bloom's: Knowledge
136. This concept regularly arises in insurance markets. It is described as a situation in which a person buys insurance against some risk and subsequently takes actions that increase the risk.
a. | Moral Hazard. |
b. | Insurance Premium Imbalance. |
c. | Reckless Theory. |
d. | Asymmetric Information. |
e. | None of these. |
OBJ: conceptual
SEC: 5. Corporate Governance Problems
TOP: Corporate Governance Problems
MSC: Bloom's: Knowledge
/
137. One of the reasons why capitalism works is that managers always act in the best interest of the stock holders.
Basic
OBJ: conceptual
SEC: 5. Corporate Governance Problems
TOP: Corporate Governance Problems
MSC: Bloom's: Knowledge
138. In insurance and other markets, adverse selection is known as a situation in which the people who choose to buy insurance will be the riskiest group in the population.
Basic
OBJ: conceptual
SEC: 5. Corporate Governance Problems
TOP: Corporate Governance Problems
MSC: Bloom's: Knowledge
Multiple Choice
139. There are obvious incentives to overcome adverse selection and moral hazard problems in the world of corporate finance. One way in which problems of moral hazard and adverse selection can be limited is through the use of programs in which managers and employees receive a share of profits earned by the firm. These programs are commonly known as
a. | fair profit exchange agreements. |
b. | profit sharing agreements. |
c. | earnings compatibility constraints. |
d. | corporate earnings fairness. |
e. | the economy of communion. |
OBJ: conceptual
SEC: 5. Corporate Governance Problems
TOP: Corporate Governance Problems and Solutions
MSC: Bloom's: Knowledge
/
140. Severe adverse selection and moral hazard problems can prevent the formation of business relationships between principals and agents. For example, people may be unwilling to buy stock in a firm because they believe that managers may use that money for their own benefit rather than for the company's interests.
Moderate
OBJ: conceptual
SEC: 5. Corporate Governance Problems
TOP: Corporate Governance Problems and Solutions
MSC: Bloom's: Analysis | AACSB: Analytic
141. One way in which problems of moral hazard and adverse selection can be limited is through the use of profit sharing agreements, whereby managers and employees are given a share of the profits earned by the firm. That way the agents of the firms have a financial stake in the firm's success, and hence have their interests aligned with the principals.
Moderate
OBJ: conceptual
SEC: 5. Corporate Governance Problems
TOP: Corporate Governance Problems and Solutions
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
142. The SEC is a governmental institution responsible for preventing securities violations. It also regulates certain investment management firms, such as mutual funds, under the Investment Act of 1940 to promote accurate financial reporting. What does SEC stand for?
a. | Securities and Economic Commission. |
b. | Securities and Exchange Commission. |
c. | Single Equity Cooperation. |
d. | Single Equity Control. |
e. | None of these. |
OBJ: factual
SEC: 6. The Role of Government in Financial Markets
TOP: The Role of Government in Financial Markets
MSC: Bloom's: Knowledge
143. Bernard Madoff was famously caught in one of the biggest frauds in U.S. history. He perpetrated the management of funds where existing investors' returns were paid using new investors' funds rather than from legitimate investments in the stock or bond markets. This type of fraud is known as
a. | a Madoff fraud. |
b. | a Ponzi scheme. |
c. | a SEC blunder. |
d. | a return fallacy. |
e. | a limited liability hazard. |
OBJ: factual
SEC: 6. The Role of Government in Financial Markets
TOP: The Role of Government in Financial Markets
MSC: Bloom's: Knowledge
144. In the fall of 2008, the U.S. Treasury and the Federal Reserve together attempted to deal with the collapse of major financial institutions through
a. | actions of the Federal Open Market Committee. |
b. | the Troubled Assets Relief Program. |
c. | the American Recovery and Reinvestment Act. |
d. | a $500 tax rebate to individual taxpayers. |
e. | None of these. |
OBJ: factual
SEC: 6. The Role of Government in Financial Markets
TOP: The Role of Government in Financial Markets
MSC: Bloom's: Knowledge
145. When the Troubled Assets Relief Program was first announced in 2008, stock market prices continued to fall to reflect the public’s
a. | trust of the government’s role in bailing out financial institutions. |
b. | believe about the government debt would explore. |
c. | uncertainty about the effectiveness of the government in stabilizing the financial system. |
d. | speculation that the economy would grow too fast to spark higher inflation. |
e. | All of these. |
OBJ: factual
SEC: 6. The Role of Government in Financial Markets
TOP: The Role of Government in Financial Markets
MSC: Bloom's: Knowledge | AACSB: Analytic
/
146. Government has a role to play in dealing with some corporate governance problems because these problems can be viewed as a form of market failure.
