1) Common stock is the riskiest corporate security, followed by preferred stock and
then bonds.
2) The current yield on a bond is a good approximation of the bond’s yield to maturity
when the bond matures in five years or less and its price differs from its par value by a
large amount.
3) Financial institutions are among the largest employers in the country and frequently
pay very high salaries.
4) Loan loss reserves are an asset on a bank’s balance sheet.
5) The failure of one bank can hasten the failure of others in what is referred to as a
contagion effect.
6) Given a bank’s return on assets, the higher the bank capital, the higher the return for
the owners of the bank.
7) The Sarbanes-Oxley Act of 2002 established a Public Company Accounting
Oversight Board (PCAOB), overseen by the SEC, to supervise accounting firms and
ensure that audits are independent and controlled for quality.
8) FIRREA imposed new restrictions on thrift activities that, in essence, re-regulated
the S&L industry to the asset choices it had before 1982 .
9) Listing large amounts of goodwill as an asset is another way that savings and loans
are able to hide the fact that they are insolvent.
10) An anchor currency provides the base for a floating exchange rate system.
11) For a simple loan, the simple interest rate equals the
A) real interest rate
B) nominal interest rate
C) current yield
D) yield to maturity
12) The Fed’s monetary policy strategy can be described as follows:
A) The Fed uses its policy tools to adjust intermediate targets that directly impact its
operating targets in a way that allows the Fed to achieve its goals
B) The Fed uses its policy tools to adjust operating targets that directly impact its
intermediate targets in a way that allows the Fed to achieve its goals
C) The Fed uses its operating targets to adjust its intermediate targets that directly
impact its policy tools in a way that allows the Fed to achieve its goals
D) None of the above
13) If First National Bank has a gap equal to a negative $30 million, then a 5 percentage
point increase in interest rates will cause profits to
A) increase by $15 million
B) increase by $1.5 million
C) decline by $15 million
D) decline by $1.5 million
14) ________ view credit unions as unfair competitors due to government support they
receive in the form of tax advantages.
A) Regulators
B) The Federal Reserve
C) Commercial banks
D) none of the above
15) If the Fed wants to raise the federal funds interest rate, it will ________ securities to
________ the banking system.
A) sell; add reserves to
B) sell; remove reserves from
C) buy; add reserves to
D) buy; remove reserves from
16) (I) Firms and individuals use the capital markets for long-term investments.
(II) Capital markets provide an alternative to investment in assets such as real estate and
gold.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
17) The capital of financial institutions is often measured by the ________ ratio.
A) current
B) net worth
C) asset turnover
D) liquidity
18) A debt contract is said to be incentive compatible if
A) the borrower’s net worth reduces the probability of moral hazard
B) restrictive covenants limit the type of activities that can be undertaken by the
borrower
C) both A and B of the above occur
D) neither A nor B of the above occur
19) Adverse selection is a problem associated with equity and debt contracts arising
from
A) the lender’s relative lack of information about the borrower’s potential returns and
risks of his investment activities
B) the lender’s inability to legally require sufficient collateral to cover a 100 percent
loss if the borrower defaults
C) the borrower’s lack of incentive to seek a loan for highly risky investments
D) none of the above
20) The most important source of the changes in supply conditions that stimulate
financial innovation has been the
A) aging of the baby-boomer generation
B) dramatic increase in the volatility of interest rates
C) improvement in information technology
D) dramatic increase in competition from foreign banks
E) deregulation of financial institutions
21) The Social Security system is an example of a public pension plan that is ________.
A) underfunded
B) fully funded
C) overfunded
D) none of the above
22) If a central bank does not want to see its currency rise in value, it may pursue
________ monetary policy to ________ the domestic interest rate, thereby weakening
its currency.
