NORTHEASTERN UNIVERSITY
Department of Economics
ECON 3442-01 Professor: Martin K. Konan
Money & Banking
SAMPLE MIDTERM EXAMINATION
Answer the following questions:
1. "The presence of transaction costs in financial markets explains, in part, why financial
intermediaries and indirect finance play such an important role in financial markets ".
Circle one: True / False / Uncertain.
2. The definition of the U.S. money supply that views money primarily as a medium of
exchange is .
3. Successful financial intermediaries have higher earnings on their investments because they
are better equipped than individuals to screen out good from bad risks, thereby reducing
losses due to:
Circle one: moral hazard / adverse selection / bad luck / financial panics
4. Which of the following are primary markets?
Circle: The New York Stock Exchange / The U.S. government bond market / The
over-the counter stock market / The options markets / None of the above
5. An investor is interested in purchasing a 10-year government bond carrying a 10 percent
coupon rate. The bond’s current market price is $900 for a $1000 par value instrument.
Suppose the investor sells the bond at the end of 5 years for $950. What is the holding-
period yield?
ANSWER:
6. Provide two sources of information for prices and interest rates on securities:
7. Let us consider a discount bond (or zero coupon bond) such as a three-year U.S. Treasury
bond, which pays a face value of $1000 in three years. If the current price of the bond is
$800, what is its interest rate, or yield to maturity?
ANSWER:
8. You decide to take out a 30-year mortgage loan to buy the home of your dreams. The
home purchase price is $130,000. You manage to scrape together a $30,000 down
payment and plan to borrow the balance of the purchase price. Hardy Savings and Loan
Association quotes you a fixed annual loan rate of 12 percent. What will your monthly
payment be?
ANSWER:
9. In your opinion are the coupon rate and the current yield good measures of the rate of
return on a bond or other financial instrument? Why or why not?
10. A risk-free intermediate or long-term investment
A. is free of all types of risk.
B. does guarantee the future purchasing power of its cash flows.
C. does not guarantee the future purchasing power of its cash flows as it is insured by the
U.S. Treasury.
D. A and B.
E. B and C.
ANSWER:
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11. Over the past year you earned a nominal rate of interest of 10 percent on your money. The
inflation rate was 5 percent over the same period. The actual growth rate of your
purchasing power was
A. 15.5%.
B. 10.0%.
C. 5.0%.
D. 4.8%.
E. 15.0%
ANSWER:
12. If the interest rate paid by borrowers and the interest rate received by savers accurately
reflects the realized rate of inflation:
A. borrowers gain and savers lose.
B. savers gain and borrowers lose.
C. both borrowers and savers lose.
D. neither borrowers nor savers gain or lose.
E. both borrowers and savers gain.
ANSWER:
13. The interest-rate risk of a bond is
A. the risk related to the possibility of bankruptcy of the bond's issuer.
B. the risk that arises from the uncertainty of the bond's return caused by changes in interest
rates.
C. the unsystematic risk caused by factors unique in the bond.
D. A and B above.
E. A, B, and C above.
ANSWER:
14. Why are many bonds callable? What is the disadvantage to the investor of a callable
bond? What does the investor receive in exchange for a bond being callable? How are
bond valuation calculations affected if bonds are callable?
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15. A 12% coupon bond, semiannual payments, is callable in 5 years. The call price is $1,120;
if the bond is selling today for $1,110, what is the yield to call?
A. 12.03%.
B. 10.86%.
C. 10.95%.
D. 9.14%.
E. none of the above.
ANSWER:
16. If a 7% coupon bond is trading for $975.00, it has a current yield of ____________
percent.
A. 7.00
B. 6.53
C. 7.24
D. 8.53
E. 7.18
ANSWER:
17. A decrease in the riskiness of corporate bonds will ________ the price of corporate bonds
and ________ the price of Treasury bonds, everything else held constant.
A. increase; increase
B. reduce; reduce
C. reduce; increase
D. increase; reduce
ANSWER:
18. Consider an 8% coupon bond selling for $953.10 with 3 years until maturity making
annual coupon payments. The interest rates in the next three years will be, with certainty,
r1=8%, r2=10% and r3=12%. Calculate the yield to maturity and realized compound yield
of the bond.
