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Increase in T-bills supply

1) Assume that the Treasury experiences a large increase in the budget deficit and issues a large number of T-bills. This action will _________________ the price of T-bills in the market and places __________________ pressure on the yield of T-bills.

A) decrease; downward
B) decrease; upward
C) increase; upward
D) increase; downward

2) True or False? A broker executes securities transactions between two parties and charges a fee reflected in the bid-ask spread.________________________________

3) ____________ facilitate transactions on the New York Stock Exchange by executing stock transactions for their clients.

A) Floor brokers
B) Capstone members
C) Specialists
D) none of the above

4) A(n) ______ in the discount rate may signal a stimulative economic policy and anticipation that the Fed will attempt to ______ market interest rates.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

5) In response to the September 11 attack, the Fed ________ the supply of loanable funds in the banking system, which placed _______ pressure on interest rates.

A) decreased; upward
B) decreased; downward
C) increased; upward
D) increased; downward
E) The Fed did not change the supply of loanable funds in response to the
September 11 attack.

6) Money market securities generally have ______. Capital market securities are typically expected to have a ______.

A) less liquidity; higher annualized return
B) more liquidity; lower annualized return
C) less liquidity; lower annualized return
D) more liquidity; higher annualized return

7) The ______ is directly responsible for controlling money supply growth.

A) Federal Advisory Council
B) FOMC
C) Board of Governors
D) president of the United States

8) Which of the following is not true with respect to the discount rate?

A) An adjustment in the discount rate affects the money supply only if depository institutions respond to the adjustment.
B) The discount window offers depository institutions three types of credit.
C) To decrease the money supply, the Fed would increase the discount rate.
D) All of the above are true with respect to the discount rate.

9) Kudrow stock just paid a dividend of $4.76 per share and plans to pay a dividend of $5 per share next year, which is expected to increase by 3 percent per year subsequently. The required rate of return is 15 percent. The value of Kudrow stock, according to the dividend discount model, is $__________.

A) 39.67
B) 41.67
C) 33.33
D) 31.73
E) none of the above

10) Which of the following is not a major component of the Federal Reserve System?

A) member banks
B) Federal Open Market Committee
C) Securities and Exchange Commission
D) Board of Governors

11) The federal government demand for loanable funds is __________. If the budget deficit was
expected to increase, the federal government demand for loanable funds would ________.

A) interest elastic; decrease
B) interest elastic; increase
C) interest inelastic; increase
D) interest inelastic; decrease

12) If analysts expect that the demand for loanable funds will increase, and the supply of loanable funds will decrease, they would most likely expect interest rates to ______ and prices of existing bonds to ______.

A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

13) Historical evidence has shown that, when the Fed significantly increases money supply, U.S. inflation tends to ______ shortly thereafter which in turn places ______ pressure on U.S. interest rates.

A) increase; downward
B) increase; downward
C) decrease; downward
D) decrease; upward

14) Securities with maturities of one year or less are class¬ified as ____________________.

A) capital market instruments.
B) money market instruments.
C) preferred stock.
D) none of the above

15) The appropriate discount rate for valuing any bond is the____________.

A) bond's coupon rate.
B) bond's coupon rate adjusted for the expected infla¬tion rate over the life of the bond.
C) Treasury bill rate with an adjustment to include a risk premium if one exists.
D) yield that could be earned on alternative invest¬ments with similar risk and maturity.

16) A call provision normally _______________

A) allows the firm to call bonds at par value.
B) gives the firm the option to call bonds at market value.
C) allows the firm to call bonds at a price below par value.
D) requires the firm to call bonds at a price above par value.

17) If security prices fully reflect all market related informa¬tion (such as historical price patterns) but do not fully reflect all other public informa¬tion, security markets are

A) weak form efficient.
B) semi strong form efficient.
C) strong form efficient.
D) B and C.
E) None of the above.

18) Assume that you purchased bonds of a corporation one year ago. Today, it is announced that the firm plans a leveraged buyout. The market value of your bonds will ______ as a result.
____________

A) rise
B) decline
C) be zero
D) be unaffected

19) If the economy weakens, there is _________ pressure on interest rates. If the Federal Reserve increases the money supply there is ______ pressure on interest rates (assume that inflationary expectations are not affected).

A) upward; upward
B) upward; downward
C) downward; upward
D) downward; downward

20) If interest rates suddenly ____________, those existing bonds that have a call feature are __________ likely to be called.______________

A) decline; more
B) decline; less
C) increase; more
D) none of the above

21) The ______ is commonly used to determine what a stock's price should have been.

A) capital asset pricing model
B) Treynor Index
C) Sharpe Index
D) B and C

22) When financial institutions expect interest rates to ______, they may ______.

A) increase; sell bonds and buy short term securities
B) increase; sell short term securities and buy bonds
C) decrease; sell bonds and buy short term securities
D) B and C

23) Which of the following transactions would not be considered a secondary market transaction?
____________

A) an individual investor purchases some existing shares of stock in IBM through his broker
B) an institutional investor sells some Disney stock through its broker
C) Microsoft issues new shares of common stock using its investment bank
D) all of the above would occur on the New York Stock Exchange

24) An institution that originates and holds a fixed rate mortgage is adversely affected by _______ interest rates; the borrower who was provided the mortgage is adversely affected by _______ interest rates.

