1) A point on a mortgage loan refers to one monthly payment of principal and interest.
2) If the dollar depreciates relative to the British pound, British sweaters will become
more expensive in the United States.
3) Finance companies essentially sell commercial paper and use the proceeds to make
loans.
4) Adverse selection refers to those with high credit risks, being most aggressive in their
search for funds.
5) Interest rates are determined in the bond markets.
6) A better capitalized bank has more to lose when it fails and is less likely to take less
risk.
7) Evidence that a mutual fund has performed extraordinarily well in the past
contradicts the efficient market hypothesis.
8) Usury statutes limit the level of interest rates that finance companies can charge their
customers.
9) Debt deflation refers to the decline in debt values as creditors agree to lower interest
rates as an alternative to defaults.
10) When a bank receives additional deposits, it gains an equal amount of reserves;
when it loses deposits, it loses an equal amount of reserves.
11) Registered bonds have now been largely replaced by bearer bonds, which do not
have coupons.
12) Open market purchases by the Fed cause the federal funds rate to rise.
13) Like the consumer finance market, finance companies face many regulations in the
business loan market.
14) During the early years of a mortgage loan, the lender applies most of the payment to
the principal on the loan.
15) The seller of an option has the
A) right to buy or sell the underlying asset
B) the obligation to buy or sell the underlying asset
C) ability to reduce transaction risk
D) right to exchange one payment stream for another
16) The Federal National Mortgage Association (Fannie Mae)
A) was set up to buy mortgages from thrifts so that these institutions could make more
loans
B) funds purchases of mortgages by selling bonds to the public
C) provides insurance for certain mortgage contracts
D) does all of the above
E) does only A and B of the above
17) Moral hazard is an important consequence of insurance arrangements because the
existence of insurance
A) provides increased incentives for risk taking
B) impedes efficient risk taking
C) causes the private cost of the insured activity to increase
D) does both A and B of the above
E) does both B and C of the above
18) (I) Controls on capital outflows may increase capital flight by weakening
confidence in the government. (II) Controls on capital outflows are an inadequate
substitute for financial reform to deal with currency crises.
A) (I) is true; (II) false
B) (I) is false; (II) true
C) Both are true
D) Both are false
19) Large fluctuations in interest rates lead to
A) substantial capital gains and losses to owners of securities
B) greater uncertainty about returns on investments
C) greater interest-rate risk
D) all of the above
20) Financial guarantees
A) are insurance policies to back bond issues
B) are purchased by financially weaker security issuers
C) lower the risk of the bonds covered by the guarantee
D) do all of the above
E) do only A and B of the above
21) First National Bank
Table 23.1
Refer to Table 23.1. Assuming that the average duration of its assets is five years, while
the average duration of its liabilities is three years, a rise in interest rates from 5% to
10% will cause the net worth of First National to ________ by ________ of the total
original asset value.
A) increase; 11%
B) decline; 11%
C) increase; 10%
D) decline; 5%
22) Since 1990, the number of credit union members has ________.
A) increased substantially
B) increased slightly
C) decreased substantially
D) decreased slightly
23) Under best efforts underwriting, the underwriter
A) pays for the entire security issue
B) sells the security on a commission basis
C) spreads the risk among different brokerage houses
D) makes a special appeal to the Securities and Exchange Commission to delay the
issue
24) There are approximately how many commerical banks in the United States
currently?
A) 5,000
B) 7,500
C) 1,000
D) 1,250
25) Credit unions’ main source of funds is ________.
A) regular share accounts
B) share certificates
C) share draft accounts
D) money market accounts
26) In which industry is a floor plan common practice?
A) automobile
B) tech services
C) entertainment
D) apparel
27) An instruction to a securities agent to purchase a stock as long as its price does not
exceed a specified level is a ________.
A) short sell
B) market order
C) limit order
D) stop loss order
28) The largest asset held by S&Ls is ________.
A) consumer loans
B) securities
C) mortgage loans
D) consumer savings
29) If the yield curve slope is flat, the liquidity premium theory indicates that the
market is predicting
A) a mild rise in short-term interest rates in the near future and a mild decline further
out in the future
B) constant short-term interest rates in the near future and further out in the future
C) a mild decline in short-term interest rates in the near future and a continuing mild
decline further out in the future
D) constant short-term interest rates in the near future and a mild decline further out in
the future
30) Since the late 1970s, thrift institutions’ importance as a source of funds for
borrowers has shrunk markedly, from above ________ percent of total credit advanced
to below ________ percent today.
A) 30; 20
B) 30; 15
C) 40; 5
D) 20; 10
31) Which of the following financial intermediaries are depository institutions?
A) A savings and loan association
B) A commercial bank
C) A credit union
D) All of the above
E) Only A and C of the above
32) The primary reason that individuals and firms choose to borrow long-term is to
A) reduce the risk that interest rates will fall before they pay off their debt
B) reduce the risk that interest rates will rise before they pay off their debt
C) reduce monthly interest payments, as interest rates tend to be higher on short-term
than long-term debt instruments
D) reduce total interest payments over the life of the debt
33) Stage Three of a financial crisis in an emerging market economy features
A) a general increase in inflation
B) debt deflation
C) an increase in general price levels
D) a full-fledged financial crisis
34) Approximately how large was the U.S. subprime mortgage market in 2007?
A) $100 million
B) $100 billion
C) $500 billion
D) $1 trillion
35) Sometimes one observes that the price of a company’s stock falls after the
announcement of favorable earnings. This phenomenon is
A) clearly inconsistent with the efficient market hypothesis
B) consistent with the efficient market hypothesis if the earnings were not as high as
anticipated
C) consistent with the efficient market hypothesis if the earnings were not as low as
anticipated
D) the result of none of the above
36) (I) To sell an old bond when interest rates have risen, the holder will have to
discount the bond until the yield to the buyer is the same as the market rate.
(II) The risk that the value of a bond will fall when market interest rates rise is called
interest-rate risk.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
37) By the time the subprime financial crisis hit in force, Fannie and Freddie had
________ subprime and Alt-A assets on their books.
A) over $1 trillion of
B) very few
C) been prohibited from holding
D) none of the above
38) Which of the following long-term bonds should have the highest interest rate?
A) Corporate Baa bonds
B) U.S. Treasury bonds
C) Corporate Aaa bonds
D) Municipal bonds
39) The primary function of large diversified brokerage firms in the money market is to
A) sell money market securities to the Federal Reserve for its open market operations
B) make a market for money market securities by maintaining an inventory from which
to buy or sell
C) buy money market securities from corporations that need liquidity
D) buy T-bills from the U.S. Treasury Department
40) Another way to state the efficient market hypothesis is that in an efficient market,
A) unexploited profit opportunities will never exist as market participants, such as
arbitrageurs, ensure that they are instantaneously dissipated
B) unexploited profit opportunities will not exist for long, as market participants will
act quickly to eliminate them
C) every financial market participant must be well informed about securities
D) only A and C of the above
41) In the long run, ________ affect the exchange rate.
A) relative price levels
B) tariffs and quotas
C) productivity
D) all of the above