1. Bank capital represents costs and benefits for bank owners. Greater amounts of bank capital ________ the likelihood of bankruptcy, which ________ the return on equity for a given return on assets.

reduces; increases

increases; increases

increases; reduces

reduces; reduces

2. Going-Going-Gone issues $100 face value, zero-coupon, one-year bonds. The current return on one-year, zero-coupon U.S. government bonds is 3.5 percent%. What is the risk premium on Going-Going-Gone bonds that sell for $92.00?

5.2 percent

8.0 percent

8.7 percent

1.5 percent

3. If the annual interest rate is 7 percent (0.07), the price of a three-month, $100 Treasury bill would be:

$93.46

$97.77

$98.32

$96.67

4. There is a decline in returns on financial investments other than bonds. Other things being equal, this will cause:

a movement down along the bond demand curve.

the supply curve of bonds to shift to the left.

bond prices to rise.

the demand curve for bonds to shift to the left.

5. Money:

requires at least two transactions for a double coincidence of wants.

is useless without a double coincidence of wants.

ensures that a double coincidence of wants never occurs.

makes possible an immediate double coincidence of wants.

6. Bond rating agencies such as Moody's, Standard & Poor's, and Fitch base their ratings on the characteristics of issuer. This service:

transfers risk from the investor to the rating agency.

provides a lower cost solution to the high cost of information.

decreases the real return to bondholders.

increases information asymmetry.

7. Suppose that a bank's return on equity is unchanged, but the ratio of the bank’s assets to capital has decreased. It must then be that case that the:

bank has become more highly leveraged.

bank has become less profitable.

bank's return on assets has decreased.

bank's return on assets has increased.