1) The market for U.S. Treasury bills is a shallow market because so few individual
investors buy T-bills.
2) Mutual funds are regulated under four federal laws designed to protect investors.
3) A bank maintains bank capital to lessen the chance that it will become insolvent.
4) A defined-contribution plan promises employees a specific amount of retirement
income.
5) The Sarbanes-Oxley Act of 2002 was passed in response to scandals in the
investment banking industry.
6) When the federal government’s budget deficit decreases, the demand curve for bonds
shifts to the right.
7) Casualty insurance can be provided in either named-peril policies or open-peril
policies.
8) The Board of Governors sets reserve requirements.
9) The theory of purchasing power parity cannot fully explain exchange rate
movements because fiscal policy differs across countries.
10) The Fed’s operating procedures and paying interest on reserves contains the federal
funds rate between the interest rate paid on reserves and the discount rate.
11) The term money market is actually a misnomer, because liquid securities are traded
in these markets rather than money.
12) Factoring refers to purchasing a firm’s accounts receivables at a premium.
13) Private mortgage insurance is a policy that guarantees to make up any discrepancy
between the value of the property and the loan amount, should a default occur.
14) By the end of 2010, China had accumulated more than $2 trillion of international
reserves.
15) An option that gives the holder the right to buy an asset in the future is a put.
16) A banker’s acceptance is an order to pay a specified amount of money to the bearer
on a given date. Banker’s acceptances have been used since the twelfth century.
17) The major provisions of the Competitive Equality in Banking Act of 1987 included
A) expanding the responsibilities of the FDIC, which is now the sole administrator of
the federal deposit insurance system
B) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts
placed in conservatorship or receivership
C) directing the Federal Home Loan Bank Board to continue to pursue regulatory
forbearance
D) all of the above
E) only A and B of the above
18) In the generalized dividend valuation model, a stock’s value depends only on
A) its future dividend payments and its future price
B) its future dividend payments and the required return on equity
C) its future price and the required return on investments on equity
D) its future dividend payments
19) Cross-country evidence suggests that an increase in central bank independence
results in a ________ inflation rate and ________ unemployment.
A) lower; higher
B) lower; no worse
C) higher; lower
D) higher; higher
20) As the price of a bond ________ and the expected return ________, bonds become
more attractive to investors and the quantity demanded rises.
A) falls; rises
B) falls; falls
C) rises; rises
D) rises; falls
21) Equity contracts account for a small fraction of external funds raised by American
businesses because
A) costly state verification makes the equity contract less desirable than the debt
contract
B) there is greater scope for moral hazard problems under equity contracts, as compared
to debt contracts
C) equity contracts do not permit borrowing firms to raise additional funds by issuing
debt
D) all of the above
E) both A and B of the above
22) If a bank has a gap of -$10 million, it can reduce its interest-rate risk by
A) paying a fixed rate on $10 million and receiving a floating rate on $10 million
B) paying a floating rate on $10 million and receiving a fixed rate on $10 million
C) selling $20 million fixed-rate assets
D) buying $20 million fixed-rate assets
23) Holding all else constant, when a bank receives the funds for a deposited check,
A) cash items in process of collection fall by the amount of the check
B) bank assets increase by the amount of the check
C) bank liabilities decrease by the amount of the check
D) all of the above occur
24) Leading up to the foreign exchange crisis of September 1992, the Bank of England
wanted to pursue a(n) ________ monetary policy and the German Bundesbank wanted
to pursue a(n) ________ monetary policy.
A) expansionary, expansionary
B) expansionary; contractionary
C) contractionary; expansionary
D) contractionary; contractionary
25) The Federal Reserve Act required all ________ banks to become members of the
Federal Reserve System, while ________ banks could choose to become members of
the system.
