Reasons for the rapid structural change in financial markets in recent years include all
of the following except:
A. globalization.
B. technological advances in computing.
C. technological advances in communication.
D. high real interest rates.
Answer:
The fact that people can write drafts (checks) from many stock and money market
accounts has:
A. increased the transactions demand for money.
B. decreased the transactions demand for money.
C. not affected the transactions demand for money.
D. increased the cost of converting non-money assets to a means of payment.
Answer:
A $600 investment has the following payoff frequency: a quarter of the time it will be
$0; three quarters of the time it will pay off $1000. Its standard deviation and value at
risk respectively are:
A. $750; $600
B. $433; $600
C. $0; $1000
D. $433; $1000
Answer:
Countries that lack well-defined property laws and legal structures:
A. have large secondary financial markets because the primary markets do not exist.
B. will not develop as fast economically as counties with clear property rights and a
formal legal system.
C. will have much lower transaction costs associated with any level of lending.
D. will not have any financial markets at all.
Answer:
In investment matters, generally young workers compared to older workers will:
A. minimize expected return and focus more on variability.
B. be less risk-averse.
C. have equal concern for expected return and variability.
D. be more risk-averse.
Answer:
A young father needing to provide his family with financial security would be better off
purchasing:
A. a whole life insurance policy.
B. a term life insurance policy.
C. as much life insurance as they can afford.
D. no life insurance; instead he should focus on saving.
Answer:
The yield on a 30-year U.S. Treasury security is 6.5%; the yield on a 2-year U.S.
Treasury bond is 4.0%. This data indicate:
A. the yield curve is downward sloping.
B. the yield curve is flat since the risk premium needs to be added for longer
maturities.
C. the yield curve is upward sloping.
D. that people expect inflation to decrease in the future.
Answer:
U.S. government bonds that provide for bondholders to receive a fixed rate of interest
plus the change in the consumer price index were designed to remove:
A. default risk.
B. liquidity risk.
C. inflation risk.
D. interest-rate risk.
Answer:
Speculators differ from hedgers in the sense that:
A. speculators do not like risk.
B. hedgers seek to transfer risk.
C. speculators seek to transfer risk.
D. speculators are hedgers, there isn’t any difference.
Answer:
Which of the following are depository institutions?
A. Credit unions
B. Mutual funds
C. Pension funds
D. Insurance companies
Answer:
The intrinsic value of an option:
A. is the amount the investor believes the option will be worth on the expiration date.
B. is the amount the option is worth if it is exercised immediately.
C. is equal to price of the underlying asset.
D. cannot be determined without knowing the future price of the underlying asset.
Answer:
You start with a portfolio valued at $500. Over the next twelve months it loses 40%; the
following year it has a gain of 30%. At the end of two years your portfolio is worth:
A. $390.
B. $450.
C. $300.
D. $410.
Answer:
During the Great Moderation experienced in the United States during the 1990s the
volatility of inflation and growth:
A. moved in opposite directions.
B. both dropped significantly.
C. both increased but only slightly.
D. disappeared.
Answer:
If their only concern were the cost of issuing municipal debt, how would you expect the
mayors of most U.S. cities to respond to a revenue-neutral change in the federal income
tax that sharply lowered the top marginal tax rate?
A. Favorably, since this will significantly increase the demand for municipal bonds.
B. Unfavorably, the demand for municipal bonds will fall and their yields will increase.
C. Favorably, the price of municipal bonds should increase and their yields fall.
D. No reaction, this should have no impact on municipal bonds at all.
Answer:
The specific goals of central banks include all of the following except:
A. high stock prices.
B. low and stable inflation.
C. high and stable real growth.
D. a stable exchange rate.
Answer:
Usually an investment will be profitable if:
A. the internal rate of return is less than the cost of borrowing.
B. the cost of borrowing is equal to the internal rate of return.
C. it is financed with retained earnings.
D. the cost of borrowing is less than the internal rate of return.
Answer:
A risk-averse investor will:
A. always accept a greater risk with a greater expected return.
B. only invest in assets providing certain returns.
C. never accept lower risk if it means accepting a lower expected return.
D. sometimes accept a lower expected return if it means less risk.
Answer:
A bank run involves:
A. illegal activities on the part of the bank’s officers.
B. a bank being forced into bankruptcy.
C. a large number of depositors withdrawing their funds during a short time span.
D. a bank’s return on assets being below the acceptable level.
Answer:
Which of the following statements is true?
