1) The federal funds rate is an operating target.
2) In a lease financing arrangement, a finance company will purchase equipment, which
it then leases to a company for a set period.
3) Debentures are long-term unsecured bonds that are backed only by the general
creditworthiness of the issuer.
4) A mutual fund is not a depository institution.
5) Lease financing is an example of a business financing need not served by most
banks.
6) Financial markets are what makes financial institutions work.
7) Unless a bond defaults, an investor cannot lose money investing in bonds.
8) Because asymmetric information problems in the banking industry are a fact of life
throughout the world, bank regulation in other countries is similar to that in the United
States.
9) In a bull market stock prices are rising, on average.
10) Credit unions view commercial banks as government-supported and hence unfair
competitors due to their tax advantages.
11) Monetary policy affects interest rates but has little effect on inflation or business
cycles.
12) One factor explaining the rapid growth in mutual funds is that they are financial
intermediaries that are not regulated by the federal government.
13) Loss aversion means the unhappiness a person feels when he or she suffers a
monetary loss exceeds the happiness the same person experiences from receiving a
monetary gain of the same amount.
14) Nontransaction deposits are the primary source of bank funds.
15) A whole life insurance policy pays a death benefit if the policyholder dies.
16) A mutual fund’s board of directors picks the securities that will be held and makes
buy and sell decisions.
17) ________ cannot explain the empirical fact that interest rates on bonds of different
maturities tend to move together.
A) The market segmentation theory
B) The expectations theory
C) The liquidity premium theory
D) Both A and B of the above
E) Both A and C of the above
18) Two important characteristics of any financial market are flexibility and
A) risk
B) innovation
C) tolerance
D) capital
19) Tasks that investment bankers perform when acting as underwriters to sell securities
to the public include:
A) pricing the security
B) preparing the filings required by the Securities and Exchange Commission
C) arranging for the security to be rated
D) all of the above
E) only A and B of the above
20) The country whose banks are the most restricted in the range of assets they may
hold is
A) Japan
B) Canada
C) Germany
D) the United States
21) For simple loans, the simple interest rate is ________ the yield to maturity.
A) greater than
B) less than
C) equal to
D) not comparable to
22) When the value of the British pound changes from $1.50 to $1.25, the pound has
________ and the dollar has ________.
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
23) The yield to maturity on a consol bond that pays $100 yearly and sells for $500 is
A) 5 percent
B) 10 percent
C) 12.5 percent
D) 20 percent
E) 25 percent
24) In situations where asymmetric information problems are not severe,
A) the money markets have a distinct cost advantage over banks in providing short-term
funds
B) the money markets have a distinct cost advantage over banks in providing long-term
funds
C) banks have a distinct cost advantage over the money markets in providing short-term
funds
D) the money markets cannot allocate short-term funds as efficiently as banks can
25) The Federal Reserve can influence the federal funds interest rate by buying
securities, which ________ reserves, thereby ________ the federal funds rate.
A) adds; raising
B) removes; lowering
C) adds; lowering
D) removes; raising
26) The policy of regulatory forbearance
A) meant delaying the closing of “zombie S&Ls” as their losses mounted during the
1980s
B) benefited “zombie S&Ls” at the expense of healthy S&Ls, as healthy institutions lost
deposits to insolvent institutions
C) had the advantage of benefiting healthy S&Ls by giving them the opportunity to
attract deposits that began to leave the “zombie S&Ls”
D) did both A and B of the above
E) did both A and C of the above
27) That several hundred S&Ls were not even examined once in the period January
1984 through June 1986 can be explained by
A) Congress’s unwillingness to allocate the necessary funds to thrift regulators
B) regulators’ reluctance to find the specific problem thrifts that they knew existed
C) prohibitions against onerous regulatory restrictions against S&Ls as mandated in the
Competitive Equality in Banking Act
D) all of the above
E) only A and B of the above
28) During the 2007-2009 financial crisis, what actions did the Fed take to limit the
scope of the crisis?
A) The Fed lowered the spread on the discount rate to 50 basis points, and then to 25
B) The Fed set up the Term Auction Facility to provide further liquidity to banks
C) The Fed purchased assets of Bear Stearns to facilitate the purchase of Bear Stearns
by J.P. Morgan
D) all of the above
29) With an interest rate of 5 percent, the present value of $100 received one year from
now is approximately
A) $100
B) $105
C) $95
D) $90
30) (I) A simple loan requires the borrower to repay the principal at the maturity date
along with an interest payment.
