1) The dollar amount invested in mutual funds is about the same as the total assets of all
commercial banks at the beginning of 2004.
2) Whether a fund is organized as a closed- or an open-end fund, is will have the same
basic organizational structure.
3) Many common stocks are traded over the counter, although a majority of the largest
corporations have their shares traded at organized stock exchanges.
4) The second major liability of savings and loans is borrowings.
5) About half of new equity issues are preferred stock.
6) Equity represents an ownership interest in a firm and entitles the holder to the
residual cash flows.
7) Risk occurs when the issuer of the bond is unable or unwilling to make interest
payments when promised or pay off the face value when the bond matures.
8) American investors pay attention to only the Dow Jones Industrial Average.
9) In recent years, financial markets have become more risky. However, only a limited
number of tools (such as derivatives) are available to assist in managing this risk.
10) One advantage of using options to hedge is that the accounting transaction will
never require the firm to show large unrecognized losses.
11) General obligation bonds have specific assets pledged as security or specific
sources of revenue allocated for their repayment.
12) Due to criticisms of rating agencies following the default of many subprime
products, the SEC prohibited credit rating agencies from structuring the same products
that they rate.
13) An increase in income tax rates will cause the interest rates on tax-exempt
municipal bonds to fall relative to the interest rate on taxable corporate securities.
14) By buying a long $100,000 futures contract for 115, you agree to pay ________ for
________ face value securities.
A) $100,000; $115,000
B) $115,000; $100,000
C) $86,956; $100,000
D) $86,956; $115,000
15) Although it enjoys a high degree of autonomy, the Fed is still subject to the
influence of Congress because
A) Congress can pass legislation that would restrict the Fed’s independence
B) Congress can withhold the Fed’s budget requests
C) Congress can remove members of the Board of Governors whose views on policy
differ from those of key members of Congress
D) All of the above
16) Tests used to rate the performance of rules developed in technical analysis conclude
that
A) technical analysis outperforms the overall market
B) technical analysis far outperforms the overall market, suggesting that stockbrokers
provide valuable services
C) technical analysis does not outperform the overall market
D) technical analysis does not outperform the overall market, suggesting that
stockbrokers do not provide services of any value
17) All other things held constant, premiums on call options will increase when the
A) exercise price falls
B) volatility of the underlying asset falls
C) term to maturity decreases
D) futures price increases
18) The main cause of fluctuations in stock prices is changes in
A) tax laws
B) errors in technical stock analysis
C) daily trading volume in stock markets
D) information available to investors
E) total household wealth in the economy
19) Thrifts suffered problems in the 1970s as
A) market interest rates rose above the rates thrifts could pay on deposits and savings
accounts
B) thrift customers moved their funds from thrifts to money market mutual funds
C) government regulators severely limited the scope of activities that thrifts could
undertake to grow their way out of trouble
D) all of the above occurred
E) only A and B of the above occurred
20) The concept of ________ is based on the notion that a dollar paid to you in the
future is less valuable to you than a dollar today.
A) present value
B) future value
C) interest
D) deflation
21) When the corporate bond market becomes more liquid, other things equal, the
demand curve for corporate bonds shifts to the ________ and the demand curve for
Treasury bonds shifts to the ________.
A) right; right
B) right; left
C) left; left
D) left; right
22) A bond’s future payments are called its
A) cash flows
B) maturity values
C) discounted present values
D) yields to maturity
23) Thrifts
A) fueled the home-building boom from 1934-1978
B) suffered in the 1970s as inflation rose above deposit interest rate ceilings
C) have grown in importance in attracting deposits relative to commercial banks since
1980
D) are all of the above
E) are only A and B of the above
24) As compared to a default on the notional principle, a default on a swap
A) is more costly
B) is about as costly
C) is less costly
D) may cost more or less than default on the notional principle
25) Rising market interest rates in the 1960s and the 1970s, combined with regulated
deposit rate ceilings,
A) worked in the short-run to give mortgage-issuing institutions a source of low-cost
funds
B) led eventually to an outflow of deposits from depository institutions
C) led to financial innovations that worked to avoid these regulations
D) did all of the above
E) did only A and C of the above
26) The demand curve for reserves shifts to the left and the federal funds rate falls when
the Fed
A) decreases reserve requirements or does an open market purchase
B) lowers the discount rate
C) lowers the discount rate or does an open market purchase
D) decreases reserves requirements
E) does an open market sale
27) When bonds become less widely traded, and as a consequence the market becomes
less liquid, the demand curve for bonds shifts to the ________ and the interest rate
________.
A) right; rises
B) right; falls
C) left; falls
D) left; rises
28) Insurance companies’ attempts to minimize adverse selection and moral hazard
explain which of the following insurance practices?
A) collection of information and screening of potential policyholders
B) risk-based premiums
C) deductibles and coinsurance
D) all of the above
E) only A and B of the above
29) A spot transaction in the foreign exchange market involves the
A) exchange of exports and imports at a specified future date
B) exchange of bank deposits at a specified future date
C) immediate (within two days) exchange of exports and imports
D) immediate (within two days) exchange of bank deposits
30) So-called fallen angels differ from junk bonds in that
A) junk bonds refer to previously issued bonds which have had their credit ratings fall
below Baa
B) fallen angels refer to newly issued bonds with low credit ratings
C) junk bonds refer to newly issued bonds with low credit ratings
D) they are both A and B of the above
31) In 1975, financial institutions developed financial derivatives that included
________.
A) adjustable-rate mortgages
B) futures contracts
C) financial engineering
D) virtual banks
32) Monetary policy affects
A) interest rates
B) inflation
C) business cycles
D) all of the above
33) Which of the following terms are found in mortgage loan contracts to protect the
lender from financial loss?
A) collateral
B) down payment
C) private mortgage insurance
D) all of the above
34) (I) The coupon rate is the rate of interest that the issuer of the bond must pay.
(II) The coupon rate is usually fixed for the duration of the bond and does not fluctuate
with market interest rates.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
35) Duration gap analysis
A) is a refinement of basic gap analysis that accounts for interest-rate changes over a
multiyear period
B) is a refinement of basic gap analysis that accounts for how long a gap will last
C) is a complement to basic gap analysis that accounts for the effect of interest rate
changes on market value
D) is a complement to basic gap analysis that accounts for the influence of partially
rate-sensitive assets
36) To sell an old bond when interest rates have ________, the holder will have to
________ the price of the bond until the yield to the buyer is the same as the market
rate.
A) risen; lower
B) risen; raise
C) fallen; lower
D) risen; inflate
37) A form of electronic money used on the Internet to pay for goods and services is
A) e-money
B) e-cash
C) a smart card
D) a virtual bank
38) (I) Prices of longer-maturity bonds respond less dramatically to changes in interest
rates.
(II) Prices and returns for long-term bonds are less volatile than those for shorter-term
bonds.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false