1 Sample of question for the first exam. F ebruary 27, 2023 Prof. Pedro Elosegui 1. Default risk a) is the probability that a borrower will not pay in full the promised interest or principal. b) exists only for the bonds of small corporations. c) is also known as market risk. d) is zero for bonds issued by cities and states. 2 Diversification can eliminate all risk in a portfolio. a) Both the aggregate and idiosyncratic risk. b) Only the macroeconomic or market risk. c) Only the idiosyncratic risk d) None of the risk can be eliminated through diversification. 3. The price (interest rate) of bonds may differ by risk but not by maturity True/ Fals e 4. The rating of a Bond may affect the access to loanable funds for a company. True /False 5 Bond yield can be divided in two parts to get the default premium. True /False 6. Investors base their decisions on the after - tax yield and bonds may have different tax treatments. True /False 7. Yields on short - term bonds are NOT more volatile than yields on long - term bonds True/False 8. The Expectations Hypothesis assumes that bonds of different maturities are perfect substitutes for each other. True /False 9. Interest rates of different maturities will move together. True/False 10. Risk is the key to understanding the upward slope of the yield curve. True/False 2 11. The liquidity premium theory of the term structure of interest rates considers two components , one free risk (related to the expectation hypothesis) and other explained by inflation and interest rate risk. True/False 12. A Treasury Bond is issued by the US treasury (the government) to pay for government expenditure and used by the Federal Reserve to operate monetary policy. True/False 13. If the expected return on bond increases comparing with other financial assets then... a) The supply of bonds will increase b) The demand of other financial assets increases. c) Investors will increase their d emand for bonds and the supply of bonds will move to the right. d) Investors will increase their demand for bonds and the demand curve for bonds will shift to the right. 14. Why do interest rates on bonds usually falls during recessions? a) Because the d emand for bonds shifts more than the supply. b) Because the demand for bonds shifts less than the supply. c) Because the demand for bonds do not shift. c) None of the above. 15. The Fed as Central Bank of US has a dual objective a) Inflation and employmen t b) Inflation and monetary policy c) macroeconomic stability d) None of the above 16. The Fed uses only one instrument to pursue its dual mandate True/False 17. The Fed can use REPO operations to sterilize the amount of monetary liabilities in the economy. True/False 18. The design and function of financial instruments, markets, and institutions are tied to the importance of information. Describe the role pl ayed by financial instrument in the financial system. a) summarize essential information about the individual borrower. b) aggregate information from many sources and communicate it widely c) produce information to screen and monitor borrowers. 3 d) None of the above 19. Describe the role played by financial markets in the financial system. They... a) produce information to screen and monitor borrowers. b) aggregate information from many sources and communicate it widely. c) summarize essential information about the individual borrower. d) None of the above. 20. The financial institutions a) produce information to screen and monitor borrowers. b) aggregate information from many sources and communicate it widely. c) summarize essential information about the individual borrower. d) increase the risk in the financial markets. 21. Can a country have more than one money circulating? True/False 22. Almost anything can be considered money as long as... a) can be used as a mean of exchange. b) it is a financial as set with a clear store of value function. c) it has a unit of value with respect with all the other goods in the economy. d) it simultaneously complies (totally or in part) with a, b and c. 23. Are the dollar notes the only money circulating in the US? a) yes, they are. b) no, there are other non - cash means of payments like debit cards. c) it is not the legal tender. d) all of the above. 24. The main difference between a Primary Market and a Secondary market is the risk. a) Primary markets are f inancial markets in which financial assets are exchanged. b) Primary markets are financial markets in which stocks, bonds, and other securities are sold for the first time and have more risk. c) The difference, beyond any risk, is that Primary markets ar e financial markets in which stocks, bonds, and other securities are sold for the first time and Secondary markets are financial markets where already issued securities are exchanged. 4 d) The difference, beyond any risk, is that Secondary markets are financ ial markets in which stocks, bonds, and other securities are sold for the first time and Primary markets are financial markets where already issued securities are exchanged. 25. What statement is true with respect to the federal funds rate. a) The federa l funds rate is the interest rate that banks charge each other on short - term loans. b) The interbank market is the market where the bank exchange reserves among them charging the federal funds rate. c) The FOMC order the NY Fed to implement Open Market Op erations targeting the federal funds rate. d) All of the above. 