42) So-called fallen angels differ from junk bonds in that
A) junk bonds refer to previously issued bonds which have had their credit ratings fall below
Baa.
B) fallen angels refer to newly issued bonds with low credit ratings.
C) junk bonds refer to newly issued bonds with low credit ratings.
D) they are both A and B of the above.
43) So-called fallen angels differ from junk bonds in that
A) junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to
previously issued bonds which have had their credit ratings fall below Baa.
B) junk bonds refer to previously issued bonds which have had their credit ratings fall below
Baa, whereas fallen angels refer to newly issued bonds with low credit ratings.
C) junk bonds have ratings below Baa, whereas fallen angels have ratings below C.
D) fallen angels have ratings below Baa, whereas junk bonds have ratings below C.
44) High-yield bonds rated below investment grade by the bond-rating agencies are frequently
referred to as ________.
A) municipal bonds
B) Yankee bonds
C) “fallen angels”
D) junk bonds
45) In 1977, ________ pioneered the concept of selling new public issues of junk bonds for
companies that had not yet achieved investment-grade status.
A) Michael Milken
B) Roger Milliken
C) Ivan Boskey
D) Carl Ichan
46) The practice of creating marketable debt instruments that are backed by otherwise illiquid
assets is known as ________.
A) standardization
B) homogenization
C) securitization
D) adverse selection
47) The driving force behind the securitization of mortgages and automobile loans has been
A) the rising regulatory constraints on substitute financial instruments.
B) the desire of mortgage and auto lenders to exit this field of lending.
C) the improvement in computer technology.
D) the relaxation of regulatory restrictions on credit card operations.
48) The bundling of mortgages into a saleable security (usually for large institutional investors)
is called ________.
A) disintermediation
B) quasi-intermediation
C) futures bundling
D) hedge optioning
E) securitization
49) In the usual GNMA pass-through security, the ________ has direct ownership of a pro-rata
share of the portfolio of mortgage loans.
A) seller
B) buyer
C) financial institution issuing the mortgage loan
D) financial institution securitizing the mortgage loan
50) Bank managers look on reserve requirements as a
A) tax on deposits.
B) subsidy on deposits.
C) subsidy on loans.
D) tax on loans.
51) Checking accounts that earn interest (such as NOW accounts) were not available until
________.
A) 1962
B) 1972
C) 1982
D) 1992
52) Burdensome regulations, along with inflation and rising interest rates, help to explain
A) the rapid pace of financial innovations in banking in the 1960s and 1970s.
B) the low rate of bank failures in the 1980s.
C) both A and B of the above.
D) neither A nor B of the above.
53) The Federal Reserve’s Regulation Q
A) set maximum interest rates banks could pay on deposits.
B) set minimum interest rates banks could pay on deposits.
C) set maximum interest rates banks could charge on loans.
D) discouraged disintermediation.
54) When disintermediation occurs, the banking system ________ deposits and bank lending
________.
A) gains; increases
B) gains; decreases
C) loses; increases
D) loses; decreases
55) Which of the following is not a reason for the disappointing revenue growth and profits of
Internet-only banks?
A) High cost per transaction
B) Security concerns
C) Customer preferences
D) Technical problems
56) It now appears that the predominant delivery system for banking services in the future will
be
A) Internet-only banks.
B) traditional banks.
C) traditional banks supplemented with online services.
D) none of the above.
57) The growing use and proliferation of ATMs has been stimulated by
A) lower transaction costs.
B) greater customer convenience.
C) declining cost of the ATM equipment.
D) all of the above.
58) Since 1974, commercial banks’ importance as a source of funds for borrowers has shrunk
dramatically, from around ________ percent of total credit advanced to near ________ percent
by 2012.
A) 60; 30
B) 40; 22
C) 25; 20
D) 30; 15
59) Thrift institutions’ importance as a source of funds for borrowers
A) has shrunk from around 40 percent of total credit advanced in the late 1970s to below 30
percent today.
B) has shrunk from over 20 percent of total credit advanced in the late 1970s to below 10 percent
today.
C) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s
to above 25 percent today.
D) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s
to above 30 percent today.
60) Since the late 1970s, thrift institutions’ importance as a source of funds for borrowers has
shrunk markedly, from above ________ percent of total credit advanced to below ________
percent today.
A) 30; 20
B) 30; 15
C) 40; 5
D) 20; 10
61) Bank failures and mergers have caused the number of commercial banks in the U.S. to
decline from around ________ in the 1970s to below ________ today.
A) 25,000; 10,000
B) 15,000; 8,000
C) 25,000; 20,000
D) 15,000; 5,000
62) The traditional financial intermediation role of banking has been to make ________-term
loans and to fund them with ________-term deposits.
A) short; long
B) long; short
C) short; short
D) long; long
63) The process in which people seeking higher interest rates take their money out of financial
institutions is called ________.