Moderate
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: The Role of Government in Financial Markets
MSC: Bloom's: Knowledge | AACSB: Analytic
147. Government has a role to play in dealing with some corporate governance problems because these problems can be viewed as a form of market failure.
Moderate
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: The Role of Government in Financial Markets
MSC: Bloom's: Knowledge | AACSB: Analytic
148. Poor corporate governance can take the extreme form of outright fraud, and because corporate fraud is legal under U.S. law, it must be dealt with internally, such as with a profit sharing agreement.
Moderate
OBJ: factual
SEC: 6. The Role of Government in Financial Markets
TOP: The Role of Government in Financial Markets
MSC: Bloom's: Knowledge | AACSB: Analytic
149. The U.S. government did not intervene to prevent the failure of any financial institution during the 2007-2008 financial crisis.
Basic
OBJ: factual
SEC: 6. The Role of Government in Financial Markets
TOP: The Role of Government in Financial Markets
MSC: Bloom's: Knowledge
150. One common type of fraud in financial marketssecurities fraudoccurs when managers lie or misreport facts about the firm's financial statements or the firm's profitability in order to entice investors to buy or hold their stock.
Basic
OBJ: factual
SEC: 6. The Role of Government in Financial Markets
TOP: The Role of Government in Financial Markets
MSC: Bloom's: Knowledge
151. One possible role for government is to intervene to prevent the failure of large financial institutions and thereby prevent instability in the financial markets. Indeed, during 2008 the federal government intervened in several ways by loaning or investing funds to help some of these financial institutions.
Moderate
OBJ: factual
SEC: 6. The Role of Government in Financial Markets
TOP: Financial Crisis 2008
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice
152. In the United States, one of the agencies that regulates financial institutions is
a. | the Office of the Comptroller of the Currency. |
b. | a municipal government. |
c. | the Central Intelligence Agency. |
d. | the Internal Revenue Services. |
e. | the White House. |
OBJ: factual
SEC: 6. The Role of Government in Financial Markets
TOP: Government Regulation of Financial Institutions
MSC: Bloom's: Knowledge
153. One major aspect of bank regulation is to require banks to keep
a. | a minimum amount of capital. |
b. | a given amount of loans. |
c. | a variety of investment options. |
d. | a fixed set of interest rates. |
e. | All of these |
OBJ: factual
SEC: 6. The Role of Government in Financial Markets
TOP: Government Regulation of Financial Institutions
MSC: Bloom's: Knowledge
154. One key reason for the federal government to regulate banks is that
a. | it will lose profit tax revenue if a bank fails. |
b. | taxpayers’ money will be used to pay off losses in bank deposits if a bank fails. |
c. | it wants to ensure that people can borrow as much as they want. |
d. | it tries to protect domestic banks from foreign competition. |
e. | it tries to keep interest rates at low levels. |
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: Government Regulation of Financial Institutions
MSC: Bloom's: Analysis | AACSB: Analytic
155. A regulatory capture in the financial system occurs when
a. | government regulators own stocks of financial institutions. |
b. | the government and financial institutions become hostile to each other. |
c. | government regulators and financial institutions take actions to benefit each other. |
d. | the government makes loans directly to borrowers without going through the financial system. |
e. | the general public bails out a financial institution. |
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: Government Regulation of Financial Institutions
MSC: Bloom's: Knowledge
156. Gretchen Morgenson and Joshua Rosner argued that the main reason for the most recent financial crisis was that
a. | the Federal Reserve had too much control over the financial system. |
b. | no one could see the risk in the financial market at that time. |
c. | there were too many banks and other financial institutions in the United States. |
