tesfatsi@iastate.edu
ANSWER OUTLINE
ECON 353 -- SECTION 2 L. Tesfatsion
FIRST MIDTERM EXAM: 40 POINTS TOTAL February 27, 2001
1-2. The aggregate price level for the U.S. in 2001
A. is the total value of all goods and services sold in the U.S. in 2001
B. is the total sum of prices for goods and services in the U.S. during 2001.
C C. is the average price of goods and services in the U.S. during 2001.
D. is the average cost of U.S.-owned assets at the end of 2001.
2-2. The key difference between nominal GDP (gross domestic product) and real
GDP for the United States is that
A. Nominal GDP includes production outside the borders of the U.S.
whereas real GDP does not.
B B. Real GDP is corrected for price movements whereas nominal GDP is not.
C. Nominal GDP includes financial assets whereas real GDP includes only
real assets.
D. Nominal GDP is the initial measure of output and real GDP is the
final revised measure of output.
3-2. A "recession" is defined to be a period of time during which________
and an "expansion" is defined to be a period of time during which __________.
A. real wages are low; real wages are high.
B B. real GDP is declining; real GDP is increasing.
C. the current account is in deficit; the current account is in surplus.
D. the real money supply is low; the real money supply is high.
4-2. The U.S. government budget DEFICIT in 1991 measured the extent to which
A. the U.S. had to rely on foreign borrowing in 1991.
B. U.S. government tax revenues exceeded U.S. government expenditures in 1991.
C C. U.S. government expenditures exceeded U.S. government tax revenues in 1991.
D. U.S. imports exceeded U.S. exports in 1991.
5-2. According to U.S. time series data presented in Mishkin (Chapter 1):
A. Over 1980-2000, U.S. stock prices have dramatically increased.
B. Over 1980-2000, fluctuations in U.S. interest rates have been substantial.
C. Over 1980-2000, the U.S. aggregate price level has dramatically increased.
D D. All of the above.
6-2. Which of the following is most likely to result from a weaker dollar
against the Japanese yen (that is, a drop in the yen per dollar exchange rate)?
A. U.S. citizens will buy more Japanese goods.
B. U.S. goods exported to Japan will cost more in Japan, so the Japanese
will buy fewer of them.
C. the U.S. will definitely be worse off.
D D. U.S. goods exported to Japan will cost less in Japan, so the Japanese
will buy more of them.
7-2. Securities are ________ for the issuer and _________ for the purchaser.
A. puts; calls
B. assets; liabilities
C C. liabilities; assets
D. liquid; illiquid
8-2. A primary way in which a broker DIFFERS from a dealer is as follows:
A. Brokers facilitate the trade of financial assets.
B. Brokers do not take positions in the financial assets they trade.
C. Brokers charge commissions to the users of their services.
D. all of the above.
E E. only B and C above.
9-2. A key DISTINCTION between a financial intermediary (FI) and a dealer is:
A. A dealer keeps an investment portfolio of the assets he or she trades in.
B. An FI buys low and sells high whereas a dealer is paid by commission
C C. The assets sold by an FI to buyers (lenders) differ from the assets
bought by the FI from sellers (borrowers).
D. FIs are key players in auction markets.
E. FIs are key players in over-the-counter markets.
10-2. A type of financial institution that plays a major role in the sale of
securities in PRIMARY markets is
A. a stock exchange.
B B. an investment bank.
C. a savings and loan.
D. a commercial bank.
11-2. Which of the following are SECONDARY markets.
A. The auction market for U.S. Treasury bills, notes, and bonds
B. The New York Stock Exchange
C. The foreign exchange market.
D. The U.S. over-the-counter stock market
E E. Only B, C, and D above
12-2. Corporations do NOT acquire new funds when their securities are sold
A. in a primary market by investment banks.
B B. in a secondary market by securities dealers.
C. directly in a primary market overseas.
D. directly by the corporation in a domestic market.
13-2. Which of the following statements is TRUE?
A A. The maturity of a financial asset is the length of time to the
financial asset's expiration date
B. Common stock shares are an example of a "short term" security because
they have no maturity date.
C. A common stock share is a financial instrument that promises to pay
dividends over its maturity.
D. All of the above are true
14-2 Which of the following properties is TRUE for debt instruments:
A. In case of bankruptcy, debt claims are paid before the claims of
common stock holders.
B. Debt payments are conditional on the profits earned by the
debt issuer (borrower), except when the issuer declares bankrupcty.
C. Debt holders do not usually participate in the management of the
affairs of debt issuers except under conditions of duress.
D D. Only A and C above.
15-2. Which of the following can be described as DIRECT finance:
A A. The U.S. government sells newly issued Treasury bonds to
the government of Japan.
