TUTORIAL 1

OVERVIEW OF FINANCIAL SYSTEM

Part 1. Questions for review

1. What is the main function of financial markets
Performs the essential function of channeling funds from
economic players that have saved surplus funds to those
that have a shortage of funds
2. Classify financial markets
- Debt and Equity Markets
+ Debt instruments (contractual agreement). Maturity: the remaining time until
the expiration date
+ Equities (residual claims to net income and assets). Dividends: periodic
payment to shareholders. Residual claimant
- Primary and Secondary Markets
+ The primary markets are not well known to the public. Investment banks
underwrite securities in primary markets.
+ The previously issued securities will be sold in the secondary market. Brokers
and dealers work in secondary markets.
-Exchanges and Over-the-Counter (OTC) Markets:
+ Exchanges: NYSE, Chicago Board of Trade
+ OTC markets: Foreign exchange, Federal funds
- Money and Capital Markets:
+ Money markets deal in short-term debt instruments. Short terms to maturity,
least price fluctuations and least risky investment
+ Capital markets deal in longer-term debt and equity instruments. With
maturities more than one year

3. List and distinguish the differences among financial instruments

4. Identify the differences among types of financial intermediaries (in terms of primary
liabilities and assets) using Table 3, page 40

Part 1. Multiple-choice questions

1. Evidence from the United States and other foreign countries indicates that
A. Money growth is clearly unrelated to inflation
B. There is a strong positive association between inflation and growth rate of money
over long periods of times
C. Countries with low monetary growth rate tend to experience higher rates of inflation,
all else being constant
D. There is a little support for the assertion that “inflation is always and everywhere a
monetary phenomenon” cái dm
2. Economists group commercial banks, saving and loans associations, credit unions, mutual
funds, mutual savings banks, insurance companies, pension funds and finance companies
under the heading financial intermediaries. Financial intermediaries:
A. produce nothing of value and therefore a drain on society’s resources
B. provide a channel for linking between those who want to save and those who want to
spend
 C. can hurt the performance of the economy
D. have been a source of slow and resistant financial innovation

3. What is the basic activity of banks?

A. To sell shares of corporations to the general public
B. To facilitate the transfer of money from savers to borrowers
C. To represent the interest of insurance companies
D. To ensure everyone who wants a loan gets one
E. To equate future consumption with current consumption

4. Banks, savings and loans associations, mutual savings banks and credit unions
A. are no longer important players in financial intermediation
B. have been adept(thành thạo) at innovating(đổi mới) in response to changes in
regulatory environment
C. produce nothing of value and therefore a drain on society’s resources
D. since deregulation now provide services only to small depositors

5. Why are financial markets important to the health of the economy?

A. They channel funds from investors to savers
B. They identify and shut down inefficient firms
C. They eliminate the needs for financial intermediaries
D. They allow consumers to time their purchase better

6. These financial institutions are very small cooperative lending institutions organized
around a particular group: union members, employees of a firm and so forth. They
acquire funds from deposits called shares and primarily make consumer loans. They are
A. Credit unions(textbook p90)
B. Commercial banks
C. Savings and loan associations
D. Mutual fund

7. These financial intermediaries raise funds primarily by issuing checkable deposits,

savings deposits and time deposits. They then use these funds to make commercial,
consumer and mortgage loans, and to buy US government securities and municipal bonds.
They are
A. Credit union
B. Commercial bank(textbook p89)
C. Savings and loan
D. Mutual fund

8. These instruments are typically overnight loans between banks of their deposits at Federal
Reserve.
A. Commercial paper
B. Treasury bills
C. Repurchase agreement
D. Federal Funds(textbook p79)
E. Banker’s acceptances

9. Short-term debt instruments issued by large banks and well-known corporations

A. Commercial paper(textbook p78)
 B. Treasury bills
C. Repurchase agreement
D. Federal Funds
E. Banker’s acceptances

10. These instruments are effectively short-term loans (usually with maturity of less than two
weeks) for which Treasury bills serve as collateral, which the lender receives if the
borrower does not pay back the loan.
A. Commercial paper
B. Treasury bills
C. Repurchase agreement(p78)
D. Federal Funds
E. Banker’s acceptances : chấp phiếu ngân hàng: issed by company but bank accept

11. A share of Microsoft common stock is:

A. a liability to the shareholder because it must be sold to realize a capital gain
B. an asset of Microsoft because it allows Microsoft to invest in capital equipment or
other companies
C. identical to a bond issued by Microsoft
D. an asset for its owner and a liability for Microsoft.
Microsoft common stock is an asset for its owner because it is a claim on the
company(use of funds). It's a liability for Microsoft because the company is giving up
control in order to sell the stock to raise funds(résource of funds)

12. A share of common stock is a claim on a corporationʹs
A) debt.
B) liabilities.
C) expenses.
D) earnings and assets.

13. The price paid for the rental of borrowed funds (usually expressed as a percentage of the r
ental
of $100 per year) is commonly referred to as the
A) inflation rate.
B) exchange rate.
C) interest rate.
D) aggregate price level.

