If a bank’s return on equity remains constant, but the ratio of bank assets to bank capital
increases:
A. the bank’s return on assets must have increased.
B. the bank’s return on assets must have decreased.
C. the bank’s assets and capital must have increased by the same percentage.
D. the bank must be unprofitable.
Answer:
The monetary policy framework is:
A. the Law that created the Federal Reserve System.
B. the idea that central banks should be interconnected across countries.
C. a way to prioritize and implement the central bank’s objectives when they are in
conflict.
D. a growing belief that there should be one central bank headquartered at the World
Bank.
Answer:
A lender is promised a $100 payment (including interest) one year from today. If the
lender has a 6% opportunity cost of money, he/she should be willing to accept what
amount today?
A. $100.00
B. $106.20
C. $96.40
D. $94.34
Answer:
If a recession results from higher oil prices:
A. inflation should increase as output decreases.
B. inflation should fall as output falls.
C. output should not change but inflation should increase.
D. an expansionary gap should occur.
Answer:
In a barter system people:
A. have to specialize in order to have goods to trade.
B. cannot specialize because they never know what goods will be desired.
C. are less likely to specialize as extensively as they would in a monetary economy.
D. must be self sufficient.
Answer:
If financial markets didn’t exist:
A. required returns would be lower since fewer instruments would trade.
B. liquidity would diminish and returns would be lower.
C. more funds would flow directly between borrowers and savers.
D. liquidity would diminish, reducing the flow of funds between borrowers and savers.
Answer:
An investment pays $1,200 a quarter of the time; $1,000 half of the time; and $800 a
quarter of the time. Its expected value and variance respectively are:
A. $1,000; 20,000 dollars2
B. $1,050; 20,000 dollars2
C. $1,000; 40,000 dollars2
D. $1,000; 80,000 dollar2
Answer:
The Social Security System in the U.S. is best described as a:
A. defined benefits plan.
B. defined contribution plan.
C. employer funded plan.
D. pay-as-you-go system.
Answer:
The theory of purchasing power parity:
A. contradicts the law of one price.
B. explains exchange rate movements in the short run, while the law of one price
explains exchange rate movements over the long run.
C. assumes away inflation to have any validity.
D. extends the law of one price to a basket of goods.
Answer:
When the yield curve slope is more upward sloping than usual, people are expecting:
A. an economic slowdown.
B. the U.S. Treasury may default on its obligations.
C. the Federal Reserve is going to ease monetary policy.
D. a future rise in short-term interest rates.
Answer:
The dynamic aggregate demand curve shifts as a result of:
A. discretionary fiscal policy.
B. automatic fiscal policy.
C. either discretionary or automatic fiscal policy.
D. fiscal policy but only when it’s used in conjunction with monetary policy.
Answer:
Which of the following is not a reason why the yield to maturity can differ from the
current yield?
A. Because the yield to maturity considers the capital gain/loss.
B. Because the current yield focuses only on the coupon payment and the purchase
price.
C. Because most bonds are not purchased for face value.
D. Because the current yield moves in the opposite direction from price.
Answer:
The First Bank of Podunk has recently suffered some extraordinary losses on its loan
portfolio due to the closing of the largest employer in town. As a result, the bank’s
management decides to raise the interest rate to new loan applicants. This move is
likely to:
A. increase the profitability of the bank.
B. cause even greater losses.
C. significantly increase both loan applicants and profits.
D. treat the problem of adverse selection that contributed to the losses the bank is
experiencing.
Answer:
As the corporation uses more debt financing, which of the following holds true for the
stockholders?
A. The expected return to the stockholders decreases and the standard deviation of that
return decreases.
B. The expected return to the stockholders increases and the standard deviation of the
return decreases.
C. The expected return to the stockholders increases and the standard deviation of the
return increases.
D. The expected return to the stockholders decreases and the standard deviation of the
return increases.
Answer:
One thing the Fed has learned over the past twenty-five years is:
A. the money multiplier is fairly constant no matter what changes are made to the
monetary base.
B. the money multiplier is unstable over time.
C. the money multiplier has a trend rate of growth that is fairly constant.
D. it should focus its attention on targeting M2.
Answer:
Which of the following statements is most correct?
A. The FOMC sets the federal funds rate.
B. The discount rate is the primary policy tool of the FOMC.
C. The FOMC sets the target federal funds rate.
D. The difference between the target and actual federal funds rate is the dealer’s spread.
Answer:
On the settlement date of a futures contract:
A. the future’s price is always above the price of the underlying asset.
B. the future’s price is always below the price of the underlying asset.
C. the future’s price is equal to the price of the underlying asset.
D. the future’s price may be above or below the price of the underlying asset but not
equal to it.
Answer:
A collection of assets is known as a(n):
A. asset-backed security.
B. derivative.
C. futures contract.
D. portfolio.
Answer:
Next year, the price of a stock is expected to be $2200 and the stock will pay a $55
dividend. The interest rate is 10%. Based on equation 7 in the chapter, what is the
current price of this stock?
A. $1,980
B. $2,000
C. $2,050
D. $2,035
Answer:
Which of the following statements is most correct?
A. When the real interest rate increases the reward for saving decreases.
B. When the real interest rate decreases current consumption becomes less expensive
and the reward for saving decreases.