A) capital mobility
B) loophole mining
C) disintermediation
D) deposit jumping
64) One factor contributing to the decline in cost advantages that banks once had is the decline in
the importance of checkable deposits from over ________ percent of banks’ source of funds to
________ percent today.
A) 70; 30
B) 60; 5
C) 50; 20
D) 40; 15
65) The most important developments that have reduced banks’ cost advantages in the past
twenty years include
A) the elimination of Regulation Q ceilings.
B) the competition from money market mutual funds.
C) the growth of securitization.
D) all of the above.
E) only A and B of the above.
66) The most important developments that have reduced banks’ cost advantages in the past
twenty years include
A) the growth of the junk bond market.
B) the competition from money market mutual funds.
C) the growth of securitization.
D) all of the above.
E) only A and B of the above.
67) The most important developments that have reduced banks‘ income advantages in the past
twenty years include
A) the growth of the commercial paper market.
B) the growth of the junk bond market.
C) the growth of securitization.
D) all of the above.
E) only A and B of the above.
68) The most important developments that have reduced banks’ income advantages in the past
twenty years include
A) the growth of the commercial paper market.
B) the growth of the junk bond market.
C) the elimination of Regulation Q ceilings.
D) all of the above.
E) only A and B of the above.
69) One factor contributing to the decline in income advantages that banks once had is the
increased competition from the commercial paper market, which has grown in size to over
________ percent of commercial and industrial bank loans today.
A) 20
B) 30
C) 40
D) 50
70) Rising market interest rates in the 1960s and the 1970s, combined with regulated deposit rate
ceilings,
A) worked in the short-run to give mortgage-issuing institutions a source of low-cost funds.
B) led eventually to an outflow of deposits from depository institutions.
C) led to financial innovations that worked to avoid these regulations.
D) did all of the above.
E) did only A and C of the above.
71) The presence of so many commercial banks in the United States is most likely the result of
A) consumers’ strong preference for dealing with only local banks.
B) adverse selection and moral hazard problems that give local banks a competitive advantage
over larger banks.
C) regulations that restrict the ability of banks to open branches.
D) all of the above.
72) The McFadden Act of 1927
A) effectively prohibited banks from branching across state lines.
B) required that banks maintain bank capital equal to at least 6 percent of their assets.
C) effectively required that banks maintain a correspondent relationship with large money center
banks.
D) did all of the above.
73) The legislation that effectively prohibited banks from branching across state lines and forced
all national banks to conform to the branching regulations of the state in which they reside is the
A) McFadden Act.
B) National Banking Act.
C) Glass-Steagall Act.
D) Garn-St. Germain Act.
74) Which of the following is an advantage of forming a bank holding company?
A) It allows ownership of several banks where branching is prohibited.
B) It allows owners to engage in activities related to banking that are prohibited to banks.
C) Both A and B of the above.
D) None of the above.
75) Which of the following are true statements concerning bank holding companies?
A) Bank holding companies own almost all large banks.
B) Bank holding companies have experienced dramatic growth in the past twenty-five years.
C) Through a loophole in the McFadden Act, bank holding companies have successfully evaded
interstate branching restrictions.
D) All of the above are true.
E) Only A and B of the above are true.
76) As a result of shared electronic banking facilities,
A) barriers to branching have become less burdensome.
B) banking has become less competitive.
C) both of the above have occurred.
D) neither of the above has occurred.
77) The McFadden Act’s prohibition against interstate branching
A) was weakened by the introduction of shared electronic banking facilities that provide banking
services nationwide.
B) was weakened by regional compacts that allowed banks to own banks in other states in their
region.
C) impeded banks’ ability to diversify their loans and take advantage of economies of scale.
D) did all of the above.
78) A bank with a large credit-card customer base can market other financial products to these
customers at a low cost. This is an example of
A) economies of scale.
B) economies of scope.
C) becoming a superregional bank.
D) none of the above.
79) As a result of restrictive banking regulations, the United States
A) has too few banks when compared to other industrialized countries.
B) has banks that are quite large relative to those in other countries.
C) has too many banks when compared to other industrialized countries.
D) has both A and B of the above.
80) Which of the following is not expected to result from bank consolidation in the U.S.?
A) The disappearance of small community banks.
B) The acceleration of the decline in the number of banks.
C) Banks will be more efficient.
D) Banks will be less likely to fail.
81) The legislation that separated investment banking from commercial banking was the
A) National Bank Act.
B) Federal Reserve Act.
C) Glass-Steagall Act.
D) McFadden Act.
82) The prohibition against banks underwriting corporate securities and engaging in brokerage,
real estate, and insurance activities was repealed by the
A) Gramm-Leach-Bliley Financial Services Modernization Act.
B) Competitive Equality in Banking Act.
C) Depositary Institution Deregulation and Monetary Control Act.
D) Glass-Steagall Act.
83) The Riegle-Neal Act of 1994
A) required all banks to become universal banks.
B) removed ceilings on bank deposit interest rates.
C) allowed banks to underwrite insurance and securities and engage in real estate activities.
D) overturned prohibitions on interstate banking and branching.