d. | there were too many government regulators. |
e. | government regulators were being “captured” by banks. |
OBJ: factual
SEC: 6. The Role of Government in Financial Markets
TOP: Government Regulation of Financial Institutions
MSC: Bloom's: Knowledge | AACSB: Analytic
/
157. The Federal Reserve is the only government authority that oversees U.S. banks.
Moderate
OBJ: factual
SEC: 6. The Role of Government in Financial Markets
TOP: Government Regulation of Financial Institutions
MSC: Bloom's: Knowledge | AACSB: Analytic
158. One major reason for the outbreak of the financial crisis was too much government regulation in the banking system.
Moderate
OBJ: factual
SEC: 6. The Role of Government in Financial Markets
TOP: Government Regulation of Financial Institutions
MSC: Bloom's: Knowledge | AACSB: Analytic
159. The regulatory capture theory suggests that the way banks and government officials looked after each other led to the financial crisis in 2008.
Moderate
OBJ: factual
SEC: 6. The Role of Government in Financial Markets
TOP: Government Regulation of Financial Institutions
MSC: Bloom's: Knowledge | AACSB: Analytic
Short Answer
160. Draw the equilibrium risk-return relationship. Why does this relationship hold ?
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: Equilibrium Risk-Return Relationship
MSC: Bloom's: Knowledge | AACSB: Communication
161. Why does diversification reduce risk?
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: Diversification
MSC: Bloom's: Analysis | AACSB: Analytic
162. Suppose a stock has the same expected rate of return as a bank account. Explain why this is not an equilibrium situation.
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: Expected Rate of Return of a Stock
MSC: Bloom's: Analysis | AACSB: Analytic
163. Calculate the expected return on an asset for which there is a 60-percent chance that its value will increase by $100 and a 40-percent chance that its value will fall by $100.
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: Expected Return
MSC: Bloom's: Application | AACSB: Analytic
164. Will a risk-averse person who wants to invest $1000 prefer to put his or her funds into a bank account that pays 10-percent interest or in a stock that has a 10-percent dividend and a 75-percent chance of a 20-percent price decrease and a 25-percent chance of a 20-percent price increase? Explain.
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: Expected Rate of Return of a Stock
MSC: Bloom's: Application | AACSB: Analytic
165. Label each of the following as financial capital or physical capital.
(A) | New shares of stock issued to raise funds for an expansion |
(B) | A new factory built as part of an expansion |
(C) | A car loan |
(D) | A new car |
(E) | New computer equipment |
(F) | Checking deposits |
(A) | Financial capital |
(B) | Physical capital |
(C) | Financial capital |
(D) | Physical capital |
(E) | Physical capital |
(F) | Financial capital |
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: Capital Market Terminology
MSC: Bloom's: Knowledge | AACSB: Analytic
166. Draw the supply curve for farmland. Is there economic rent? Explain. Suppose the farmland was separated into high-productivity land and low-productivity land. Which curve would be more elastic? Explain.
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: Economic Rent
MSC: Bloom's: Analysis | AACSB: Analytic
167. Suppose your company owns a computer that cost $10,000 and depreciates $500 per year. If the interest rate is 5 percent, what is the implicit rental price of the computer? When interest rates increase, are firms more or less likely to purchase equipment?
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: Rental Price of Capital
MSC: Bloom's: Application | AACSB: Analytic
168. Suppose the U.S. government issues a one-year Treasury bill with a face value of $5,000 and a $100 coupon payment. If the market interest rate is 9 percent, what is the market price of the bond based on its present discounted value? If bond prices rise by 4 percent, what must have happened to the market interest rate? Explain.
