1) When the Bundesbank lowered German mark interest rates in September 1992,
A) there was a massive sell-off of German marks, requiring intervention to support the
value of the mark
B) there was a massive sell-off of British pounds, requiring intervention to support the
value of the pound
C) there was a gradual sell-off of German marks, which avoided the need for
intervention to support the value of the mark
D) there was a gradual sell-off of British pounds, which avoided the need for
intervention to support the value of the pound
2) Bonds with relatively low risk of default are called
A) zero coupon bonds
B) junk bonds
C) investment-grade bonds
D) none of the above
3) According to the liquidity premium theory of the term structure, a downward-sloping
yield curve indicates that short-term interest rates are expected to
A) rise in the future
B) remain unchanged in the future
C) decline moderately in the future
D) decline sharply in the future
4) If a corporation’s earnings rise, then the default risk on its bonds will ________ and
the equilibrium interest rate on these bonds will ________.
A) increase; decrease
B) decrease; decrease
C) increase; increase
D) decrease; increase
5) The near collapse of Long Term Capital Management was caused by
A) the high management fees charged by the fund’s two Nobel Prize winners
B) the fund’s high leverage ratio of 20 to 1
C) a sharp decrease in the spread between corporate bonds and Treasury bonds
D) a sharp increase in the spread between corporate bonds and Treasury bonds
E) the fund’s shift away from a market-neutral investment strategy
6) The Federal Advisory Council has ________ member(s) from each district.
A) one
B) two
C) three
D) can have any number of
7) Forward exchange rates
A) involve the immediate exchange of bank deposits
B) involve the exchange of bank deposits at some specified future date
C) involve the immediate exchange of imports and exports
D) none of the above
8) Bank capital
A) is raised by selling new equity
B) is a cushion against a drop in the value of its assets
C) comes from retained earnings
D) is all of the above
9) With an option ARM loan, the borrower has an option to
A) reduce the monthly interest rate being charged
B) reduce the monthly payment, possibly increasing the mortgage balance from one
month to the next
C) increase the outstanding balance by increasing the monthly payment
D) Both A and C are correct
10) Which of the following is a feature of index funds?
A) They have lower fees
B) They select and hold stocks to match the performance of a stock index
C) They do not require managers to select stocks and decide when to buy and sell
D) All of the above
11) (I) A majority of life insurance companies are organized as mutual companies.
(II) State governments have the major responsibility for regulating insurance
companies.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
12) (I) If a corporate bond becomes less liquid, the interest rate on the bond will fall.
(II) If a corporate bond becomes less liquid, the interest rate on Treasury bonds will fall.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
13) Mutual fund companies frequently offer a number of separate mutual funds called
________.
A) indexes
B) complexes
C) components
D) actuaries
14) The Second Bank of the United States was denied a new charter by
A) President Andrew Jackson
B) Vice President John Calhoun
C) President Benjamin Harrison
D) President John Q. Adams
15) Mutual savings banks are concentrated in the ________ United States.
A) northeastern
B) southeastern
C) western
D) all of the above
16) (I) The average lifetime of a debt security’s stream of payments is called duration.
(II) The duration of a portfolio is the weighted average of the durations of the individual
securities, with the weights reflecting the proportion of the portfolio invested in each.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
17) (I) Debt markets are often referred to generically as the bond market.
(II) A bond 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
18) The largest purchasers of capital market securities are
A) households
B) corporations
C) governments
D) central banks
19) ________ perform their main function in the primary market for securities and
________ perform their main function in the secondary market.
A) Investment banks; securities brokers and dealers
B) Securities brokers and dealers; investment banks
C) Securities brokers; securities dealers
D) Securities dealers; securities brokers
20) Which is not a management practice for reducing the problems of adverse selection
and moral hazard in insurance?
A) deductibles
B) restrictive provisions
C) coinsurance
D) reinsurance
21) Monetary policy is chiefly concerned with
A) how much money businesses earn
B) the level of interest rates and the nation’s money supply
C) how much money people pay in taxes
D) whether people have saved enough money for retirement
22) If you sell a short contract on financial futures, you hope interest rates will
________.
A) rise
B) fall
C) not change
D) fluctuate
23) Futures differ from forwards because they are
A) used to hedge portfolios
B) used to hedge individual securities
C) used in both financial and foreign exchange markets
D) marked to market daily
24) Rules used to predict movements in stock prices based on past patterns are,
according to the efficient markets theory,
A) a waste of time
B) profitably employed by all financial analysts
C) the most efficient rules to employ
D) consistent with the random walk hypothesis
25) When the economy enters into a boom, normally the demand for bonds ________,
the supply of bonds ________, and the interest rate ________.
A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; rises
D) decreases; increases; rises
26) When you deposit $50 in the First National Bank,
A) its liabilities decrease by $50.
B) its assets increase by $50
C) its reserves increase by $50
D) only B and C of the above occur
27) A bank failure is more likely to occur when
A) a bank holds less in U.S. government securities
B) a bank suffers large deposit outflows
C) a bank holds less equity capital
D) all of the above occur
E) only A and B of the above occur
28) The case for Federal Reserve independence includes the idea that
A) political pressure would impart an inflationary bias to monetary policy
B) a politically insulated Fed would be more concerned with long-run objectives and
thus be a defender of a sound dollar and a stable price level
C) a Federal Reserve under the control of Congress or the president might make the
so-called political business cycle more pronounced
D) all of the above
29) Of the following financial intermediaries, which holds the least liquid assets?
A) property and casualty insurance companies
B) life insurance companies
C) money market mutual funds
D) commercial banks
30) The type of open market operation intended to offset movements in other factors
that affect reserves and the monetary base is
A) the dynamic open market operations
B) the defensive open market operations
C) the reserve requirements
D) market equilibrium
31) Call provisions will be exercised when interest rates ________ and bond values
________.
A) rise; rise
B) fall; rise
C) rise; fall
D) fall; fall
32) The purchasing power parity theory
A) has significant predictive power in the short run
B) is the starting point for understanding how exchange rates are determined
C) does not take into account that many goods and services are not traded across
borders
D) is none of the above
33) With the start of the subprime financial crisis in August 2007, the dollar ________
in value against the euro as the Fed lowered interest rates. By December of 2008, with
the financial crisis spreading throughout Europe, foreign central banks cut their interest
rates, leading to a ________ in the value of the dollar relative to the euro.
A) rose; further increase
B) rose; decline
C) declined; rise
D) declined; further decline