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Bond

1. The idea that markets adjust rapidly enough to eliminate profit opportunities immediately is called________

a. perfect information.
b. market manipulation.
c. market efficiency.
d. market foolishness.
e. amateurs running the market.

2. Seeking to own stocks of different kinds in many markets is an example of
a. portfolio diversification.
b. portfolio rearrangement.
c. risk aversion.
d. risk neutrality.
e. investment confusion.

3. Suppose a stock has a price that gives it the same expected rate of return as 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 rise and the expected rate of return will increase.
d. the price of the stock will fall and the expected rate of return will increase.
e. the price of the stock will fall and the expected rate of return will decrease.

4. 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.

5. Which of the following is not an example of physical capital?
a. Drill press
b. Office furniture
c. Stapler
d. Money

6. Which of the following is an example of an equity contract?
a. Mortgage
b. Dividends
c. Stocks
d. Interest

7. Which of the following is not an example of financial capital?
a. IBM bonds
b. IBM stocks
c. Automatic teller machines
d. Government bonds
e. Corporate cash balances

8. Explain what happens to the price of a bond that pays a fixed percent of the face value every year when interest rates in the economy increase.

9. Suppose that a stock has a price that gives it the same expected rate of return as a bank account. Explain why this is not an equilibrium situation.

Solution Preview

1. c. market efficiency.
2. a. portfolio diversification.
3. d. the price of the stock will fall and the expected rate of return will increase.
4. a. the face value of the bond as well as the coupon.
5. d. Money
6. c. Stocks
7 c. Automatic teller machines
8. The outcome depends on the original price of the ...

Solution Summary

The solution goes into a great amount of detail related to the several questions being asked. The solution is very easy to follow along and can be easily understood by anyone with a basic understanding of the concepts. The solution answers all the question(s) being asked in a succinct way. The solution does not give explanation for the multiple choice questions and only provides answers. However, the explanation provided for the two questions towards the end is very detailed and well written. Overall, an excellent response.

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