1) Having performed well in the past indicates that an investment adviser or a mutual
fund will perform well in the future.
2) Investors make their choices of which assets to hold by comparing the expected
return, liquidity, and risk of alternative assets.
3) An important lesson from the 20072009 financial crisis is that central banks and
other regulators should have a laissez-faire attitude and let credit-driven bubbles
proceed without any reaction. Intervention is always a mistake.
4) Using options to control interest-rate risk reduces the chance of a loss but increases
the chance of a gain.
5) Technical analysts look at historical prices for information to project future prices.
6) An alternative corporate structure for U.S. banks that operate overseas is the Edge
Act corporation, a special subsidiary engaged primarily in international banking.
7) The failure of Ohio Life Insurance and Trust in 1857 did not signal the start of a
recession due to prompt actions by the Fed.
8) When the payoff method is used to resolve a failed bank, both large and small
depositors are protected from suffering losses.
9) A sterilized intervention leaves the money supply changed and has a direct way of
affecting interest rates or the expected future exchange rate.
10) In a typical private equity buyout, a partnership is formed and private equity
investors are contacted to pledge participation.
11) If the exchange rate between the dollar and the Swiss franc changes from 1.8 to 1.5
francs per dollar, the franc depreciates and the dollar appreciates.
12) In a leveraged buy-out, a firm greatly increases its debt level by issuing junk bonds
to finance the purchase of another firm’s stock.
13) The T-bill is not an investment to be used for anything but temporary storage of
excess funds because it barely keeps up with inflation.
14) The capital market is a financial market in which only short-term debt instruments
(generally those with an original maturity of less than one year) are traded.
15) The fact that insurance companies charge young males higher automobile insurance
premiums than young females is an example of
A) risk-based premiums
B) an attempt to minimize adverse selection
C) coinsurance
D) all of the above
E) only A and B of the above
16) The major provisions of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 included
A) abolishing the Federal Home Loan Bank Board and the FSLIC
B) transferring the regulatory role of the Federal Home Loan Bank Board to the Office
of Thrift Supervision, a bureau within the U.S. Treasury Department
C) expanding the responsibilities of the FDIC, which is now the sole administrator of
the federal deposit insurance system
D) all of the above
E) only A and B of the above
17) The Fed can influence the federal funds interest rate by adjusting the level of
reserves available to banks. The Fed can
A) lower the federal funds interest rate by adding reserves
B) raise the federal funds interest rate by removing reserves
C) remove reserves by selling securities
D) do all of the above
E) do only A and B of the above
18) A balance of payments ________ is associated with a ________ of international
reserves.
A) surplus; loss
B) surplus; gain
C) deficit; gain
D) balance; loss
19) If borrowers with the most risky investment projects are more likely to seek bank
loans than borrowers with the safest investment projects, banks face the problem of
________.
A) adverse credit risk
B) adverse selection
C) moral hazard
D) conflict of interest
20) A frequently used approximation for the yield to maturity on a long-term bond is the
A) coupon rate
B) current yield
C) cash flow interest rate
D) real interest rate
21) Distinct elements of a mortgage loan include
A) origination
B) investment
C) servicing
D) all of the above
E) only B and C of the above
22) Of all commercial banks, about ________ percent belong to the Federal Reserve
System.
A) 15
B) 20
C) 30
D) 50
23) Bank managers look on reserve requirements as a
A) tax on deposits
B) subsidy on deposits
C) subsidy on loans
D) tax on loans
24) The relationship among interest rates on bonds with identical default risk but
different maturities is called the
A) time-risk structure of interest rates
B) liquidity structure of interest rates
C) yield curve
D) bond demand curve
25) Stage Three of a financial crisis in an advanced economy features
A) a general increase in inflation
B) debt deflation
C) an increase in general price levels
D) a full-fledged financial crisis
26) Most of the time, the interest rate on Treasury notes and bonds is ________ that on
money market securities because of ________ risk.
A) above; interest-rate
B) above; default
C) below; interest-rate
D) below; default
27) Holding other factors constant, which of the following would decrease the size of
the U.S. current account deficit?
A) an increase in the amount of services purchased from foreigners
B) an increase in the amount of goods purchases from foreigners
C) an increase in the amount of goods sold to foreigners
D) only A and B of the above
28) Since the early 1990s, the net income of savings and loan associations has
________.
A) risen
B) fallen slightly
C) fallen sharply
D) held steady
29) The government granted thrifts greater powers in the early 1980s in hopes of
turning the industry’s problems around. These powers
A) required greater expertise in managing risk than many thrift managers possessed
B) encouraged thrifts to expand lending rapidly in real estate, increasing their exposure
to risk
C) expanded the scope and complexity of thrift lending activities that went beyond what
regulators could effectively monitor, given their limited resources
D) did all of the above
E) did only A and B of the above
30) Which of the following statements about money market securities are true?
