1. The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called:

A) Private risk

B) Term risk

C) Interest risk

D) Credit risk

2. True or False: When a firm wants to borrow directly from the public to finance the purchase of new equipment, it does so by selling shares of stock.

3. The slope of demand for loanable funds curve represents the:

A) Negative relation between the real interest rate and investment

B) Positive relation between the real interest rate and investment

C) Negative relation between the real interest rate and savings

D) Positive relation between the real interest rate and savings

4. We could expect the interest rate on bond A to be higher than the interest rate on bond B if the two bonds have identical characteristics except that:

A) The credit risk associated with bond A is lower than the credit risk associated with bond B

B) Bond A was issued by the state of New York and Bond B was issued by Exxon Mobile Corp

C) Bond A has a term of 20 years and Bond B has a term of 2 years

D) Each of these answers is correct

5. Which of the following statements is correct?

A) All bonds are, by definition, perpetuities

B) When a corporation sells stocks as a means of raising funds it is engaging in debt finance

C) The owners of bonds sold by the Microsoft corporation are part owners of that corporation

D) The extended future profitability of a corporation influences the demand for that corporations stock.

6. In a closed economy, what does (Y - T- C) represent ?

A) National savings

B) Government tax revenue

C) Public savings

D) Private savings

7. True or False : The sale of either stock or bonds to raise money is known as equity finance.

8. If there is a shortage of loanable funds, then:

A) The quantity of loanable funds supplied is greater than the quantity of loanable funds demanded, and the interest rate is below equilibrium

B) The quantity of loanable funds supplied is greater than the quantity of loanable funds demanded, and the interest rate is above equilibrium

C) The quantity of loanable funds demanded is greater than the quantity of loanable funds Supplied, and the interest rate is above equilibrium

D) The quantity of loanable funds demanded is greater than the quantity of loanable funds supplied, and the interest rate is below equilibrium

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 higher than interest rates on short-term bonds

D) Less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds

10. A national chain of grocery stores wants to finance the construction of several new stores. The firm has limited internal funds, so it likely will:

A) Demand the required funds by selling bonds

B) Supply the required funds by selling bonds

C) Supply the required funds by buying bonds

D) Demand the required funds by buying bonds

11. Which of the following is not a nonsensical headline?

A) Disney issues new bonds with term of $1000 each

B) British perpetuities about to mature

C) Standard and poor�¢ï¿½ï¿½s judges new junk bond to have very low credit risks

D) Government bonds currently pay less interest than corporate bonds

12. A bond buyer is a:

A) Borrower; bond buyers must hold their bonds until maturity

B) Borrower; bond buyers may sell their bonds prior to maturity

C) Saver; bond buyers must hold their bonds until maturity

D) Saver; bond buyers may sell their bonds prior to maturity

13. True or false: If congress instituted an investment tax credit, the demand for loanable funds would shift rightward.

14. True or false: When the government budget deficit rises, national saving is reduced, interest rates rise, and investment falls

15. Which of the following statements about mutual funds is correct?

A) A mutual fund acquires its funds primarily by selling shares to the public

B) A mutual fund is a financial intermediary

C) Each of these answers is correct

D) People who buy shares from a mutual fund accept all of the risk and return associated with the mutual funds portfolio

16. Managed funds:

A) Typically have a lower rate of return and lower costs than index funds

B) Typically have a higher rate of return and lower costs than index funds

C) Typically have a lower rate of return and higher costs than index funds

D) Typically have a higher rate of return and higher costs than index funds

17. Which of the following statements is correct

A) On average, managed funds outperform index funds

B) A mutual fund is a financial market

C) A large, well-known corporation such as Intel generally would use financial intermediation to finance expansion of its facilities

D) Unlike corporate bonds and stocks, checking accounts are a medium of exchange

18. The supply of loanable funds will shift to the right if either:

A) Tax reforms encourage greater saving or investment tax credits were increased

B) The budget deficit became larger or tax reforms discouraged savings

C) The budget deficit became larger or investment tax credits were increased

D) Tax reforms encouraged greater saving or the budget deficit became smaller

19. Bolivia had a smaller budget deficit in 2003 than in 2002. Other things the same, we would expect this reduction in the budget deficit to have:

A) Decrease both interest rates and investments

B) Increase both interest rates and investments

C) Decrease interest rates and increased investment

D) Increase interest rates and decreased investment