ANSWER:
ANSWER:
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19. The market for trading newly issued securities is known as the:
A. Money market
B. Cash market
C. Spot market
D. Primary market
E. Open market
ANSWER:
20. Find the present value of $200 perpetuity if the interest rate is 10 percent compounded
yearly. Payments are at the beginning of the period.
ANSWER:
21. What is the main function of the financial market or system?
22. “The maturity of a debt instrument is the number of years (term) to that instrument's
expiration date.”
Circle one: True / False
23. Money’s role as a store of value is reduced or made less effective by:
A. Greater use of barter
B. Taxation
C. Declining prices for goods and services
D. Rising prices for goods and services
E. None of the above
ANSWER:
24. High interest rates might cause a corporation to ________ building a new plant that would
provide more jobs.
A. complete
B. consider
C. postpone
D. contemplate
ANSWER:
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25. Suppose that an investor is considering the purchase of a bond due to mature in 30 years,
carrying a 9 percent coupon rate (coupons are paid semi-annually). This security is
available for purchase at a current market price of $950. The bond has a par value of
$1000. What is the investor’s yield to maturity, y?
ANSWER:
26. A 20-year corporate bond sold to investors for $1010 with a 10 percent coupon rate is
called fourteen years later at par plus one year's coupon income. What is his holding
period yield (or yield to call)?
ANSWER:
27. An electronic payments system has not completely replaced the paper payments system
because of all of the following reasons except
A. expensive equipment is necessary to set up the system.
B. security concerns.
C. privacy concerns.
D. transportation costs.
ANSWER:
28. Your retirement account has a current balance of $66,500. What interest rate would you
need to be earned in order to accumulate a total of $1,000,000 in 35 years, by adding
$6,500 annually?
ANSWER:
29. Which of the following are true concerning the distinction between interest rates and
returns?
A. The rate of return on a bond will not necessarily equal the interest rate on that bond.
B. The return can be expressed as the difference between the current yield and the rate of
capital gains.
C. The rate of return will be greater than the interest rate when the price of the bond falls
between time t and time t + 1.
D. The return can be expressed as the sum of the discount yield and the rate of capital
gains.
ANSWER:
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30. Everything else held constant, would an increase in volatility of stock prices have any
impact on the demand for rare coins? Why or why not?
31. If a loan carries an interest of 1.5 percent per month, what is its effective annual rate?
ANSWER:
32. Everything else held constant, an increase in expected inflation, lowers the expected return
on ________ compared to ________ assets
A. bonds; financial
B. bonds; real
C. physical; financial
D. physical; real
ANSWER:
33. Suppose that you borrow $340,000 to purchase a house. If you are making monthly
payments of $2,100 for 20 years, what annualized interest rate are you paying for this loan?
ANSWER:
34. Find the future value of 6-year $200 annuity if the interest rate is 10 percent compounded
yearly. Payments are at the beginning of the period.
ANSWER:
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35. The reduction in transactions costs per dollar of investment as the size of transactions
increases is
A. discounting.
B. economies of scale.
C. economies of trade.
D. diversification.
ANSWER:
36. Everything else held constant, a decrease in marginal tax rates would likely have the effect
of ________ the demand for municipal bonds, and ________ the demand for U.S.
government bonds.
A. increasing; increasing
B. increasing; decreasing
C. decreasing; increasing
D. decreasing; decreasing
ANSWER:
37. Suppose that you make a deposit of $1,500. Then you make six additional deposits growing
at 5 percent. If the interest rate is 12 percent, how much will you be able to withdraw at the
end of seven years?
ANSWER:
38. Your retirement account has a current balance of $66,500. What interest rate would you
need to be earned in order to accumulate a total of $1,000,000 in 35 years, by adding
$6,500 annually?
ANSWER:
39. Find the present value of $200 perpetuity if the interest rate is 10 percent compounded
yearly. Payments are at the beginning of the period.
ANSWER:
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40. Consider a deposit of $250 made today. Deposits grow at a rate of 5 percent for another 4
years. The goal is to save $2000 at the end of 5 years. What must the interest rate be?
ANSWER:
