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EC223 Chapter Notes - Chapter 1: Canadian Dollar, Money Supply, Financial Instrument

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pinkelephant413
29 Oct 2012
School
WLU
Department
Economics
Course
EC223
Professor
Angela Trimarchi

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Document Summary

Financial markets markets in which funds are transferred from people who have an excess of available funds to people who have a shortage. Bond and stock markets; these are crucial to promoting greater economic efficiency. Security (financial instrument) claim on the issuer"s future income or assets. Bond debt security that promises to make payments periodically for a specified period of time. Interest rate cost of borrowing or the price paid for the rental of funds. Mortgage rates, car loan rates, interest on bonds. The interest rate on 3 month t-bills fluctuate more than other interest rates and is lower on average. The interest rate on long term corporate bonds is higher on average than the other interest rates, and the spread between it and the other rates fluctuates over time. Common stock represents a share of ownership in a corporate; a security that is a claim on the earnings and assets of the corporation.

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Related Questions

6. If there is a shortage of loanable funds, then

a.

the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium.

b.

the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.

c.

the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.

d.

the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.

 

7. We associate the term debt finance with

a.

the bond market and we associate the term equity finance with the stock market.

b.

the stock market and we associate the term equity finance with the bond market.

c.

financial intermediaries and we associate the term equity finance with financial markets.

d.

financial markets and we associate the term equity finance with financial intermediaries.

8. If the demand for loanable funds shifts to the right, then the equilibrium interest rate

a.

and the quantity of loanable funds rises.

b.

and the quantity of loanable funds falls.

c.

rises and the quantity of loanable funds falls.

d.

falls and the quantity of loanable funds rises.

 

9. Long-term bonds are

a.

riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.

b.

riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

c.

less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.

d.

less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

10. Compared to bondholders, stockholders

a.

face higher risk and have the potential for higher returns.

b.

face higher risk but receive a fixed payment.

c.

face lower risk and have the potential for higher returns.

d.

face lower risk but receive a fixed payment.

11. The old adage, 'don't put all your eggs in one basket',€ is very similar to a modern bit of advice concerning financial matters:

a.

Buy low-risk bonds.

b.

Use a medium of exchange.

c.

Diversify.

d.

Intermediate.


12. A budget surplus is created if

a.

the government sells more bonds than it buys back.

b.

the government spends more than it receives in tax revenue.

c.

private saving is greater than zero.

d.

None of the above is correct.

Which of the following statements about financial markets and securities is true?

a. A debt instrument is intermediate-term if its maturity is ten years or longer.

b. The maturity of a debt instrument is the number of years (term) to that instrument's expiration date.

c. A debt instrument is intermediate-term if its maturity is less than one year.

d. A bond is long-term security that promises to make periodic payments called dividends to the firm's residual claimants.

Based on the current events in our economy, please keep this in mind. When interest rates are held more or less at a constant rate and price risk remains stable, financial leverage does not greatly impact changes in stock return at the market level. However, when price risk takes hold and interest rates fluctuate, you will see significant swings in stock return. Then financial leverage adds more to stock volatility for a small firm rather than larger corporations. Why do you think this is?