1) A financial guarantee ensures that the lender (bond purchaser) will be paid both
principal and interest in the event the issuer defaults.
2) All stocks pay dividends, as that is the only way an investor can profit from holding
stock.
3) Within the broad universe of private equity sectors, the two most common are
venture funds and capital buyouts.
4) Interest rates can be accurately described as the rental price of money.
5) Holding everything else constant, as the dollar strengthens foreigners will buy more
U.S. exports.
6) Following the subprime collapse, the spread (difference) between the interest rates
on Baa bonds and Treasury bonds widened.
7) The real interest rate is equal to the nominal rate minus inflation.
8) Most legal work in the U.S. involves the writing and enforcement of contracts, not
ambulance chasing, criminal law, and frivolous lawsuits.
9) Prior to the 2007-2009 financial crisis, inaccurate ratings provided by credit rating
agencies helped promote risk taking throughout the financial system.
10) A long-term bond’s price is less affected by interest rate movements than a
short-term bond’s price.
11) A financial intermediary borrows funds from people who have saved.
12) An increase in tariffs and quotas on imports causes a country’s currency to
appreciate.
13) The larger the number of shares traded in a stock transaction, the lower the
transaction costs per share.
14) The Wall Street Journal reports on 23 different indexes in its “Markets Lineup”
column.
15) Not all commercial banks deal in the secondary money market for their customers.
16) The Enron financial scandal increased uncertainty about the quality of accounting
information and as a result, increased required return on investment in stocks.
17) The Dodd-Frank legislation of 2010 finally resolved the status of GSEs such as
Freddie Mac.
18) More stock trading in the U.S. occurs in over-the-counter markets rather than on
organized exchanges.
19) Commercial paper securities are unsecured promissory notes, issued by
corporations, that mature in no more than 270 days.
20) Seigniorage is
A) when a country abandons its currency altogether and adopts that of another country
B) when a country loses the revenue that it received by issuing money
C) when the par exchange rate is reset at a lower level
D) when the domestic currency is backed 100% by a foreign currency
21) Capital market trading occurs in
A) the primary market
B) the secondary market
C) both A and B of the above
D) none of the above
22) (I) A bond is a debt security that promises to make payments periodically for a
specified period of time.
(II) A stock is a security that is a claim on the earnings and assets of a corporation.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
23) The Depository Institutions Deregulation and Monetary Control Act of 1980
A) approved NOW accounts nationwide
B) restricted the use of ATS accounts
C) imposed interest rate ceilings on bank loans
D) did all of the above
24) ________ intermediation means that small investors can pool their funds with other
investors to purchase high face value securities.
A) Liquidity
B) Financial
C) Denomination
D) Share
25) The current yield on a $5,000, 8 percent coupon bond selling for $4,000 is
A) 5%
B) 8%
C) 10%
D) 20%
E) none of the above
26) Credit unions are characterized by
A) mutual ownership
B) common bond membership
C) nonprofit, tax-exempt status
D) all of the above
E) none of the above
27) When the exchange rate for the euro changes from $1.00 to $1.20, then, holding
everything else constant, the euro has
A) appreciated and German cars sold in the United States become more expensive
B) appreciated and German cars sold in the United States become less expensive
C) depreciated and American wheat sold in Germany becomes more expensive
D) depreciated and American wheat sold in Germany becomes less expensive
28) (I) Restrictive covenants often limit the amount of dividends that firms can pay the
stockholders.
(II) Most corporate indentures include a call provision, which states that the issuer has
the right to force the holder to sell the bond back.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
29) Lower tariffs and quotas cause a country’s currency to ________ in the ________
run.
A) depreciate; short
B) appreciate; short
C) depreciate; long
D) appreciate; long
30) The biggest danger of financial derivatives occurs
A) when notional amounts exceed a bank’s capital
B) when financial market prices and rates are highly volatile
C) in the trading activities of financial institutions
D) in the large amount of credit exposure
31) The Federal Reserve’s Regulation Q
A) set maximum interest rates banks could pay on deposits
B) set minimum interest rates banks could pay on deposits
C) set maximum interest rates banks could charge on loans
D) discouraged disintermediation
32) In financial markets, lenders typically have inferior information about potential
returns and risks associated with any investment project. This difference in information
is called
A) comparative informational disadvantage
B) asymmetric information
C) variant information
D) caveat venditor
33) By the beginning of 2010, banks held $1,177 billion in consumer loans. Finance
companies held about ________ of that figure.
A) 40%
B) 60%
C) 90%
D) 110%
34) Which of the following are important factors in determining the degree and timing
of financial innovation?