26. Liquidity is the ease with which an asset can be exchanged for money. a) Financial markets and intermediaries help make financial assets more liquid. b) The less liquid the market the hi gher the risk of buying a given security. c) The term liquidity is also used to distinguishes between the different definitions of money, like monetary base, M1, M2. d) All of the above. 27. The presence of money helps to solve the double coincidence of wants issue comparing with a barter economy. a) the double coincidence of wants increases the transactions costs for the exchange of goods and services. b) reduces the need to have a price for e ach good with respect to any other good. c) helps to the s tandardization of exchange for all goods and services (only one price for each). d) all of the above. 28. Money as a standard of deferred payments function.... a) is something that is generally accepted as payment for goods and services. b) a way of measuring value in an economy in terms of money c) can facilitate exchange over time (not only at a point in time) d) all of the above. 29. A currency is a legal ten der a) when the government designates th e currency a s accepted for payment of taxes and people must accept it in payment of debts b) when the government does not accept the currency for payment of taxes, but people must accept it in payment of debts. 5 c) when it is the only money circulating in the economy. d) all of the above. 30. The technology behind bitcoins is blockchain. a) Th at can allow bitcoins to be considered as a legal tender money. b) That it is a distributed ledger allowing to settle trans actions instantly and securely on encrypted sites. c) That it is not considered money and it is not considered a financial asset. d) none of the above. 31. M2 is a broader definition of the money supply: a) It includes (all the assets included in) M1. b) It includes time deposits with <$100,000, savings accounts, money market deposit accounts, and noninstitutional money market mutual fund shares. c) Is a monetary aggregate that it is les liquid than M1. d) All of the above. 32. Following the Quantity Theory Explanation of Inflation: a) The inflation rate would be the difference between the percentage change in M and the percentage change in output (assuming a fixed velocity of money). b) The inflation rate would be the difference between the percentage change in M and the percentage change in output (NOT assuming a fixed velocity of money). c) The inflation rate would be the sum between the percentage change in M and the percentage change in output (assuming a fixed velocity of money). d) all of the abo ve. 33. Discounting is the process of finding the present value of funds that will be received in the future (i.e., the opposite of compounding) a) it is used to price any asset by adding up the present values of all the payments from its sellers to buyer s. b) it is not used to valuate compound bonds. c) it is not used to valuate fixed – payment loans. d) none of the above. 34. Nominal interest rates are interest rates that are not adjusted for changes in purchasing power. a) can be used to calculate the real interest rates by subtracting the inflation rate. b) can be used to calculate the real interest rates by adding up the inflation rate. 6 c) are not observable, as the real interest rates. d) all of the above. 35. The following figure indicates the demand for bonds and the supply for loanable funds. a) The graphs (a) and (b) are not related. b) The graphs (a) and (b) are related, showing that the quantity of bonds demanded for lenders can be seen as the quantity of loanab le funds supplied by lenders. c) The graphs (a) and (b) are related, showing that the quantity of bonds demanded for lenders can be seen as the quantity of loanable funds demanded by lenders. d) None of the above is true. 36. The Treasury yield curve shows th e relationship among the interest rates on Treasury bonds with different maturities. a) The expectations theory helps to explain that Interest rates on bonds of all maturities tend to rise and fall together and that the Interest rates on long - term bonds a re usually higher than interest rates on short - term bonds but can also be occasionally lower. b) The segmented market theory helps to explain that Interest rates on bonds of all maturities tend to rise and fall together and that the Interest rates on long - term bonds are usually higher than interest rates on short - term bonds but can also be occasionally lower. c ) The liquidity premium theory helps to explain that Interest rates on bonds of all maturities tend to rise and fall together and that the Interest r ates on long - term bonds are usually higher than interest rates on short - term bonds but can also be occasionally lower. d) None of the above. Questions 37 up to 43 should be answered fr om the following Federal Reserve Bank Balance Sheet: 7 37. The quantity of narrow money of money base in the economy was given by: a) 2414 b) 5 981 c) 6081 d) 500 38) The amount of Claims on government sector net of treasury money holdings was: a) 5397 b) 2674 c) 4897 d) none of the above. 39) The amount of Net Foreign Assets, usually the main component of the asset side of the balance sheet of a C B, in the case of the FED is equal to. a) 5397 b) 2674 c) less than 412 d) none of the above. 