The use of deposit sweeping allows banks to:
A. pay higher rates of interest than are allowed by law.
B. reduce the amount of required reserves they must hold.
C. pay less for FDIC insurance.
D. weed out less profitable deposits.
Answer:
If a bond has a face value of $1000 and a coupon rate of 4.25%, the bond owner will
receive annual coupon payments of:
A. $425.00
B. $4.25
C. $42.50
D. a value that cannot be determined from the information provided.
Answer:
Bank mergers require government approval because banking officials want to make
sure that:
A. the merger will create a larger bank.
B. the merger will not create a monopoly.
C. the merged bank will be more profitable.
D. the merger will not result in regulatory competition.
Answer:
Nobel-laureate economist Milton Friedman suggested that policymakers strive to ensure
that the monetary aggregates:
A. grow at a rate equal to the rate of inflation.
B. grow at a rate equal to the rate of real growth plus the desired level of inflation.
C. grow at a rate equal to the rate of real growth less the desired level of inflation.
D. remain constant in terms of dollar amounts.
Answer:
There is a futures contract for the purchase of 1000 bushels of corn at $3.00 per bushel.
At the end of the day when the market price of corn falls to $2.50:
A. the buyer (long position) needs to transfer $500 to the seller (short position).
B. the seller (long position) needs to transfer $500 to the buyer (short position).
C. nothing happens since marked to market adjustments only occur if the market price
rises above the contract price.
D. nothing happened since no funds are transferred until the settlement date.
Answer:
Money markets are where trades occur for:
A. stocks.
B. bonds of all maturities.
C. derivatives.
D. short-term bonds issued by both governments and private companies.
Answer:
Money aggregates can best be defined as a set of measures of the amount of:
A. money that exists at a particular point in time.
B. money the Federal Reserve has on deposit as reserves.
C. money available to the economy over a year.
D. U.S. currency the Bureau of Printing and Engraving has produced.
Answer:
In high inflation countries, inflation rates can exceed the rate of growth of money
because:
A. high inflation increases the velocity of money.
B. high rates of inflation increase the opportunity cost of holding money.
C. money loses value quickly with inflation.
D. all of the answers given are correct.
Answer:
Which of the following statements is correct?
A. If you can buy the same goods this year as you bought last year with less money
there must have been inflation.
B. If purchasing the same goods today that were purchased one year ago requires more
money, there must have been deflation.
C. If purchasing the same goods today as one year ago requires less money, the money
supply likely decreased.
D. If purchasing the same goods today as one year ago requires less money, the money
supply likely increased.
Answer:
Mary Jones is the president of a local bank. She knows that half of the loan applicants
in town she would classify as high risk and the other half as low risk. She observes that
the other banks in town charge two different interest rates, a lower rate for low risk
borrowers and the higher rate for high risk borrowers. She decides that to have an
advantage over the other banks she will offer an average rate to everyone. The likely
result will be:
A. Mary’s bank will be highly successful as this will provide the bank with a large
competitive advantage.
B. Mary’s bank is likely to see a dramatic increase in both types of borrowers.
C. Mary’s bank will experience adverse selection and have a disproportionate number
of low risk borrowers.
D. Mary’s bank will experience adverse selection and have a disproportionate number
of high risk borrowers.
Answer:
Tax-exempt bonds:
A. generate higher returns for the bondholder when purchased through a tax-exempt
retirement account.
B. are not affected by changes in yields on taxable bonds.
C. are most beneficial to those who pay higher income tax rates.
D. include U.S. Treasury securities because the Internal Revenue Service does not
charge income tax on interest earned from these bonds.
Answer:
A $1000 face value bond, with one year to maturity that sells for $950 and has a $40
annual coupon has a:
A. current yield and yield to maturity of 4.00%.
B. yield to maturity that equals the current yield.
C. coupon rate of 4.00% and a current yield that is below this.
D. current yield of 4.21%.
Answer:
Whenever central bankers face more than one goal, the policy framework requires:
A. the central bank to always focus on inflation first.
B. central bankers to focus on all goals, no matter what.
C. economic growth to be the top priority.
D. central bankers to make their priorities clear.
Answer:
The stocks that make up the Dow Jones Industrial Average:
A. are dominated by the automobile industry.
B. are the same ones that were originally used to construct the index.
C. are not a broad measure of the market since they do not include any technology
companies.
D. have changed as the structure of the economy has changed.
Answer:
An increase in wealth in the U.S. will lead to the following in the foreign exchange
market:
A. a decrease in the demand for dollars.
B. a decrease in the supply of dollars.
C. an increase in the supply of dollars.
D. an increase in the demand for dollars.
Answer:
Fannie Mae, Ginnie Mae, and Freddie Mac are examples of:
A. private regulatory bodies that supervise home mortgage lenders.
B. government-sponsored enterprises chartered to encourage home lending.
C. government-sponsored enterprises that were chartered to encourage small business
loans.
D. government-sponsored enterprises that provide homeowners insurance to people
that cannot obtain it from private insurers.
Answer:
Taxes play an important role in bond returns because:
A. all interest from owning bonds is taxed.
B. all governments (federal, state, municipal) tax bonds similarly.
C. some bond interest is exempt from some government taxation, so after tax returns
across bonds can vary considerably.
D. only U.S. Treasury bonds are tax-exempt, so investors should always seek higher
returns from other bonds.
Answer:
Comparing a lottery where a $1 ticket purchases a chance to win $1 million with
another lottery in which a $5,000 ticket purchases a chance to win $5 billion, we notice
many people would participate in the first but not the second, even though the odds of
winning both lotteries are the same. We can perhaps best explain this outcome by:
A. higher expected value for the lottery paying $1 million.
B. higher expected value for the lottery paying $5 billion.
C. lower value at risk for the lottery paying $1 million.
D. higher value at risk for the lottery paying $1 million.
Answer:
Using the rule of 72, determine the approximate time it will take $1000 to double given
the following interest rates.
a) 5.5%
b) 10.0%
c) 30.0%
d) 2.0%
e) 4.5%
Answer:
Fly-By-Night Inc. issues $100 face value, zero-coupon, one-year bonds. The current
return on one-year, zero-coupon U.S. government bonds is 3.5%. If the Fly-By-Night
bonds are selling for $92.00, what is the risk premium for these bonds?
A. 8.7%
B. 1.5%
C. 5.2%
D. 8.0%
Answer:
Which of the following bank assets would be categorized as secondary reserves?
A. U.S. Treasury bills
B. Cash
C. Mortgage loans
D. Deposits at the Federal Reserve
Answer:
A flight to quality should result in the:
A. price of U.S. Treasury Securities rising and the price of corporate bonds rising.
B. yield on U.S. Treasury Securities falling and the price of corporate bonds rising.
C. yield on corporate bonds falling and the price of U.S. Treasury Securities rising.
D. yield on U.S. Treasury securities falling and the price of corporate bonds falling.
Answer:
Regulators require a bank to hold some of its assets as reserves mainly to address:
A. liquidity risk.
B. trading risk.
C. credit risk.
D. operational risk.
Answer:
Central bankers with a relatively flat monetary policy reaction curve will:
A. move interest rates more aggressively when inflation rises, leading to more
volatility in output.
B. move interest rates more aggressively when inflation rises, leading to less volatility
in output.
C. move interest rates less aggressively when inflation rises, leading to more volatility
in output.
D. move interest rates less aggressively when inflation rises, leading to less volatility in
output.
Answer:
The procedure that estimates the interest-rate sensitivity of a bank’s assets and liabilities
is called:
A. managing credit risk.
B. estimating operating risk differential.
C. trading risk minimization.
D. gap analysis.
Answer:
Comparing the European and the U.S. central bank systems, the National Central Banks
that make up part of the European System of Central Banks resembles:
A. the U.S. Treasury.
B. the Board of Governors.
C. the FOMC.
D. the regional Federal Reserve Banks.
Answer:
The risk premium for an investment:
A. is negative for U.S. treasury securities.
B. is a fixed amount added to the risk-free return, regardless of the level of risk.
C. increases with risk.
D. is zero (0) for risk-averse investors.
Answer:
The New York Stock Exchange (NYSE) originated as:
A. a decentralized electronic market made up of dealers all over the world.
B. an example of a centralized exchange.
C. a financial market where nearly 100 million shares of stock are traded every
business day.
D. the only centralized stock exchange in the world.
Answer:
In calculating the current yield for a bond the:
A. coupon payment and purchase price is all that is needed.
B. present value of the capital gain/loss is ignored.
C. present value of the final payment is the only important consideration.
D. present value of the coupon payments is the only important consideration.
Answer:
A monthly growth rate of 0.5% is an annual growth rate of:
A. 6.00%
B. 5.00%
C. 6.17%
D. 6.50%
Answer:
The Fed sells German bonds to commercial banks. Which of the following best
describes the impact on the Fed’s and the Banking System’s balance sheets resulting
from this transaction?
A. The Fed’s assets and liabilities increase, the banking systems assets and liabilities
decrease.
B. The Fed’s assets increase and its liabilities both increase. For the banking system,
the value of assets and liabilities do not change, only the composition of assets changes.
C. The Fed’s assets and liabilities do not change, only the compositions of the assets
change. For the banking system, assets and liabilities increase.
D. The Fed’s assets and liabilities both decrease. For the banking system, the value of
assets and liabilities do not change, only the composition of assets changes.
Answer:
The future value of $100 that earns 10% annually for n years is best expressed by which
of the following?
A. $100(0.1)n
B. $100 × n × (1.1)
C. $100(1.1)n
D. $100/(1.1)n
Answer:
If the level of current output suddenly falls below the potential level of output, central
bankers would:
A. lower the real interest rate.
B. raise the real interest rate.
C. keep the real interest rate constant and focus on only changing the nominal interest
rate.
D. attempt to shift the aggregate expenditures curve.
Answer:
Suppose that a bank initially has a leverage ratio of 8 to 1. If this bank increases its
capital by $1 million and its assets by $10 million, then the bank’s:
A. risk increases and its leverage decreases.
B. liabilities decrease and its leverage increases.
C. leverage decreases and its liabilities increase.
D. leverage and risk increases.
Answer:
The introduction of money market substitutes for basic checking accounts was fueled
partially by the:
A. relatively high rates of inflation that existed in the late 1970s and early 1980s.
B. reluctance of many retailers to accept checks.
C. high number of bank failures that were occurring in the 1970s.
D. higher interest rates banks had to pay on checking accounts.
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