A. Unsecured loans generally involve very high interest rates as a result of the
free-rider problem.
B. Unsecured loans generally involve very high interest rates as a result of adverse
selection.
C. Unsecured loans are no longer made; all loans now must have some form of
collateral.
D. Unsecured loans are only made to individuals with very high net worth because it is
the only way to limit the risk.
Answer:
Which of the following best expresses the proceeds a lender receives from a one-year
simple loan when the annual interest rate equals i?
A. PV + i
B. FV/i
C. PV(1 + i)
D. PV/i
Answer:
The moral hazard problem caused by government safety nets:
A. is greater for larger banks.
B. is greater for smaller banks.
C. is pretty constant across banks of all sizes.
D. only exists for banks with high leverage ratios.
Answer:
Standardization of derivative contracts:
A. results in increased risk for the parties involved.
B. makes them more difficult to understand and therefore leads to increased misuse.
C. makes the premiums involved with these contracts increase.
D. leads to greater liquidity and lower risk.
Answer:
Which of the following is not a feature of common stock?
A. Stockholders receive regular fixed payments on their shares.
B. Stockholders have limited liability.
C. Stock holders are residual claimants.
D. Stockholders have voting rights.
Answer:
The theory of efficient markets assumes that:
A. prices of bonds, but not stocks, reflect all available information.
B. the prices of all financial instruments reflect all available information.
C. stock prices are relatively rigid because it takes a while for information to efficiently
move through the market.
D. the best approach to determining stock prices is to follow the chartists.
Answer:
The ways the Fed can inject reserves into the banking system include:
A. an increase in the size of the Fed’s balance sheet through purchasing securities.
B. increasing the discount rate.
C. making loans to non-bank corporations.
D. an increase in the size of the Fed’s balance sheet through selling securities.
Answer:
The FOMC controls the real interest rate:
A. if inflation changes quickly.
B. if inflation doesn’t change quickly.
C. only if it adjusts the federal funds rate to match the changes in the rate of inflation.
D. only on an annual basis.
Answer:
Gold would be a superior commodity money compared to wheat because:
A. wheat has a high value relative to weight, which gold does not.
B. it is easier to divide wheat into small units.
C. wheat has more practical uses than gold.
D. wheat is perishable.
Answer:
Business cycles vary in:
A. the length of recessions only.
B. the time between recessions only.
C. both the length of recessions and the time between recessions.
D. none of the answers given is correct; business cycles are by definition recurring
waves that rise and fall in a periodic pattern.
Answer:
Purchasing power parity implies:
A. a basket of goods should sell for the same price in all countries, even if trade
barriers exist.
B. a basket of goods will sell for the same price in all countries as long as there are no
trade barriers is a free flow of capital across borders.
C. a basket of goods cannot sell for the same price in different countries due to the
different wage rates.
D. as long as all goods and services are traded freely across international boundaries,
one unit of domestic currency should buy the same basket of goods anywhere in the
world.
Answer:
Purchasing power parity says that:
A. differences in inflation rates between countries should have no impact on the
exchange rate between those countries.
B. differences in inflation rates between countries will create changes in exchange
rates.
C. the changes in exchange rates move independently from inflation.
D. for inflation to change the exchange rate, the rate of inflation has to be the same
between countries.
Answer:
If an economy is initially at a state of long-run equilibrium, the short-run effect(s) from
a decrease in aggregate demand will include:
A. an expansionary gap.
B. a higher rate of inflation.
C. a higher level of potential output.
D. a recessionary gap.
Answer:
An investment pays $1000 three quarters of the time, and $0 the remaining time. Its
expected value and variance respectively are:
A. $1,000: 62,500 dollars2
B. $750; 46,875 dollars
C. $750; 62,500 dollars
D. $750; 187,500 dollars2
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