1) The efficient market hypothesis suggests that
A) investors should not try to outguess the market by constantly buying and selling
securities
B) investors do better on average if they adopt a “buy and hold” strategy
C) buying into a mutual fund is a sensible strategy for a small investor
D) all of the above are sensible strategies
E) only A and B of the above are sensible strategies
2) In the early stages of the banking crisis in the 1980s, financial institutions were
especially harmed by
A) declining interest rates from late 1979 until 1981
B) the severe recession in 1981-82
C) the disinflation from mid-1980 to early 1983
D) all of the above
3) The smallest average-sized depository institution is ________.
A) credit unions
B) savings and loan associations
C) commercial banks
D) money market mutual funds
4) When a financial institution is hedging interest-rate risk on its overall portfolio, the
hedge is a ________.
A) macro hedge
B) micro hedge
C) cross hedge
D) futures hedge
5) Property that is pledged to the lender in the event that a borrower cannot make his or
her debt payment is called
A) points
B) interest
C) collateral
D) good faith money
6) According to the Gordon growth model, what is an investor’s valuation of a stock
whose current dividend is $1.00 per year if dividends are expected to grow at a constant
rate of 10 percent over a long period of time and the investor’s required return is 15
percent?
A) $20
B) $11
C) $22
D) $7.33
E) $4.40
7) An SIV, or structured investment vehicle, is an off-balance-sheet entity that shields a
sponsoring institution from risk. What happened to some of these SIVs when they ran
into financial problems?
A) The SIV sued the sponsoring institution to pay, in full, all liabilities of the SIV
B) The SIV still remained off-balance-sheet, but investors did sue sponsoring
institutions
C) Nothing! The SIV status as off-balance-sheet remained, a nice example of a financial
structure that worked during the financial crisis
D) Troubled SIVs became an asset of the sponsoring institution — the off-balance-sheet
status was meaningless
8) If First State Bank has a gap equal to a positive $20 million, then a 5 percentage
point drop in interest rates will cause profits to
A) increase by $10 million
B) increase by $1.0 million
C) decline by $10 million
D) decline by $1.0 million
9) The return on a bond is equal to the yield to maturity when
A) the holding period is longer than the maturity of the bond
B) the maturity of the bond is longer than the holding period
C) the holding period and the maturity of the bond are identical
D) none of the above
10) Which of the following is true of life insurance companies?
A) They primarily hold long-term assets that are not particularly liquid
B) They primarily hold short-term liquid assets
C) Payouts to policyholders are relatively predictable
D) Both A and C of the above are true
11) Because of the abuses by state banks and the clear need for a central bank to help
the federal government raise funds during the War of 1812, Congress created the
A) First Bank of the United States in 1812
B) Bank of North America in 1814
C) Second Bank of the United States in 1816
D) Federal Reserve System in 1813
12) Evidence in favor of market efficiency does not include
A) random-walk behavior
B) technical analysis
C) performance of investment analysts and mutual funds
D) the January effect
13) A declining stock market index due to lower share prices
A) reduces people’s wealth and as a result may reduce their willingness to spend
B) increases people’s wealth and as a result may increase their willingness to spend
C) decreases the amount of funds that business firms can raise by selling newly issued
stock
D) both A and C of the above
E) both B and C of the above
14) Economists group commercial banks, savings and loan associations, credit unions,
mutual funds, mutual savings banks, insurance companies, pension funds, and finance
companies together under the heading financial intermediaries. Financial intermediaries
A) act as middlemen, borrowing funds from those who have saved and lending these
funds to others
B) produce nothing of value and are therefore a drain on society’s resources
C) help promote a more efficient and dynamic economy
D) do all of the above
E) do only A and C of the above
15) Compared to interest rates on long-term U.S. government bonds, interest rates on
three-month Treasury bills fluctuate ________ and are ________ on average.
A) more; lower
B) less; lower
C) more; higher
D) less; higher
16) Every financial market performs the following function:
A) It determines the level of interest rates
B) It allows common stock to be traded
C) It allows loans to be made
D) It channels funds from lenders-savers to borrowers-spenders
17) Unlike most money market securities, commercial paper
A) is not generally traded in a secondary market
B) usually has a term to maturity that is longer than a year
C) is not popular with most money market investors because of the high default risk
D) all of the above
E) only A and B of the above
18) The Riegle-Neal Act of 1994
A) required all banks to become universal banks
B) removed ceilings on bank deposit interest rates
C) allowed banks to underwrite insurance and securities and engage in real estate
activities
D) overturned prohibitions on interstate banking and branching
19) The policy of regulatory forbearance
A) meant delaying the closing of “zombie S&Ls” as their losses mounted during the
1980s
B) benefited “zombie S&Ls” at the expense of healthy S&Ls, as healthy institutions lost
deposits to insolvent institutions
C) contributed to declining profitability in the S&L industry and an increase in the
number of “zombie S&Ls”
D) did all of the above
E) did only A and B of the above
20) Which of the following statements is true?
A) Credit-driven asset bubbles are particularly dangerous. When asset prices fall, the
deleveraging of credit markets reduces economic activity
B) Bubbles driven solely by irrational exuberance lead to a failure of financial
institutions
C) Both A and B are correct
D) Neither A nor B is correct
21) A security
A) is a claim or price of property that is subject to ownership
B) promises that payments will be made periodically for a specified period of time
C) is the price paid for the usage of funds
D) is a claim on the issuer’s future income
22) To say that stock prices follow a “random walk” is to argue that
A) stock prices rise, then fall, then rise again
B) stock prices rise, then fall in a predictable fashion
C) stock prices tend to follow trends
D) stock prices cannot be predicted based on past trends
23) If the expected path of one-year interest rates over the next four years is 5 percent, 4
percent, 2 percent, and 1 percent, then the pure expectations theory predicts that today’s
interest rate on the four-year bond is
A) 1 percent
B) 2 percent
C) 4 percent
D) none of the above
24) When a lender refuses to make a loan, although borrowers are willing to pay the
stated interest rate or even a higher rate, it is said to engage in ________.
A) constrained lending
B) strategic refusal
C) credit rationing
D) collusive behavior
25) An option that gives the owner the right to sell a financial instrument at the exercise
price within a specified period of time is a(n) ________.
A) call option
B) put option
C) American option
D) European option
26) Treasury bonds are subject to ________ risk but are free of ________ risk.
A) default; interest-rate
B) default; underwriting
C) interest-rate; default
D) interest-rate; underwriting