1) The primary difference between the “payoff” and the “purchase and assumption”
methods of handling failed banks is that the FDIC
A) guarantees all deposits, not just those under the $250,000 limit, when it uses the
“payoff” method
B) guarantees all deposits, not just those under the $250,000 limit, when it uses the
“purchase and assumption” method
C) is less likely to use the “payoff” method when the bank is large and it fears that
depositor losses may spur business bankruptcies and other bank failures
D) does both A and B of the above
E) does both B and C of the above
2) Examiners from the Federal Home Loan Bank Board of San Francisco recommended
that Lincoln Savings and Loan be seized when they discovered that
A) officials at the thrift had attempted to mislead them
B) it had exceeded the 10 percent limit on equity investments by $600 million
C) its owner, Charles Keating, had been convicted of embezzlement ten years before he
purchased the thrift
D) all of the above occurred
E) only A and B of the above occurred
3) If the Fed uses the federal funds rate as an interest rate target, an increase in the
demand for reserves will result in a(n) ________ in ________.
A) increase; nonborrowed reserves
B) decrease; nonborrowed reserves
C) increase; the federal funds interest rate
D) decrease; the federal funds interest rate
4) The efficient market hypothesis
A) is based on the assumption that prices of securities fully reflect all available
information
B) holds that the expected return on a security equals the equilibrium return
C) both A and B
D) neither A nor B
5) The efficient market hypothesis suggests that
A) investors should purchase no-load mutual funds, which have low management fees
B) investors can use the advice of technical analysts to outperform the market
C) investors let too many unexploited profit opportunities go by if they adopt a “buy
and hold” strategy
D) only A and B of the above are sensible strategies
6) A bank
A) obtains funds by borrowing and by issuing liabilities
B) makes profits by charging an interest rate on their asset holdings of securities and
loans that is lower than the interest and other expenses on their liabilities
C) does both A and B of the above
D) does neither A nor B of the above
7) A loan-servicing agent will
A) package the loan for an investor
B) hold the loan in their investment portfolio
C) collect payments from the borrower
D) do both A and C of the above
E) do both B and C of the above
8) If the Fed wants to “prick” an asset-pricing bubble driven by a credit boom, what is
the primary tool for accomplishing this?
A) Raising interest rates
B) Lowering interest rates
C) Increasing reserve requirements
D) Taking a short position in the overpriced asset
9) Which of the following statements about the money markets are true?
A) Most money market securities do not pay interest. Instead, the investor pays less for
the security than it will be worth when it matures
B) Pension funds invest a portion of their assets in the money market to have sufficient
liquidity to meet their obligations
C) Unlike most participants in the money market, the U.S. Treasury Department is
always a demander of money market funds and never a supplier
D) All of the above are true
E) Only A and B of the above are true
10) The prohibition against banks underwriting corporate securities and engaging in
brokerage, real estate, and insurance activities was repealed by the
A) Gramm-Leach-Bliley Financial Services Modernization Act
B) Competitive Equality in Banking Act
C) Depositary Institution Deregulation and Monetary Control Act
D) Glass-Steagall Act
11) Lower expected interest rates in the future ________ the demand for long-term
bonds and shift the demand curve to the ________
A) increase; left
B) increase; right
C) decrease; left
D) decrease; right
12) The most effective way to deal with currency crises is to
A) impose controls on capital inflows
B) impose controls on capital outflows
C) impose controls on both capital inflows and outflows
D) improve bank regulation and supervision
13) The Federal Reserve desires interest rate stability because
A) it allows for less uncertainty about future planning
B) interest rate volatility often leads to demands to curtail the Fed’s power
C) it guarantees full employment
D) both A and B of the above
14) The current yield on a $6,000, 10 percent coupon bond selling for $5,000 is
A) 5%
B) 10%
C) 12%
D) 15%
15) Which of the following bank assets are the most liquid?