B. You buy shares in a mutual fund.
C. A pension fund manager buys commercial paper in the secondary market.
D. You take out a loan from a bank.
E. None of the above.
16-2. Which of the following can be described as INDIRECT finance.
A. The U.S. government buys commercial paper on a secondary market.
B B. A bank makes a loan to a corporation.
C. You buy stock shares on the New York Stock Exchange.
D. The U.S. government buys commercial paper newly issued by a corporation.
E. None of the above.
17-2. If bad credit risks are the ones that most actively seek out and
receive loans from a financial intermediary due to its loan contract
provisions, then the financial intermediary has _______________
A. a moral hazard problem
B B. an adverse selection problem
C. a free-riding problem
D. a risk diversification problem
18-2. Money is defined as
A. currency
B B. anything that is generally accepted in payment for goods and services
or in the repayment of debt.
C. a riskless repository of spending power.
D. income (e.g., dollars received per unit of time)
E. anything that must be accepted by law in repayment of debt.
19-2. If the U.S. aggregate price level were to double, then (all else
equal) the value of a dollar would
A. double.
B B. fall by 50 percent.
C. more than double.
D. rise but not double due to diminishing returns.
20-2. The conversion of a barter economy to one that uses money
A. increases efficiency by reducing the need to exchange goods and
services
B. increases efficiency by reducing the need to specialize.
C C. increases efficiency by reducing transactions costs.
D. decreases economic efficiency by reducing double coincidence of wants.
21-2. For an economy with exactly 9 goods, _______ prices are needed to
support exchange under a barter payment system while ______ prices are
needed to support exchange under a monetary payment system.
A. 36; 18
B. 18; 9
C. 72; 18
D D. 36; 9
E. 72; 9
22-2. Which of the following statements about "fiat money" is accurate:
A. fiat money is unbacked, i.e., it is not collateralized by any commodity.
B. fiat money is paper money.
C. fiat money is legal tender -- i.e., by law, citizens must accept
it as repayment for debts.
D D. all of the above are true by definition of fiat money.
23-2. The evolution of the means of payment from commodity money to backed
paper money to checkable deposits and to electronic money and beyond can best
be understood as a consequence of
A. government mandates regarding means of payment that were designed to
ensure the overall safety of the payments system.
B. government mandates regarding means of payment that were designed to
promote the overall efficiency of the payments system.
C. financial innovations introduced by government to ensure the overall
safety of the payments system.
D D. financial innovations introduced by private agents in order to
increase their profits.
24-2. Government monetary policy is the management by government of
A. the extent of foreign borrowing.
B. the balance of payments.
C. U.S. exports and imports.
D D. money and interest rates.
25-2. Which of the following assets would NOT be included in a theoretical
approach to the measurement of the money supply:
A. currency
B. traveler's checks
C. checking account deposits
D D. long-term corporate bonds
26-2. When a person in the U.S. takes currency from under her mattress and
deposits it in a (noninstitutional) U.S. money market mutual fund, then
A. M1 and M2 both decrease for the U.S.
B. M1 and M2 both increase for the U.S.
C. M1 decreases and M2 increases for the U.S.
D. M1 increases and M2 decreases for the U.S.
E E. None of the above
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NOTE: Part E (the correct answer) for 26-2 is missing on the
original exam copies. Recall that the need to add Part E to 26-2
was announced by the instructor toward the beginning of the exam
period as a needed correction to the midterm exam.
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27-2. Which of the following is true in general for FIXED PAYMENT loans?
A. The borrower makes only one fixed payment, at maturity, and this payment
combines interest and principal repayment.
B. The borrower makes the same fixed payment in every payment period until
maturity, where the payments consist entirely of principal repayments.
C C. The borrower makes the same fixed payment in every payment period until
maturity, where the payments consist of both interest and principal.
D. At maturity the borrower makes one fixed payment, equal to face value.
28-2. Which of the following is true in general for COUPON BONDS?
A. The coupon bond owner receives a fixed coupon payment in every payment
period through to maturity, at which time the face value is also received.
B. U.S. Treasury bonds and notes are examples of coupon bonds.
C. Corporate bonds are examples of coupon bonds.
D D. All of the above
E. Only A and B of the above
29-2. A _________ is generally bought at a price below its face value, and
the only payment received by the purchaser is the _______ at the maturity date.
