1) Advocates of Fed independence fear that subjecting the Fed to direct presidential or
congressional control would
A) impart an inflationary bias to monetary policy
B) force monetary authorities to sacrifice the long-run objective of price stability
C) make the so-called political business cycle less pronounced
D) do all of the above
E) do only A and B of the above
2) The largest source of bank income is
A) interest on loans
B) interest on securities
C) service charges on deposit accounts
D) noninterest income
3) In which industry is factoring a common practice?
A) automobile
B) tech services
C) entertainment
D) apparel
4) (I) ARMs offer lower initial rates and the rate may fall during the life of the loan.
(II) Conventional mortgages do not allow a borrower to take advantage of falling
interest rates.
A) (I) is true, (II) is false
B) (I) is false, (II) is true
C) Both are true
D) Both are false
5) Which of the following is not a requirement in selecting an intermediate target?
A) measurability
B) controllability
C) flexibility
D) predictability
6) The most common type of mortgage-backed security is
A) the mortgage pass-through, a security that has the borrower’s mortgage payments
pass through the trustee before being disbursed to the investors
B) collateralized mortgage obligations, a security which reduces prepayment risk
C) the participation certificate, a security which passes the borrower’s mortgage
payments equally among all the owners of the certificates
D) the securitized mortgage, a security which increases the liquidity of otherwise
illiquid mortgages
7) Hedge funds are
A) low risk because they are market-neutral
B) low risk if they buy Treasury bonds
C) low risk because they hedge their investments
D) high risk because they are market-neutral
E) high risk, even though they may be market-neutral
8) (I) Securities that have an original maturity greater than one year are traded in money
markets.
(II) The best known money market securities are stocks and bonds.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
9) Which of the following are true for a coupon bond?
A) When the coupon bond is priced at its face value, the yield to maturity equals the
coupon rate
B) The price of a coupon bond and the yield to maturity are positively related
C) The yield to maturity is greater than the coupon rate when the bond price is above
the par value
D) All of the above are true
E) Only A and B of the above are true
10) The first step in finding the value of a bond is to
A) discount back the cash flows using an interest rate that represents the yield available
on other bonds of like risk and maturity
B) identify the cash flows the holder of the bond will receive
C) contact the holder of the bond
D) none of the above
11) The PE ratio approach to valuing stock is especially useful for valuing
A) privately held firms
B) firms that don’t pay dividends
C) both A and B of the above
D) neither A nor B of the above
12) Which of the following are TRUE statements?
A) The FOMC usually meets every six weeks to set monetary policy
B) The FOMC issues directives to the trading desk at the New York Fed
C) Designers of the Federal Reserve Act did not envision the use of discount lending as
a monetary policy tool
D) All of the above are true statements
E) Only A and B of the above are true statements
13) Measuring the sensitivity of bank profits to changes in interest rates by multiplying
the gap times the change in the interest rate is called ________.
A) basic duration analysis
B) basic gap analysis
C) interest-exposure analysis
D) gap-exposure analysis
14) The banking industry
A) should have an efficiency advantage in gathering information that would eliminate
the need for the money markets
B) exists primarily to mediate the asymmetric information problem between
saver-lenders and borrower-spenders
C) is subject to more regulations and governmental costs than the money markets
D) all of the above are true
E) only A and B of the above are true
15) One financial intermediary in our financial structure that helps to reduce the moral
hazard arising from the principal-agent problem is the
A) venture capital firm
B) money market mutual fund
C) pawn broker
D) savings and loan association
16) The ________ theory is the most widely accepted theory of the term structure of
interest rates because it explains the major empirical facts about the term structure so
well.