14. ___________ occurs when the potential borrowers who are the most likely to produce an
undesirable (adverse) outcome – the bad credit risks – are the ones who most actively
seek out a loan and are thus most likely to be selected.
A. Adverse selection
B. Asymmetric information
C. Moral hazard
D. Credit ratings

15. A situation where one party often does not know enough about the other party to make
accurate decisions
A. Adverse selection
B. Asymmetric information
 C. Moral hazard
D. Credit ratings

16. A situation where the borrower might engage in activities that are undesirable from the
lender’s point of view because they make it less likely that the loan will be paid back.
A. Adverse selection
B. Asymmetric information
C. Moral hazard(p87)
D. Credit ratings
17. Which of the following is a true statement?
A) Money or the money supply is defined as Federal Reserve notes.
B)The average price of goods and services in an economy is called the aggregate price level
C) he inflation rate is measured as the rate of change in the federal government budget
deficit.
D) The aggregate price level is measured as the rate of change in the inflation rate.

17. Equity holders are a corporationʹs ________.  That means the corporation must pay

all of its debt holders before it pays its equity holders.
A) debtors
B) brokers
C) residual claimants
D) underwriters

18. A corporation acquires new funds only when its securities are sold in the
A) secondary market by an investment bank.
B) primary market by an investment bank.
C) secondary market by a stock exchange broker.
D) secondary market by a commercial bank.

19. Which of the following statements about financial markets and securities is true?
A) Many common stocks are traded over-the-counter, although the largest corpotations
usually have their shares traded at organized stock exchanges such as such as the New York
Stock Exchange.
B)As a corporation gets a share of the brokerʹs commission, a corporation acquires new
funds whenever its securities are sold.
C) Capital market securities are usually more widely traded than shorter-term securities and
so tend to be more liquid.
D) Because of their short term to maturity, the prices of money market instruments tend to
fluctuate widely.
Part 2: Questions and applications
Chapter 2: Questions 3, 4, 10
3: This argument makes sense. Financial markets are essential to promoting economic
efficiency because they allow funds to be transferred from a person who has no investment
opportunities to one who has them. It's very difficult and expensive to do in undeveloped
markets. Microfinance tries to develop financial markets to aid in transactions
4:The principal debt instruments used were foreign bonds which were sold in Britain and
denominated in pounds. The British gained because they were able to earn higher interest
rates as a result of lending to Americans, while the Americans gained because they now had
access to capital to start up profitable businesses such as railroads.
10: You'd worry about their incentives and motivation to actually work, depending on
compensation for tasks. Are they focused on work?
TUTORIAL 2
MONEY AND INTEREST RATES

Part 1: Review questions

1. Definition of money, measuring money
2. Distinguish major credit types, provide examples
3. Relationship between YTM and bond prices
4. Yield and returns

Part 2: Multiple choice questions

1. Fiat money is:

A. credit card charges
B. not convertible into precious metals.
C. coins
D. checks

2. Which of these is not a function of money in an economy?

A. Unit of account
B. Source of income
C. Store of value
D. Medium of exchange

3. Which of the following is not part of M1?

A. traveler's checks
B. savings accounts
C. checking accounts
D. currency

4. If Mary deposits $100 of her currency in her checking account, then:

A. M2 will fall by $100.
B. M1 will increase by $100.
C. M1 and M2 will not change.
D. M2 will increase by $100.

5. If Mary moves $100 from her savings account to her checking account, then:
A. M2 will not change.
B. M2 will fall by $100.
C. M1 will not change.
D. M1 will fall by $100
M1 INCREASE BECAUSE CÓ 1 ÍT TIỀN NHẢY VÀO
6. Inefficiencies that are created when using checks as money include:
A. Checks can transfer funds slowly and require paper shuffling.
B. Checks can be written for any amount.
C. Checkbooks can be stolen.
D. There are too many bad checks written
SÉC THÌ SẼ MẤT 2-3 NGÀY ĐỂ CHO TIỀN VÀO TÀI KHOẢN VÌ NÓ CÒN CÓ
NHỮNG GIẤY TỜ
7. The liquidity of an asset is:
A. the amount of an asset sold at discount or premium.
B. the ability of an asset to earn interest income.
C. the relative ease with which an asset can be converted into a medium of
exchange.
D. the relative ease with which an asset can be converted into a common stock.

8. Which of the following is true regarding money's store of value function?

A. money is superior to all other stores of value during periods of inflation.
B. money is the most liquid store of value available.
C. money is the only store of value available.
D. money does not allow a person to hold purchasing power from the time income
is earned until it is spent.

9. Which of the following is not a disadvantage of electronic money?

A. The cost of setting up a system for processing e-money payments is high.
B. People are concerned about the privacy and security of e-money transactions.
C. E-money does not allow people to take advantage of float.
D. E-money transactions cost more than paper check transactions.

10. You receive a check for $100 two years from today. The discounted present value of
this $100 is:
A. $100*(1+i)
B. $100/(1+i)2
C. $100*(1+i)2
D. $100/(1+i)

11. Why do current prices on previously issued bonds offered for resale change when
the market interest rate changes?
A. Because old bonds cannot sell at face value today.
B. Because no buyer of bonds today will accept a lower yield to maturity than the
market rate, and no buyer will be able to get a higher yield.
C. Because the marketplace does not provide enough information to price bonds
accurately.
D. Because new bonds are always preferred to old bonds.
explain:
12. If a bond sells at a premium, where price exceeds face value, then we would expect to
see:
A. market interest rates could be the same, higher, or lower than the coupon rate.
B. market interest rate the same as the coupon rate.
C. market interest rates below the coupon rate.
D. market interest rates above the coupon rate.

