1) Collateralized debt is also called secured debt.
2) The principle underlying Treasury strips is that an investor will earn a higher interest
rate when reinvestment risk is eliminated.
3) Checkable deposits, a traditional source of low-cost funds for banks, have declined
dramatically in importance, falling from over 60 percent of bank liabilities to less than
10 percent today.
4) “Truth in lending” was mandated under the Consumer Protection Act of 1969 and
requires all lenders to reveal the annual percentage rate, or APR, on loans.
5) The primary issuers of capital market securities are local governments and
corporations.
6) The problem of adverse selection helps to explain why direct finance is more
important than indirect finance as a source of business finance.
7) Discount points (or simply points) are interest payments made at the beginning of a
loan.
8) Many retailers established finance companies to provide financing for their
customers. Although these finance subsidiaries did increase sales, the subsidiary was
typically unprofitable.
9) A stock’s market value will be higher the higher the investor’s required rate of return
is, all else being equal.
10) Private placements are more common for the sale of stocks than for bonds.
11) Depreciation of a currency makes it easier for domestic manufacturers to sell their
goods abroad and makes foreign goods less competitive in domestic markets.
12) According to the expectations theory, the interest rate on a long-term bond is the
average of the short-term interest rates expected over the life of the long-term bond.
13) The risk structure of interest rates describes the relationship between the interest
rates of different bonds with the same maturities.
14) The FOMC does not actually carry out securities purchases or sales.
15) Nearly half the funds for mortgage lending comes from mortgage pools and trusts.
16) The process of financial intermediation is also known as direct finance.
17) A stock is a debt security that promises to make periodic payments for a specific
period of time.
18) The Fed can influence the federal funds rate by adjusting the level of reserves in the
banking system.
19) An unsterilized intervention in which domestic currency is purchased by selling
foreign assets leads to a rise in international reserves, a decrease in the money supply,
and an appreciation of the domestic currency.
20) A long contract obligates the holder to sell securities in the future.
21) Because checking accounts are ________ liquid for the depositor than passbook
savings, they earn ________ interest rates.
A) less; higher
B) less; lower
C) more; higher
D) more; lower
22) According to the liquidity premium theory of the term structure,
A) because buyers of bonds may prefer bonds of one maturity over another, interest
rates on bonds of different maturities do not move together over time
B) the interest rate on long-term bonds will equal an average of short-term interest rates
that people expect to occur over the life of the long-term bonds plus a term premium
C) because of the positive term premium, the yield curve cannot be downward-sloping
D) all of the above
E) only A and B of the above
23) All other things held constant, premiums on put options will increase when the
A) exercise price increases
B) volatility of the underlying asset falls
C) term to maturity increases
D) A and C are both true
24) What is the model whose equations are estimated using statistical procedures used
in forecasting interest rates called?
A) econometric model
B) liquidity preference framework
C) market equilibrium
D) Fisher effect
25) With private investing,
A) capital is raised by selling securities to the public
B) capital is raised by issuing new shares of stock
C) a limited partnership is formed that raises money from a small number of
high-wealth investors
D) all of the above occur
26) When an old bond’s market value is above its par value, the bond is selling at a
________. This occurs because the old bond’s coupon rate is ________ the coupon rates
of new bonds with similar risk.
A) premium; below
B) premium; above
C) discount; below
D) discount; above
27) When the growth rate of the money supply increases, interest rates end up being
permanently lower if
A) the liquidity effect is larger than the other effects
B) there is fast adjustment of expected inflation
C) there is slow adjustment of expected inflation
D) the expected inflation effect is larger than the liquidity effect
28) One factor contributing to the decline in cost advantages that banks once had is the
decline in the importance of checkable deposits from over ________ percent of banks’
source of funds to ________ percent today.
A) 70; 30
B) 60; 5
C) 50; 20
D) 40; 15
29) Retired people can live on the equity they have in their homes by using a
A) GEM
B) GPM
C) SAM
D) RAM
30) Which of the following are primary markets?
A) The New York Stock Exchange
B) The U.S. government bond market
C) The over-the-counter stock market
D) The options markets
E) None of the above
31) A stock currently sells for $25 per share and pays $0.24 per year in dividends. What
is an investor’s valuation of this stock if she expects it to be selling for $30 in one year
and requires a 15 percent return on equity investments?