A) liquidity premium
B) market segmentation
C) expectations
D) none of the above
17) When inflation rose in the late 1970s,
A) consumers moved money out of money market mutual funds because their returns
did not keep pace with inflation
B) banks solidified their advantage over money markets by offering higher deposit rates
C) brokerage houses introduced highly popular money market mutual funds, which
drew significant amounts of money out of bank deposits
D) consumers were unable to take advantage of higher rates in money markets because
of the requirement of large transaction sizes
18) Critics of the current system of Fed independence contend that
A) the current system is undemocratic
B) voters have too much say about monetary policy
C) the president has too much control over monetary policy on a day-to-day basis
D) all of the above are true
19) The efficient market hypothesis suggests that allocating your funds in the financial
markets on the advice of a financial analyst
A) will certainly mean higher returns than if you had made selections by throwing darts
at the financial page
B) will always mean lower returns than if you had made selections by throwing darts at
the financial page
C) is not likely to prove superior to a strategy of making selections by throwing darts at
the financial page
D) is good for the economy
20) In 2010, the largest portion of loans made by finance companies was ________,
representing 43.3% of the loans.
A) consumer loans
B) factoring loans
C) business loans
D) real estate
21) The loanable funds framework is easier to use when analyzing the effects of
changes in ________, while the liquidity preference framework provides a simpler
analysis of the effects from changes in income, the price level, and the supply of
________
A) expected inflation; bonds
B) expected inflation; money
C) government budget deficits; bonds
D) the supply of money; bonds
22) Securities dealers
A) hold inventories of securities, which they sell to customers who want to buy
B) hold securities that they have purchased from customers who wanted to sell
C) are called market takers, as they have significantly cut into the market that brokers
used to dominate
D) do all of the above
E) do only A and B of the above
23) If the expected path of one-year interest rates over the next five years is 1 percent, 2
percent, 3 percent, 4 percent, and 5 percent, then the pure expectations theory predicts
that the bond with the highest interest rate today is the one with a maturity of
A) one year
B) two years
C) three years
D) four years
E) five years
24) Americans’ fear of centralized power and their distrust of moneyed interests explain
why the U.S. did not have a central bank until the
A) 17th century
B) 18th century
C) 19th century
D) 20th century
25) (I) S&Ls’ net worth ratio is about the same as that of commercial banks.
(II) Goodwill accounts for a majority of S&Ls’ capital.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
26) Since the passage of the International Banking Act of 1978, the competitive
advantage enjoyed by foreign banks has been ________.
A) reduced
B) mildly expanded
C) completely eliminated
D) greatly expanded
27) Credit rationing occurs when a bank
A) refuses to make a loan of any amount to a borrower, even when she is willing to pay
a higher interest rate
B) restricts the amount of a loan to less than the borrower would like
C) does either A or B of the above
D) does neither A nor B of the above
28) Which of the following statements are true?
A) Because coupon payments on municipal bonds are exempt from federal income tax,
the expected after-tax return on them will be higher for individuals in higher income tax
brackets
B) An increase in tax rates will increase the demand for Treasury bonds, lowering their
interest rates
C) Interest rates on municipal bonds will be higher than on comparable bonds without
the tax exemption
D) Only A and B are true statements
29) The chartering process is especially designed to deal with the ________ problem,
and restrictions on asset holdings help to reduce the ________ problem.
A) adverse selection; adverse selection
B) adverse selection; moral hazard
C) moral hazard; adverse selection
D) moral hazard; moral hazard
30) Bank reserves can be categorized as
A) vault cash and deposits at the Fed
B) required reserves and excess reserves
C) borrowed reserves and nonborrowed reserves
D) all of the above
31) The Bretton Woods system was one in which central banks
A) agreed to limit domestic money growth to the average of the seven largest industrial
nations
B) agreed not to intervene in the foreign exchange market to maintain a fixed exchange
rate regime that had existed prior to World War I
C) agreed to limit domestic money growth to the average of the five largest industrial
nations
D) bought and sold their own currencies to keep their exchange rates fixed
32) The McFadden Act of 1927
A) effectively prohibited banks from branching across state lines
B) required that banks maintain bank capital equal to at least 6 percent of their assets
C) effectively required that banks maintain a correspondent relationship with large
money center banks
D) did all of the above