The financial system is inherently more unstable than most other industries due to the
fact that:
A. while in most other industries customers disappear at a faster rate, in banking they
disappear slowly so the damage is done before the real problem is identified.
B. banks deal in paper profits, not in real profits.
C. a single firm failing in banking can bring down the entire system; this isn’t true in
most other industries.
D. there is less competition than in other industries.
Answer:
The money multiplier is much lower today than it was twenty-five years ago because:
A. people are holding less currency today.
B. the currency-to-deposit ratio is much higher today.
C. there is less currency available today.
D. credit cards are more widely used.
Answer:
Most central banks of industrialized countries have monetary policy formed by:
A. an individual, usually the minister of finance.
B. their version of Congress.
C. a committee made up of members of their central bank.
D. an individual, usually the person heading the central bank at the time.
Answer:
Tom borrows $100,000 from his local bank to purchase inventory for his store for the
upcoming holiday season. Tom’s neighbor tells him about a get-rich-quick scheme that
can take this $100,000 and triple it in a month. Tom decides to buy into this scheme
figuring he can repay the bank and still have plenty left for inventory. This is an
example of:
A. adverse selection.
B. sound risk analysis on Tom’s part.
C. diversification.
D. moral hazard.
Answer:
A tariff disrupts the workings of the law of one price because tariffs:
A. are standardized by GATT.
B. are taxes on imports and can vary across products and countries.
C. apply only to goods countries export.
D. are only applied to commodity products.
Answer:
Mutual funds offer investors:
A. a greater return for greater risk than what an investor can earn on his own.
B. a lower return for more risk than what the investor could earn on his own.
C. a lower return for less risk than what the investor could earn on his own.
D. a way for individuals to eliminate the idiosyncratic risk associated with any single
investment.
Answer:
For central bankers to alter the real interest rate by changing the nominal interest rate,
which of the following must be true?
A. The rate of inflation has to remain constant.
B. Inflation expectations are quite stable.
C. The expected rate of inflation has to change.
D. The change in the expected rate of inflation must equal the change in the nominal
interest rate.
Answer:
Someone who purchases a call option is really buying insurance to protect against:
A. the stock not being available when they want to purchase it.
B. the price of the stock falling.
C. a seller not being able to deliver the stock.
D. the price of the stock rising.
Answer:
The bond rating of a security reflects the:
A. size of the coupon payment relative to the face value.
B. likelihood the lender/borrower will be repaid by the borrower/issuer.
C. return a holder is likely to receive.
D. size of the coupon rate relative to other interest rates.
Answer:
Hedging is possible only when investments have:
A. opposite payoff patterns.
B. the same payoff patterns.
C. payoffs that are independent of each other.
D. the same risk premiums.
Answer:
The main reason for diversification for an investor is to:
A. take advantage of the fact that returns of assets are perfectly positively correlated.
B. take advantage of the fact that returns on assets are not perfectly correlated.
C. lower transaction costs.
D. gain from the greater returns that come from greater risk.
Answer:
The Federal Reserve’s surveys of bank loan officers can help the Fed determine
whether:
A. a drop in the quantity of loans granted resulted from fewer applications or a
tightening of credit standards.
B. an increase in the quantity of loans granted resulted from fewer applications or a
tightening of credit standards.
C. climbing interest-rate spreads are the result of more borrowers or fewer loans being
granted.
D. an increase in the quantity of new loans was due to a decrease in supply or an
increase in demand.
Answer:
Some good did come from the internet bubble of the late 1990s. One good thing was
that:
A. people learned they should not invest in dotcom companies.
B. start-up companies found they could bypass venture capitalists and raise funds
directly from the capital markets.
C. stock market bubbles do not have to result in an inefficient allocation of resources.
D. the theory of efficient markets doesn’t always hold and consistently
better-than-market returns are achievable.
Answer:
Suppose that Ray Allen, a basketball player for the Miami Heat, will become a free
agent at the end of this NBA season. Suppose that Allen is considering two possible
contracts from different teams. Note that the salaries are paid at the end of EACH year.
The interest rate is 10%. Based on this information, which of the following is true?
A. Allen should take the Seattle contract because it has a higher present value.
B. Allen should take the Portland contract because it has a higher present value.
C. Allen is indifferent between the two contracts because they are both worth $12
million.
D. Allen is indifferent between the two contracts because they are both worth $10.9
million.
Answer:
If there were an increase in the number of bank failures, we should expect the amount
of excess reserves in the banking system to:
A. decrease.
B. increase.
C. not change.
D. decrease since failing banks lost theirs.
Answer:
Which of the following statements is false?
A. Diversification can reduce risk.
B. Diversification can reduce risk but only by reducing the expected return.
C. Diversification reduces idiosyncratic risk.
D. Diversification allocates savings across more than one asset.
Answer:
If policymakers are not aggressive about keeping inflation close to the target rate, the
slope of the monetary policy reaction curve would be:
A. steep.
B. relatively flat.
C. horizontal.
D. negative.
Answer:
Forward contracts are:
A. an agreement between more than two parties.
B. contracts usually involving the exchange of a commodity or financial instrument.
C. always standardized.
D. easily resold.
Answer:
At expiration, the value of an option:
A. is greater than the intrinsic value.
B. is less than the intrinsic value.
C. is equal to the time value of the option.
D. is equal to the intrinsic value.
Answer:
The types of loans the Fed makes consist of each of the following, except:
A. primary credit.
B. conditional credit.
C. seasonal credit.
D. secondary credit.
Answer:
With a futures contract:
A. payment is made when the contract is created.
B. no payment is made until the settlement date.
C. the short position agrees to purchase the underlying asset.
D. the risk is eliminated for both parties.
Answer:
Disability Income Insurance is:
A. insurance borrowers can take out in case the company they invest in defaults.
B. insurance that makes payments of wages to workers when the company they work
for is disabled due to a natural disaster.
C. insurance that makes payments to workers when they are unable to work due to an
injury.
D. only available through the government as part of the Social Security System.
Answer:
Defined-benefit plans:
A. are more common than defined contribution plans.
B. pay a pension based on the amount contributed into the plan by the employee and
employer.
C. do not require any responsibility on the part of the employer for the employees’
retirement income; it is based on employee contributions.
D. usually require an employee to work a very long time for the same employer in
order to reap a large benefit.
Answer:
Using the equation of exchange, if real GDP increases by 3.0%, the velocity of money
grows by 1.0% and the growth rate of money is 3.0%; what is the rate of inflation?
A. +1.0%
B. It is constant or a 0% change
C. It is the same as the growth rate of money, or 3.0%
D. -1.0%
Answer:
With regard to exchange rate determination, the law of one price is a useful theory only
when applied to:
A. long-run periods of time.
B. forward exchange rates.
C. very short-run periods of time.
D. futures contracts.
Answer:
Uncertainties that are not quantifiable:
A. are what we define as risk.
B. are factored into the price of an asset.
C. cannot be priced.
D. are benchmarks against which quantifiable risks can be assessed.
Answer:
A business needs a loan to help keep its shelves stocked. This is an example of:
A. an inventory loan.
B. sales finance.
C. equipment leasing.
D. consumer finance.
Answer:
Purchasing power parity is a good theory of explaining exchange rate behavior:
A. over very short periods.
B. over periods lasting six to twelve months.
C. over very long periods, such as decades.
D. over both long and short periods.
Answer:
Which of the following statements best completes this sentence: “On a bank’s balance
sheet”?
A. liabilities show the uses of funds and assets show the sources of funds.
B. assets show the sources of funds and the net worth shows the uses of funds.
C. net worth shows the sources of funds and liabilities show the uses of funds.
D. liabilities show the sources of funds and assets show the uses of funds.
Answer:
An inverted yield curve is a valuable forecasting tool because:
A. the yield curve usually is inverted so it reflects a growing economy.
B. the yield curve seldom is inverted and can signal an economic slowdown.
C. investors are expecting higher short-term rates in the future, and this usually signals
an economic slowdown.
D. inverted yield curves signal better economic times are expected.
Answer:
Which core principle(s) could you use to explain why credit card issuers charge such
high rates of interest?
Answer:
Former Bank of England Governor Mervyn King, commenting on a speech given by
then Fed Chairman Greenspan, said “any (coherent) monetary policy can be written as
an inflation target plus a response to supply shocks.” What do these comments mean
and what insight do they provide us to the focus of central banks?
Answer:
Why is the financial industry inherently more unstable than most other industries?
Answer:
How are the decisions of government policy makers, such as the Federal Reserve,
related to risk and an individual investor’s portfolio?
Answer:
You do some research and find for a driver of your age and gender the probability of
having an accident that results in damage to your automobile exceeding $100 is 1/10
per year. Your auto insurance company will reduce your annual premium by $40 if you
will increase your collision deductible from $100 to $250. Should you? Explain.
Answer:
If a country is running a current account deficit year after year, what should we expect
to happen to the exchange rate for that country? Explain.
Answer:
Why are electronic transactions increasingly taking the place of paper transactions?
Answer:
Why can it be argued that, while interest rate decisions are made by the FOMC, a
committee, the real power of the committee lies with the Chairman of the Federal
Reserve System?
Answer:
Explain why inflation is a way for governments to default on a portion of the debts they
owe.
Answer:
Answer:
If we consider the relationship between the opportunity cost of holding money and
velocity that existed in the 1980s, if the Fed followed the same policymaking in the
1990s and 2000s, would they have achieved the desired results? Explain.
Answer:
One of the cash items included on the asset side of banks’ balance sheets is reserves.
What makes up reserves and what is their purpose?
Answer:
Many college campuses use student ID cards as a way for students to pay for
on-campus expenses, such as books, photocopies, and food. For convenience, some
students will maintain a balance on their ID cards. Are these balances a means of
payment? Are they a store of value? Explain why or why not.
Answer:
One of the specific goals for central bankers is financial system stability. Considering
the U.S., for example, would this imply that the Federal Reserve would always take
action to prevent any single bank from failing? Explain.
Answer:
You are provided with the following information: a bank has a net income after taxes of
$3.5 million; it has assets of $150 million; and bank capital of $12.5 million. What is
the bank’s return on assets; its return on equity, and its debt-to-equity ratio?
Answer:
If a bank has a net worth that is negative, what do you know about the relationship
between the amounts the bank has in assets and liabilities?
Answer:
When the former Soviet Union collapsed in 1990, most of the countries that made up
the union experienced extremely high rate of inflation? What was the source of the high
inflation and why did it happen?
Answer:
The required reserve rate set by the Fed is ten percent of all checkable deposits. A bank
sells $1 million of U.S. Treasury securities it owns to the Fed. Describe what this
transaction does to the bank’s total reserves, its required reserves and its excess
reserves.
Answer:
Consider the following two investments. One is a risk-free investment with a $100
return. The other investment pays $2000 20% of the time and a $375 loss the rest of the
time. Based on this information, answer the following:
(i) Compute the expected returns and standard deviations on these two investments
individually.
(ii) Compute the value at risk for each investment.
(iii) Which investment will risk-averse investors prefer, if either? Which investment
will risk-neutral investors prefer, if either?
Answer: