1) (I) Municipal bonds that are issued to pay for essential public projects are exempt
from federal taxation.
(II) General obligation bonds do not have specific assets pledged as security or a
specific source of revenue allocated for their repayment.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
2) If the liquidity effect is smaller than the other effects, and the adjustment of expected
inflation is slow, then the
A) interest rate will fall
B) interest rate will rise
C) interest rate will initially fall but eventually climb above the initial level in response
to an increase in money growth
D) interest rate will initially rise but eventually fall below the initial level in response to
an increase in money growth
3) Which of the following is not a service securities brokers offer their clients?
A) holding customers’ stock for safekeeping
B) providing insurance against loss of the securities
C) providing insurance against loss of value of the securities
D) extending margin credit
4) If a decline in interest rates causes the market value of a bank’s net worth to rise, then
the bank must have a ________.
A) negative duration gap
B) positive duration gap
C) negative gap
D) positive gap
5) World Bank research on the effects of deposit insurance concludes that
A) adoption of deposit insurance will promote stability and efficiency in the banking
systems of emerging-market economies
B) adoption of explicit government deposit insurance is associated with a higher
incidence of banking crises
C) adoption of deposit insurance has the greatest benefits in countries that have weaker
institutional environments
D) none of the above are true
6) Which of the following provisions of legislation to deal with conflicts of interest
does not increase the flow of information in financial markets?
A) requiring a firm’s chief officers to certify its financial statements and other
disclosures
B) requiring investment banks to make their analysts’ recommendations public
C) requiring disclosure of off-balance-sheet transactions
D) increasing resources available to the Securities and Exchange Commission to
supervise financial markets
7) Which of the following statements concerning bank regulation in the United States
are true?
A) The Office of the Comptroller of the Currency has the primary responsibility for
state banks that are members of the Federal Reserve System
B) The Federal Reserve and the state banking authorities jointly have responsibility for
state banks that are members of the Federal Reserve System
C) The Office of the Comptroller of the Currency has sole regulatory responsibility
over bank holding companies
D) All of the above are true
E) Only A and B of the above are true
8) A bank with a large credit-card customer base can market other financial products to
these customers at a low cost. This is an example of
A) economies of scale
B) economies of scope
C) becoming a superregional bank
D) none of the above
9) A current account ________ indicates that the United States is ________ its claims
on foreign wealth.
A) deficit; decreasing
B) deficit; increasing
C) surplus; decreasing
D) balance; increasing
10) Which of the following statements about trading operations in an organized
exchange is correct?
A) Floor traders all deal in a wide variety of stocks
B) In most trades, specialists match buy and sell orders
C) In most trades, specialists buy for or sell from their own inventories
D) The SuperDOT system is used to expedite large trades of over 100,000 shares
11) Finance companies are ________ market intermediaries.
A) stock
B) bond
C) FX
D) money
12) Spinning is the practice of
A) investment banks allowing executives of potential client companies to buy
underpriced initial public offerings of other companies’ securities
B) investment bank analysts providing misleading information about a company to
encourage more investors to purchase the company’s securities
C) accounting firms encouraging its audit clients to also purchase its management
advisory services
D) credit rating agencies providing higher ratings on a company’s securities in order to
develop a long-term relationship with the company
13) The existence of deposit insurance can increase the likelihood that depositors will
need deposit protection, as banks with deposit insurance
A) are likely to take on greater risks than they otherwise would
B) are likely to be too conservative, reducing the probability of turning a profit
C) are likely to regard deposits as an unattractive source of funds due to depositors’
demands for safety
D) are placed at a competitive disadvantage in acquiring funds
14) A decrease in marginal tax rates would likely have the effect of ________ the
demand for municipal bonds and ________ the demand for U.S. government bonds.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing
15) When the interest rate on a bond is above the equilibrium interest rate, there is
excess ________ in the bond market and the interest rate will ________.
A) demand; rise
B) demand; fall
C) supply; fall
D) supply; rise
16) Economists’ attempts to explain the term structure of interest rates
A) illustrate how economists modify theories to improve them when they are
inconsistent with the empirical evidence
B) illustrate how economists continue to accept theories that fail to explain observed
behavior of interest rate movements
C) prove that the real world is a special case that tends to get short shrift in theoretical
models
D) have proved entirely unsatisfactory to date
17) The political economy of the S&L crisis shows that the principal-agent problem
occurs in politics. In this instance, the agent-regulators did not act to protect the
principal-taxpayers because
A) regulators wanted to escape blame, hoping the situation would improve before
others discovered the problem
B) regulators responded to pressure to pursue regulatory forbearance from politicians
who had accepted campaign donations from owners of S&Ls
C) Congress was unwilling to allocate the necessary funds regulators needed to close
insolvent S&Ls
D) all of the above
E) only A and B of the above
18) Net worth
A) is the difference between current assets and current liabilities
B) is the difference between assets and liabilities
C) is total assets divided by total liabilities
D) is total assets plus total liabilities
19) Which of the following is not a reason for the disappointing revenue growth and
profits of Internet-only banks?
A) high cost per transaction
B) security concerns
C) customer preferences
D) technical problems
20) An investment pool is formed to
A) manipulate the market by spreading false rumors
B) lower brokerage fees by combining security purchases
C) share investment advice among member investors
D) take advantage of tax breaks introduced by the 1933 and 1934 securities acts
21) A debt contract that specifies that the company can only use the funds to finance
certain activities
A) is a private loan
B) contains a restrictive covenant
C) increases the problem of adverse selection
D) all of the above
E) only A and B of the above
22) The PE ratio approach to valuing stock is especially useful for valuing
A) publicly held corporations
B) firms that regularly pay dividends
C) both A and B of the above
D) neither A nor B of the above
23) Which of the following factors led up to the Mexican financial crisis of 1994?
A) speculative attacks on the peso and a rise in actual and expected inflation
B) a rise in domestic interest rates and a deterioration in bank balance sheets
C) a rise in foreign interest rates and domestic stock market declines
D) all of the above
E) only B and C of the above
24) Which of the following best explains the recent decline in the role of financial
intermediaries?
A) Private production and sale of information
B) Government regulation to increase information
C) Improvements in information technology
D) None of the above can explain the recent decline
25) Holding everything else the same, if a corporation’s earnings rise, then the default
risk on its bonds will ________ and the expected return on those bonds will ________.
A) increase; decrease
B) decrease; decrease
C) increase; increase
D) decrease; increase