13. As bond prices increase:

A. yields to maturity decrease.
B. yields to maturity increase.
C. yields to maturity can rise, fall, or not change.
D. yields to maturity do not change.
14. For a $1000 one year discount bond with a price of $975, the yield to maturity is
A. ($1000 – $975)/($1000)
B. $975/$1000
C. ($1000 – $975)/$975
D. $1000/$975

15. The return on a bond is

A. current yield + rate of capital gain.
B. coupon rate – rate of capital gain.
C. coupon rate + rate of capital gain.
D. current yield – rate of capital gain

16. Interest rate risk is:

A. the risk the coupon rate on the bond will fall.
B. the risk the government or firm will not make interest payments.
C. the risk associated with change in return with changes in interest rates.
D. the risk the coupon payment will rise.

17. The real interest rate is:

A. the nominal rate plus the expected inflation rate.
B. the nominal interest rate/the CPI.
C. the product of the nominal rate and the CPI.
D. the nominal rate minus the expected inflation rate

18. For a coupon bond, the yield to maturity is the:

A. difference between the bond's price and its face value.
B. annual interest payment divided by the bond's face value.
C. interest rate that equates the bond's present value with its price.
D. interest rate that equates the bond's present value with its face value.

19. When interest rates fluctuate, which bonds will experience the least price volatility?
A. 20-year bonds
B. 1-year bonds
C. 5-year bonds
D. 10-year bonds

20. Why is the Rate of Return often the most relevant measure of a bond's benefit to the
buyer?
A. Because the Rate of Return uses the current yield.
B. Because the Rate of Return includes the return of the face value at maturity.
C. Because the Rate of Return uses the difference between the face value and the
purchase price to compute a capital gain on the bond.
D. Because the Rate of Return recognizes that many bond buyers do not plan to
hold to maturity, but will sell the bond before maturity.

21. If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment

every year is
A) $650.
B) $1,300.
C) $130.
 D) $13.

22. Examples of discount bonds include
A) U.S. Treasury bills.
B) corporate bonds.
C) U.S. Treasury notes.
D) municipal bonds.

23.Economists consider the ________ to be the most accurate measure of interest rates
A) simple interest rate.
B) current yield.
C) yield to maturity.
D) real interest rate.

24.If the amount payable in two years is $2420 for a simple loan at 10 percent interest,
the loan amount is
A) $1000.
B) $1210.
C) $2000.
D) $2200.

25.If $22,050 is the amount payable in two years for a $20,000 simple loan made today,
the interest rate is
A) 5 percent.
B) 10 percent.
C) 22 percent.
D) 25 percent

26.If a security pays $110 next year and $121 the year after that, what is its yield to mat
urity if it sells for $200?
A) 9 percent
B) 10 percent
C) 11 percent
D) 12 percent

27.The price of a coupon bond and the yield to maturity are ________ related; that is, as
the yield to maturity ________, the price of the bond ________.
A) positively; rises; rises
B) negatively; falls; falls
C) positively; rises; falls
D) negatively; rises; falls
.
28. Which of the following $5,000 face-value securities has the highest to maturity?
A) A 6 percent coupon bond selling for $5,000
B) A 6 percent coupon bond selling for $5,500
C) A 10 percent coupon bond selling for $5,000
D) A 12 percent coupon bond selling for $4,500

29. In which of the following situations would you prefer to be the lender?
A) The interest rate is 9 percent and the expected inflation rate is 7 percent.
B) The interest rate is 4 percent and the expected inflation rate is 1 percent.
C) The interest rate is 13 percent and the expected inflation rate is 15 percent.
D) The interest rate is 25 percent and the expected inflation rate is 50 percent.

30. In which of the following situations would you prefer to be the borrower?
A) The interest rate is 9 percent and the expected inflation rate is 7 percent.
B) The interest rate is 4 percent and the expected inflation rate is 1 percent.
C) The interest rate is 13 percent and the expected inflation rate is 15 percent.
D) The interest rate is 25 percent and the expected inflation rate is 50 percent.

Part 3: End-of-chapter questions

Chapter 3: Questions 12, 13, 15
Chapter 4: Questions 2, 6, 7, 10, 11

Part 4: Additional problems

1. You have just purchased a 10-year, $1,000 par value bond. The coupon rate on this
bond is 8 percent annually, with interest being paid each 6 months. If you expect to
earn a 10 percent yield on this bond, how much did you pay for it?
2. Callaghan Motors ‘bonds have 10 years remaining to maturity. Interest is paid
annually, they have a $1,000 par value, the coupon interest rate is 8%, and the yield to
maturity is 9%. What is the bond’s current market price?
3. 3. A bond has a $1,000 par value, 10 years to maturity, and a 7% annual coupon and
sells for $985.

a. What is its yield to maturity (YTM)?

b. Assume that the yield to maturity remains constant for the next 3 years. What will
the price be 3 years from today?
 TUTORIAL 3
BEHAVIOR OF INTEREST RATES

Part 1. Review questions

1. Explain the theory of asset demand. Provide example
2. Loanable fund framework:
- Explain how the interest rate is determined
- Distinguish movement and shift of demand and supply curves;
- Factors affecting interest rates.
3. Liquidity preference framework:
- Demand for money
- Supply of money;
- Change in equilibrium interest rate

Part 2. Multiple-choice questions

1. If brokerage commissions on bond sales decrease, then, other things equal, the
demand for bonds will ______ and the demand for real estate will ______
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

2. If gold becomes acceptable as a medium of exchange, the demand for gold will
________ and the demand for bonds will ______, everything else held constant.
A) decrease; decrease
B) decrease; increase
C) increase; increase
D) increase; decrease

3. The demand curve for bonds has the usual downward slope, indicating that at
________ prices of the bond, everything else equal, the ________ is higher.
A) higher; demand
B) higher; quantity demanded
C) lower; demand
D) lower; quantity demanded

4. Everything else held constant, if the expected return on U.S. Treasury bonds falls
from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent,
then the expected return of holding GE stock ________ relative to U.S. Treasury
bonds and the demand for GE stock ________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls

5. An increase in the expected rate of inflation will ________ the expected return on
 bonds relative to the that on ________ assets, everything else held constant.
A) reduce; financial
B) reduce; real
C) raise; financial
D) raise; real

6. The theory of asset demand tells us that

A) The demand for an asset will increase if the expected return on an asset rises.
B) Risky assets have higher liquidity.
C) Risky assets bring higher returns.
D) The higher the return on an asset, the lower the liquidity.