40) The FOMC decides to increase the interest rate by implementing an Open Market Operation, s ell ing TBs and decreas ing bank reserves in the banking system by an amount of 735 $. Then the following is true: a) Claims on government sector will be reduced by 735 while the deposit of depositary institutions declines by the same amount. b) Claims on financial sector will be reduced by 735 while the reserves decline by the same amount. c) Claims on foreign sector will be reduced by 735 at the same time that the reserves decline by the same amount. 8 d) none of the above. 41) Following the 2007 financi al crisis, the FOMC decided to decrease the interest rate *the fed funds rate. Then the FOMC ordered the Fed at NY to conduct OMO to increase the amount of reserves in the system. Looking the actual Balance Sheet today, would be equivalent to a buy of TBs by 900 $. Therefore: a) Claims on financial sector will be reduced by 735 while the deposit of depositary institutions declines by the same amount. b) Claims on government sector increased by 900 while the deposit of depositary institutions increase s by the same amount. c) Claims on foreign sector will be reduced by 900 at the same time that the reserves decline by the same amount. d) none of the above. 42) After such intervention, the increased in money in the economy and the increase in the Fed Balan ce, worried the Fed for its potential inflationary effect: a) The monetary base increased by 900 and the Balance Sheet increased by 735. b) The monetary base increased by 735 and the Balance Sheet increased by 735. c) The monetary base increased by 900 and the Balance Sheet increased by 900. d) none of the above. 43) Fearing the possible inflationary impact, the Fed decided to offer the depositary institutions a reverse REPO of 65 $. After the operation: a) The monetary base increased by 900 and the Balance Sheet increased by 8 35. b) The monetary base increased by 8 35 and the Balance Sheet increased by 900. c) The monetary base increased by 900 and the Balance Sheet increased by 900. d) None of the above. 9 44) For the graph below : 44.1. Line A would be a) Supply of money b) Demand of money c) Excess demand of money d) none of the above 44.2. Line B would be a) Supply of money b) Demand of money c) Excess demand of money d) none of the above 10 44.3. The intervention descripted in question 42 would imply in the graph 44. a) a shift in the demand for credit to the right and an increase in the interest rate. b) a shift in the money supply to the right (line c) and an increase in the interest rate (from D to F) c) a shift in the money supply to the right (line c) and a decrease in the interest rate (from D to F) d) none of the above. 44.4. The intervention descripted in question 43 would imply in the graph 44. a) a shift of the money supply fro m line c towards line b and an increase in the interest rate that get closer to D and a reduction in the equilibrium quantity of money, reaching G. b) a shift of the money supply from line c towards line b and an increase in the interest rate that get clo ser to D and a reduction in the equilibrium quantity of money towards point B. c) a shift of the money demand from line c towards line b and an increase in the interest rate closer to D and a reduction in the equilibrium quantity of money, reaching G. d) all of the above. 45. Chart #4 1 Chart #4 shows the public's demand for mo ney, which is proxied by dividing M2 by nominal GDP — think of it as the amount of the average person's annual income he or she prefers to hold in cash and cash equivalents. The inverse of this is commonly known as the velocity of money, which has been surgi ng as money demand has been falling. The chart further suggests that we are likely to see further declines in money demand (and further increases in money velocity) before this is all over. Why couldn't money demand return to its pre - Covid levels? To keep this from happening too quickly (since that would boost inflation), the Fed will need to keep interest rates relatively high for at least the balance of this year. It's nice to know that this is what the bond market fully expects to see — which means we won' t be in for any unpleasant shocks. a) This situation is predicted by the theoretical money demand L(Y,i) 1 M2 news continues to impress http://s cottgrannis.blogspot.com/2023/01/m2 - news - continues - to - impress.html by Scott Grannis 11 b) The described situation is related to the recent increase in the interest rate by the FOMC. c) The situation may be also related to a more moderated econo mic growth. d) All of the above. 46. Consider a U.S. Treasury Bill with 270 days to maturity. The face value is $100. If the annual yield is 5.0 percent, what is the price? (Note: Treat 270 days as 9 months, or 9/12 of a year using a 360 - day year.) a) 89.4 1 b) 96.41 c)95.41 d) None of the above. 47. A new website is launched facilitating the trading of corporate bonds with much more ease than before. Which of the following graphs depicts better the situation? a) Graph b, showing an increase in the supply of bonds. b) Graph a, showing an increase in the demand for bonds, increasing the price of the bonds and reducing the yields leading to an increase in the equilibrium amount of outstanding bonds. c) Both. d) None. (a) (b) 48. The following graph is showing: 12 a) A removal of tax incentives on investment that make investment more costly, reducing the supply of bonds by corporations and shifting the supply curve to the left. b) An increase in the demand for bonds that increase the yield of the bond. c) An increase in taxes incentives on investment that make investment more attractive, reducing the supply of bonds. d) None of the above.