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: Bond Prices
MSC: Bloom's: Application | AACSB: Analytic
169. Suppose the U.S. government issues a two-year Treasury note with a face value of $4,000 and an 8-percent coupon.
(A) | If the current interest rate is 10 percent, what will be the market price of the note? |
(B) | Suppose you expect the interest rate to remain at 10 percent this year but rise to 12 percent next year. How much would you pay for the note today? Why? |
(A) | The market price of the note is the sum of the present values of the future payments: |
| |
(B) | If the interest rate is expected to equal 10 percent this year and 12 percent next year, the price of the note is: |
| |
You would pay less because next year's coupon and face value payments are discounted at a higher interest rate, the average of 10 and 12 percent. |
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: Present Value
MSC: Bloom's: Application | AACSB: Analytic
170. Refer to the table below. A particular stock market investment strategy has the following possible outcomes:
(A) | What is the expected return from this stock market investment strategy? |
(B) | Would you choose this expected return or take a safe return of either 8 percent from a U.S. Treasury bill or 6 percent from a savings deposit at a bank? Why? |
(C) | Suppose your grandfather tells you he would choose a safe return of 7 percent from a bank over the above stock-market investment strategy. Is he risk-averse? Explain. |
(A) | The expected return is 7 percent. |
(B) | A risk-averse or risk-neutral person would choose a safe return of 8 percent from a U.S. Treasury bill because the return is higher and the risk is lower. A risk-averse person might take 6 percent from a savings deposit at a bank rather than the expected market return of 7 percent. |
(C) | If your grandfather tells you he would prefer the safe return of 7 percent from the bank over the stock market investment, he is risk-averse. He prefers a safe return to a riskier return with the same expected value. |
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: Expected Return
MSC: Bloom's: Application | AACSB: Analytic
171. Suppose you are considering purchasing stock from two firms, firm A and firm B. The expected return is the same for both stocks; however, the return on stock A is more variable than the return on stock B. Which stock would you buy? Why? What do you think other investors will do? What will be the effect of investors' behavior on the relative prices of these two stocks?
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: Risk and Return
MSC: Bloom's: Application | AACSB: Analytic
172. Refer to the table below. Graph the data on risk and expected rate of return for the following securities.
Draw the risk-return line through your graph. Which asset will experience a change in price in the near future? In which direction will the price change? Explain.
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: Risk and Return
MSC: Bloom's: Application | AACSB: Analytic
173. Suppose the news indicates that stock prices have been higher in January than in other months of the year. What would be the likely reaction of the stock market?
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: Expected Return
MSC: Bloom's: Analysis | AACSB: Analytic
174. A firm has been making relatively large profits lately and has an extra $20,000 to invest. The firm is choosing among three investment options: improving the training of store employees, buying new computer equipment, or saving the $20,000 in a bank account and using it at a later date. How should the firm decide which option to choose? Which option is least risky? Most risky?
OBJ: conceptual
SEC: 6. The Role of Government in Financial Markets
TOP: Return on Human Capital
MSC: Bloom's: Application | AACSB: Analytic
Chapter 16 Appendix
Present Discounted Value
Multiple Choice
1. With zero inflation, a dollar received today is worth ____ a dollar received one year from now.
a. | the same as |
b. | more than |
c. | less than |
d. | There is not enough information provided to answer this question. |
OBJ: conceptual
SEC: 8. Appendix: Present Discounted Value
TOP: Future Value
MSC: Bloom's: Knowledge
2. The process of determining how much a sum paid or received in the future is worth in the present is called
a. | appraisal. |
b. | valuing. |
c. | discounting. |
d. | dealing. |
e. | inflating. |
OBJ: factual
SEC: 8. Appendix: Present Discounted Value
TOP: Discounting
MSC: Bloom's: Knowledge
3. The value of a sum of money or an asset to be paid or received in the future is called the
a. | rated value. |
b. | present calculated value. |
c. | future present value. |
d. | present rated value. |
e. | present discounted value. |
OBJ: factual
SEC: 8. Appendix: Present Discounted Value
TOP: Present Discounted Value
MSC: Bloom's: Knowledge
4. The percentage rate used to calculate the value of a future sum is called the
a. | discount rate. |
b. | calculation rate. |
c. | interest rate. |
d. | future rate. |
e. | present rate. |
OBJ: factual
SEC: 8. Appendix: Present Discounted Value
TOP: Discount Rate
MSC: Bloom's: Knowledge
5. The discount rate is commonly measured by the
a. | stock market returns. |
b. | rate of inflation. |
c. | interest rate. |
d. | unemployment rate. |
e. | rate of economic growth. |
OBJ: factual
SEC: 8. Appendix: Present Discounted Value
TOP: Discount Rate
MSC: Bloom's: Knowledge
6. The present discounted value of $75 to be received in two years with no interest is ____ when the interest rate is 8 percent.
