1. Financial markets are a. the market where capital goods are traded. b. market

ID: 1112531 • Letter: 1

Question

1. Financial markets are

a. the market where capital goods are traded.

b. markets where funds accumulated by one group are made available to another group.

c. banks interact to lend and borrow reserves.

d. markets where money is traded between the Fed and economic agents.

2. The interest rate on a bond is

a. the difference between the face value and the yield, expressed as a percentage of the bond price.

b. the difference between the face value and the bond price, expressed as a percentage of the face value.

c. the ratio of the face value and the bond price, expressed as a percentage.

d. the difference between the face value and the bond price, expressed as a percentage of the bond price.

3. Which of the following is true with regard to bonds?

a. As the price of a bond falls, the interest rates remains unchanged

b. As the price of a bond falls, the interest rates falls.

c. As the price of a bond rises, the interest rates rises.

d. As the price of a bond falls, the interest rates rises

4. The price of a bond is determined by

a. the seller.

b. the demand for and supply of bonds.

c. the investment bank that auctions off the bonds.

d. the buyer.

5. The supply of bonds curve slopes upwards because

a. at higher prices, bonds pay higher interest which makes them more attractive to suppliers.

b. higher prices raise the cost of borrowing which makes them less attractive to suppliers.

c. lower prices raises the cost of borrowing which makes them less attractive to suppliers.

d. at lower prices, bonds pay higher interest which makes them more attractive to suppliers

(1) (b)

In a financial market, savings accumulated by one group are loaned by financial institutions to another group.

(2) (b)

Interest rate = (Bond price - Face value) / Face value [If bond is trading at premium]

= (Face value - Bond price) / Face value [If bond is trading at discount]

(3) (d)

Bond price and interest rate are inversely related, so a fall (rise) in bond price leads to a rise (fall) in interest rate.

(4) (b)

Bond price is determined by free market forces of demand and supply.

NOTE: As per Chegg answering guidelines, first 4 questions are answered.

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