Q: A $10,000 investment earns 6\% interest compounded annually for 3 years. What is the future value?

$$FV = 10,000 \times (1 + 0.06)^3$

Question 1

Which of the following best describes the primary function of money in an economy?

Accepted Answer

Money acts as a medium of exchange, a unit of account, and a store of value.

Question 2

According to the concept of 'money as a weighted aggregate,' which of the following is true?

Accepted Answer

Different types of money (currency, deposits, etc.) are combined using weights to reflect their relative liquidity.

Question 3

Which equation correctly represents the Fisher Equation, relating nominal and real interest rates?

Accepted Answer

$$i = r + \pi^e$$

Question 4

A bank offers a nominal interest rate of 5\% per year. If the expected inflation rate is 2\%, what is the real interest rate?

Accepted Answer

$$r = 5\% - 2\% = 3\%$$

Question 5

Which of the following is NOT a component of the financial system?

Accepted Answer

Manufacturing firms

Question 6

If the term structure of interest rates is upward sloping, what does this typically indicate about market expectations?

Accepted Answer

Investors expect future interest rates to rise.

Question 7

Which formula is used to calculate the present value (PV) of a future cash flow (FV) received in $$n$$ years at an annual interest rate $$r$$?

Accepted Answer

$$PV = \frac{FV}{(1 + r)^n}$$

Question 8

A $$1,000 bond pays 50 $$interest annually and matures in 5 years. If the market interest rate is 4\%, what is the price of the bond? (Assume annual payments and no default risk)

Accepted Answer

$$P = \sum_{t=1}^{5} \frac{50}{(1 + 0.04)^t} + \frac{1000}{(1 + 0.04)^5$}$$

Question 9

Which of the following best explains why financial intermediaries exist?

Accepted Answer

They reduce transaction costs and help allocate resources efficiently.

Question 10

If inflation unexpectedly rises, what is the likely impact on lenders and borrowers?

Accepted Answer

Lenders lose and borrowers gain because the real value of repayments falls.

Question 11

Which of the following is a key reason for the existence of the term structure of interest rates?

Accepted Answer

Investors require compensation for risk and time preference.

Question 12

Which of the following is NOT a function of financial markets?

Accepted Answer

Producing consumer goods

Question 13

If the expected inflation rate is 3\% and the real interest rate is 2\%, what is the nominal interest rate?

Accepted Answer

$$i = 2\% + 3\% = 5\%$$

Question 14

Which of the following best describes the 'risk structure of interest rates'?

Accepted Answer

Interest rates differ across bonds due to differences in default risk, liquidity, and tax treatment.

Question 15

A $10,000 investment earns 6\% interest compounded annually for 3 years. What is the future value?

Accepted Answer

$$FV = 10,000 	imes (1 + 0.06)^3$

Question 16

Which of the following is most likely to increase the demand for money?

Accepted Answer

An increase in income levels

Question 17

If a bond's yield to maturity is higher than its coupon rate, what does this indicate about the bond's price?

Accepted Answer

The bond is selling at a discount.

Question 18

Which of the following is a direct effect of inflation on the purchasing power of money?

Accepted Answer

Inflation decreases the purchasing power of money.

Question 19

Which formula would you use to calculate the yield to maturity (YTM) of a bond?

Accepted Answer

$$P = \sum_{t=1}^{n} \frac{C}{(1 + YTM)^t} + \frac{F}{(1 + YTM)^n}$$

Question 20

Which of the following statements about the term structure of interest rates is correct?

Accepted Answer

It shows the relationship between interest rates and the maturity of debt instruments.

Midterm Syllabus and Study Guide: Money, Banking, and Interest Rates

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