(II) A discount bond is bought at a price below its face value, and the face value is
repaid at the maturity date.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
31) The risk on an agency bond is
A) high
B) zero
C) moderate
D) low
32) Of the four theories that explain how interest rates on bonds with different terms to
maturity are related, the one that assumes that bonds of different maturities are not
substitutes for one another is the
A) expectations theory.
B) segmented markets theory
C) liquidity premium theory
D) preferred habitat theory
33) Suppose that you purchase a 91-day Treasury bill for $9,850 that is worth $10,000
when it matures. The security’s annualized yield if held to maturity is about
A) 4 percent
B) 5 percent
C) 6 percent
D) 7 percent
34) Regular bank examinations and restrictions on asset holdings indirectly help to
________ the adverse selection problem because, given fewer opportunities to take on
risk, risk-prone entrepreneurs will be ________ from entering the banking industry.
A) increase; encouraged
B) increase; discouraged
C) reduce; encouraged
D) reduce; discouraged
35) The Board of Governors
A) establishes, within limits, reserve requirements
B) effectively sets the discount rate
C) sets margin requirements
D) does all of the above
E) does only A and B of the above
36) The purpose of the Commodity Futures Trading Commission is to do all of the
following except
A) oversee futures trading
B) see that prices are not manipulated
C) approve proposed futures contracts
D) establish minimum prices for futures contracts
37) A decrease in the expected rate of inflation causes the demand for bonds to
________ and the supply of bonds to ________.
A) fall; fall
B) fall; rise
C) rise; fall
D) rise; rise
38) (I) There are two types of exchanges in the secondary market for capital securities:
organized exchanges and over-the-counter exchanges.
(II) When firms sell securities for the very first time, the issue is an initial public
offering.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
39) Suppose the average industry PE ratio for auto parts retailers is 20 . What is the
current price of Auto Zone stock if the retailer’s earnings per share is projected to be
$1.85?
A) $21.85
B) $37
C) $10.81
D) $9.25
40) Which of the following is not a proposal for insuring that sufficient funds will be
available to provide Social Security benefits to future retirees?
A) Raise the maximum income cap on which workers and employers are taxed
B) Provide more generous annual cost of living increases
C) Raise the minimum age for receiving benefits
D) Reduce the amount of future benefits
41) If a portfolio manager believes stock prices will fall and knows that a block of
funds will be received in the future, then he should
A) sell stock index futures short
B) buy stock index futures long
C) stay out of the futures market
D) borrow and buy securities now
42) When nearly half of the S&Ls in the United States had a negative net worth and
were thus insolvent by the end of 1982, regulators adopted a policy of ________, which
amounted to ________ capital requirements.
A) regulatory forbearance; raising
B) regulatory forbearance; lowering
C) regulatory stringency; raising
D) regulatory stringency; lowering
43) If you expect the inflation rate to be 5 percent next year and a one-year bond has a
yield to maturity of 7 percent, then the real interest rate on this bond is
A) -12 percent
B) -2 percent
C) 2 percent
D) 12 percent
44) When the Federal Reserve was created, its most important role was intended to be
A) a storage facility for the nation’s gold
B) a lender of last resort
C) a regulator of bank holding companies
D) none of the above
45) Banker’s acceptances
A) can be bought and sold until they mature
B) are issued only by large money center banks
C) carry low interest rates because of the very low default risk
D) are all of the above
E) are only A and B of the above
46) In 1977, ________ pioneered the concept of selling new public issues of junk bonds
for companies that had not yet achieved investment-grade status.
A) Michael Milken
B) Roger Milliken
C) Ivan Boesky
D) Carl Ichan
47) What is a credit default swap?
A) a swap agreement where two parties swap credit payments
B) an agreement to swap interest payments when one party defaults
C) a type of insurance against bond defaults
D) a swap between credit rating agencies
48) ________ are investment advisory firms that rate the quality of corporate and
municipal bonds in terms of probability of default.
A) Financial institutions
B) Credit-rating agencies
C) Securities companies
D) none of the above