A) $30.24
B) $26.30
C) $26.09
D) $27.74
32) The condition which states that the domestic interest rate equals the foreign interest
rate minus the expected appreciation of the domestic currency is called
A) the purchasing power parity condition
B) the interest parity condition
C) money neutrality
D) the theory of foreign capital mobility
33) A borrower with a 30-year loan can create a GEM by
A) simply increasing the monthly payments beyond what is required and designating
that the excess be applied entirely to the principal
B) converting his ARM into a conventional mortgage
C) converting his conventional mortgage into an ARM
D) converting his conventional mortgage into a GPM
34) According to the text, the Competitive Equality in Banking Act of 1987
A) turned the thrift industry around by providing the necessary funds to close the
“zombie S&Ls”
B) lowered the cost of bailing out the S&Ls by quickly closing “zombie S&Ls” before
they could cause other thrifts to fail
C) failed to provide the funds necessary to close ailing S&Ls, and actually encouraged
regulators to continue to pursue regulatory forbearance
D) did both A and B of the above
35) An important lesson from the Black Monday Crash of 1987 and the tech crash of
2000 is that
A) factors other than market fundamentals affect stock prices
B) the strong version of the efficient market hypothesis, that stock prices reflect the
true fundamental value of securities, is correct
C) market psychology has little if any effect on stock prices
D) there is no such thing as a rational bubble
36) The risk premium on corporate bonds becomes smaller if
A) the riskiness of corporate bonds increases
B) the liquidity of corporate bonds increases
C) the liquidity of corporate bonds decreases
D) the riskiness of corporate bonds decreases
E) either B or D of the above occur
37) The traditional American distrust of moneyed interests and the fear of centralized
power help to explain
A) the failures of the first two experiments in central banking in the United States
B) the decentralized structure of the Federal Reserve System
C) why the Board of Governors of the Federal Reserve System is not located in New
York
D) all of the above
E) only A and B of the above
38) A rise in the price level causes the demand for money to ________ and the demand
curve to shift to the ________
A) decrease; right
B) decrease; left
C) increase; right
D) increase; left
39) Institutional features of debt markets in Asia that propelled several countries into
financial crises include
A) debt contracts with long durations
B) firms with debt denominated in U.S. dollars
C) governments that could not intervene to protect depositors
D) all of the above
E) only A and C of the above
40) A debt contract is more likely to be incentive compatible if
A) the company must follow standard accounting principles
B) the funds are provided by a venture capital firm
C) owners of the firm have more of their own money in the business
D) all of the above
E) only B and C
41) The amount of assets per dollar of equity capital is called the
A) asset ratio.
B) equity ratio
C) equity multiplier
D) asset multiplier
E) return on equity
42) Which of the following is a potential operating target for the Fed?
A) Nonborrowed reserves
B) The federal funds rate
C) The monetary base
D) All of the above
43) ________ is an insurance product that will help if you live longer than you expect.
For an initial fixed sum or stream of payments, the insurance company agrees to pay
you a fixed amount for as long as you live.
A) Life insurance proper
B) Disability insurance
C) An annuity
D) Health insurance
44) If a firm must pay for goods it has ordered with foreign currency, it can hedge its
foreign exchange rate risk by
A) selling foreign exchange futures short
B) buying foreign exchange futures long
C) staying out of the exchange futures market
D) doing none of the above
45) REMICs are most like
A) Freddie Mac pass-through securities
B) Ginnie Mae pass-through securities
C) participation certificates
D) collateralized mortgage obligations
46) (I) Conventional mortgages are originated by private lending institutions, and FHA
or VA loans are originated by the government.
(II) Conventional mortgages are insured by private companies, and FHA or VA loans
are insured by the government.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
47) When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and
the bank chooses not to hold any excess reserves but instead makes loans, then in the
bank’s final balance sheet,
A) the assets at the bank increase by $800,000
B) the liabilities of the bank increase by $1,000,000
C) the liabilities of the bank increase by $800,000
D) reserves increase by $160,000
48) A bank manager concerned about interest income who expects interest rates to fall
and who knows the bank currently has a positive gap should ________ rate-sensitive
assets and ________ rate-sensitive liabilities.
A) increase; increase
B) decrease; increase
C) decrease; decrease
D) increase; decrease