1) The major provisions of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 included
A) 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
B) expanding the responsibilities of the FDIC, which is now the sole administrator of
the federal deposit insurance system
C) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts
placed in conservatorship or receivership
D) all of the above
E) only A and B of the above
2) To prevent the moral hazard problem, health and life insurance companies may write
policies
A) for which premiums increase dramatically once the policyholder is discovered to
have contracted an illness
B) containing provisions which either reduce or eliminate benefits to persons who
contract prespecified illnesses
C) limiting the amount the companies will pay in the event that claims are submitted by
policyholders
D) with all of the above provisions
E) with only A and B of the above provisions
3) Eurodollars
A) are time deposits with fixed maturities and are, therefore, somewhat illiquid
B) may offer the borrower a lower interest rate than can be received in the domestic
market
C) are limited to London banks
D) are all of the above
E) are only A and B of the above.
4) When the price of a bond is ________ the equilibrium price, there is an excess
supply of bonds and the price will ________.
A) above; rise
B) above; fall
C) below; fall
D) below; rise
5) The economist Irving Fisher, after whom the Fisher effect is named, explained why
interest rates ________ as the expected rate of inflation ________.
A) rise; increases
B) rise; stabilizes
C) rise; decreases
D) fall; increases
E) fall; stabilizes
6) Private pension plan assets are invested mainly in ________.
A) government securities
B) corporate bonds
C) stock
D) certificates of deposit
7) If the interest rate is 13 percent on euro deposits and 15 percent on dollar deposits,
and if the euro is expected to appreciate at a 4 percent rate relative to the dollar, then
A) euro deposits have a lower expected return than dollar deposits
B) the expected return on euro deposits in terms of dollars is 9 percent
C) the expected return on dollar deposits in terms of euros is 19 percent
D) both A and B of the above will occur
E) none of the above will occur
8) A lower 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
9) Which of the following is not a step in the process by which an investment bank
assists in the sale of a company or corporate division?
A) preparation of a confidential memorandum
B) negotiation of a letter of intent
C) preparation of a definitive agreement
D) forming a syndicate of purchasers
10) Which of the following is not an element of the Gordon growth model of stock
valuation?
A) the stock’s most recent dividend paid
B) the expected constant growth rate of dividends
C) the required return on investments in equity
D) the stock’s expected future price
11) Factors that lead to worsening conditions in financial markets include
A) increases in interest rates
B) declining stock prices
C) increasing uncertainty in financial markets
D) all of the above
E) only A and B of the above
12) The most important developments that have reduced banks’ income advantages in
the past twenty years include
A) the growth of the commercial paper market
B) the growth of the junk bond market
C) the elimination of Regulation Q ceilings
D) all of the above
E) only A and B of the above
13) Finance companies play a unique role in money markets by
A) giving consumers indirect access to money markets
B) combining consumers’ investments to purchase money market securities on their
behalf
C) borrowing in capital markets to finance purchases of money market securities
D) assisting the government in its sales of U.S. Treasury securities
14) The earliest form of insurance was ________ insurance.
A) life
B) health
C) automobile
D) property and casualty
15) The nominal interest rate minus the expected rate of inflation
A) defines the real interest rate
B) is a less accurate measure of the incentives to borrow and lend than is the nominal
interest rate
C) is a less accurate indicator of the tightness of credit market conditions than is the
nominal interest rate
D) defines the discount rate
16) Which of the following is most likely to be a no-load fund?
A) value funds
B) hedge funds
C) growth funds
D) index funds
17) A weakness of the PE approach to valuing stock is that it is
A) difficult to estimate the constant growth rate of a firm’s dividends
B) difficult to estimate the required return on equity
C) difficult to predict how much a firm will pay in dividends
D) based on industry averages rather than firm-specific factors
18) (I) Because interest rates on Treasury bills are more volatile than rates on long-term
securities, the return on short-term Treasury securities is usually above that on
longer-term Treasury securities.
(II) A Treasury STRIP separates the periodic interest payments from the final principal
repayment.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
19) During the early years of an amortizing mortgage loan, the lender applies
A) most of the monthly payment to the outstanding principal balance
B) all of the monthly payment to the outstanding principal balance
C) most of the monthly payment to interest on the loan
D) all of the monthly payment to interest on the loan
E) the monthly payment equally to interest on the loan and the outstanding principal
balance
20) Corporate bonds are less risky if they are ________ bonds and municipal bonds are
less risky if they are ________ bonds.
A) secured; revenue
B) secured; general obligation
C) unsecured; revenue
D) unsecured; general obligation
21) Which of the following statements is false?
A) A bank’s assets are its uses of funds
B) A bank issues liabilities to acquire funds
C) A bank’s assets provide the bank with income
D) Bank capital is an asset on the bank balance sheet
22) The chairman of the Board of Governors of the Federal Reserve System exercises a
high degree of control over the board
A) through his ability to set the agenda of the Board and the FOMC
B) through his role as spokesperson for the Fed with the President and before Congress
C) because he can veto decisions made by a majority of the other Board members
D) because of all of the above
E) because of only A and B of the above
23) Governments never issue stock because
A) they cannot sell ownership claims
B) the Constitution expressly forbids it
C) both A and B of the above
D) neither A nor B of the above
24) A banker’s acceptance is
A) used to finance goods that have not yet been transferred from the seller to the buyer
B) an order to pay a specified amount of money to the bearer on a given date
C) a relatively new money market security that arose in the 1960s as international trade
expanded
D) all of the above
E) only A and B of the above
25) The security with the longest maturity is a Treasury
A) note.
B) bond
C) acceptance
D) bill
26) Which of the following statements is true?
A) A bank’s assets are its sources of funds
B) A bank’s liabilities are its uses of funds
C) A bank’s balance sheet shows that total assets equal total liabilities plus equity
capital
D) All of the above are true
27) As a way of stemming the decline in the number of savings and loans and mutual
savings banks, the Garn-St. Germain Act of 1982 allowed
A) money market certificates
B) money market mutual funds
C) money market deposit accounts
D) negotiable order of withdrawal accounts
28) Federal Reserve independence is thought to
A) introduce a short-term bias to monetary policymaking
B) lead to better fiscal and monetary policy coordination
C) introduce longer-run considerations to monetary policymaking
D) do both A and B of the above
29) That most used cars are sold by intermediaries (i.e., used car dealers) provides
evidence that these intermediaries
A) have been afforded special government treatment, since used car dealers do not
provide information that is valued by consumers of used cars
B) are able to prevent potential competitors from free-riding off the information that
they provide
C) have failed to solve adverse selection problems in this market because “lemons”
continue to be traded
D) do all of the above
30) The buyers of private placement securities are most likely to be ________.
A) insurance companies
B) pension funds and mutual funds
C) commercial banks
D) all of the above
E) only A and B of the above