Test Bank Financial Markets and Institutions
The study major and field is going to dictate what it is you see inside the test bank. However, in the basic scheme of things, a test bank will include the following questions:
- Multiple choice
- True/false
- Fill in the blank
- Matching
- Short questions
- Essay question
Chapter 4 Why Do Interest Rates Change?
4.1 Multiple Choice
1) As the price of a bond ________ and the expected return ________, bonds become more attractive to investors and the quantity demanded rises.
A) falls; rises
B) falls; falls
C) rises; rises
D) rises; falls
Answer: A
Topic: Chapter 4.1 Determining Asset Demand
Question Status: Previous Edition
2) The supply curve for bonds has the usual upward slope, indicating that as the price ________, ceteris paribus, the ________ increases.
A) falls; supply
B) falls; quantity supplied
C) rises; supply
D) rises; quantity supplied
Answer: D
Topic: Chapter 4.2 Supply and Demand in the Bond Market
Question Status: Previous Edition
3) When the price of a bond is above the equilibrium price, there is excess ________ in the bond market and the price will ________.
A) demand; rise
B) demand; fall
C) supply; fall
D) supply; rise
Answer: C
Topic: Chapter 4.2 Supply and Demand in the Bond Market
Question Status: Previous Edition
4) When the price of a bond is below the equilibrium price, there is excess ________ in the bond market and the price will ________.
A) demand; rise
B) demand; fall
C) supply; fall
D) supply; rise
Answer: A
Topic: Chapter 4.2 Supply and Demand in the Bond Market
Question Status: Previous Edition
5) When the price of a bond is ________ the equilibrium price, there is an excess supply of bonds and the price will ________.
A) above; rise
B) above; fall
C) below; fall
D) below; rise
Answer: B
Topic: Chapter 4.2 Supply and Demand in the Bond Market
Question Status: Previous Edition
6) When the price of a bond is ________ the equilibrium price, there is an excess demand for bonds and the price will ________.
A) above; rise
B) above; fall
C) below; fall
D) below; rise
Answer: D
Topic: Chapter 4.2 Supply and Demand in the Bond Market
Question Status: Previous Edition
7) When the interest rate on a bond is above the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________.
A) demand; rise
B) demand; fall
C) supply; fall
D) supply; rise
Answer: B
Topic: Chapter 4.3 Changes in Equilibrium Interest Rates
Question Status: Previous Edition
8) When the interest rate on a bond is below the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________.
A) demand; rise
B) demand; fall
C) supply; fall
D) supply; rise
Answer: D
Topic: Chapter 4.3 Changes in Equilibrium Interest Rates
Question Status: Previous Edition
9) When the interest rate on a bond is ________ the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________.
A) above; demand; fall
B) above; demand; rise
C) below; supply; fall
D) above; supply; rise
Answer: A
Topic: Chapter 4.3 Changes in Equilibrium Interest Rates
Question Status: Previous Edition
10) When the interest rate on a bond is ________ the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________.
A) below; demand; rise
B) below; demand; fall
C) below; supply; rise
D) above; supply; fall
Answer: C
Topic: Chapter 4.3 Changes in Equilibrium Interest Rates
Question Status: Previous Edition
11) When the demand for bonds ________ or the supply of bonds ________, interest rates rise.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
Answer: D
Topic: Chapter 4.2 Supply and Demand in the Bond Market
Question Status: Previous Edition
12) When the demand for bonds ________ or the supply of bonds ________, interest rates fall.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
Answer: B
Topic: Chapter 4.2 Supply and Demand in the Bond Market
Question Status: Previous Edition
13) When the demand for bonds ________ or the supply of bonds ________, bond prices rise.
A) increases; decreases
B) decreases; increases
C) decreases; decreases
D) increases; increases
Answer: A
Topic: Chapter 4.2 Supply and Demand in the Bond Market
Question Status: Previous Edition
14) When the demand for bonds ________ or the supply of bonds ________, bond prices fall.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
Answer: D
Topic: Chapter 4.2 Supply and Demand in the Bond Market
Question Status: Previous Edition
15) Factors that determine the demand for an asset include changes in the
A) wealth of investors.
B) liquidity of bonds relative to alternative assets.
C) expected returns on bonds relative to alternative assets.
D) risk of bonds relative to alternative assets.
E) all of the above.
Answer: E
Topic: Chapter 4.1 Determining Asset Demand
Question Status: Previous Edition
16) The demand for an asset rises if ________ falls.
A) risk relative to other assets
B) expected return relative to other assets
C) liquidity relative to other assets
D) wealth
Answer: A
Topic: Chapter 4.1 Determining Asset Demand
Question Status: Previous Edition
17) The higher the standard deviation of returns on an asset, the ________ the asset’s ________.
A) greater; risk
B) smaller; risk
C) greater; expected return
D) smaller; expected return
Answer: A
Topic: Chapter 4.1 Determining Asset Demand
Question Status: Previous Edition
18) Diversification benefits an investor by
A) increasing wealth.
B) increasing expected return.
C) reducing risk.
D) increasing liquidity.
Answer: C
Topic: Chapter 4.A1 Models of Asset Pricing
Question Status: Previous Edition
19) In a recession when income and wealth are falling, the demand for bonds ________ and the demand curve shifts to the ________.
A) falls; right
B) falls; left
C) rises; right
D) rises; left
Answer: B
Topic: Chapter 4.1 Determining Asset Demand
Question Status: Previous Edition
20) During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________.
A) falls; right
B) falls; left
C) rises; right
D) rises; left
Answer: C
Topic: Chapter 4.1 Determining Asset Demand
Question Status: Previous Edition
21) Higher expected interest rates in the future ________ the demand for long-term bonds and shift the demand curve to the ________.
