24 Questions
What is the primary function of financial institutions?
To facilitate the flow of funds between investors and borrowers
What type of financial institution includes commercial banks and thrift institutions?
Depository type
What is the role of interest rate in borrowing?
The price of borrowing money for the use of its purchasing power
What is the relationship between interest rate and the demand for loanable funds?
Inversely related
What is the nominal interest rate if the real rate of interest is 7% and the expected inflation rate is 9%?
16%
What happens to the nominal interest rate when the actual inflation rate is higher than the expected inflation rate?
It increases
What is the realized rate of return if the real rate of interest is 5% and the actual inflation rate is 8%?
3%
Which of the following economic units spend more money than they earn?
Deficit units
What is the purpose of financial institutions in the economy?
To facilitate the flow of funds between investors and borrowers
What is NOT true about financial claims?
They are issued by deficit units and sold to investors
What is a written promise to pay a specific sum of money?
Debt security
What is the type of financing where funds flow directly?
Direct financing
What is NOT true about the secondary market?
It is a place where new financial securities are sold
What are the economic units that receive more money than their expenditures?
Surplus units
What is the term for the money borrowed plus a fee for the use of the money?
Debt security
What happens in indirect financing?
Funds flow indirectly through financial intermediaries
What is the value of 𝒓𝒓 in the equation 𝒓𝒓 = 𝒊 − 𝑨 𝑰𝑵𝑭?
12%
What type of market is used to facilitate the transfer of short-term funds from individuals, corporations, or governments with excess funds to those with deficient funds?
Money markets
Which of the following is NOT a true characteristic of money market securities?
Most of them are issued in very large denominations
What is the term for the purchase of securities by one party from another with an agreement to sell them back?
Reverse repo
If you purchased a $120,000 T-bill maturing in 4 months for $112,000, what is the T-bill yield?
15.6%
What is the return on an investment if you purchase an NCD today for $485,000, and the certificate will mature 1 year from now at a price of $500,000 with an interest of $30,000?
9.3%
What is the formula to calculate the yield on a T-bill?
𝒚𝒕 = (𝑷𝒂𝒓 − 𝑷𝑷) / 𝑷𝑷 × (1/n) × 100%
What is the formula to calculate the discount rate on a T-bill?
𝒚𝒅 = (𝑷𝒂𝒓 − 𝑷𝑷) / 𝑷𝒂𝒓 × (1/n) × 100%
Practice questions on institutions, focusing on economic units, financial claims, and budgeting concepts. Prepare for your mid-term exam with these questions.
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