1) Inflation targeting makes the central bank less accountable.
2) In a fixed exchange rate system, a country whose currency is undervalued will lose
international reserves.
3) There are two kinds of exchange rate transactions.
4) To reduce foreign exchange risk from selling goods to a foreign country, futures
contracts should be sold.
5) A lower than average PE may mean that the market expects earnings to rise in the
future.
6) The unusual structure of the Federal Reserve System is best explained by Americans’
fear of centralized power.
7) Probably the most important feature of FDICIA is its prompt corrective action
provisions which require the FDIC to intervene earlier and more vigorously when a
bank gets into trouble.
8) When it acts as a lender of last resort, the IMF may increase the likelihood that
financial institutions take excessive risks and thus increase moral hazard.
9) When workers voluntarily leave work while they look for better jobs, the resulting
unemployment is called frictional unemployment.
10) When a life-long chain smoker attempts to purchase a life insurance policy, the
insurance company faces the problem of adverse selection.
11) In the second stage of a financial crisis in an emerging economy, foreign exchange
markets start placing huge bets that there will be an appreciation of the emerging
market country’s currency.
12) Reserve requirements that force banks to keep a certain fraction of their deposits as
reserves and restrictions on the interest rates that can be paid on deposits have been the
major forces behind financial innovation.
13) Currency swaps involve the exchange of a set of payments on one currency for a set
of payments in another.
14) A central bank’s international reserves are its holdings of assets denominated in
foreign currencies.
15) The current account balance plus the capital account balance equals the net change
in government international reserves.
16) The U.S. Treasury Department is the single largest borrower in the U.S. money
market.
17) Health maintenance organizations (HMOs) shift the risk from the provider to the
insurance company.
18) The increase in the number of defined contribution pension funds has slowed the
growth of mutual funds.
19) The Sarbanes-Oxley Act of 2002 and the Global Legal Settlement of 2002 both
have the potential to reduce economies of scope.
20) Disintermediation occurs when funds are deposited into banks and lent to
borrowers.
21) ________ funds are the simplest type of investment funds to manage.
A) Balanced
B) Global equity
C) Growth
D) Index
22) Which of the following is a reason for the rapid expansion of international banking?
A) the rapid growth in international trade
B) the growth of multinational corporations
C) the desire of U.S. banks to expand
D) all of the above
23) The discount rate is
A) the interest rate on loans from the Fed to a bank
B) the price the Fed pays for government securities
C) the interest rate on loans of reserves from one bank to another
D) the price banks pay the Fed for government securities
E) the interest rate on loans from a bank to the federal government
24) Moral hazard in equity contracts is known as the ________ problem because the
manager of the firm has fewer incentives to maximize profits than the stockholders
might ideally prefer.
A) principal-agent
B) adverse selection
C) free-rider
D) debt deflation
25) The bond contract that states the lender’s rights and privileges and the borrower’s
obligations is called the
A) bond syndicate
B) restrictive covenant
C) bond covenant
D) bond indenture
26) The Fisher equation states that
A) the nominal interest rate equals the real interest rate plus the expected rate of
inflation
B) the real interest rate equals the nominal interest rate less the expected rate of
inflation
C) the nominal interest rate equals the real interest rate less the expected rate of
inflation
D) both A and B of the above are true
E) both A and C of the above are true
27) The riskiness of an asset’s return that results from interest rate changes is called
A) interest-rate risk
B) coupon-rate risk
C) reinvestment risk
D) yield-to-maturity risk
28) The disadvantage of swaps is that
A) they lack liquidity
B) it is difficult to arrange for a counterparty
C) they suffer from default risk
D) they are all of the above
29) Which of the following reduces moral hazard for the mortgage borrower?
A) collateral
B) down payments
C) private mortgage insurance
D) borrower qualifications
30) The Federal Housing Administration (FHA)
A) was set up to buy mortgages from thrifts so that these institutions could make more
loans
B) funds purchases of mortgages by selling bonds to the public
C) provides insurance for certain mortgage contracts
D) does all of the above
E) does only A and B of the above
31) When you deposit $50 in currency at the Old National Bank,
A) its assets increase by less than $50 because of reserve requirements
B) its reserves increase by less than $50 because of reserve requirements
C) its liabilities increase by $50
D) only A and B of the above occur
32) Financial markets improve economic welfare because
A) they allow funds to move from those without productive investment opportunities to
those who have such opportunities
B) they allow consumers to time their purchases better
C) they weed out inefficient firms
D) they do all of the above
E) they do A and B of the above
33) What are the three main types of finance companies?