7. At a bond price above the equilibrium

A) there is an excess supply and the price will tend to fall.
B) there is an excess demand and the price will tend to rise.
C) there is an excess demand and the price will tend to fall.
D) there is an excess supply and the price will tend to rise.

8. Suppose the price of bond J rises. This will:

A) increase the supply of bond K and reduce the interest rate on bond K.
B) increase the demand for bond K and decrease the interest rate on bond K.
C) increase the demand for bond K and increase the interest rate on bond K.
D) increase the supply of bond K and increase the interest rate on bond K

9. Which of the following will increase the supply of bonds (shift the supply curve to
the right)?
A) A government budget surplus.
B) An increase in the bond prices.
C) A business cycle expansion.
D) A decrease in the expected inflation rate

10. At interest rates below the equilibrium rate of interest

A) there is an excess demand for money and the interest rate will rise.
B) there is an excess demand for bonds and the interest rate will fall.
C) there is an excess supply of bonds and the interest rate will fall.
D) there is an excess demand for money and the interest rate will fall.

11. Why does the supply curve for bonds slope upward?
A) Because as the price falls, firms are more willing to supply bonds.
B) Because as the interest rate falls, firms are more willing to borrow money.
C) Because as the price rises, firms are more willing to buy bonds.
D) Because as the interest rate rises, firms are more willing to borrow money

12. Increasing government deficits causes

A) The supply curve for bonds to shift right because government bonds pay higher interest
relative to other bonds
B) The supply curve for bonds to shift right because the U.S. Treasury will issue bonds to
pay for the deficit
C) The supply curve for bonds to shift left because government bonds slow expected
 inflation
D) The supply curve for bonds to shift left because corporations will borrow less due to
decreased profitability when the government is in debt

13. When the price of a bond decreases, all else equal, the bond demand curve ________.
A) shifts right
B) shifts left
C) does not shift
D) inverts

14. Everything else held constant, if interest rates are expected to fall in the

future, the demand for long-term bond today______ and the demand curve shifts to
the _____________.
A) rises; right
B) rises; left
C) falls; right
D) falls; left

15. In a business cycle expansion, the ________ of bonds increases and the ________ cur
ve shifts to the ______ as business investments are expected to be more profitable.
A) supply; supply; right
B) supply; supply; left
C) demand; demand; right
D) demand; demand; left

16. The bond supply and demand framework is easier to use when analyzing the effects
of changes in ________, while the liquidity preference framework provides a simpler
analysis of the effects from changes in income, the price level, and the supply of
________.
A) expected inflation; bonds
B) expected inflation; money
C) government budget deficits; bonds
D) government budget deficits; money

17. In his Liquidity Preference Framework, Keynes assumed that money has a zero rate
of return; thus,
A) when interest rates rise, the expected return on money falls relative to the expected return
on bonds, causing the demand for money to fall.
B) when interest rates rise, the expected return on money falls relative to the expected return
on bonds, causing the demand for money to rise.
C) when interest rates fall, the expected return on money falls relative to the expected return
on bonds, causing the demand for money to fall.
D) when interest rates fall, the expected return on money falls relative to the expected return
on bonds, causing the demand for money to rise.

18. In Keynes's liquidity preference framework,

A) the demand for bonds must equal the supply of money.
B) the demand for money must equal the supply of bonds.
C) an excess demand of bonds implies an excess demand for money.
D) an excess supply of bonds implies an excess demand for money.
19. The opportunity cost of holding money is
A) the level of income.
B) the price level.
C) the interest rate.
D) the discount rate.

20. An increase in the interest rate

A) increases the demand for money.
B) increases the quantity of money demanded.
C) decreases the demand for money.
D) decreases the quantity of money demanded.

21. If there is an excess supply of money

A) individuals sell bonds, causing the interest rate to rise.
B) individuals sell bonds, causing the interest rate to fall.
C) individuals buy bonds, causing interest rates to fall.
D) individuals buy bonds, causing interest rates to rise.

22. In the Keynesian liquidity preference framework, an increase in the interest rate
causes the demand curve for money to ________, everything else held constant.
A) shift right
B) shift left
C) stay where it is
D) invert

23. When the price level ________, the demand curve for money shifts to the ________
and the interest rate ________, everything else held constant.
A) falls; left; falls
B) rises; right; falls
C) falls; left; rises
D) rises; right; rises

24. When the Fed ________ the money stock, the money supply curve shifts to the
________ and the interest rate ________, everything else held constant.
A) decreases; right; rises
B) increases; right; falls
C) decreases; left; falls
D) increases; left; rises

25. ________ in the money supply creates excess ________ money, causing interest rates
to ________, everything else held constant.
A) a decrease; demand for; rise
B) an increase; demand for; fall
C) an increase; supply of; rise
D) a decrease; supply of; fall

26. When the growth rate of the money supply increases, interest rates end up being
permanently lower if
A) the liquidity effect is larger than the other effects.
B) there is fast adjustment of expected inflation.
C) there is slow adjustment of expected inflation.
D) the expected inflation effect is larger than the liquidity effect.

