Reference no: EM133267161

Assignment:

1. Suppose you are an advisor to Jerome Powell, chairman of the Federal Reserve System. He wants to know whether to lower interest rates, or raise interest rates. He tells you: 'by lowering interest rates we will let the market do its job, and businesses will want to invest'. You reply that

A. Yes, lowering interest rates will always let the market do its job well.

B. Lowering interest rates too much will result in too many businesses borrowing, which could raise default risk

C. Higher interest rates could also be bad because the businesses willing to pay high rates might be taking on risky ventures.

D. Both B and C.

2. Real interest rates:

A. always exceed inflation rates.

B. can decline to zero but no lower.

C. can be negative, zero, or positive.

D. traditionally exceed nominal rates.

3. Which one of the following bond values will change when interest rates change?

A. The expected cash flows

B. The present value

C. The coupon payment

D. The maturity value

4. Investors who purchase bonds having lower credit ratings should expect:

A. lower yields to maturity.

B. higher default possibilities.

C. lower coupon payments.

D. higher purchase prices.

5. In the music industry, a new firm, Kobalt, appears to make more money for music artists if they charge lower prices. How can musicians' profits increase when they allow consumers to pay $0?

A. Because the market is based on reputation and other musician services such as concerts

B. Because consumers do not understand the value of their products

C. The musicians will soon start to make losses

D. Because of government intervention

6. The value of common stock will likely decrease if:

A. the investment horizon decreases.

B. the growth rate of dividends increases.

C. the discount rate increases.

D. dividends are discounted back to the present.

7. Based on the random walk theory, if a stock's price decreased last week, then this week the price:

A. will reverse last week's loss and go up.

B. will continue last week's decline.

C. will stand still until new information is released.

D. has an equal chance of going either up or down.

8. As the discount rate is increased, the NPV of a specific project will:

A. increase.

B. decrease.

C. remain constant.

D. decrease to zero, then remain constant.

9. When inflation is positive, the nominal interest rate is larger than the real rate.

A. TRUE

B. FALSE

10. You are a sports analyst and are told that international soccer is a superstar market. As a result, you know that

A. The standard demand-supply framework is a good description of the soccer market

B. The standard demand-supply framework is a poor description of the soccer market

C. The best midfielders are paid the same as the worst midfielders

D. All midfielders are well paid