A) sales, lease, and buyback
B) business, sales, and consumer
C) factor, lease, and floor plan
D) None of the above are correct
34) The efficient markets hypothesis is weakened by evidence that
A) stock prices tend to follow a random walk
B) stock prices are more volatile than fluctuations in their fundamental values can
explain
C) technical analysis does not outperform the overall market
D) an investment adviser’s past success or failure at picking stocks does not predict his
or her future performance
35) A special subsidiary of a U.S. bank that is engaged in international banking is called
A) an international banking facility
B) an agency office
C) an Edge Act corporation
D) a foreign bank subsidiary
36) The capital account describes the flow of capital between the United States and
other countries. Capital inflows are
A) American purchases of foreign assets
B) foreign purchases of American assets
C) both A and B of the above
D) neither A nor B of the above
37) The supply curve for reserves shifts to the left and the federal funds rate rises when
the Fed
A) raises reserves requirements
B) does an open market purchase
C) does an open market sale
D) raises the discount rate
38) If Second National Bank has more rate-sensitive assets than rate-sensitive
liabilities, it can reduce interest-rate risk with a swap which requires Second National to
A) pay a fixed rate while receiving a floating rate
B) receive a fixed rate while paying a floating rate
C) both receive and pay a fixed rate
D) both receive and pay a floating rate
39) A credit default swap, or CDS, is essentially
A) insurance against default on a financial instrument
B) a method for swapping credit agreements between banks
C) a method for companies in default to swap credit ratings
D) insurance against the default of a party in a swap agreement
40) The advantage of forward contracts over futures contracts is that forward contracts
A) are standardized
B) have lower default risk
C) are more liquid
D) are none of the above
41) Preferred stockholders hold a claim on assets that has priority over the claims of
A) both common stockholders and bondholders
B) neither common stockholders nor bondholders
C) common stockholders, but after that of bondholders
D) bondholders, but after that of common stockholders
42) Which of the following are true concerning the distinction between interest rates
and return?
A) The rate of return on a bond will not necessarily equal the interest rate on that bond
B) The return can be expressed as the sum of the current yield and the rate of capital
gains
C) The rate of return will be greater than the interest rate when the price of the bond
falls between time t and time t + 1
D) All of the above are true
E) Only A and B of the above are true
43) Which of the following are useful for home buyers who expect their income to fall
in the future?
A) GPMs
B) RAMs
C) GEMs
D) Only A and B are useful
E) Only A and C are useful
44) Although federal banking legislation in the 1860s attempted to eliminate
state-chartered banks by imposing a prohibitive tax on banknotes, these banks have
been able to stay in business by
A) issuing credit cards
B) ignoring the regulations
C) issuing deposits
D) branching into other states
45) The McFadden Act’s prohibition against interstate branching
A) was weakened by the introduction of shared electronic banking facilities that
provide banking services nationwide
B) was weakened by regional compacts that allowed banks to own banks in other states
in their region
C) impeded banks’ ability to diversify their loans and take advantage of economies of
scale
D) did all of the above
46) In a primary market, ________ sell new issues of securities; in a secondary market,
________ assist in trading previously issued securities.
A) securities dealers; securities brokers
B) securities brokers; securities dealers
C) investment banks; securities brokers and dealers
D) securities brokers and dealers; investment banks
47) Which of the following are reported as assets on a bank’s balance sheet?
A) discount loans from the Fed
B) loans
C) borrowings
D) only A and B of the above
48) The process in which people seeking higher interest rates take their money out of
financial institutions is called ________.
A) capital mobility
B) loophole mining
C) disintermediation
D) deposit jumping
49) Liabilities that are partially, but not fully, rate-sensitive include ________.
A) checkable deposits
B) federal funds
C) non-negotiable CDs
D) fixed-rate mortgages
E) money market deposit accounts
50) Credit cards date back to
A) prior to World War II
B) just after World War II
C) the early 1950s
D) the late 1950s
51) If the desired intermediate target is a monetary aggregate, then the preferred
operating target will be a(n) ________ variable like the ________.
A) interest rate; three-month Treasury bill rate
B) interest rate; federal funds rate
C) reserve aggregate; monetary base
D) reserve aggregate; nonborrowed reserves
52) A balance of payments ________ is associated with a ________ of international
reserves.
A) deficit; loss
B) deficit; gain
C) surplus; loss
D) balance; gain
53) Burdensome regulations, along with inflation and rising interest rates, help to
explain
A) the rapid pace of financial innovations in banking in the 1960s and 1970s
B) the low rate of bank failures in the 1980s
C) both A and B of the above
D) neither A nor B of the above
54) A firm will borrow long-term
A) if the extra interest cost of borrowing long-term is less than the expected cost of
rising interest rates before it retires its debt
B) if the extra interest cost of borrowing short-term due to rising interest rates does not
exceed the expected premium that is paid for borrowing long-term
C) if short-term interest rates are expected to decline during the term of the debt
D) if long-term interest rates are expected to decline during the term of the debt
55) The Board of Governors of the Federal Reserve System
A) appoint three directors to each Federal Reserve Bank
B) elect six members to member commercial banks
C) both of the above
D) none of the above
56) Under a fixed exchange rate regime, if the domestic currency is initially ________,
that is ________ par, the central bank must intervene to buy the domestic currency by
selling foreign assets.
A) overvalued; below
B) overvalued; above
C) undervalued; below
D) undervalued; above
57) Under the Basel plan,
A) assets and off-balance sheet activities are assigned to various categories to reflect the
degree of credit risk
B) a bank’s total capital must equal or exceed 8 percent of total risk-weighted assets
C) both of the above occur
D) none of the above occur