27. Of the four effects on interest rates from an increase in the money supply, the one
that works in the opposite direction of the other three is the
A) liquidity effect.
B) income effect.
C) price level effect.
D) expected inflation effect.

28. If the liquidity effect is smaller than the other effects, and the adjustment to
expected inflation is immediate, then the
A) interest rate will fall.
B) interest rate will rise.
C) interest rate will fall immediately below the initial level when the money supply grows.
D) interest rate will rise immediately above the initial level when the money supply grows.

29. When the growth rate of the money supply is increased, interest rates will fall
immediately if the liquidity effect is _________ than the other money supply effects
and there is ________ adjustment of expected inflation.
A) larger; fast
B) larger; slow
C) smaller; slow
D) smaller; fast

30. In the figure above, illustrates the effect of an increased rate of money supply
growth at time period 0. From the figure, one can conclude that the
A) Liquidity effect is smaller than the expected inflation effect and interest rate adjust quickly
to changes in expected inflation
B) Liquidity effect is larger than the expected inflation effect and interest rate adjust quickly
to changes in expected inflation
C) Liquidity effect is larger than the expected inflation effect and interest rate adjust slowly
to changes in expected inflation
D) Liquidity effect is smaller than the expected inflation effect and interest rate adjust slowly
to changes in expected inflation

Part 3. Questions and applications

Chapter 5: Questions 1, 4, 6, 10, 12, 13, 18

TUTORIAL 4
RISK AND TERM STRUCTURE OF INTEREST RATES

Part 1: Review questions

1. What is the risk structure of the interest rate? What factors explain the risk structure
2. What is the term structure of the interest rate? Yield curve? What theories are used to
explain the shape of the yield curve? What are three main facts of the yield curve?

Part 2: Multiple-choice questions

1. Generally, which bond has the highest interest rate?
A. Corporate Baa Bonds
B. Long-term Government Bonds
C. Municipal Bonds
D. Corporate Aaa Bonds

2. Default risk is:

A. the chance the issuer will be unable to make interest payments or repay principal.
B. the chance the issuer will retire the debt early.
C. the chance the issuer will sell more debt.
D. the chance the issuing firm will be sold to another firm.

3. Suppose that there are two bonds, A and B. Suppose also the default risk on
bond A increases. As a result of this we would expect to see:
A. the demand for A to decrease and the demand for B to increase.
B. the demand for A to increase and the demand for B to decrease.
C. the demand for A to decrease and the demand for B to decrease.
D. the demand for A to increase and the demand for B to increase.

4. The risk premium on a bond is:

A. the difference in interest rate between that bond and a US Treasury bond.
B. the difference in interest rate between that bond and a municipal bond.
C. the difference in interest rate between that bond and a bank CD.
D. the difference in interest rates between that bond and a S&P 500 firm bond.

5. An increase in the level of risk for bond A will:

A. increase the risk premium on bond A and reduce the risk premium on bond B.
B. increase the risk premium on bond B and reduce the risk premium on bond A.
C. increase the risk premium on bond A and increase the risk premium on bond B.
D. reduce the risk premium on bond A and reduce the risk premium on bond B.
 6. Municipal bonds generally have lower interest rates than U.S. Government
bonds because:
A. they have less risk.
B. they never mature.
C. they are exempt from Federal taxes.
D. they are more liquid.

7. Yield curves show:

A. the relationship between time to maturity and bond interest rates (yields).
B. the relationship between bond interest rates (yields) and bond prices.
C. the relationship between risk and bond interest rates (yields).
D. the relationship between liquidity and bond interest rates (yields).

8. The liquidity premium theory explains an inverted yield curve by

A. Assuming that interest rated move together over time
B. Assuming that the liquidity premium is always positive
C. Assuming that short-term rates are expected to fall to a great degree in the future
D. Assuming that investors prefer shorter-term bonds over longer maturity bonds

9. The liquidity premium theory suggests that yield curves should usually be:
A. inverted.
B. up-sloping through year 1, then flat thereafter.
C. up-sloping.
D. flat.

10. The liquidity premium theory is based upon the idea that, other things
remaining equal,
A. investors are indifferent between short-term and long-term bonds.
B. investors prefer long-term bonds.
C. investors prefer short-term bonds.
D. investors prefer intermediate-term bonds.

11. The shape of the yield curve is usually:

A. flat.
B. downward sloping.
C. upward sloping for shorter maturities and downward sloping for longer maturities.
D. upward sloping.

12. The expectations theory of the term structure assumes:

A. buyers of bonds consider bonds of different maturities to be perfect substitutes.
B. buyers of bonds prefer bonds with shorter maturities.
C. buyers of bonds prefer bonds with longer maturities.
D. markets for different maturity bonds are completely separate

13. What will the yield curve look like if future short-term interest rates are
expected to rise sharply?
A. It will steeply slope upward.
B. It will slightly slope upward.
C. It will be horizontal.
D. It will slope downward.

