1) Securities dealers
A) sell securities out of their inventories to customers who want to buy
B) buy securities, which they add to their inventories, from customers who want to sell
C) are largely responsible for the health and growth of small businesses in the United
States
D) do all of the above
E) do only A and B of the above
2) Although finance companies are largely unregulated, they do face some regulations
aimed primarily at
A) protecting unsophisticated customers
B) the government deposit insurance
C) large corporate customers
D) protecting the finance companies from failure
3) An analysis of the political economy of the savings and loan crisis helps one to
understand
A) why politicians aided the efforts of thrift regulators, raising regulatory
appropriations and encouraging the closing of insolvent thrifts
B) why thrift regulators were quick to inform Congress of the problems that existed in
the thrift industry
C) why thrift regulators willingly acceded to pressures placed upon them by members
of Congress
D) all of the above
4) If a bank has a duration gap of 2 years, then a fall in interest rates from 6 percent to 3
percent will lead to
A) a rise in the market value of its net worth of 5.66 percent
B) a fall in the market value of its net worth of 5.66 percent
C) a rise in net interest income of 5.66 percent
D) a fall in net interest income of 5.66 percent
E) an unknown change
5) The Sarbanes-Oxley Act of 2002 dealt with conflicts of interest in
A) investment banks
B) accounting firms
C) credit-rating agencies
D) all of the above
6) When the price of a bond is ________ the equilibrium price, there is an excess
demand for bonds and the price will ________.
A) above; rise
B) above; fall
C) below; fall
D) below; rise
7) SEC registration is
A) required for all securities
B) required if less than $1.5 million in securities are issued per year
C) not required for securities that are sold through a private placement
D) required if the securities mature in less than one year
E) not required if securities are underwritten by a reputable investment bank
8) The nearer a bond’s price is to its par value and the longer the maturity of the bond,
the more closely the ________ approximates the ________.
A) current yield; yield to maturity
B) current yield; coupon rate
C) yield to maturity; current yield
D) yield to maturity; coupon rate
9) If the Fed increases reserve requirements, the demand for reserves ________ and the
equilibrium federal funds rate ________.
A) increases; drops
B) decreases; rises
C) decreases; drops
D) increases; rises
10) Long-term debt and equity instruments are traded in the ________ market.
A) primary
B) secondary
C) capital
D) money
11) Assets on the Fed’s balance sheet include
A) government securities and currency in circulation
B) discount loans and reserves
C) government securities and discount loans
D) currency in circulation and reserves
12) What role did the credit-rating agencies play leading up to the start of the financial
crisis in 2007?
A) Inaccurate ratings provided by credit-rating agencies helped promote risk taking
throughout the financial system
B) The credit-rating agencies were the first to see signs of trouble, and they developed
more stringent standards as the housing bubble evolved
C) Solid ratings provided by credit-rating agencies helped limit risk taking throughout
the financial system
D) The credit-rating agencies were largely uninvolved with the financial crisis
13) The authors’ analysis of adverse selection indicates that financial intermediaries
A) overcome free-rider problems by holding nontraded loans
B) must buy securities from corporations to diversify the risk that results from holding
nontradable loans
C) have not been very successful in dealing with adverse selection problems in financial
markets
D) do all of the above
E) do only A and B of the above
14) The expected return on dollar deposits in terms of foreign currency is the ________
the interest rate on dollar deposits and the expected appreciation of the dollar.
A) product of
B) ratio of
C) sum of
D) difference in
15) Which of the following are reported as assets on a bank’s balance sheet?
A) cash items in the process of collection
B) deposits with other banks
C) checkable deposits
D) bank capital
E) only A and B of the above
16) Prior to August 1989, the agency that regulated the nation’s savings and loan
associations was the
A) Federal Home Loan Bank Board
B) Office of Thrift Supervision
C) Resolution Trust Corporation
D) Comptroller of the Currency
17) According to the interest parity condition, the domestic interest rate is equal to the
foreign interest rate
A) plus the expected appreciation of the domestic currency
B) less the expected appreciation of the domestic currency
C) less the expected depreciation of the domestic currency
D) less the expected depreciation of the domestic currency weighted by the domestic
interest rate
18) Which of the following statements is false regarding Electronic Communications
Networks (ECNs)?
A) Archipelago and Instinet are two examples of ECNs
B) Competition from ECNs has forced NASDAQ to cut its fees
C) Traders benefit from lower trading costs and faster service
D) ECNs allow institutional investors, but not individuals, to trade after hours
19) Politicians have ________ incentives to act in their own interests rather than in the
interests of taxpayers.
A) no
B) strong
C) weak
D) low
20) According to the Gordon growth model, what is an investor’s valuation of a stock
whose current dividend is $1.00 per year if dividends are expected to grow at a constant
rate of 10 percent over a long period of time and the investor’s required return is 11
percent?
