The principal in an interest rate swap is:
A. always transferred from the originator to the counterparty of the swap.
B. is usually held by a clearinghouse to guarantee payment.
C. usually borrowed from a third party.
D. is not borrowed, lent, or exchanged. It just serves as the basis for the calculation of
cash flows.
Answer:
A bank has 10,000 depositors, each of whom deposits $100 in the bank. If the bank
makes 1000 loans for $1,000 each then each depositor has contributed:
A. $1 to each loan.
B. $100 to each loan.
C. $0.10 to each loan.
D. $10 to each loan.
Answer:
One of the lessons from the 2007-2009 financial crisis regarding the management of
risk by financial institution is that:
A. many banks lacked real-time information that would allow them to assess their
various risk exposures at the bank-wide level.
B. some banks, especially large ones, overestimated the trading risk associated with
mortgage backed securities.
C. banks were holding too much capital as a protection against market risk.
D. many of the usual mechanisms for managing liquidity risk actually worked pretty
well.
Answer:
To make sure the U.S. President cannot unduly influence the Board of Governors:
A. the terms of the governors are staggered.
B. the law prevents a resident from appointing more than one governor.
C. the terms of the governors are ten years long.
D. only three governors can be replaced in any one year.
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:
Which of the following does not contribute to the failure of the law of one price?
A. Tariffs
B. Transportation costs
C. Technical specifications
D. Tastes are similar across countries
Answer:
The price of a coupon bond is determined by taking the present value of:
A. the bond’s final payment and subtracting the coupon payments.
B. the coupon payments and adding this to the face value.
C. the bond’s final payment.
D. all of the bond’s payments.
Answer:
Consider the effect of business cycles on bondholders versus stockholders. We expect
that business cycles will affect:
A. bondholders and stockholders about the same.
B. bondholders more since the amount they receive depends on profits.
C. stockholders more since they are residual claimants.
D. bondholders more since they do not have any claim to property.
Answer:
According to the equation of exchange, if real output and the money supply stay the
same and the price level increases:
A. the velocity of money has to increase.
B. the velocity of money has to decrease.
C. the real GDP had to rise.
D. nominal GDP remains constant.
Answer:
Index funds are often preferred to other mutual funds because:
A. they offer greater diversification.
B. they are managed better.
C. they have greater liquidity.
D. on average they have lower management fees.
Answer:
If the U.S. government’s borrowing needs decrease, all other factors constant the:
A. supply of bonds will increase.
B. demand for bonds will decrease.
C. price of bonds will decrease.
D. price of bonds will increase.
Answer:
Every one percent decrease in the rate of inflation will:
A. raise the target federal funds rate by 1.5%.
B. lower the target federal funds rate by 0.5%.
C. lower the target federal funds rate by 1.5%.
D. raise the target federal funds rate by 0.5%.
Answer:
The largest liability for commercial banks in the U.S. is:
A. demand deposits.
B. non-transaction deposits.
C. borrowing from other U.S. banks.
D. borrowing from the Federal Reserve.
Answer:
If inflation in the United States averages more than inflation in the euro area over a long
period of time, we should expect:
A. the dollar to appreciate relative to the euro.
B. the euro/U.S. dollar exchange rate to fluctuate in a narrow range set by the European
Central Bank.
C. the dollar to depreciate relative to the euro.
D. no effect; there isn’t a link between inflation and exchange rates over the long run.
Answer:
Which of the following is not true of adverse selection?
A. It exists because information is perfect.
B. It describes the problem a lender faces in identifying loan applicants as good or bad
risk borrowers.
C. It arises because borrowers have more information than lenders regarding their
creditworthiness.
D. It arises if lenders try to charge an average price to all applicants.
Answer:
The objectives set for the Fed by Congress are:
A. very specific; this adds to the Fed’s accountability.
B. by design, quite vague, allowing the Fed to really set its own goals.
C. specific regarding inflation, but vague on all other goals.
D. specific on the growth rate for the economy, but vague on all other objectives.
Answer:
Financial markets:
A. enable buyers and sellers to exchange financial instruments but not risk.
B. enable buyers and sellers to exchange risk by buying and selling financial
instruments.