14. Reduced liquidity of a bond causes the interest rate on that bond
A. To be higher because it is more widely traded.
B. To be higher because it is less widely traded.
C. To be lower because it is less widely traded
D. To be lower because it is more widely traded

15. The Segmented Markets theory of term structure suggests that

A. Interest rates on long-term bonds strongly influence the demand for short-term bonds.
B. Bonds of different maturities are perfect substitutes for each other.
C. Investors have no preference for short-term bonds over long-term bonds, or vice versa.
D. Investors have strong preferences for bonds of a particular maturity

Part 3: Applications
Chapter 6: Questions and Problems 2, 5, 7, 8, 17, 23, 25

TUTORIAL 5
STOCK MARKET: THE EFFICIENT MARKET HYPOTHESIS

Part 1: Review questions

1. Gordon Growth model
2. Efficient market hypothesis

Part 2: Multiple-choice questions

1. Rational expectations are:

A. identical to optimal forecasts using all available information.
B. always correct.
C. based only on past information.
D. identical to optimal forecasts using all information.

2. An implication of rational expectation is that

A. Forecast errors of expectations will, on the average, be zero.
B. Changes in how a variable move over time will not affect the way expectations are
formed.
C. Some error can be forecast.
D. Forecast error will always be zero

3. People and firms make optimal forecasts based upon all available information
because:
A. Forecasting error is costly.
B. Optimal forecasting errors are zero.
C. Optimal forecasting errors are small.
D. All forecasting errors are small

4. The efficient market hypothesis states that

A. prices of securities in financial markets reflect only past price information on that and
similar securities.
B. prices of securities in financial markets reflect all available information.
C. prices of securities in financial markets reflect only monetary policy changes.
D. prices of securities in financial markets reflect only past price information on that
security

5. The expected rate of return (RETe) on a security is:

A. (Pet+1 – Pt + C)/Pt
B. (Pet+1 – Pt+1 + C)/Pt+1
C. (Pet+1 – Pt + C)/Pt+1
D. (Pet+1 – Pt+1 + C)/Pt

6. Based upon unexploited profit opportunities, if RETOF > RET*, then:

A. people will buy the security, increasing its price, and reducing RET*.
B. people will not buy the security, lowering its price, and reducing RET*.
C. people will buy the security, increasing its price, and reducing RETOF.
D. people will not buy the security, lowering its price, and reducing RETOF.

7. A random walk describes movements of a variable:

A. whose future changes can be perfectly predicted.
B. whose future changes can only be predicted with past information.
C. whose future changes can be predicted based upon money supply changes.
D. whose future changes cannot be predicted.

8. Technical analysis:
A. is the study of past stock price data in search of patterns.
B. generates buy/sell rules that usually outperform the markets as a whole.
C. exploits the idea that stocks follow a random walk.
D. examines the role of unexpected events in determining stock prices

9. Which of the following is not part of the evidence against market efficiency?
A. Markets overreact to news and announcements.
B. Stocks with high returns now tend to have high returns in the future.
C. The January effect.
D. The small firm effect.

10. Stock prices respond to announcements and news only when:

A. the announcements are well-known anyway before the official release of the
announcement.
B. the announcements are new and unexpected.
C. the announcements are about predictable events.
D. the announcements are made early in the day.

11. Which of the following is true regarding adaptive expectations?

A. They are identical to optimal forecasts.
B. They are based only on past values of the variable being forecasted.
C. They quickly adjust to changes in the value of the variable being forecasted.
D. They are based on all available information.
 12. Which is not an implication of the stronger version of efficient markets theory?
A. There are unexploited profit opportunities.
B. Any investment is as good as any other.
C. Securities' prices are based on market fundamentals.
D. Securities' prices are correct.

13. The generalized dividend model of determining stock prices hypothesizes that
A. The price you are willing to pay for a stock depends only on the amount of the
dividends you expect to receive from the stock.
B. The price you are willing to pay for a stock today depends on the price you expect it
to be next year.
C. The price you are willing to pay for a stock depends upon both the dividends you
expect to receive and the capital gain you expect to get from owning the stock.
D. The price you are willing to pay for a stock depends on the present value of the
dividends you expect to receive from the stock.

14. In an auction environment, a stock's price

A. Is determined by the buyer willing to pay the lowest price.
B. Is determined by the buyer for whom the stock poses the greatest risk.
C. Will rise with the perceived risk of the stock.
D. Is determined by the buyer willing to pay the highest price.

15. “An efficient market is one in which no one ever profits from having better
information than the rest”. Why this statement is false?
A. Acting by better information is not allowed by market regulators and organized
exchange
B. People with better information make the market more efficient by exploiting profit-
making opportunities
C. An efficient market is one where the share prices never change
D. If markets follow a “random walk”, there is never opportunity for making profit

Part 3: chapter 7: Questions and Problems No. 3, 5, 7, 22, 23

Question 3: Some economists think that central banks should try to prick bubbles in the stock
market before they get out of hand and cause later damage when they burst. How
can monetary policy be used to prick a market bubble? Explain using the Gordon growth
model.

Question 5: Suppose that you are asked to forecast future stock prices of ABC Corporation,
so you proceed to collect all available information. The day you announce your forecast,
competitors of ABC Corporation announce a brand new plan to merge and reshape the
structure of the industry. Would your forecast still be considered optimal?
Question 7: Suppose that you decide to play a game. You buy stock by throwing a dice a few
times, using that method to select which stock to buy. After ten months you calculate the
return on your investment and the return earned by someone who followed “expert” advice
during the same period. If both returns are similar, would this constitute evidence in favor of
or against the efficient market hypothesis?