A) state; national
B) state; municipal
C) national; state
D) national; municipal
26) Suppose legislation requiring the Fed to keep the inflation rate between 1.5% and
2.5% per year is passed by Congress. This law restricts the Fed’s
A) instrument independence
B) goal independence
C) both A and B of the above
D) neither A nor B of the above
27) The interest rate that financial economists consider to be the most accurate measure
is the
A) current yield
B) yield to maturity
C) yield on a discount basis
D) coupon rate
28) Because information is scarce,
A) equity contracts are used much more frequently to raise capital than are debt
contracts
B) monitoring managers gives rise to costly state verification
C) government regulations, such as standard accounting principles, can help reduce
moral hazard
D) all of the above are true
E) only B and C of the above are true
29) An increase in expected inflation causes the supply of bonds to ________ and the
supply curve to shift to the ________.
A) increase, left
B) increase, right
C) decrease, left
D) decrease, right
30) A short contract requires that the investor
A) sell securities in the future
B) buy securities in the future
C) hedge in the future
D) close out his position in the future
31) The main sources of financing for businesses, in order of importance, are
A) financial intermediaries, issuing bonds, issuing stocks
B) issuing bonds, issuing stocks, financial intermediaries
C) issuing stocks, issuing bonds, financial intermediaries
D) issuing stocks, financial intermediaries, issuing bonds
32) When a bank repays a discount loan to the Fed, there is a(n) ________ in reserves
in the banking system and a(n) ________ in the monetary base.
A) increase; decrease
B) decrease; decrease
C) decrease; increase
D) increase; increase
33) Bad firms
A) do not have an incentive to make themselves look good
B) will slant the information they are required to transmit to the public
C) both A and B of the above
D) neither A nor B of the above
34) A bond rating of Aa or AA would mean that the quality of the bond is
A) the highest
B) high
C) medium grade
D) speculative
35) An instruction to a securities agent to buy or sell the security at the current market
price is called a ________.
A) limit order
B) market order
C) stop loss order
D) margin order
36) Bonds
A) are securities that represent a debt owed by the issuer to the investor
B) obligate the issuer to pay a specified amount at a given date, generally without
periodic interest payments
C) both A and B of the above
D) none of the above
37) Economists group commercial banks, savings and loan associations, credit unions,
mutual funds, mutual savings banks, insurance companies, pension funds, and finance
companies together under the heading financial intermediaries. Financial intermediaries
A) act as middlemen, borrowing funds from those who have saved and lending these
funds to others
B) play an important role in determining the quantity of money in the economy
C) help promote a more efficient and dynamic economy
D) do all of the above
E) do only A and C of the above
38) Holding everything else constant, a decrease in the money supply causes
A) interest rates to decline initially
B) interest rates to increase initially
C) bond prices to increase initially
D) both A and C of the above
E) both B and C of the above
39) Which combination of activities within a single financial institution is least likely to
lead to conflicts of interest?
A) auditing and management advisory services
B) commercial banking and investment banking
C) assessment of credit quality and consulting
D) consumer lending and business lending
40) The belief that bank failures were regularly caused by fraud or the lack of sufficient
bank capital explains, in part, the passage of
A) the National Bank Charter Amendments of 1918
B) the Glass-St. Germain Act of 1982
C) the National Bank Act of 1863
D) none of the above
41) In a ________ banking system, commercial banks provide a full range of banking,
securities, and insurance services, all within a single legal entity.
A) universal
B) British-style universal
C) barrier-free
D) seamless
42) Which of the following statements about cash management accounts (CMAs) are
true?
A) The cash management account was developed in 1977 by Merrill Lynch
B) The advantage of brokerage-based cash management accounts is that they make it
easier to buy and sell securities
C) As a result of CMAs, the distinction between banking activities and the activities of
nonbank financial institutions has become more clearly defined
D) All of the above are true
E) Only A and B of the above are true
43) Securities not listed on one of the exchanges trade in the over-the-counter market.
In this exchange, dealers “make a market” by
A) buying stocks for inventory when investors want to sell
B) selling stocks from inventory when investors want to buy
C) doing both of the above
D) doing neither of the above