C. When the real interest rate decreases the cost of current consumption increases.
D. When the real interest rate increases the level of saving always decreases.
Answer:
The FOMC targets the federal funds rate, but if they are going to alter the course of the
economy they must influence the:
A. real interest rate as well.
B. long-term nominal interest rate as well.
C. real exchange rate as well.
D. nominal exchange rate as well.
Answer:
Newly issued U.S. Treasury Securities are sold in:
A. the primary financial market.
B. only to the Federal Reserve who then resells them.
C. the secondary market since bonds cannot be sold in the primary market.
D. secondary markets but only using registered bond dealers.
Answer:
Holding liquidity and default risk constant, an investor earning 4% from a tax-exempt
bond who is in a 20% tax bracket would be indifferent between that bond and a taxable
bone with a(n):
A. 7.5% yield.
B. 8.0% yield.
C. 5% yield.
D. 6% yield.
Answer:
An investment will pay $2,000 half of the time and $1,400 half of the time. The
standard deviation for this investment is:
A. $90,000.
B. $300.
C. $1,700.
D. $30.
Answer:
Stock market bubbles are:
A. the increase in a stock’s price resulting from reported higher profits by a firm.
B. persistent and expanding gaps between stocks’ actual prices and the prices warranted
by the fundamentals.
C. synonymous to stock market crashes.
D. those periods of time when the overall level of the stock market is rising at a slow
rate reflecting market fundamentals.
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:
During the financial crisis of 2007-2009 it became difficult for the Fed to hit their target
federal funds rate because:
A. of the number of bank failures.
B. of the Federal government stimulus package.
C. of the loss of liquidity in the interbank lending market.
D. of the instability in the stock market.
Answer:
The Breton Woods System was an agreement that:
A. required each participating country to peg their currency to the U.S. dollar.
B. required each participating country to abolish all trade barriers.
C. required each participating country to stay on the gold standard.
D. standardized tariffs across all participating countries.
Answer:
If monetary policymakers do not want an increase in government purchases, which
increases aggregate demand, to cause an increase in inflation, they would:
A. shift the monetary policy reaction curve to the right, raising inflation at every real
interest rate.
B. do nothing and let the economy’s self-correcting mechanism work.
C. shift the monetary policy reaction function left, increasing the real interest rate at
every rate of inflation.
D. increase the growth rate of money.
Answer:
According to Robert Shiller, speculative bubbles are difficult to predict because:
A. they depend on the existence of a particular pattern of thinking which is difficult to
predict.
B. they are totally random events.
C. they arise because of government regulatory activity which is difficult to predict.
D. turns in business cycles are difficult to predict.
Answer:
According to the Expectations Theory of the term structure, if interest rates are
expected to be 2%, 2%, 4%, and 5% over the next four years, which yield is the closest
to the yield on a three-year bond today?
A. 2.7%
B. 4%
C. 4.3%
D. 8%
Answer:
Dollarization is associated with each of the following, except:
A. slower integration into world markets.
B. adopting the monetary policy of the country whose currency is being used.
C. the central bank no longer has the ability to be the lender of last resort.
D. the loss of revenue from printing currency.
Answer:
Explain why insurance companies may find themselves at times having to refuse
business.
Answer:
Life insurance companies usually offer a lower premium to non-smokers than the
premium charged to smokers. Discuss first the potential for adverse selection and moral
hazard and then ways the company can seek to reduce or eliminate these problems.
Answer:
You are the head of finance for a very large corporation located in a relatively small
town. At a local chamber of commerce meeting, the president of the local bank asks you
why you keep the corporation’s bank accounts in a very large mid-western bank and not
in his local bank. From a risk reduction perspective, how could you answer his
question?
Answer:
Explain the difference between a pension fund that is a defined-contribution plan from
one that is a defined-benefit.
Answer:
How will an increase in the U.S. productivity of labor versus labor in the European
Union impact the real exchange rate, all other factors held constant? Explain.
Answer:
Explain why the law of one price may best be applied to financial assets.
Answer:
Is the obtaining of a car loan a primary or secondary market transaction?
Answer:
What is the process that makes sure the market price of an underlying asset equals the
price of a futures contract at the settlement date? Provide an example.
Answer:
Provide an example of how a bank achieves lower cost in making a large loan to a
company than could be achieved without the bank.
Answer:
Why are banks restricted in the assets that they can own? For example, why do you
think banks are prohibited from owning common stock?
Answer:
Why are U.S. banks prohibited from owning stocks?
Answer:
If a borrower and a lender agree on a long-term loan at a nominal interest rate that is
fixed over the duration of the loan, how will a higher-than-expected rate of inflation
impact the parties if at all?
Answer:
During what period was money a better store of value: 1960-1980 or 1990-2009?
Explain.
Answer:
Suppose you purchase a call option to purchase General Motors common stock at $80
per share in March. The current price of GM stock is $83 and the time value of the
option is $5. What is the intrinsic value of the option? As the expiration date
approaches, what will happen to the size of the time value of the option?
Answer:
You win your state lottery. The lottery officials offer you the following options: you can
accept annual payments of $50,000 for 20 years or receive an upfront payment of
$700,000. Ignoring issues like mortality tables, taxes, etc.; and assuming the first
payment is made immediately, what market interest rate would make it more attractive
to take the upfront payment?
Answer:
During economic slowdowns why would you expect the risk premium to increase the
most between U.S. Treasury bonds and junk bonds?
Answer: