1) Demographic trends and changes in retirement patterns suggest that Social Security
funding problems will ease over the next few decades.
2) Subprime loans are those made to borrowers who do not qualify for loans at the
usual market rate of interest because of a poor credit rating or because the loan is larger
than justified by their income.
3) The Social Security system is an example of a pension plan that is fully funded.
4) To keep enough cash on hand to meet depositors’ demand for withdrawals, banks
must engage in liquidity management.
5) The Glass-Steagall Act made it illegal for an investment bank to buy or sell securities
on behalf of its customers.
6) Interest-rate swaps involve the exchange of a set of payments in one currency for a
set of payments in another.
7) When the value of the dollar changes from 0.50 pounds to 0.75 pounds, the pound
has appreciated and the dollar has depreciated.
8) The value-at-risk method for estimating a bank’s risk exposure measures the losses a
bank could incur under a worst-case scenario.
9) Junk bonds are high-risk, high-return equity securities that were used primarily to
finance takeover attempts.
10) Interest-rate swaps are more liquid than futures contracts.
11) The Securities and Exchange Commission requires firms to submit various
documents to increase the flow of information to investors but does not verify the
accuracy of that information.
12) If a bank has a negative gap, then a decrease in interest rates will increase income.
13) One reason why indirect financing is used is to minimize adverse selection
problems.
14) The Bretton Woods system was a fixed exchange rate regime in which central banks
bought and sold their own currencies to keep their exchange rates fixed.
15) Which of the following causes a depreciation of the domestic currency?
A) A lower domestic interest rate due to a lower expected inflation rate
B) A decline in the domestic real interest rate
C) A decrease in the domestic money supply
D) All of the above
16) Which of the following is an element of the Federal Reserve System?
A) The Federal Reserve banks
B) The Board of Governors
C) The FOMC
D) All of the above
17) As the relative expected return on dollar deposits increases, foreigners will want to
hold more ________ deposits and less ________ deposits.
A) foreign; foreign
B) foreign; dollar
C) dollar; foreign
D) dollar; dollar
18) If your competitive bid for a Treasury bill is successful, then you will
A) certainly pay less than if you had submitted a noncompetitive bid
B) probably pay more than if you had submitted a noncompetitive bid
C) pay the average of prices offered in other successful competitive bids
D) pay the same as other successful competitive bidders
19) Ivan Boesky, the most successful of the so-called arbs in the 1980s, was able to
outperform the market on a consistent basis, indicating that
A) securities markets are not efficient
B) unexploited profit opportunities were abundant
C) investors can outperform the market with inside information
D) only B and C of the above
20) The goal for high employment should be a level of unemployment at which the
demand for labor equals the supply of labor. Economists call this level of
unemployment the
A) frictional rate of unemployment
B) structural rate of unemployment
C) natural rate of unemployment
D) ideal rate of unemployment
21) A stock currently sells for $30 per share and pays $1.00 per year in dividends. What
is an investor’s valuation of this stock if he expects it to be selling for $37 in one year
and requires a 12 percent return on equity investments?
A) $38
B) $33.50
C) $34.50
D) $33.93
22) Bank panics in 1819, 1837, 1857, 1873, 1884, 1893, and 1907 convinced many that
A) the Federal Reserve needed greater control over the banking system
B) the Federal Reserve needed greater authority to deal with problem banks
C) a central bank was needed to prevent future financial panics
D) both A and B of the above
23) The duration of a ten-year, 10 percent coupon bond when the interest rate is 10
percent is 6.76 years. What happens to the price of the bond if the interest rate falls to 8
percent?
A) It rises 20 percent
B) It rises 12.3 percent
C) It falls 20 percent
D) It falls 12.3 percent
24) The interest rate borrowers pay on their mortgages is determined by
A) current long-term market rates
B) the term
C) the number of discount points
D) all of the above
25) To use the concept of duration to analyze the effect of changes in interest rates on
the market value of an asset, a bank manager would multiply
A) the negative of the duration of the asset by the change in the interest rate, i
B) the negative of the duration of the asset by i /(1 + i)
C) the duration of the asset by the change in the interest rate, i
D) the duration of the asset by i /(1 + i)
26) On a bank’s income statement, the provision for loan losses is an ________ item
and represents the amount of ________ in the bank’s loan loss reserves.
A) income; decrease
B) income; increase
C) expense; decrease
D) expense; increase
27) One factor contributing to the decline in income advantages that banks once had is
the increased competition from the commercial paper market, which has grown in size
to over ________ percent of commercial and industrial bank loans today.
A) 20
B) 30
C) 40
D) 50
28) Holding other things constant, a stock’s value will be highest if its dividend growth
rate is
A) 15%
B) 10%
C) 5%
D) 2%
29) A smart card is a form of
A) stored-value card
B) credit card
C) debit card
D) e-cash card
30) What is default risk?
A) A problem that arises when a firm runs short of cash
B) The risk of asset prices rising too high
C) The chance that the borrower will fail to repay a loan
D) The risk associated with longer-term contracts
31) The 12 Federal Reserve banks are involved in monetary policy in several ways:
A) their directors establish the discount rate
B) they decide which banks can obtain discount loans from the Federal Reserve Bank
C) their directors select one commercial banker from each bank’s district to serve on the
Federal Advisory Council
D) all of the above
32) Exchange traded funds (ETFs) have which of the following features?
A) They are listed and traded as individual stocks on a stock exchange
B) They are indexed rather than actively managed
C) Their value is based on the underlying net asset value of the stocks held in the index
basket
D) All of the above
33) First National Bank
Table 23.1
Referring to Table 23.1, if interest rates rise by 5 percentage points, then bank profits
(measured using gap analysis) will
A) decline by $0.5 million
B) decline by $1.5 million
C) decline by $2.5 million
D) increase by $1.5 million
34) “Zombie S&Ls”
A) paid above market interest rates to attract deposits to fuel their lending boom
B) offered loans at below market interest rates to expand their lending
C) drove down the profitability of solvent S&Ls, threatening to turn them into
“zombies” too
D) did all of the above
E) did only A and B of the above
35) An increase in marginal tax rates would likely have the effect of ________ the
demand for municipal bonds and ________ the demand for U.S. government bonds.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing
36) In response to an asset-price bubble, macroprudential regulation appears to be the
right tool. What is macroprudential regulation?
A) Increasing the federal funds rate across the macroeconomy
B) The use of tax incentives to capture some of the gains from bubbles
C) Regulatory policy to affect what is happening in credit markets in the aggregate
D) None of the above is correct
37) Although the verdict is not yet in, the available evidence indicates that, for many
purposes, the efficient market hypothesis is
A) a good starting point for analyzing expectations
B) not a good starting point for analyzing expectations
C) too general to be a useful tool for analyzing expectations
D) none of the above
38) Measuring the sensitivity of bank profits to changes in interest rates by multiplying
the gap for several maturity subintervals by the change in the interest rate is called
A) basic gap analysis
B) the segmented maturity approach to gap analysis
C) the maturity bucket approach to gap analysis
D) the segmented maturity approach to interest-exposure analysis
E) none of the above
39) The financial panic of 1907 resulted in such widespread bank failures and
substantial losses to depositors that the American public finally became convinced that
A) the First Bank of the United States had failed to serve as a lender of last resort
B) the Second Bank of the United States had failed to serve as a lender of last resort
C) the Federal Reserve System had failed to serve as a lender of last resort
D) a central bank was needed to prevent future panics