Question 1

Suppose that financial market participants expect that the central bank will pursue a monetary expansion in the future.Also assume that the yield curve is initially upward sloping.Given this information,we would expect which of the following to occur?

Accepted Answer

A)  The yield curve will become steeper.
B)  i₂t will increase.
C)  i₂t will decrease.
D)  The yield curve will become downward sloping.

Question 2

Which of the following best explains why the long-term interest rate will generally change by less than 1% when the short-term interest rate changes by 1%?

Accepted Answer

A)  The mathematical calculations are more difficult for analysts in the case of long-term bonds.
B)  Long-term rates are always lower than short-term rates, so there is less room for them to change.
C)  Financial market participants will not expect this increase in the short-term interest rate to persist fully in the future.
D)  Financial markets are often affected by bubbles and fads.
E)   none of the above

Question 3

Suppose there is a decrease in the short-term interest rate.Give this reduction in the current short-term interest rate,which of the following will most likely occur?

Accepted Answer

A)  The long-term interest rate will increase.
B)  The long-term interest rate will remain the same.
C)  The long-term interest rate will decrease by more than the short-term rate.
D)  The long-term interest rate will decrease by the same amount as the short-term rate.
E)   The long-term interest rate will decrease, but by less than the short-term rate.

Question 4

Suppose there is a report that the unemployment rate unexpectedly increased in the previous month.To what extent will the expected central bank response to this news affect how stock prices will respond to this report of a higher than expected unemployment rate? Explain.

Accepted Answer

The effect on stock prices will be ambig...

Question 5

Suppose the central bank implements a monetary expansion in the current period and is not expected to continue this policy in the future.Explain what effect this policy will have on the shape of the yield curve and on stock prices.

Accepted Answer

The current one-year rate will fall with...

Question 6

The length of time over which a bond promises to make payments to the holder is called which of the following?

Accepted Answer

A)  the term structure of interest rates
B)  the face value
C)  the yield to maturity
D)  the holding period
E)   none of the above

Question 7

Give two explanations why stock prices might deviate from their fundamental values.

Accepted Answer

Answers should discuss speculative bubbles and fads.

Question 8

Suppose individuals expect an increase in future taxes.Explain what effect this expected increase in future taxes will have on the yield curve and on stock prices in the current period.

Accepted Answer

The increase in future taxes will cause ...

Question 9

An expected tax increase will tend to cause

Accepted Answer

A)  an increase in stock prices.
B)  a reduction in stock prices.
C)  no change in stock prices.
D)  an ambiguous effect on stock prices.

Question 10

Which of the following bonds (of equal maturity) would have the largest risk premium?

Accepted Answer

A)  U) S. government bonds
B)  German government bonds
C)  the bonds of a financially stable corporation, like IBM
D)  Bondsbrated Aaa by Moody's
E)   junk bonds E

Question 11

Suppose the current one-year interest rate is 4%.Also assume that financial markets expect the one-year interest rate next year to be 5%,and expect the one-year rate to be 6% the year after that.Given this information,the yield to maturity on a three-year bond will be approximately

Accepted Answer

A)  4%.
B)  5%.
C)  6%.
D)  15%.

Question 12

Suppose the Fed implements a monetary expansion that is at least partially unexpected.Explain what effect this will have on stock prices.

Accepted Answer

This will cause the interest rate to fal...

Question 13

Assume that the current one-year rate is 3% and the two-year rate is 5%.Given this information,the one-year rate expected one year from now is

Accepted Answer

A)  5%.
B)  6%.
C)  7%.
D)  9%.
E)   12%.

Question 14

An expected increase in the money supply will tend to cause

Accepted Answer

A)  an increase in stock prices.
B)  a reduction in stock prices.
C)  no change in stock prices.
D)  an ambiguous effect on stock prices.

Question 15

An expected tax cut will tend to cause

Accepted Answer

A)  an increase in stock prices.
B)  a reduction in stock prices.
C)  no change in stock prices.
D)  an ambiguous effect on stock prices.

Question 16

The yield curve indicates that the two-year interest rate will be a function of what variables? Include in your answer an explanation of how changes in these variables will affect the two-year interest rate.

Accepted Answer

The two-year rate will be a function of ...

Question 17

Which of the following bonds (of equal maturity) would have the lowest risk premium?

