1) In an emerging market economy, a lending boom and crash are inevitable outcomes
of financial liberalization and globalization.
2) The share of bank operating income earned from off-balance-sheet activities has
increased over the past two decades.
3) American businesses use stock to finance about 10 percent of their external
financing.
4) American businesses get more funds from direct financing than from indirect
financing.
5) An increase in the inflation rate will cause the demand curve for bonds to shift to the
right.
6) The discount rate is an operating target.
7) Investors in venture capital firms expect to profit quickly from their investment.
8) A stock’s market value will be higher the higher its expected dividend stream is, all
else being equal.
9) If the markets are efficient, the optimal investment strategy will be to buy and hold
so as to minimize transaction costs.
10) Credit rationing reduces adverse selection problems.
11) To be classified as a well-capitalized bank, a bank’s leverage ratio must exceed 8
percent.
12) From largest to smallest in terms of total assets, the four classes of mutual funds are
A) equity funds, bond funds, hybrid funds, money market funds
B) equity funds, money market funds, bond funds, hybrid funds
C) money market funds, equity funds, hybrid funds, bond funds
D) bond funds, money market funds, equity funds, hybrid funds
13) Investment banks find it less difficult to price securities if the firm has prior issues
currently selling in the market, called ________.
A) secondary issues
B) seasoned issues
C) outstanding issues
D) experienced issues
14) Deposits in European banks denominated in dollars for the purpose of international
transactions are known as ________.
A) Eurodollars
B) European Currency Units
C) euros
D) International Monetary Units
15) When it comes to choosing an operating target, both the ________ rate and
________ aggregates are easily controllable using the Fed’s policy tools.
A) federal funds; monetary
B) federal funds; reserve
C) three-month Treasury bill; monetary
D) ten-year Treasury bond; reserve
16) If a rise in interest rates causes the market value of a bank’s net worth to rise, then
the bank must have a ________.
A) negative duration gap
B) positive duration gap
C) negative gap
D) positive gap
17) Lines of credit and long-term relationships between banks and their customers
A) reduce the costs of information collection
B) make it easier for banks to screen good risks from bad
C) enable banks to deal with moral hazard contingencies that are neither anticipated nor
specified in restrictive covenants
D) do all of the above
E) do only A and B of the above
18) The Global Legal Settlement of 2002 dealt with conflicts of interest in
A) accounting firms
B) investment banks
C) credit-rating agencies
D) all of the above
19) The prices of Treasury notes, bonds, and bills are quoted
A) as a percentage of the coupon rate
B) as a percentage of the previous day’s closing value
C) as a percentage of $100 face value
D) as a multiple of the annual interest paid
20) The main reason to buy an option on a futures contract rather than the futures
contract itself is
A) to reduce transaction cost
B) to preserve the possibility for gains
C) to limit losses
D) to remove the possibility for gains
21) In its simplest form, a credit default swap provides
A) insurance against default in the principle and interest payments of a credit
instrument
B) an alternative method for bond issuers to pay principle and interest payments via a
swap
C) bond investors with a method to swap interest payments for principle payments
during a “credit event”
D) the government with a guarantee that certain bond issues will not run into credit
problems
22) Conflicts of interest pose a problem because they
A) lower the quality of information
B) increase problems of asymmetric information
C) make the financial system less efficient
D) do all of the above
23) The elimination of riskless profit opportunities in the futures market is referred to as
________.
A) speculation
B) hedging
C) arbitrage
D) open interest
E) mark to market
24) A contract that requires the investor to buy securities on a future date is called a
________.
A) short contract
B) long contract
C) hedge
D) cross
25) A firm issuing credit cards earns income from
A) loans it makes to credit card holders
B) payments made to it by stores on credit card purchases
C) payments made to it by manufacturers of the products sold in stores on credit card
purchases
D) all of the above
E) only A and B of the above
26) Mortgage-backed securities
A) have been growing in popularity in recent years as institutional investors look for
attractive investment opportunities
B) are securities collateralized by a pool of mortgages
C) are securities collateralized by both insured and uninsured mortgages
D) are all of the above
E) are only A and B of the above
27) The theory of bureaucratic behavior when applied to the Fed helps to explain why
the Fed
A) resists so vigorously congressional attempts to limit the central bank’s autonomy
B) is secretive about the conduct of future monetary policy
C) sought less control over banks in the 1980s
D) all of the above
E) only A and B of the above
28) The theory of purchasing power parity states that exchange rates between any two
currencies will adjust to reflect changes in
A) the trade balances of the two countries
B) the current account balances of the two countries
C) fiscal policies of the two countries
D) the price levels of the two countries
29) The most important developments that have reduced banks’ cost advantages in the
past twenty years include
A) the elimination of Regulation Q ceilings
B) the competition from money market mutual funds
C) the growth of securitization
D) all of the above
E) only A and B of the above
30) Which of the following statements about private placements are true?
A) Private placements are more common for the sale of bonds than for stocks
B) Investment bankers, though not required for a private placement, often facilitate the
transaction
C) Investment bankers help the issuing firm file the paperwork required by the SEC
D) All of the above are true
E) Only A and B of the above are true
31) ________ bonds are exempt from federal income taxes.
A) Corporate Aaa
B) U.S. Treasury
C) Corporate Baa
D) Municipal
32) A bank manager has which of the following concerns?
A) to acquire funds at low cost
B) to minimize risk by diversifying asset holdings
C) to have enough ready cash to meet deposit outflows
D) all of the above
33) Which of the following are secondary 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) All of the above
34) Of the following assets, the one which has the highest capital requirement under the
Basel Accord is
A) municipal bonds
B) residential mortgages
C) commercial paper
D) securities issued by industrialized countries’ governments
35) Ginnie Mae
A) insures qualifying mortgages
B) insures pass-through certificates
C) insures collateralized mortgage obligations
D) does only A and B. of the above
E) does only B and C of the above
36) Because larger loans create greater incentives for borrowers to engage in
undesirable activities that make it less likely they will repay the loans, banks
A) ration credit, granting borrowers smaller loans than they have requested
B) ration credit, charging higher interest rates to borrowers who want large loans than
to those who want small loans
C) ration credit, charging higher fees as a percentage of the loan to borrowers who want
large loans than to those who want small loans
D) do none of the above