A) expansionary; raise
B) contractionary; raise
C) expansionary; lower
D) contractionary; lower
23) Holding everything else constant, if a corporation begins to suffer large losses, then
the default risk on its bonds will ________ and the expected return on those bonds will
________.
A) increase: increase
B) decrease; increase
C) increase; decrease
D) decrease; decrease
24) Changes in stock prices
A) affect people’s wealth and their willingness to spend
B) affect firms’ decisions to sell stock to finance investment spending
C) are characterized by considerable fluctuations
D) all of the above
E) only A and B of the above
25) The majority of mutual fund assets are now owned by
A) individual investors
B) institutional investors
C) fiduciaries
D) business organizations
E) retirees.
26) Money market securities have all the following characteristics except they are not
A) short term
B) money
C) low risk
D) very liquid
27) Higher expected interest rates in the future ________ the demand for long-term
bonds and shift the demand curve to the ________.
A) increase; left
B) increase; right
C) decrease; left
D) decrease; right
28) Which of the following types of information will most likely enable the exploitation
of a profit opportunity?
A) Financial analysts’ published recommendations
B) Technical analysis
C) Hot tips from a stockbroker
D) Insider information
29) The driving force behind the securitization of mortgages and automobile loans has
been
A) the rising regulatory constraints on substitute financial instruments
B) the desire of mortgage and auto lenders to exit this field of lending
C) the improvement in computer technology
D) the relaxation of regulatory restrictions on credit card operations
30) The agency responsible for regulation of the futures exchanges and trading in
financial futures is the
A) Commodity Futures Trading Commission
B) Securities and Exchange Commission
C) Federal Trade Commission
D) Futures Exchange Commission
31) Checking accounts that earn interest (such as NOW accounts) were not available
until ________.
A) 1962
B) 1972
C) 1982
D) 1992
32) If a bank has more rate-sensitive assets than rate-sensitive liabilities, then a(n)
________ in interest rates will ________ bank profits.
A) increase; increase
B) increase; reduce
C) decline; increase
D) decline; not affect
33) In September of 2008, the money market mutual fund Reserve Primary Fund had a
price of less than $1.00 for a dollar invested. How did this happen?
A) The fund invested in debt of Lehman Brothers, which was worthless when Lehman
went broke
B) The fund invested in high-yield junk bonds, which defaulted
C) The fund invested in Treasuries, which yielded less than 0% returns
D) This actually didn’t happen. It cannot happen since the fund only invested in
low-risk debt
34) The Fed is reluctant to use reserve requirements to control the money supply
because
A) of their overly-powerful impact on the money supply
B) they have the potential to create liquidity problems for banks with low excess
reserves
C) frequent changes in reserve requirements complicate liquidity management for
banks
D) of all of the above
E) of only A and B of the above
35) Which of the following provides funds to companies not yet ready to sell securities
to the public?
A) investment banks
B) securities brokers and dealers
C) venture capital firms
D) none of the above
36) (I) The risk premium widens as the default risk on corporate bonds increases.
(II) The risk premium widens as corporate bonds become less liquid.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
37) The liquidity premium theory of the term structure
A) indicates that today’s long-term interest rate equals the average of short-term interest
rates that people expect to occur over the life of the long-term bond
B) assumes that bonds of different maturities are perfect substitutes
C) suggests that markets for bonds of different maturities are completely separate
because people have different preferences
D) does none of the above
38) ________ bonds are the most liquid of all long-term bonds.
A) Callable
B) Municipal
C) Corporate Aaa
D) U.S. Treasury
39) The Bretton Woods agreement created the ________, which was given the task of
promoting the growth of world trade by setting rules for the maintenance of fixed
exchange rates and by making loans to countries that were experiencing balance of
payments difficulties.
A) IMF
B) World Bank
C) Central Settlements Bank
D) Bank of International Settlements
E) European Exchange Rate Mechanism (ERM)
40) ________ means the investors can convert their investment into cash quickly at a
low cost.
A) Liquidity intermediation
B) Denomination intermediation
C) Diversification
D) Managerial expertise