Problem 22: Compute the price of a share of stock that pays a $5 per year dividend and that
you expect to be able to sell in one year for $40, assuming you require a 5% return.

Problem 23: After careful analysis, you have determined that a firm’s dividends should grow
at 15%, on average, in the foreseeable future. The firm’s last dividend was $1.5.
Compute the current price of this stock, assuming the required return is 20%

TUT 7

1. Suppose the exchange rate between U.S. dollars and British pounds is $1.51/£.
Then
A. a £100 U.K. good will cost $151 in the U.S.
B. a $100 U.S. good will cost £100 in the U.K.
C. a £100 U.K. good will cost $100 in the U.S.
D. a $100 U.S. good will cost £151 in the U.K.

2. When a currency increases in value compared to other currencies

A. It is elastic.
B. It is inelastic.
C. It depreciates.
D. It appreciates.
Khi một loại tiền tệ tăng giá trị so với các loại tiền tệ khác
Nó có tính đàn hồi.
Nó không co giãn.
Nó mất giá.
Nó đánh giá cao.

3. When a currency appreciates in value compared to other currencies, then

 A. the rest of the world's goods become more expensive to that country.
B. that country's goods do not change in price to the rest of the world.
C. that country's goods become less expensive to the rest of the world.
D. that country's goods become more expensive to the rest of the world.
Khi một loại tiền tệ tăng giá trị so với các loại tiền tệ khác, thì
phần còn lại của hàng hóa trên thế giới trở nên đắt hơn đối với quốc gia đó.
hàng hóa của quốc gia đó không thay đổi về giá so với phần còn lại của thế giới.
hàng hóa của quốc gia đó trở nên ít đắt hơn so với phần còn lại của thế giới.
hàng hóa của quốc gia đó trở nên đắt hơn đối với phần còn lại của thế giới.

4. According to the law of one price, if the French price level rises by 10%, and the
U.S. price level increases by 5%, then:
A. the dollar will depreciate by 10%.
B. the dollar will depreciate by 5%.
C. the dollar will appreciate by 10%.
D. the dollar will appreciate by 5%.
Theo quy luật một giá, nếu mức giá của Pháp tăng 10% và mức giá của Hoa Kỳ tăng 5%, thì:
đồng đô la sẽ mất giá 10%.
đồng đô la sẽ mất giá 5%.
đồng đô la sẽ tăng giá 10%.
đồng đô la sẽ tăng giá 5%.

5. Which of the following does not account for the inability of PPP to fully explain
exchange rate movements?
A. goods that are not identical
B. different methods of calculating growth rates
C. goods that are not identical
D. trade barriers
PPP(Purchasing Power Parity)
Điều nào sau đây không giải thích cho việc PPP (Sức mua tương đương) không có khả năng
giải thích đầy đủ các biến động của tỷ giá hối đoái?
hàng hóa không giống hệt nhau
các phương pháp tính toán tỷ lệ tăng trưởng khác nhau
hàng hóa không giống hệt nhau
rào cản thương mại
6. Which of the following can cause a country’s currency to appreciate in the long
run?
A. A decrease in the demand for a country’s exports.
B. A rise in a country's relative price level.
C. A relative decrease in the productivity of a country.
D. Increasing tariffs.
Điều nào sau đây có thể khiến tiền tệ của một quốc gia tăng giá về lâu dài?
Giảm nhu cầu đối với hàng xuất khẩu của một quốc gia.
Mức giá tương đối của một quốc gia tăng lên.
Một sự giảm sút tương đối trong năng suất của một quốc gia.
Tăng thuế quan.

7. Suppose that you, in the U.S., are considering a one-year deposit of $100 in a
U.K. bank that currently has an interest rate of 5%. Currently the dollar/pound
 exchange rate is $1.50. Your best guess is that in one year the exchange rate will
be $1.60. At the end of the year your investment will be worth:
A. $98
B. $112
C. $67
D. $105

8. The relative expected return on deposits in terms of dollars is given by:

A. Relative RETD = iF – iD + (Eet+1 – Et)/Et-1
B. Relative RETD = iF – iD + (Eet+1 – Et)/Et
C. Relative RETD = iD – iF + (Eet+1 – Et)/Et
D. Relative RETD = iD – iF - (Eet+1 – Et)/Et

9. Which of the following will tend to cause domestic currency to depreciate?

A. an increase in the domestic interest rate.
B. an increase in foreign interest rates.
C. An increase in the expected export demand
D. An increase in productivity.
Điều nào sau đây sẽ có xu hướng làm cho đồng nội tệ mất giá?
lãi suất trong nước tăng.
lãi suất nước ngoài tăng.
Sự gia tăng nhu cầu xuất khẩu dự kiến
Tăng năng suất.
10. A higher domestic money supply will tend to:
A. cause the domestic currency to appreciate.
B. cause the domestic currency to either depreciate or appreciate, depending on the size of
the change.
C. cause the domestic currency to depreciate.
D. cause the domestic currency to not change in value.
Cung tiền trong nước cao hơn sẽ có xu hướng:
khiến đồng nội tệ tăng giá.
làm cho đồng nội tệ mất giá hoặc tăng giá, tùy thuộc vào quy mô của sự thay đổi.
làm cho đồng nội tệ mất giá.
khiến đồng nội tệ không thay đổi giá trị

