Money, Banking, Financial Markets and Institutions

SOLUTION MANUAL For Money, Banking, Financial
Markets and Institutions, 2nd Edition by Brandl
Michael


Primary markets are markets in which users of funds raise cash by selling securities
to funds suppliers TF - ANSWER: True

Secondary markets are markets used by corporations to raise cash by issuing
securities for a short time period TF - ANSWER: False

Corporate security issuers are always directly involved in funds transfers in the
secondary market TF - ANSWER: False

Money markets are the markets for securities with an original maturity of one year
or less TF - ANSWER: True

Financial intermediaries rather than financial systems are the most common agents
to channel funds from the suppliers to the users of funds TF - ANSWER: True

What factors are not encouraging financial institutions to offer overlapping financial
services such as banking, investment banking, brokerage, etc.?
I. Regulatory changes allowing institutions to offer more services
II. Technological improvements reducing the cost of providing financial services
III. Increasing competition from full-service global financial institutions
IV. Reduction in the need to manage risk at financial institutions - ANSWER: D

Which of the following is/are money market instrument(s)?
A) Negotiable CDs
B) Common stock
C) T-bonds
D) 4-year maturity corporate bond
E) Negotiable CDs, common stock, and T-bonds - ANSWER: A

Money markets trade securities that
I. mature in one year or less.
II. have little chance of loss of principal.
III. must be guaranteed by the federal government.

A) I only
B) II only
C) I and II only

,D) I and III only
E) I, II, and III - ANSWER: C. I and II only

Which of the following are capital market instruments?
A) 10-year corporate bonds
B) 30-year mortgages
C) 20-year Treasury bonds
D) 15-year U.S. government agency bonds
E) All of these choices are correct - ANSWER: E. All of these choices are correct.

The present value of an expected future payment ________ as the interest rate
increases
A. falls
B. rises
C. is constant
D. is unaffected - ANSWER: falls

The current yield is a good approximation to the yield to maturity when:
A. the bond price is very close to par
B. the bond is a short-term bond
C. the current bond price is below its face value
D. the coupon rate of the bond is higher than its yield to maturity - ANSWER: A

True or False: With a discount bond, the return on a bond is equal to the rate of
capital gain
A. True: A discount bond has no coupon payments so the return on the bond is equal
to the rate of capital gain
B. False: Bond returns can never equal the rate of capital gain; there must be a
capital loss or gain indicated
C. True: A discount bond pays fixed interest payments every year so the return is
equal to the rate of capital gain
D. There is no way to determine this without the knowing the coupon amount and
interest rate - ANSWER: A

If interest rates decline, which would you rather be holding, long-term bonds or
short-term bonds?
A. Long-term bonds because their price would increase more than the price of short-
term bonds
B. Short-term bonds because their price is less sensitive to interest-rate volatility
C. Short-term bonds because their price would increase more than the price of long-
term bonds
D. Long-term bonds because their price is likely to fall - ANSWER: A

Retired persons often have much of their wealth placed in savings accounts and
other interest-bearing investments, and complain whenever interest rates are low.
Which of the following, if true, would be a valid complaint?

, A. Nominal interest rates decrease, while there is a slight increase in real interest
rates
B. There has not been significant growth of nominal interest rates for the last 5 years
C. Expected inflation is falling at the same rate as nominal interest rates
D. Expected inflation is falling at a slower rate than nominal interest rates - ANSWER:
D

A discount bond will have a negative nominal interest rate when the
A. bond is sold long before its maturity date
B. sum of the annual coupon payments and the face value of the bond is higher than
its current price
C. current bond price is greater than its face value
D. current bond yield is smaller than its yield to maturity - ANSWER: C

Which of the following statements is true?
A. Neither a coupon bond nor a perpetuity can have a negative nominal interest rate
B. Only a coupon bond can have a negative nominal interest rate
C. Only a perpetuity can have a negative nominal interest rate
D. Both a coupon bond and a perpetuity can have a negative nominal interest rate -
ANSWER: B

Of the four factors that influence asset demand, which factor will cause the demand
for all assets to increase when it increases, everything else held constant?
A) wealth
B) expected returns
C) risk
D) liquidity - ANSWER: wealth

If wealth increases, the demand for stocks ________ and that of long-term bonds
________, everything else held constant.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases - ANSWER: increases, increases

If housing prices are expected to increase, then, other things equal, the demand for
houses will ________ and that of Treasury bills will ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase - ANSWER: b. increase; decrease

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