Question

20. As interest rates change, present values change:

a. Directly.

b. There is no connection between interest rates and present values.

c. Inversely.

d. Upward.

21. When interest rates rise, present values:

a. Increase.

b. Decrease.

c. Remain the same.

d. First rise, then fall.

22. Financial markets and institutions perform which of the following functions:

a. They are a payments mechanism.

b. They are a vehicle for savings.

c. They are a supplier of credit.

d. They are a storehouse of wealth.

e. They are a source of liquidity.

f. They are a mechanism for risk shifting.

g. All of the above.

23. A deficit-budget unit: a. Spends more than it earns. b. Earns more than it spends. c. Spends exactly what it earns. d. None of the above.

24. A a. Spends more than it earns. b. Earns more than it spends. c. Spends exactly what it earns. d. None of the above. surplus-budget unit

25. A a. Be surplus-budget units when young and balanced-budget units when older. b. Be balanced-budget units when young and deficit budget units when older. c. Be surplus-budget units when young and deficit-budget units when older. d. Be deficit-budget units when young and surplus-budget units when older. common pattern for individuals is to:

26. In a. Use a financial intermediary. b. Use a broker. c. Use the government. d. Know each other.

27. The money markets are where: a. Short-term equity is traded. b. Long-term equity is traded. c. Short-term debt is traded. d. Long-term debt is traded.

28. Participants in the money markets include: a. Individuals taking short term loans. b. Companies financing working capital needs. c. The U.S. government issuing three-month treasury bills. d. All of the above.

29. A major advantage of issuing securities through an investment banker is that the firm:

A. Can purchase underwriting services.
B. Receives expert advice on the pricing of the issue.
C. Can issue securities at a lower cost than if it did it itself.

D. All of the above.

30. An advantage of using a private placement when issuing new securities is:

A. The firm can raise funds in an amount too small to warrant a public offering

B. The firm doesn’t have to register the offering with the SEC.

C. The terms of the issue can be directly negotiated by borrower and lender.

D. All Above

31. Risk is: a. The chance that something will come out worse than planned. b. The amount of money lost by an investor. c. The returns from a startup company. d. Putting your money in a savings account.

32. The relationship between risk and return in financial markets can be summarized by saying: a. The more risk, the more the actual return an investor will receive. b. The more risk, the greater the return demanded by investors. c. The more risk, the less the actual return an investor will receive. d. The more risk, the less the return demanded by investors.

Answer 1

20) Ans c) Inversely.

Lets say future value = 100 and rate of return = 10%

PV = FV/(1+r)

=100/(1+10%)

=100/1.1

=90.91$

Now, r = 15%

PV = FV/(1+r)

=100/(1+15%)

=100/1.15

=86.96 $

Thus as interest rate increases present value decreases

21) b) Decrease.

When interest rate rises, present value decreases as discussed above

22) g) All of the above.

23) a) Spends more than it earns.

Deficit means shortage. Deficit in other words is loss. Thus deficit buget unit spends more than it earns