A) The interest rates on all money market instruments move very closely together over
time
B) The secondary market for Treasury bills is extensive and well developed
C) There is no well-developed secondary market for commercial paper
D) All of the above are true
E) Only A and B of the above are true
31) According to the interest parity condition, if the domestic interest rate is 10 percent
and the foreign interest rate is 12 percent, then the expected ________ of the foreign
currency must be ________ percent.
A) appreciation; 4
B) appreciation; 2
C) depreciation; 2
D) depreciation; 4
32) A basic product of life insurance companies is ________.
A) disability insurance
B) annuities
C) health insurance
D) all of the above
33) A decrease in the domestic interest rate shifts the expected return schedule for
________ deposits to the ________ and causes the domestic currency to depreciate.
A) domestic; right
B) domestic; left
C) foreign; right
D) foreign; left
34) Individuals and households frequently purchase capital market securities through
financial institutions such as
A) mutual funds
B) pension funds
C) money market mutual funds
D) all of the above
E) only A and B of the above
35) Financial derivatives include ________.
A) stocks
B) bonds
C) forward contracts
D) both A and B
36) When a municipal bond is given tax-free status, the demand for Treasury bonds
shifts ________, and the interest rate on Treasury bonds ________.
A) leftward; rises
B) leftward; falls
C) rightward; rises
D) rightward; falls
37) The most influential participant(s) in the U.S. money market
A) is the Federal Reserve
B) is the U.S. Treasury Department
C) are the large money center banks
D) are the investment banks that underwrite securities
38) The difference between rate-sensitive liabilities and rate-sensitive assets is known
as the ________.
A) duration
B) interest-sensitivity index
C) interest-rate risk index
D) gap
39) A higher level of income causes the demand for money to ________ and the interest
rate to ________
A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase
40) If the interest rate is 7 percent on euro deposits and 5 percent on dollar deposits, and
if the dollar is expected to appreciate at a 4 percent rate,
A) euro deposits have a higher expected return than dollar deposits
B) the expected return on euro deposits in terms of dollars is 11 percent
C) the expected return on dollar deposits in terms of euros is 1 percent
D) the expected return on euro deposits in terms of dollars is 3 percent
E) the expected return on dollar deposits equals the expected return on euro deposits
41) When the default risk on corporate bonds decreases, other things equal, the demand
curve for corporate bonds shifts to the ________ and the demand curve for Treasury
bonds shifts to the ________.
A) right; right
B) right; left
C) left; left
D) left; right
42) Which of the following are not reported as assets on a bank’s balance sheet?
A) Cash items in the process of collection
B) Borrowings
C) U.S. Treasury securities
D) Reserves
43) The regulatory system that has evolved in the United States whereby banks are
regulated at the state level, the national level, or both, is known as a
A) bilateral regulatory system
B) tiered regulatory system
C) two-tiered regulatory system
D) dual banking system
44) The Competitive Equality in Banking Act of 1987
A) discouraged regulators from pursuing regulatory forbearance
B) directed regulators to close “zombie S&Ls” as quickly as administratively possible
C) encouraged regulators to continue their policy of regulatory forbearance
D) did both A and B of the above
45) There are ________ risk and ________ returns to investors in private equity
buyouts.
A) high; low
B) low; high
C) high; high
D) low; low
46) A Federal Reserve decision to sell dollars in order to buy foreign assets in the
foreign exchange market has the same effect as an open market ________ of bonds to
________ the monetary base and the money supply.
A) sale; decrease
B) purchase; decrease
C) sale; increase
D) purchase; increase
47) Given the size of the statistical discrepancy needed to balance the balance of
payments account, one can infer that
A) hidden capital flows into the U.S. are inconsequential
B) items in the balance of payments are measured quite accurately
C) many international transactions go unrecorded
D) all of the above occur
48) (I) In most years, the rate of return on short-term Treasury bills is below that on the
20-year Treasury bond.
(II) Interest rates on Treasury bills are more volatile than rates on long-term Treasury
securities.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
49) A bank manager concerned about interest income who expects interest rates to rise
and who knows the bank currently has a positive gap should ________ rate-sensitive
assets and ________ rate-sensitive liabilities.
A) increase; increase
B) decrease; increase
C) decrease; decrease
D) increase; decrease
50) A put option gives the owner the ________ to ________ the underlying security.
A) right; sell
B) obligation; sell
C) right; buy
D) obligation; buy
51) Commercial paper securities
A) are issued only by the largest and most creditworthy corporations, as they are
unsecured
B) carry an interest rate that varies according to the firm’s level of risk
C) never have a term to maturity that exceeds 270 days
D) all of the above
E) only A and B of the above