ECO 205- PROBLEM SET LECTURE 4

When a country saves a larger portion of its GDP than it did before, it will have

• more capital and higher productivity.

• more capital and lower productivity.

• less capital and higher productivity.

• less capital and lower productivity.

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

• credit risk.

• interest risk.

• term risk.

• private risk.

We would 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

• the credit risk associated with Bond A is lower than the credit risk associated with Bond B.

• Bond A was issued by the state of New York and Bond B was issued by the Exxon Mobil Corporation.

• Bond A has a term of 20 years and Bond B has a term of 2 years.

• All of the above are correct.

The economy’s two most important financial markets are

• the investment market and the saving market.

• the bond market and the stock market.

• banks and the stock market.

• financial markets and financial institutions.

Two of the economy’s most important financial intermediaries are

• suppliers of funds and demanders of funds.

• banks and the bond market.

• the stock market and the bond market.

• banks and mutual funds.

The sale of stocks

• and bonds to raise money is called debt finance.

• and bonds to raise money is called equity finance.

• to raise money is called debt finance, while the sale of bonds to raise funds is called equity finance.

• to raise money is called equity finance, while the sale of bonds to raise funds is called debt finance.

Compared to bondholders, stockholders

• face higher risk and have the potential for higher returns.

• face higher risk but receive a fixed payment.

• face lower risk and have the potential for higher returns.

• face lower risk but receive a fixed payment.

All or part of a firm’s profits may be paid out to the firm’s stockholders in the form of

• retained earnings.

• dividends.

• interest payments.

• capital accounts.

• 20, 1.25 percent

• 20, 6.25 percent

• 16, 1.25 percent

• None of the above is correct.

Which of the following is a financial intermediary?

• a. a mutual fund

• b. the stock market

• c. a U.S. government bond

• d. a wealthy individual who regularly buys and holds large quantities of government bonds