A) $110
B) $100
C) $11
D) $10
E) $5.24
21) Which of the following is an element of the Federal Reserve System?
A) The Federal Reserve banks
B) The Board of Governors
C) The FDIC
D) All of the above
E) Only A and B of the above
22) A conflict of interest occurs when
A) a financial firm sells a service to its customers for a price that exceeds the cost of
producing the service
B) lenders prefer higher interest rates and borrowers prefer lower interest rates
C) riskier borrowers are the ones who are more likely to apply for loans
D) people expected to provide reliable information to the public have incentives not to
do so
23) Interest rates are important to financial institutions since an interest rate increase
________ the cost of acquiring funds and ________ the income from assets.
A) decreases; decreases
B) increases; increases
C) decreases; increases
D) increases; decreases
24) An option that can be exercised only at maturity is called a(n) ________.
A) swap
B) stock option
C) European option
D) American option
25) (I) Preferred stockholders hold a claim on assets that has priority over the claims of
common stockholders.
(II) Bondholders hold a claim on assets that has priority over the claims of preferred
stockholders.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
26) Financial futures are regularly traded on all of the following except the
A) Chicago Board of Trade
B) Chicago Mercantile Exchange
C) New York Futures Exchange
D) Chicago Commodity Markets Board
27) One way for bank regulators to assure depositors that a bank is not taking on too
much risk is to require the bank to
A) diversify its loan portfolio
B) reduce its equity capital
C) reduce the size of its loan portfolio
D) do both A and B of the above
E) do both B and C of the above
28) Which of the following is a disadvantage of a second mortgage compared to credit
card debt?
A) The loans are secured by the borrower’s home
B) The borrower gives up the tax deduction on the primary mortgage
C) The borrower must pay points to get a second mortgage loan
D) The borrower will find it more difficult to qualify for a second mortgage loan
29) Nationwide financial panics in 1873, 1884, 1893, and 1907 might have been
avoided had
A) the First Bank of the United States served its intended role of lender of last resort
B) the Second Bank of the United States not been abolished in 1836 by President
Andrew Jackson
C) the Second Bank of the United States served its intended role of lender of last resort
D) the Federal Reserve served its intended role of lender of last resort
30) Which of the following are reported as assets on a bank’s balance sheet?
A) borrowings
B) reserves
C) savings deposits
D) bank capital
E) only A and B of the above
31) The designers of the Federal Reserve Act meant to create a central bank
characterized by its
A) system of checks and balances and decentralization of power
B) strong concentration of power in the hands of a few people
C) inability to function as a lender of last resort
D) responsiveness to the electorate
32) In an emerging market economy, a financial crisis generally begins with
A) mismanagement of financial liberalization or innovation
B) asset pricing booms and busts
C) an increase in uncertainty caused by failure of financial institutions
D) all of the above
33) Which of the following statements are true?
A) Because coupon payments on municipal bonds are exempt from federal income tax,
the expected after-tax return on them will be higher for individuals in higher income tax
brackets
B) An increase in tax rates will increase the demand for municipal bonds, lowering their
interest rates
C) Interest rates on municipal bonds will be lower than on comparable bonds without
the tax exemption
D) All of the above are true statements
E) Only A and B are true statements
34)
Figure 4.4
Figure 4.4 illustrates the effect of an increased rate of money supply growth. From the
figure, one can conclude that the
A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to
changes in expected inflation
B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to
changes in expected inflation
C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to
changes in expected inflation
D) Fisher effect is smaller than the expected inflation effect and interest rates adjust
quickly to changes in expected inflation
35) Which of the following are true of mortgage interest rates?
A) Interest rates on mortgage loans are determined by three factors: current long-term
market rates, the term of the mortgage, and the number of discount points paid
B) Mortgage interest rates tend to track along with Treasury bond rates
C) The interest rate on 15-year mortgages is lower than the rate on 30-year mortgages,
all else the same
D) All of the above are true
E) Only A and B of the above are true
36) People who take their money out of insured bank deposits to invest in uninsured
money market mutual funds have ________ risk because money market funds invest in
________ assets.
A) high; long-term
B) low; short-term
C) high; short-term
D) low; long-term
37) The yield to maturity on a consol bond that pays $200 yearly and sells for $1000 is
A) 5 percent
B) 10 percent
C) 20 percent
D) 25 percent
38) The supply curve for bonds has the usual upward slope, indicating that as the price
________, ceteris paribus, the ________ increases.
A) falls; supply
B) falls; quantity supplied
C) rises; supply
D) rises; quantity supplied
39) Which of the following are reported as liabilities on a bank’s balance sheet?
A) reserves
B) checkable deposits
C) loans
D) deposits with other banks