1) If a bank has more rate-sensitive liabilities than assets, then an increase in interest
rates will reduce bank profits.
2) Interest rates on banker’s acceptances are low because the risk of default is very low.
3) Holding everything else constant, an increase in wealth lowers the quantity
demanded of an asset.
4) Much like banking institutions, interest-rate risk is a big concern for finance
companies.
5) The concept of adverse selection helps to explain why indirect finance is more
important than direct finance as a source of business finance.
6) Interest rates are procyclical in that they tend to rise during business cycle
expansions and fall during recessions.
7) Developing and maintaining long-term customer relationships help to reduce banks’
costs of screening and monitoring borrowers.
8) When interest rates decrease, the demand curve for bonds shifts to the left.
9) A bond’s current market value is equal to the present value of the coupon payments
plus the present value of the face amount.
10) Installment credit is a loan that requires the borrower to make a series of equal
payments over some fixed length of time.
11) The Gordon growth model assumes that a stock’s dividend grows at a constant rate
forever.
12) If the Fed wants to temporarily drain reserves from the banking system, it will
engage in
A) a repurchase agreement
B) a matched sale-purchase transaction
C) a “pump” agreement
D) none of the above
13) Typically, increasing interest rates
A) discourages individuals from saving
B) discourages corporate investments
C) encourages corporate expansion
D) encourages corporate borrowing
E) none of the above
14) The result of the too-big-to-fail policy is that ________ banks will take on
________ risks, making bank failures more likely.
A) small; fewer
B) small; greater
C) large; fewer
D) large; greater
15) A ________ is a specialized firm that finances young, start-up companies.
A) venture capital firm
B) finance company
C) small-business finance company
D) capital-creation company
16) Banks can protect themselves from the disruption caused by deposit outflows by
A) holding excess reserves
B) selling securities
C) “calling in” loans
D) doing all of the above
E) doing only A and B of the above
17) When the lender provides the borrower with an amount of funds that must be repaid
to the lender at the maturity date, along with an additional payment for the interest, it is
called a ________.
A) fixed-payment loan
B) discount loan
C) simple loan
D) none of the above
18) Which of the following does not weaken the efficient markets hypothesis?
A) Mean reversion
B) Success of buy-and-hold strategy
C) January effect
D) Excessive volatility
19) A weaker dollar benefits ________ and hurts ________
A) American businesses; American consumers
B) American businesses; foreign consumers
C) American consumers; American businesses
D) foreign businesses; American consumers
20) A situation in which the price of an asset differs from its fundamental market value
is called
A) an unexploited profit opportunity
B) a bubble
C) a correction
D) a mean reversion
21) Which of the following are reasons that explain why regulators pursued a policy of
regulatory forbearance toward thrifts in the early 1980s?
A) Regulators knew that the FSLIC did not have sufficient funds to close insolvent
S&Ls and pay off their depositors
B) Regulators were probably too close to the people they were supposed to be
regulating to close down thrifts and put them out of business
C) Regulators preferred to sweep the problems that thrifts were suffering under the rug
in the hope that they would go away as the economy improved
D) All of the above explain regulatory forbearance
E) Only A and B of the above explain regulatory forbearance
22) Financial crises
A) cause failures of financial intermediaries and leave only securities markets to
channel funds from savers to borrowers
B) are a recent phenomenon that occur only in developing countries
C) invariably lead to debt deflation
D) all of the above
E) none of the above
23) The most important category of assets on a bank’s balance sheet is
A) discount loans
B) securities
C) loans
D) cash items in the process of collection
24) Bank loans from the Federal Reserve are called ________ and represent a
________ of funds.
A) discount loans; use
B) discount loans; source
C) fed funds; use
D) fed funds; source
25) Which of the following is a characteristic feature of venture capital firms?
A) developing a portfolio of companies
B) holding debt in the firms that are funded
C) allowing firms to use the funds as they see fit
D) having a short-term investment horizon
26) “Bureaucratic gambling” refers to
A) the belief of thrift managers that they would not be audited by thrift regulators in the
1980s due to the relatively weak bureaucratic power of the regulators
B) the risk that thrift regulators took in publicizing the plight of the S&L industry in the
early 1980s
C) the strategy adopted by thrift regulators of lowering capital requirements and
pursuing regulatory forbearance in the 1980s in the hope that conditions in the S&L
industry would improve
D) none of the above
27) The ________ states that exchange rates between any two currencies will adjust to
reflect changes in the price levels of the two countries.
A) theory of purchasing power parity
B) law of one price
C) theory of money neutrality
D) quantity theory of money
28) In a ________ agreement, the investment banker makes no guarantee regarding the
price the issuing firm will receive, but agrees to sell the securities on a commission
basis.
