1) Bank failures have been a feature of all U.S. financial crises from 1800 to 1944 .
2) Many common stocks are traded at organized exchanges, although a majority of the
largest corporations have their shares traded over the counter.
3) The primary purpose of loads is to provide compensation for sales brokers.
4) Mortgage-backed securities have declined in popularity in recent years as
institutional investors have sought higher returns in other markets.
5) Financial innovation has widened the cost advantages that banks have in acquiring
funds, helping to explain why bank profitability has soared in recent years.
6) The Fed has goal independence but not instrument independence.
7) To understand banking regulation in the United States, it is helpful to understand the
concepts of asymmetric information, adverse selection, and moral hazard.
8) The Pension Benefit Guarantee Corporation performs a role similar to that of the
Office of Thrift Supervision.
9) In contrast to other countries’ currencies, the Japanese yen and yen-denominated
assets are the major component of international reserves held by countries.
10) Most of the time, the interest rate on Treasury notes is below that on money market
securities because of their low default risk.
11) Money market securities are short-term instruments with an original maturity of less
than one year.
12) Even when an ATM is owned by a bank, states typically have special provisions
that allow wider establishment of ATMs than is permissible for traditional “brick and
mortar” branches.
13) Money market securities include Treasury bills, commercial paper, federal funds,
repurchase agreements, negotiable certificates of deposit, banker’s acceptances, and
Eurodollars.
14) The nominal interest rate minus the expected rate of inflation
A) defines the real interest rate
B) is a better measure of the incentives to borrow and lend than the nominal interest
rate
C) is a more accurate indicator of the tightness of credit market conditions than the
nominal interest rate
D) all of the above
E) only A and B of the above
15) The risk structure of interest rates is
A) the structure of how interest rates move over time
B) the relationship among interest rates of different bonds with the same maturity
C) the relationship among the terms to maturity of different bonds
D) the relationship among interest rates on bonds with different maturities
16) The expected return on dollar deposits in terms of dollars, RD, is
A) always the interest rate on dollar deposits, iD, for any exchange rate
B) the interest rate on dollar deposits, iD, only when Et >
C) the interest rate on dollar deposits, iD, only when Et <
D) the interest rate on dollar deposits, iD, only when Et =
17) The government regulates financial markets for two main reasons:
A) to ensure soundness of the financial system and to increase the information available
to investors
B) to improve control of monetary policy and to increase the information available to
investors
C) to ensure that financial intermediaries do not earn more than the normal rate of
return and to improve control of monetary policy
D) to ensure soundness of financial intermediaries and to prevent financial
intermediaries from earning less than the normal rate of return
18) During the 1800s, many U.S. financial crises were precipitated by an increase in
________, often originating in London.
A) interest rates
B) housing prices
C) gasoline prices
D) heating oil prices
19) If the 2005 inflation rate in Britain is 6 percent, and the inflation rate in the U.S. is 4
percent, then the theory of purchasing power parity predicts that, during 2005, the value
of the British pound in terms of U.S. dollars will
A) rise by 10 percent
B) rise by 2 percent
C) fall by 10 percent
D) fall by 2 percent
E) do none of the above
20) Which of the following is an advantage of forming a bank holding company?
A) It allows ownership of several banks where branching is prohibited
B) It allows owners to engage in activities related to banking that are prohibited to
banks
C) Both A and B of the above
D) None of the above
21) Stock market declines preceded a full-blown financial crisis
A) in the United States in 1987
B) in the United States in 2000
C) in Indonesia in 1997
D) in all of the above
E) in none of the above
22) In the short run, the quantity of dollars supplied (deposits, bonds, equities) is
A) fixed with respect to the exchange rate
B) quite volatile and difficult to model in a supply-demand framework
C) typically following the business cycle (procyclical)
D) is best represented with a horizontal supply curve
23) Holding everything else constant, if the federal funds rate falls, then the demand for
A) excess reserves falls because they have a lower return
B) excess reserves rises because they have a lower cost
C) required reserves rises because the cost of borrowing from the Fed is relatively
higher
D) required reserves rises because the cost of borrowing from the Fed is relatively
lower
E) reserves will not change because the Fed sets the level of required reserves
24) Factors that can cause the supply curve for bonds to shift to the right include
A) an expansion in overall economic activity
B) a decrease in expected inflation
C) a decrease in government deficits
D) all of the above
E) only A and B of the above
25) Since the early 1990s, the number of savings and loan associations has ________
and the average size (in assets) has ________.
A) risen; declined
B) declined; risen
C) risen; risen
D) declined; declined
26) Which of the following types of information will most likely enable the exploitation
of a profit opportunity?
A) Financial analysts’ published recommendations
B) Technical analysis
C) Hot tips from a stockbroker
D) None of the above
27) When a bank sells all or part of the cash stream from a specific loan,
A) it removes the loan from its balance sheet
B) it usually does so at a loss
C) it usually does so at a profit
D) both A and B of the above occur
E) both A and C of the above occur
28) A ________ is when one party in a financial contract has incentives to act in its own
interest rather than in the interests of the other party.
A) moral hazard
B) risk
C) conflict of interest
D) financial panic
29) (I) A discount bond requires the borrower to repay the principal at the maturity date
plus an interest payment.
(II) A coupon bond pays the lender a fixed interest payment every year until the
maturity date, when a specified final amount (face or par value) is repaid.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
30) Options on futures contracts are referred to as ________.
A) stock options
B) futures options
C) American options
D) individual options
31) The price specified in an option contract at which the holder can buy or sell the
underlying asset is called the ________.
A) premium
B) call
C) strike price
D) put
32) Restrictive covenants can
A) limit the amount of dividends the firm can pay
B) limit the ability of the firm to issue additional debt
C) restrict the ability of the firm to enter into a merger agreement
D) do all of the above
E) do only A and B of the above
33) From 1980 to early 1985 the dollar ________ in value, thereby benefiting American
________
A) appreciated; businesses
B) appreciated; consumers
C) depreciated; businesses
D) depreciated; consumers
34) Relative to life insurance companies, property and casualty insurance companies
hold
A) more liquid assets
B) more long-term government bonds
C) more commercial mortgages
D) fewer municipal bonds
35) If an investor’s holding period is longer than the term to maturity of a bond, he or
she is exposed to
A) interest-rate risk
B) reinvestment risk
C) bond-market risk
D) yield-to-maturity risk
36) A loan for borrowers who do not qualify for loans at the usual market rate of
interest because of a poor credit rating or because the loan is larger than justified by
their income is
A) a subprime mortgage
B) a securitized mortgage
C) an insured mortgage
D) a graduated-payment mortgage
37) The distribution of a firm’s capital between debt and equity is its
A) current ratio
B) liability structure
C) acid ratio
D) capital structure
38) The demand for an asset rises if ________ falls.
A) risk relative to other assets
B) expected return relative to other assets
C) liquidity relative to other assets
D) wealth