A) changes in technology
B) changes in financial market conditions
C) changes in regulation
D) all of the above
E) only A and B of the above
35) An increase in the expected rate of inflation will ________ the expected return on
bonds relative to that on ________ assets, and shift the ________ curve to the left.
A) reduce; financial; demand
B) reduce; real; demand
C) raise; financial; supply
D) raise; real; supply
36) A long contract requires that the investor
A) sell securities in the future
B) buy securities in the future
C) hedge in the future
D) close out his position in the future
37) If a bank has $1 million of deposits, a required reserve ratio of 20 percent, and
$300,000 in reserves, it need not rearrange its balance sheet if there is a deposit outflow
of
A) $50,000
B) $75,000
C) $150,000
D) either A or B of the above
38) One problem with basic gap analysis is that it
A) is calculated assuming interest rates on all maturities are equal
B) is calculated assuming interest rates on all maturities change by equal amounts
C) measures the sensitivity of net worth to interest rate changes
D) does not measure the sensitivity of income to interest rate changes
E) applies only to financial institutions
39) If potential revenues from underwriting greatly exceed brokerage commissions,
there is ________ incentive for investment bank analysts to report ________
information about firms issuing securities.
A) stronger; unbiased
B) stronger; favorable
C) weaker; unbiased
D) weaker; favorable
40) A change in the current yield ________ signals a change in the same direction of
the yield to maturity.
A) never
B) rarely
C) always
D) often
41) Suppose you are holding a 5 percent coupon bond maturing in one year with a yield
to maturity of 15 percent. If the interest rate on one-year bonds rises from 15 percent to
20 percent over the course of the year, what is the yearly return on the bond you are
holding?
A) 5 percent
B) 10 percent
C) 15 percent
D) 20 percent
42) If the interest rate on dollar deposits is 10 percent, and the dollar is expected to
appreciate by 7 percent over the coming year, the expected return on dollar deposits in
terms of the foreign currency is
A) 3 percent
B) 10 percent
C) 13.5 percent
D) 17 percent
E) 24 percent
43) Which of the following are securities?
A) A certificate of deposit
B) A share of Texaco common stock
C) A Treasury bill
D) All of the above
E) Only A and B of the above
44) According to the expectations theory of the term structure,
A) when the yield curve is steeply upward-sloping, short-term interest rates are
expected to rise in the future
B) when the yield curve is downward-sloping, short-term interest rates are expected to
remain relatively stable in the future
C) investors have strong preferences for short-term relative to long-term bonds,
explaining why yield curves typically slope upward
D) all of the above
E) only A and B of the above
45) Examples of financial services that became practical realities as the result of new
computer technology include
A) credit cards
B) electronic banking facilities
C) checking accounts
D) all of the above
E) only A and B of the above
46) The primary issuers of capital market securities include
A) the federal and local governments
B) the federal and local governments, and corporations
C) the federal and local governments, corporations, and financial institutions
D) local governments and corporations
47) (I) The market price of a security at a given time is the highest value any investor
puts on the security. (II) Superior information about a security increases its value by
reducing its risk.
A) (I) is true, (II) is false
B) (I) is false, (II) is true
C) Both are true
D) Both are false
48) Which of the following banks are required to be members of the Federal Reserve
System?
A) state-chartered banks
B) insured banks
C) banks having over $500 million in assets
D) none of the above
49) Which of the following statements about the characteristics of debt and equity are
TRUE?
A) They both can be long-term financial instruments
B) They both involve a claim on the issuer’s income
C) They both enable a corporation to raise funds
D) All of the above
E) Only A and B of the above
50) Options on individual stocks are referred to as ________.
A) stock options
B) futures options
C) American options
D) individual options
51) If a bank has ________ rate-sensitive assets than rate-sensitive liabilities, then a(n)
________ in interest rates will increase bank profits.
A) more; decline
B) more; increase
C) less; increase
D) both A and C
52) If the FDIC decides that a bank is too big to fail, it will use the ________ method,
effectively ensuring that ________ depositors will suffer losses.
A) payoff; large
B) payoff; no
C) purchase and assumption; large
D) purchase and assumption; no
53) When the economy slips into a recession, normally the demand for bonds
________, the supply of bonds ________, and the interest rate ________.
A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; falls
D) decreases; increases; rises
54) Over the past twenty years, mutual fund fees have ________, largely because
________.
A) fallen; SEC fee disclosure rules have led to greater competition
B) risen; investors have learned that funds with high fees provide better performance
C) risen; there has been collusion between large mutual fund companies
D) fallen; advances in information technology have lowered transaction costs
55) The ________ Fed bank, with about 25 percent of the system’s assets, is the most
important of the Federal Reserve banks.
A) Chicago
B) Los Angeles
C) Miami
D) New York
E) Washington, D.C.