a. | $64.30 |
b. | $69.44 |
c. | $87.48 |
d. | $75 |
e. | $81 |
OBJ: conceptual
SEC: 8. Appendix: Present Discounted Value
TOP: Present Discounted Value
MSC: Bloom's: Application | AACSB: Analytic
7. The present discounted value of a $35 payment with an interest rate of 12 percent received every year for three years is
a. | $94.15. |
b. | $84.06. |
c. | $105.00. |
d. | $24.91. |
OBJ: conceptual
SEC: 8. Appendix: Present Discounted Value
TOP: Present Discounted Value
MSC: Bloom's: Application | AACSB: Analytic
8. The proper equation to use in calculating the present discounted value of a sum F received in two years and again in four years is
a. |
|
b. |
|
c. |
|
d. |
|
OBJ: conceptual
SEC: 8. Appendix: Present Discounted Value
TOP: Present Discounted Value
MSC: Bloom's: Application | AACSB: Analytic
/
9. A dollar in the future is worth more than a dollar today.
Basic
OBJ: conceptual
SEC: 8. Appendix: Present Discounted Value
TOP: Discounting
MSC: Bloom's: Knowledge
10. Discounting is the process of calculating how much future sums of money are worth today.
Basic
OBJ: factual
SEC: 8. Appendix: Present Discounted Value
TOP: Discounting
MSC: Bloom's: Knowledge
11. Discounting implies that a given amount of money is worth more today than in the future.
Basic
OBJ: factual
SEC: 8. Appendix: Present Discounted Value
TOP: Discounting
MSC: Bloom's: Knowledge
12. The present discounted value is today’s value of future payments.
Basic
OBJ: factual
SEC: 8. Appendix: Present Discounted Value
TOP: Discounting
MSC: Bloom's: Knowledge
Short Answer
13. Suppose a friend wants to borrow $500 and offers to pay you back over the next five years by paying $100 at the end of two years, $200 at the end of three years, $150 at the end of four years, and $125 at the end of five years. You want to at least break even over the five years, and you could earn 7 percent interest on the money if you kept it. Should you make the loan? (Hint: Calculate the present discounted value of the payments. Show your work.)
OBJ: conceptual
SEC: 8. Appendix: Present Discounted Value
TOP: Present Discounted Value
MSC: Bloom's: Application | AACSB: Analytic
14. Find an expression for the present discounted value of
(A) | $500 to be paid at the end of five years. |
(B) | $100 to be paid at the end of two years and $100 to be paid at the end of three years. |
(C) | $8 to be paid at the end of one year, $8 to be paid at the end of two years, and $80 to be paid at the end of three years. |
(A) |
|
(B) |
|
(C) |
|
OBJ: conceptual
SEC: 8. Appendix: Present Discounted Value
TOP: Present Discounted Value
MSC: Bloom's: Application | AACSB: Analytic
15. Suppose you win a million dollars in the state lottery. What is the present discounted value of your winnings if you are scheduled to receive $200,000 at the end of each year for the next five years, and the rate of interest is 5 percent?
OBJ: conceptual
SEC: 8. Appendix: Present Discounted Value
TOP: Present Discounted Value
MSC: Bloom's: Application | AACSB: Analytic
16. You are considering two work contracts, each of which lasts for five years. The two contracts are summarized in the following table.
Assume that you will be paid at the end of each year. Contract 1 includes a signing bonus of $5,000 to be paid at the beginning of year 1, whereas contract 2 does not include a signing bonus. If the interest rate is 5 percent, which is the better offer?
OBJ: conceptual
SEC: 8. Appendix: Present Discounted Value
TOP: Present Discounted Value
MSC: Bloom's: Application | AACSB: Analytic