Accepted Answer

A)  U) S. government bonds
B)  German government bonds
C)  the bonds of a financially stable corporation, like IBM
D)  Bonds rated Aaa by Moody's
E)   junk bonds

Question 18

Which of the following variables would not influence the ex-dividend price of a share of stock at time t?

Accepted Answer

A)  i₁ᵉt₊₁
B)  i₁t
C)  $Dᵉt₊₁
D)  none of the above

Question 19

An upward-sloping yield curve suggests that financial market participants expect short-term interest rates will

Accepted Answer

A)  rise in the future.
B)  fall in the future.
C)  be unstable in the future.
D)  not change in the future.
E)   be equal to zero in the future.

Question 20

An unexpected reduction in the money supply will tend to cause

Accepted Answer

A)  an increase in stock prices.
B)  a reduction in stock prices.
C)  no change in stock prices.
D)  an ambiguous effect on stock prices. B

Exam 14: Financial Markets and Expectations

Suppose that financial market participants expect that the central bank will pursue a monetary expansion in the future.Also assume that the yield curve is initially upward sloping.Given this information,we would expect which of the following to occur?

Correct AnswerverifiedShow Answer

Which of the following best explains why the long-term interest rate will generally change by less than 1% when the short-term interest rate changes by 1%?

Correct AnswerverifiedShow Answer

Suppose there is a decrease in the short-term interest rate.Give this reduction in the current short-term interest rate,which of the following will most likely occur?

Correct AnswerverifiedShow Answer

Suppose there is a report that the unemployment rate unexpectedly increased in the previous month.To what extent will the expected central bank response to this news affect how stock prices will respond to this report of a higher than expected unemployment rate? Explain.

Correct AnswerverifiedThe effect on stock prices will be ambig...View AnswerShow Answer

Suppose the central bank implements a monetary expansion in the current period and is not expected to continue this policy in the future.Explain what effect this policy will have on the shape of the yield curve and on stock prices.

Correct AnswerverifiedThe current one-year rate will fall with...View AnswerShow Answer

The length of time over which a bond promises to make payments to the holder is called which of the following?

Correct AnswerverifiedShow Answer

Give two explanations why stock prices might deviate from their fundamental values.

Correct AnswerverifiedAnswers should discuss speculative bubbles and fads.

Suppose individuals expect an increase in future taxes.Explain what effect this expected increase in future taxes will have on the yield curve and on stock prices in the current period.

Correct AnswerverifiedThe increase in future taxes will cause ...View AnswerShow Answer

An expected tax increase will tend to cause

Correct AnswerverifiedShow Answer

Which of the following bonds (of equal maturity) would have the largest risk premium?

Correct AnswerverifiedE

Suppose the current one-year interest rate is 4%.Also assume that financial markets expect the one-year interest rate next year to be 5%,and expect the one-year rate to be 6% the year after that.Given this information,the yield to maturity on a three-year bond will be approximately

Correct AnswerverifiedShow Answer

Suppose the Fed implements a monetary expansion that is at least partially unexpected.Explain what effect this will have on stock prices.

Correct AnswerverifiedThis will cause the interest rate to fal...View AnswerShow Answer

Assume that the current one-year rate is 3% and the two-year rate is 5%.Given this information,the one-year rate expected one year from now is

Correct AnswerverifiedShow Answer

An expected increase in the money supply will tend to cause

Correct AnswerverifiedShow Answer

An expected tax cut will tend to cause

Correct AnswerverifiedShow Answer

The yield curve indicates that the two-year interest rate will be a function of what variables? Include in your answer an explanation of how changes in these variables will affect the two-year interest rate.

Correct AnswerverifiedThe two-year rate will be a function of ...View AnswerShow Answer

Which of the following bonds (of equal maturity) would have the lowest risk premium?

Correct AnswerverifiedShow Answer

Which of the following variables would not influence the ex-dividend price of a share of stock at time t?

Correct AnswerverifiedShow Answer

An upward-sloping yield curve suggests that financial market participants expect short-term interest rates will

Correct AnswerverifiedShow Answer

An unexpected reduction in the money supply will tend to cause

Correct AnswerverifiedB

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The effect on stock prices will be ambig...
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The current one-year rate will fall with...
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Answers should discuss speculative bubbles and fads.

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The increase in future taxes will cause ...
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E

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This will cause the interest rate to fal...
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The two-year rate will be a function of ...
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B