A) increase; left
B) increase; right
C) decrease; left
D) decrease; right
Answer: C
Topic: Chapter 4.1 Determining Asset Demand
Question Status: Previous Edition
22) Lower expected interest rates in the future ________ the demand for long-term bonds and shift the demand curve to the ________
A) increase; left.
B) increase; right.
C) decrease; left.
D) decrease; right.
Answer: B
Topic: Chapter 4.1 Determining Asset Demand
Question Status: Previous Edition
23) When people begin to expect a large stock market decline, the demand curve for bonds shifts to the ________ and the interest rate ________.
A) right; falls
B) right; rises
C) left; falls
D) left; rises
Answer: A
Topic: Chapter 4.3 Changes in Equilibrium Interest Rates
Question Status: Previous Edition
24) When people begin to expect a large run up in stock prices, the demand curve for bonds shifts to the ________ and the interest rate ________.
A) right; rises
B) right; falls
C) left; falls
D) left; rises
Answer: D
Topic: Chapter 4.3 Changes in Equilibrium Interest Rates
Question Status: Previous Edition
25) An increase in the expected rate of inflation will ________ the expected return on bonds relative to that on ________ assets, and shift the ________ curve to the left.
A) reduce; financial; demand
B) reduce; real; demand
C) raise; financial; supply
D) raise; real; supply
Answer: B
Topic: Chapter 4.3 Changes in Equilibrium Interest Rates
Question Status: Previous Edition
26) A decrease in the expected rate of inflation will ________ the expected return on bonds relative to that on ________ assets.
A) reduce; financial
B) reduce; real
C) raise; financial
D) raise; real
Answer: D
Topic: Chapter 4.3 Changes in Equilibrium Interest Rates
Question Status: Previous Edition
27) When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________.
A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; falls
D) decreases; increases; rises
Answer: D
Topic: Chapter 4.3 Changes in Equilibrium Interest Rates
Question Status: Previous Edition
28) When the expected inflation rate decreases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________.
A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; falls
D) decreases; increases; rises
Answer: C
Topic: Chapter 4.3 Changes in Equilibrium Interest Rates
Question Status: Previous Edition
29) When bond prices become more volatile, the demand for bonds ________ and the interest rate ________.
A) increases; rises
B) increases; falls
C) decreases; falls
D) decreases; rises
Answer: D
Topic: Chapter 4.3 Changes in Equilibrium Interest Rates
Question Status: Previous Edition
30) When bond prices become less volatile, the demand for bonds ________ and the interest rate ________.
A) increases; rises
B) increases; falls
C) decreases; falls
D) decreases; rises
Answer: B
Topic: Chapter 4.3 Changes in Equilibrium Interest Rates
Question Status: Previous Edition
31) When prices in the stock market become more uncertain, the demand curve for bonds shifts to the ________ and the interest rate ________.
A) right; rises
B) right; falls
C) left; falls
D) left; rises
Answer: B
Topic: Chapter 4.3 Changes in Equilibrium Interest Rates
Question Status: Previous Edition
32) When stock prices become less volatile, the demand curve for bonds shifts to the ________ and the interest rate ________.
A) right; rises
B) right; falls
C) left; falls
D) left; rises
Answer: D
Topic: Chapter 4.3 Changes in Equilibrium Interest Rates
Question Status: Previous Edition
33) When bonds become more widely traded, and as a consequence the market becomes more liquid, the demand curve for bonds shifts to the ________ and the interest rate ________.
A) right; rises
B) right; falls
C) left; falls
D) left; rises
Answer: B
Topic: Chapter 4.3 Changes in Equilibrium Interest Rates
Question Status: Previous Edition
34) When bonds become less widely traded, and as a consequence the market becomes less liquid, the demand curve for bonds shifts to the ________ and the interest rate ________.
A) right; rises
B) right; falls
C) left; falls
D) left; rises
Answer: D
Topic: Chapter 4.3 Changes in Equilibrium Interest Rates
Question Status: Previous Edition
35) Factors that cause the demand curve for bonds to shift to the left include
A) an increase in the inflation rate.
B) an increase in the liquidity of stocks.
C) a decrease in the volatility of stock prices.
D) all of the above.
E) none of the above.
Answer: D
Topic: Chapter 4.3 Changes in Equilibrium Interest Rates
Question Status: Previous Edition
36) Factors that cause the demand curve for bonds to shift to the left include
A) a decrease in the inflation rate.
B) an increase in the volatility of stock prices.
C) an increase in the liquidity of stocks.
D) all of the above.
E) only A and B of the above.
Answer: C
Topic: Chapter 4.3 Changes in Equilibrium Interest Rates
Question Status: Previous Edition
37) During an economic expansion, the supply of bonds ________ and the supply curve shifts to the ________.
A) increases; left
B) increases; right
C) decreases; left
D) decreases; right
Answer: B
Topic: Chapter 4.2 Supply and Demand in the Bond Market
Question Status: Previous Edition
38) During a recession, the supply of bonds ________ and the supply curve shifts to the ________.
A) increases; left
B) increases; right
C) decreases; left
D) decreases; right
Answer: C
Topic: Chapter 4.2 Supply and Demand in the Bond Market
Question Status: Previous Edition
39) An increase in expected inflation causes the supply of bonds to ________ and the supply curve to shift to the ________.
A) increase; left
B) increase; right
C) decrease; left
D) decrease; right
Answer: B
Topic: Chapter 4.2 Supply and Demand in the Bond Market
Question Status: Previous Edition
40) When the federal governments budget deficit increases, the ________ curve for bonds shifts to the ________.
A) demand; right
B) demand; left
C) supply; left
D) supply; right
Answer: D
Topic: Chapter 4.2 Supply and Demand in the Bond Market