A. simple loan contract; principal
B B. discount bond; face value
C. discount bond; discount
D. simple loan contract; interest payment
30-2. If the annual interest rate is 10 percent, the present value of a
payment of $700 to be received two years from now is
2
A. $700 multiplied by (1 + .10)
2
B B. $700 divided by (1 + .10)
C. $700 divided by (1 + .20)
D. $700 divided by 2
31-2. Letting "*" denote multiplication, if the annual interest rate is 5
percent, then the present value of a payment stream ($10,$0,$0,$50) with $10
to be received at the end of the FIRST year and $50 to be received at the
end of the FOURTH year is given by
4
A. $10*(1 + .05) + $50*(1 + .05)
B. $10/(1 + .05) + $50/(1 + .20)
4
C C. $10/(1 + .05) + $50/(1 + .05)
D. [$10 + $50] divided by 4
32-2. The (annual) yield to maturity i on a coupon bond with a purchase
price $170, a face value $200, a 2-year maturity, and a 2-year coupon payment
stream ($20,$20) is calculated as follows:
A. i equals the annual interest rate that, when used to calculate the
present value of the payment stream ($20,$20), results in a present
value equal to $200.
B. i equals the annual interest rate that, when used to calculate the
present value of the payment stream ($20,$20), results in a present
value equal to $170.
C. i equals the annual interest rate that, when used to calculate the
present value of the payment stream ($20,$220), results in a present
value equal to $200.
D D. i equals the annual interest rate that, when used to calculate the
present value of the payment stream ($20,$220), results in a present
value equal to $170.
33-2. The current yield on a coupon bond with a $5000 face value, an 8 percent
coupon rate, a 4 year maturity, and a current purchase price of $4000 is
A. 5 percent
B. 8 percent
C C. 10 percent
D. 20 percent
34-2. Which of the following is FALSE for the current yield of a coupon bond:
A. By definition, the current yield is the coupon payment divided by the
purchase price of the bond.
B. For a consol bond, the formula for the current yield reduces to the
formula for the yield to maturity.
C C. The current yield is a better approximation to the yield to maturity the
shorter the time to maturity, all else equal.
D. The current yield is a better approximation to the yield to maturity the
closer the purchase price is to the face value, all else equal.
35-2. For a coupon bond, its purchase price is _________ than its face value
if and only if its coupon rate is __________ than its yield to maturity.
A. higher; lower
B B. higher; higher
C. lower; higher
D. none of the above.
36-2. Which of the following $4000 face-value securities has the HIGHEST
yield to maturity?
A. A 5 percent coupon bond selling for $4,000
B. A 10 percent coupon bond selling for $4,000
C C. A 15 percent coupon bond selling for $4,000
D. A 15 percent coupon bond selling for $4,200
37-2. Which of the the following is true:
A. Over any given holding period, the return rate on a coupon bond is not
necessarily equal to the current yield on the bond.
B. The return rate on a coupon bond can be expressed as the sum of the
current yield and the rate of capital gain or loss.
C. Measured from time T to time T+1, the return rate on a coupon bond will
be greater than the current yield when the purchase price of the bond
INCREASES between T and T+1.
D D. All of the above are true.
E. Only A and B of the above are true.
38-2. Which of the following is true regarding the financial bond pages
appearing in newspapers such as the New York Times and Wall Street Journal:
A. Dealers quote positive bid-ask spreads to ensure positive profits.
B. For T-bonds/notes, if two maturity dates are reported, the first is
the earliest call date and the second is the maturity date.
C. For T-bonds/notes and corporate bonds, the listed security prices
are reported per $100 of face value, so numbers less than 100
correspond to prices less than face value and vice versa.
D. For T-bill quotes, discount yields (calculated for both bid and asked
prices) are reported rather than the bid and ask prices themselves.
E E. All of the above
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TABLE 1: T-BONDS/NOTES QUOTES
DATE RATE BID ASK CHG YLD
Feb 03 p 6 1/4 104.03 104.05 -0.01 5.08
Aug 08-13 12 148.10 148.12 +0.07 5.41
Feb 20 k 8 1/2 134.03 134.05 +0.29 5.69
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39-2. Referring to the T-BONDS/NOTES QUOTES in the above Table 1, which of the
following statements is TRUE:
A. These quotes show that the bond dealers are sometimes willing to trade
at prices resulting in a negative profit margin.
B. These quotes are INCONSISTENT with the claim for coupon bonds that the
yield to maturity moves inversely to the purchase price, all else equal.
C. These quotes show that the bonds that can be called early are commanding
a lower coupon rate.
D D. The approximate current yield of these bonds can be determined from the
the data provided in this table.
E. None of these statements is true.
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TABLE 2: T-BILL QUOTES
DATE BID ASK CHG YIELD
June 02 02 4.42 4.40 ... 4.52
Oct 14 01 4.44 4.42 +.02 4.60
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40-2. Referring to the T-Bill quotes in the above Table 2, which of the
following statements is TRUE:
A. The ASK column gives the price offered by SELLERS.
B. The ASK column gives the price offered by BUYERS.
C C. The ASK column gives the discount yield using the price offered by SELLERS.
D. The bid-ask spread for June 02 02 T-bills is NEGATIVE.
E. Only A and D are true