Exam code: 7136
1 markA long-dated £100 government bond with a coupon rate of 5% has a current market value of £125. This implies that the
current yield on the bond is 4%.
current yield on the bond is 5%.
market rate of interest is 2.5%.
market rate of interest is 5%.
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All other things being equal, in which one of the following circumstances is the Bank of England most likely to raise Bank Rate to maintain financial stability?
A fall in bank liquidity and capital ratios following several years of rapid growth in bank lending and a boom in house prices
An increase in the government’s target for the rate of inflation following a significant increase in the rate of productivity growth
An increase in the savings ratio as the economy recovers from a recession
A rise in share prices on global stock markets due to the growth in world trade
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1 markTable 2 shows the inflation rate and the rate of growth of the money supply for an economy between 2016 and 2019.
Table 2
Year | Inflation | Rate of growth of money supply |
2016 | 3.1% | 3.5% |
2017 | 3.5% | 3.3% |
2018 | 2.9% | 3.2% |
2019 | 2.5% | 2.0% |
From the data in Table 2 it may be concluded that, all other things being equal, there was
a fall in the value of money throughout the entire period.
a policy of quantitative easing in operation throughout the entire period.
an inverse relationship between inflation and the rate of growth of the money supply.
continuous disinflation throughout the entire period.
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Moral hazard results when individuals and organisations make investment decisions
based on asymmetric information. |
because they expect to make a large profit. |
based on the returns made on previous investments. |
knowing that others will bear the loss if things go wrong.
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1 markA company has an issued share capital of £1 million and an outstanding corporate bond issue of £200 000. To fund its expansion, the company issues additional corporate bonds for £300 000. All other things being equal, after the issue of the additional corporate bonds the ratio of the company’s total debt to its equity will be
0.2:1
0.3:1
0.5:1
2.0:1
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Despite its central bank operating a policy of quantitative easing for several years, an economy has rising unemployment and a rate of inflation significantly below the target rate set by the government. All other things being equal, which one of the following actions is the central bank most likely to take in order to meet the target for inflation?
A policy leading to an appreciation of the exchange rate.
An increase in its base rate of interest and the reversal of its quantitative easing policy.
Providing forward guidance indicating that the bank will continue with its programme of quantitative easing.
Selling some of its stock of government bonds to other financial institutions.
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In recent years, several central banks around the world have implemented a policy of quantitative easing (QE). All other things being equal, which one of the following combinations A, B, C or D, is most likely to be the result of this policy?
| Bank liquidity | Bond prices | Long-term interest rates |
A | Decrease | Fall | Rise |
B | Increase | Fall | Rise |
C | Decrease | Rise | Fall |
D | Increase | Rise | Fall |
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A large, unexpected decline in house prices could lead to a systemic crisis in the financial system.
This is most likely to happen if, following the fall in house prices, commercial banks and building societies
have a low ratio of capital to their total assets.
have followed Prudential Regulation Authority (PRA) guidance to reduce the amount they lend to high-risk borrowers.
have the option to use the Bank of England as the lender of last resort.
hold a high proportion of liquid assets on their balance sheets.
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The diagram below shows two aggregate demand (AD) curves, two short-run aggregate supply (SRAS) curves, and the long-run aggregate supply (LRAS) curve for an economy. |
The increase in the price level from P1 to P2 raises the rate of inflation above the target rate set by the government. In an attempt to bring inflation back to its target rate, the central bank announces a change in interest rates. Other things being equal, this is most likely to
create upward pressure on the exchange rate.
increase bond prices.
make business loans more affordable.
reduce the cost of servicing the national debt. |
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A bank makes a new loan to a customer. All other things being equal, which combination of events, A, B, C or D, shows what will happen?
| Bank’s liabilities | Bank’s assets | Money supply |
A | Increase | Increase | Increases |
B | Increase | Fall | Increases |
C | Fall | Increase | Falls |
D | Fall | Fall | Falls |
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1 markA government issued bond has a nominal value of £100 and the annual coupon is £6. The bond has 35 years until maturity. Its current yield is 5%. The current market price of the bond is
£100
£105
£106
£120
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Which one of the following combinations, A, B, C or D, best distinguishes between the functions of the money market and the capital market?
| Money market | Capital market |
A |
The market for issuing new shares |
The market where foreign currency is exchanged at some point in the future |
B | The market where commercial banks provide short-term loans to each other | The market where businesses obtain funds to finance long-term growth |
C |
The market where foreign currencies are traded | The main market in which commercial banks lend to each other |
D | The market where the government finances its budget deficit by issuing bonds | The market where short-term debt is converted into equity finance |
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