11. Which of the following expresses the interest-parity condition?

A. The domestic interest rate equals the foreign interest minus the expected appreciation of
the domestic currency.
B. The expected return on domestic deposits equals the inverse of the expected return on
foreign deposits.
C. The domestic interest rate equals the foreign interest rate.
D. The expected return on domestic deposits equals the negative of the expected return on
foreign deposits.
Điều nào sau đây thể hiện điều kiện ngang giá lãi suất?
Lãi suất trong nước bằng lãi suất nước ngoài trừ đi mức tăng giá dự kiến của đồng nội tệ.
Lợi tức kỳ vọng đối với tiền gửi trong nước bằng với tỷ suất sinh lợi kỳ vọng đối với tiền gửi
nước ngoài.
Lãi suất trong nước bằng lãi suất nước ngoài.
Lợi tức kỳ vọng của tiền gửi trong nước bằng âm của lợi tức kỳ vọng đối với tiền gửi nước
ngoài.
 12. The demand curve for domestic assets is downward sloping because
A. As the expected appreciation on dollar assets rises the quantity demanded of dollar
assets rises
B. As the exchange rate rises the quantity demanded of dollar assets rises
C. As the price of domestic assets rises the quantity demanded of dollar assets rises
D. As the relative price of domestic assets rises the quantity demand of domestic assets
rises

13. Suppose the domestic nominal interest rate rises. The domestic currency
________ if this results from an increase in the domestic real interest rate and
________ if it results from an increase in the expected inflation rate
A. depreciates; depreciates
B. depreciates; appreciates
C. appreciates; appreciates
D. appreciates; depreciates

14. If people expect the dollar to appreciate in value against the euro,
A. Then they will buy euros and the euro will appreciate.
B. Then they will buy dollars and the dollar will depreciate.
C. Then they will buy dollars and the dollar will appreciate.
D. Then they will buy euros and the dollar will depreciate.

15. Exchange rate overshooting

A. Occurs because the market has difficulty interpreting changes in the money supply.
B. Occurs because an increase in the domestic money supply lowers domestic interest rates
in the short run, but they return to previous levels in the long run.
C. Occurs because an increase in the domestic money supply has no effects on domestic
interest rates, but does raise foreign interest rates.
D. Occurs because an increase in the domestic money supply lowers domestic interest rates
in the long run but not the short run.

Part 3: Questions and problems 2, 4, 5, 10, 14 - chapter 18

2. “A country is always worse off when its currency is weak (falls in value).” Is this
statement true, false, or uncertain? Explain your answer.
4. If the Japanese price level rises by 5% relative to the price level in the United States, what
does the theory of purchasing power parity predict will happen to the value of the Japanese
yen in terms of dollars?
5. If the demand for a country’s exports falls at the same time that tariffs on imports are
raised, will the country’s currency tend to appreciate or depreciate in the long run?
10. If the Indian government unexpectedly announces that it will be imposing higher tariffs
on foreign goods one year from now, what will happen to the value of the
Indian rupee today?
14. Through the summer and fall of 2008, as the global financial crisis began to take hold,
international financial institutions and sovereign wealth funds significantly
increased their purchases of U.S. Treasury securities as a safe haven investment. How should
this have affected U.S. dollar exchange rates?
TUT8:
1. The fundamental balance sheet identity is:
A. Total assets = total liabilities + capital
B. total assets + capital = total liabilities
C. Total assets = total liabilities
D. total assets = total liabilities – capital

2. The largest bank asset is

A. Securities
B. Loans
C. Physical Assets
D. Reserves

3. The largest bank liability is

A. non-transaction deposits
B. government bonds
C. borrowing
D. checkable deposits

4. Short-term security holdings by banks are often referred to as:

A. secondary reserves
B. required reserves
C. excess reserves
D. total reserves

5. For bank A, a deposit of $100 (in cash or currency) in a checking account will:
A. increase the money supply by $100.
B. reduce the money supply by $100.
C. increase both reserves and checkable deposits by $100.
D. reduce both reserves and checkable deposits by $100.

6. If a bank gains $100 of reserves and $100 of checkable deposits, and the reserve
requirement ratio is 15%, then the bank will:
A. gain $85 of excess reserves.
B. gain $15 of excess reserves.
C. gain $85 of required reserves.
D. gain $100 of excess reserves.

7. If a bank is short of required reserves, it may:

A. borrow from the Fed at the Fed Funds rate.
B. increase loans.
C. increase security holdings.
D. borrow from the Fed at the current discount rate.

8. If a bank sells $100 of securities, it will:

A. gain $100 of bank capital.
B. gain $100 of savings accounts.
C. gain $100 of loans.
D. gain $100 of reserves.
9. When a bank purchases an earning asset (security or loan) it will:
A. lose reserves.
B. increase reserves.
C. increase savings accounts.
D. gain bank capital.

10. Return on Assets (ROA) is defined as:

A. net profit before taxes/assets.
B. net profit before taxes/liabilities.
C. net profit after taxes/assets.
D. net profit after taxes/liabilities.

11. What do banks count as reserves?

A. Capital and deposits at the Fed
B. Vault cash and deposits at the Fed
C. Deposits at other banks and cash items in process of collection
D. Vault cash and U.S. government securities

12. Acquiring funds at low cost is the main concern of ________ management
A. liquidity
B. capital
C. liability
D. asset

13. To manage credit risk, financial intermediaries can:

A. Require collateral and compensating balances.
B. Screen and monitor customers.
C. Develop long term relationships with customers
D. All of the above

14. Off-balance sheet activities include all of the following except:

A. Secondary loan participation
B. Short term loans
C. Speculation in the futures markets
D. Loan commitment fees