A) consumer loans
B) reserves
C) cash items in process of collection
D) U.S. government securities
16) A coupon bond pays the owner of the bond
A) the same amount every month until the maturity date
B) a fixed interest payment every period, plus the face value of the bond at the maturity
date
C) the face value of the bond plus an interest payment once the maturity date has been
reached
D) the face value at the maturity date
E) none of the above
17) The traditional financial intermediation role of banking has been to make
________-term loans and to fund them with ________-term deposits.
A) short; long
B) long; short
C) short; short
D) long; long
18) Compared to interest rates on long-term U.S. government bonds, interest rates on
________ fluctuate more and are lower on average.
A) medium-quality corporate bonds
B) low-quality corporate bonds
C) high-quality corporate bonds
D) three-month Treasury bills
E) none of the above
19) If you buy an option to buy Treasury futures at 110, and at expiration the market
price is 115,
A) the call will be exercised
B) the put will be exercised
C) the call will not be exercised
D) the put will not be exercised
20) Bankers’ concern regarding the optimal mix of excess reserves, secondary reserves,
borrowings from the Fed, and borrowings from other banks to deal with deposit
outflows is an example of
A) liability management
B) liquidity management
C) managing interest-rate risk
D) none of the above
21) Commercial banks are large holders of ________ and are the major issuer of
________.
A) negotiable certificates of deposit; U.S. government securities
B) U.S. government securities; negotiable certificates of deposit
C) commercial paper; Eurodollars
D) Eurodollars; commercial paper
22) The process of calculating what dollars received in the future are worth today is
called
A) calculating the yield to maturity
B) discounting the future
C) compounding the future
D) compounding the present
23) The majority of household debt in the United States consists of
A) credit card debt
B) consumer installment debt
C) collateralized loans
D) unsecured loans, such as student loans
24) The problem of ________ occurs when those most likely to get large insurance
payoffs are the ones who want to purchase insurance the most.
A) asymmetric information
B) moral hazard
C) adverse selection
D) fraudulent behavior
25) Corporate bonds are not as liquid as government bonds because
A) fewer bonds for any one corporation are traded, making them more costly to sell
B) the corporate bond rating must be calculated each time they are traded
C) corporate bonds are not callable
D) all of the above
E) only A and B of the above
26) The legislation that effectively prohibited banks from branching across state lines
and forced all national banks to conform to the branching regulations of the state in
which they reside is the
A) McFadden Act
B) National Banking Act
C) Glass-Steagall Act
D) Garn-St. Germain Act
27) Financial intermediaries (banks in particular) have the ability to avoid the free-rider
problem as long as they primarily
A) make private loans
B) acquire a diversified portfolio of stocks
C) buy junk bonds
D) do a balanced combination of A and B of the above
28) Which of the following is a description of a private equity firm?
A) Public shares are retired
B) A public company goes private
C) The firm is no longer subject to controls and oversight required of publicly held
companies
D) All of the above are correct
29) When the lender and the borrower have different amounts of information regarding
a transaction, ________ is said to exist.
A) asymmetric information
B) adverse selection
C) moral hazard
D) fraud
30) What kind of exchange rate system did the Bretton Woods agreement establish?
A) floating
B) managed float
C) dirty float
D) fixed
31) Critics of Fed independence argue
A) that it is undemocratic to have monetary policy controlled by an elite group
responsible to no one
B) that independence seemingly does little to guarantee good monetary policy
C) that its independence may encourage the Fed to pursue a course of narrow
self-interest rather than the public interest
D) all of the above
32) Which of the following markets is sometimes organized as an over-the-counter
market?
A) The stock market
B) The bond market
C) The foreign exchange market
D) The federal funds market
E) all of the above
33) The liquidity premium theory of the term structure
A) assumes investors tend to prefer short-term bonds because they have less
interest-rate risk
B) assumes that interest rates on the long-term bond respond to demand and supply
conditions for that bond
C) assumes that an average of expected short-term rates is an important component of
interest rates on long-term bonds
D) assumes all of the above
E) assumes none of the above
34) STRIPS (Separate Trading of Registered Interest and Principal Securities) are also
called
A) interest-based securities
B) zero-coupon securities
C) leveraged securities
D) covenant securities
35) Each Fed bank president attends FOMC meetings; although only ________ Fed
bank presidents vote on policy, all ________ provide input.
A) three; ten
B) five; ten
C) three; twelve
D) five; twelve
36) A clause in a mortgage loan contract requiring the borrower to purchase
homeowner’s insurance is an example of
A) a restrictive covenant
B) a collusive agreement between mortgage lenders and insurance companies
C) both A and B of the above
D) neither A nor B of the above
37) Foreign currencies that are deposited in banks outside the home country are known
as
A) foreign bonds
B) Eurobond
C) Eurocurrencies
D) Eurodollars