A) best efforts
B) brokered
C) private-placement
D) jump-start
29) Money market transactions
A) do not take place in any one particular location or building
B) are usually arranged purchases and sales between participants over the phone by
traders and completed electronically
C) are both A and B of the above
D) are none the the above
30) Under the Bretton Woods system, when a nonreserve-currency country was running
a balance of payments deficit,
A) it gained international reserves
B) it lost international reserves
C) it was necessary for the policymakers to implement a contractionary monetary
policy
D) both A and C of the above occurred
E) both B and C of the above occurred
31) An open market transaction intended to change the level of bank reserves is a
A) repurchase agreement
B) reverse repo
C) dynamic operation
D) defensive operation
32) Policymakers may not want to see their country’s currency appreciate because
A) this would hurt consumers in their country by making foreign goods more expensive
B) this would hurt domestic businesses by making foreign goods cheaper in their
country
C) this would increase inflation in their country
D) this would decrease the wealth of the country
33) The current yield on a coupon bond is the bond’s ________ divided by its
________.
A) annual coupon payment; price
B) annual coupon payment; face value
C) annual return; price
D) annual return; face value
34) Which of the following is not a characteristic feature of venture capital firms?
A) funding just one or a small number of firms
B) holding equity in the firms that are funded
C) having a long-term investment horizon
D) providing advice and assistance to the firms that are funded
35) The most active investment banking firm in the private placement market is
________.
A) Merrill Lynch
B) Lehman Brothers
C) Goldman Sachs
D) Morgan Stanley
36) Most mutual funds are structured in two ways. The most common structure is a(n)
________ fund, from which shares can be redeemed at any time at a price that is tied to
the asset value of the fund. A(n) ________ fund has a fixed number of nonredeemable
shares that are traded in the over-the-counter market.
A) closed-end; open-end
B) open-end; closed-end
C) no-load; closed-end
D) no-load; load
E) load; no-load
37) Which of the following $1,000 face value securities has the highest yield to
maturity?
A) A 5 percent coupon bond selling for $1,000
B) A 10 percent coupon bond selling for $1,000
C) A 15 percent coupon bond selling for $1,000
D) A 15 percent coupon bond selling for $900
38) A borrower who qualifies for an FHA or VA loan enjoys the advantage that
A) the mortgage payment is much lower
B) only a very low or zero down payment is required
C) the cost of private mortgage insurance is lower
D) the government holds the lien on the property
39) Which of the following appears in the capital account part of the balance of
payments?
A) a gift to an American from his English aunt
B) a purchase by the Honda corporation of a U.S. Treasury bill
C) a purchase by the Bank of England of a U.S. Treasury bill
D) income earned by the Honda corporation on its automobile plant in Ohio
40) Debt deflation refers to
A) an increase in net worth, leading to a relative fall in general debt levels
B) a decline in general debt levels due to deleveraging
C) a decline in bond prices as default rates rise
D) a decline in net worth as price levels fall while debt burden remains unchanged
41) The stock market is important because
A) it is where interest rates are determined
B) it is the most widely followed financial market in the United States
C) it is where foreign exchange rates are determined
D) all of the above
42) In the used car market, asymmetric information leads to the lemons problem
because the price that buyers are willing to pay will
A) reflect the highest quality of used cars in the market
B) reflect the lowest quality of used cars in the market
C) reflect the average quality of used cars in the market
D) none of the above
43) The authors’ analysis of adverse selection indicates that financial intermediaries in
general, and banks in particular (because they hold a large fraction of nontraded loans),
A) have advantages in overcoming the free-rider problem, helping to explain why
indirect finance is a more important source of business finance than direct finance
B) play a greater role in moving funds to corporations than do securities markets as a
result of their ability to overcome the free-rider problem
C) provide better-known and larger corporations a higher percentage of their external
funds than they do to newer and smaller corporations, which rely to a greater extent on
the new issues market for funds
D) all of the above
E) only A and B of the above
44) Repos are
A) usually low-risk loans
B) usually collateralized with Treasury securities
C) low interest rate loans
D) all of the above
E) only A and B of the above
45) The problem of adverse selection helps to explain
A) why banks prefer to make loans secured by collateral
B) why banks have a comparative advantage in raising funds for American businesses
C) why borrowers are willing to offer collateral to secure their promises to repay loans
D) all of the above
E) only A and B of the above
46) An option that gives the owner the right to buy a financial instrument at the exercise
price within a specified period of time is a(n) ________.
A) call option
B) put option
C) American option
D) European option
47) Under a fixed exchange rate regime, if the domestic currency is initially ________,
that is ________ par, the central bank must intervene to sell the domestic currency by
purchasing foreign assets.
A) overvalued; below
B) overvalued; above
C) undervalued; below
D) undervalued; above
48) A rise in the expected future exchange rate shifts the expected return schedule for
________ deposits to the ________ and causes the domestic currency to appreciate.
A) domestic; right
B) domestic; left
C) foreign; right
D) foreign; left