A) stable; decreasing
B) increasing; stable
C) increasing; decreasing
D) decreasing; increasing

25) Mortgage companies specialize in ___________________.

A) purchasing mortgages originated by other financial institutions.
B) investing and maintaining mortgages that they create.
C) originating mortgages and selling those mortgages.
D) borrowing money through the creation of mortgages that is used to invest in real estate.

26) A short-interest ratio of 20 or more indicates that many investors ___________

A) believe that the stock price is currently overvalued.
B) believe that the stock price is currently undervalued.
C) are selling the stock short.
D) both A and C.

27) The first-time issuance of shares by a specific firm to the public is referred to as a(n)

A) stock repurchase.
B) secondary stock offering.
C) initial rights issue.
D) initial public offering (IPO).

28) If the Treasury uses a relatively large proportion of ______ debt to finance the deficit, this may place upward pressure on ______ interest rates, and corporations may reduce their investment in fixed assets.

A) long-term; long-term
B) long-term; short-term
C) short-term; long-term
D) b and c

29) American Depository Receipts (ADRs) are attractive to U.S. investors because __________

A) U.S. analysts do not follow them closely.
B) companies represented by ADRs are required to file financial statements consistent with those in the United States.
C) both A and B.
D) reliable quotes on ADR prices are sporadically available.

30) Shareholders can most easily measure a firm's performance by monitoring changes in its __________ over time.

A) share price
B) employee job descriptions
C) Board of Directors
D) asset size

31) Treasury bills are sold through _____ when initially issued. ______________

A) insurance companies
B) commercial paper dealers
C) auction
D) finance companies

32) Global crowding out is described in the text to mean the impact of ________________.

A) excessive U.S. population growth on interest rates.
B) excessive global population growth on interest rates.
C) an excessive budget deficit in one country on interest rates of another country.
D) an excessive budget deficit in one country on exchange rates.

33) ____________ facilitate transactions on the New York Stock Exchange by taking positions in specific stocks; they also stand ready to buy or sell these stocks.

A) Floor brokers
B) Capstone members
C) Specialists
D) none of the above

Solution Preview

1) Assume that the Treasury experiences a large increase in the budget deficit and issues a large number of T-bills. This action will _____________ the price of T-bills in the market and places ______________ pressure on the yield of T-bills.
A) decrease; downward
B) decrease; upward
C) increase; upward
D) increase; downward

B) Increase in T-bills supply will decrease its price. Since the investment cost (T-Bill price) is lowered, the yield will be push upward.

2) True or False? A broker executes securities transactions between two parties and charges a fee reflected in the bid-ask spread ._____ _________

True. A broker executes securities transactions between two parties and charges a fee reflected in the bid-ask spread.

3) ____________ facilitate transactions on the New York Stock Exchange by executing stock transactions for their clients.
A) Floor brokers
B) Capstone members
C) Specialists
D) none of the above

A) Floor brokers are exchange members who execute orders on the floor of an exchange on behalf of others who do not have access to the trading area.

4) A(n) ______ in the discount rate may signal a stimulative economic policy and anticipation that the Fed will attempt to ______ market interest rates.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

D) Discount rate is the interest rate that an eligible depository institution is charged to borrow short term funds directly from a Federal Reserve Bank. Thus, a decrease in the discount rate will decrease market interest rates to stimulate the economy..

5) In response to the September 11 attack, the Fed ________ the supply of loanable funds in the banking system, which placed _______ pressure on interest rates.
A) decreased; upward
B) decreased; downward
C) increased; upward
D) increased; downward
E) The Fed did not change the supply of loanable funds in response to the

In order to stimulate the economy, Fed could increase the supply of loanable funds. There is now an excess supply of loanable funds at the old equilibrium interest rate. With the excess supply, the interest rate will fall until the new equilibrium is reached.

6) Money market securities generally have ______. Capital market securities are typically expected to have a ______.
A) less liquidity; higher annualized return
B) more liquidity; lower annualized return
C) less liquidity; lower annualized return
D) more liquidity; higher annualized return

D) Money market instruments are forms of debt that mature in less than one year and are very liquid. The Capital market is where capital, such as stocks and bonds, are traded and have higher return.

7) The ______ is directly responsible for controlling money supply growth.
A) Federal Advisory Council
B) FOMC
C) Board of Governors
D) president of the United States

B) the central bank(FED) controls money supply, and Federal Open Market Committee (FOMC) is the only choice to do with central bank.

8) Which of the following is not true with respect to the discount rate?
A) An adjustment in the discount rate affects the money supply only if depository institutions respond to the adjustment.
B) The discount window offers depository institutions three types of credit.
C) To decrease the money supply, the Fed would increase the discount rate.
D) All of the above are true with respect to the discount rate.
(D)no statement is wrong.

9) Kudrow stock just paid a dividend of $4.76 per share and plans to pay a ...

Solution Summary

Increase in T-bills supply and other questions are answered.

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