C. only allow the transfer of risk through derivative securities.
D. do not allow for the transfer of risk but do help reduce it.
Answer:
A bank’s loan loss reserves are:
A. the amount of loans that have defaulted in the past twelve months.
B. the same as equity capital.
C. an amount the bank sets aside to cover potential losses from defaulted loans.
D. a liability of the bank since it is a source of funds.
Answer:
The market for reserves derives from the fact that:
A. reserves pay a relatively high return.
B. desired reserves don’t always equal actual reserves.
C. the Fed refuses to lend to banks.
D. banks do not want excess reserves.
Answer:
The principal-agent problem is quite common in large public corporations due to:
A. the fact that large corporations generate large sales volumes.
B. the fact that large companies employ many people.
C. too little regulation by government.
D. the fact that the people making the operational decisions are usually not the owners.
Answer:
In the United States, control of the quantity of money is given to the:
A. President.
B. Federal Reserve System.
C. Bureau of Printing and Engraving.
D. Department of the Treasury.
Answer:
An open market sale of U.S. Treasury securities by the Fed will cause the Fed’s balance
sheet to show:
A. a decrease in the asset of securities and a decrease in the liability of reserves.
B. an increase in the liability of reserves.
C. no change in the size of the balance sheet, just the composition of assets will change
from securities to cash.
D. an increase in the asset category of securities and the liability category of reserves.
Answer:
An increase in expected inflation for any given nominal interest rate will cause:
A. the real return to bondholders to decrease.
B. a movement down the bond demand curve, but no change in the bond demand
curve.
C. the bond demand curve to shift right.
D. the price of bonds to increase.
Answer:
The Russian wheat crop fails, driving up wheat prices in the U.S. This is an example
of:
A. idiosyncratic risk.
B. diversification.
C. systematic risk.
D. quantifiable risk.
Answer:
The relationship between real estate markets and interest rates is:
A. nonexistent.
B. inverse; higher interest rates drive down real estate prices and vice versa.
C. complex; cuts in the short-term interest rate lead to increases in long-term rates and
higher real estate prices.
D. direct; high interest rates lead to high real estate values as people abandon other
financial assets.
Answer:
Which of the books used at the FOMC meetings contains anecdotal information collect
by the Federal Reserve Banks?
A. The blue book
B. The beige book
C. The teal book
D. Both the beige and blue books
Answer:
The bid price for a bond quote is:
A. the price at which the bond dealer is willing to sell the bond.
B. the price at which the bond dealer is willing to purchase the bond.
C. fixed over the life of a bond.
D. determined solely by the time left to maturity.
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:
When equity and property prices collapse (bust), bank balance sheets are impaired
because:
A. banks hold a lot of corporate stocks.
B. banks own a lot of property outright.
C. the collateral that is backing many of the loans banks have made is now worth less.
D. banks hold a lot of corporate stocks and they also own a lot of property outright.
Answer:
If inflation in country A exceeds inflation in country B, purchasing power parity implies
that:
A. the currency of country B should depreciate relative to the currency of country A.
B. the inflation rate in country B will rise to match the inflation rate in country A.
C. the currency of country A will depreciate relative to the currency of country B.
D. the inflation rate in country A will fall to match the inflation rate in country B.
Answer:
Which of the following statements is most accurate?
A. As the inflation rate increases, inflation becomes less stable.
B. As the inflation rate decreases inflation becomes less stable.
C. As the inflation rate decreases inflation becomes more volatile.
D. As the inflation rate increases, inflation becomes more stable.
Answer:
The number of regional Federal Reserve Banks is:
A. nine.
B. seven.
C. five.
D. twelve.
Answer:
Central banks can improve the welfare of a society by doing all of the following
except:
A. serving the interests of government rather than the public at large.
B. helping to promote economic growth.
C. focusing on keeping the overall level of prices stable.
D. helping to reduce the volatility of business cycles.
Answer: