Compounding refers to the
A. calculation of after tax interest returns.
B. internal rate of return a firm earns on an investment.
C. real interest return after taxes.
D. process of earning interest on both the principal and the interest of an investment.
Answer:
An open market purchase of securities by the central bank from banks usually will:
A. increase the banks’ revenue even if the bank does nothing with the reserves.
B. induce the banks to make more loans since their revenue will decrease if they do
nothing.
C. decrease the amount of deposits in the banking system.
D. decrease the banks’ willingness and ability to make loans.
Answer:
When expected inflation increases, for any given nominal interest rate the:
A. bond demand curve shifts right.
B. bond supply curve shifts right.
C. price of bonds increases.
D. yield on bonds will increase.
Answer:
International capital mobility:
A. contributes to the rigidity of exchange rates.
B. contributes to the equalization of expected returns across countries.
C. eliminates arbitrage opportunities.
D. makes interest rates equal across countries.
Answer:
Bank holding companies developed:
A. to get around the limitations on bank branching.
B. so foreign banks could open branches in the U.S.
C. to circumvent the regulation by the Office of the Comptroller of the Currency.
D. so that unit banks could combine into larger banks.
Answer:
When expected inflation increases, for any given nominal interest rate the:
A. real cost of repayment for bond issuers increases.
B. real return for bondholders increases.
C. real cost of repayment for bond issuers decreases.
D. bond demand curve shifts right.
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:
A zero-coupon bond refers to a bond which:
A. does not pay any coupon payments because the issuer is in default.
B. promises a single future payment.
C. pays coupons only once a year.
D. pays coupons only if the bond price is above face value.
Answer:
One key difference between swaps and option contracts is:
A. swaps are derivative agreements and options are not.
B. swaps do not involve any risk and options do.
C. options transfer risk, swaps create risk.
D. options trade on organized exchanges and swaps do not.
Answer:
Banks are required to disclose certain information. This disclosure is done for all of the
following reasons except:
A. to enable regulators to more easily assess the financial condition of banks.
B. to allow financial market participants to penalize banks that carry additional risk.
C. to allow customers to more easily compare prices for services offered by banks.
D. create uniform prices for standard bank services.
Answer:
Considering the methods available to the FDIC for dealing with a failed bank, the
depositors of the failed bank should:
A. be indifferent between the two since it really does not matter to them which method
is used.
B. prefer the purchase and assumption method since the deposits over $250,000 will
also be protected.
C. prefer the payoff method because they will have access to their funds earlier.
D. prefer the payoff method since a lot less paperwork is involved for the depositor.
Answer:
Stock prices may rise from a reduction in interest rates because:
A. consumer and business confidence about future growth improves.
B. stockholders will expect lower future earnings.
C. financial market participants are less optimistic about future earnings.
D. the present value of future earnings will decrease.
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:
If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A’s excess reserves
will:
A. increase by less than $100,000.
B. not change.
C. decrease by less than $100,000.
D. increase by $100,000.
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:
Most of the non-cash retail payments made each year in the United States are made by:
A. check.
B. credit card.
C. debit card.
D. electronic funds transfers.
Answer:
In the long run, a country’s exchange rate is determined by:
A. domestic monetary.
B. purchasing power parity.
C. the domestic inflation rate.
D. supply and demand.
Answer:
All of the following are true about the risk spread except it should:
A. be higher for highly speculative bonds than investment grade bonds.
B. have a direct relationship with the bond’s yield.
C. have an inverse relationship with the bond’s price.
D. have a direct relationship with the bond’s price.
Answer:
The reason financial intermediaries play such an important role in economies has to do
with all of the following except:
A. information costs.
B. transaction costs.
C. complexity of a lot of financial transactions.
D. the composition of GDP.
Answer:
The Nasdaq Composite Index:
A. is made of mainly newer, smaller firms
B. is a price-weighted index
C. is made up of over 5000 companies traded on the NYSE
D. is made of mainly older firms and is heavily weighted by manufacturing
Answer:
Which of the following is a false statement about the structure of the Federal Reserve
System?
A. Banker and business interests are reflected
B. State and regional interests are reflected
C. Government (public) and private interests are reflected
D. Exporter and importer interests are reflected
Answer:
Which of the following statements pertaining to the yield curve is not true?
A. Yield curves usually slope upwards.
B. The yield curve shows the difference in default risk between securities.
C. The yield curve shows the relationship among bonds with the same risk
characteristics but different maturities.
D. The yield curve can be flat or downward sloping depending on market conditions.
Answer:
As a result of government provided deposit insurance, the ratio of assets to capital for
commercial banks since the 1920s has:
A. just about doubled.
B. almost tripled.
C. not changed.
D. decreased.
Answer:
By 2014, the euro had become the currency of:
A. every country in Europe.
B. eighteen countries in Europe.
C. twenty-five countries in Europe.
D. all European countries except Great Britain.
Answer:
Commercial banks increased their involvement in mortgages over the years due to:
A. the ability to securitize mortgages which made them more liquid.
B. the demands of regulators.
C. the increase in commercial loans demanded due to the development of the
commercial paper market.
D. the reduced risk of borrowers’ defaulting on mortgage loans.
Answer:
To say an asset is liquid implies that:
A. we are focusing on a category of assets that are in a physically liquid form, like oil.
B. we are considering assets that may be readily converted into a means of payment.
C. we are considering any asset that can be sold.
D. we are only considering U.S. currency.
Answer:
Suppose there is a reduction of the return provided on U.S. Treasury bonds. We should
expect the current price of stocks to:
A. increase since the risk-free return is now lower.
B. decrease since U.S. Treasury bonds are safer.
C. increase since the risk premium on the stocks will increase.
D. stay the same; there is no effect on stock prices from this reduction.
Answer:
Suppose that the expected return on bonds falls relative to other assets. In the bond
market this will result in:
A. the bond supply curve shifting left.
B. a movement down the bond demand curve.
C. a shift to the left of the bond demand curve.
D. an increase in the price of bonds.
Answer:
If the monetary policy reaction curve has a relatively flat slope, the dynamic aggregate
demand curve is likely to have a:
A. relatively steep slope.
B. relatively flat slope.
C. positive slope.
D. zero slope.
Answer:
An investment with a large spread between possible payoffs will generally have:
A. a low expected return.
B. a high standard deviation.
C. a low value at risk.
D. both a low expected return and a low value at risk.
Answer:
A central bank’s purchase of securities made by writing checks on itself will:
A. decrease the size of its balance sheet.
B. have no impact at all on the balance sheet.
C. increase the size of their balance sheet.
D. only change the composition of its assets.
Answer: