1) Most municipal bonds are revenue bonds rather than general obligation bonds.
2) A fall in the expected future exchange rate shifts the expected return schedule for
domestic deposits to the right and causes the domestic currency to depreciate.
3) The Treasury accepts noncompetitive bids in ascending order of yield until the
accepted bids reach the offering amount.
4) The Competitive Equality in Banking Act of 1987 allowed the FSLIC to borrow all
the funds it needed to close insolvent S&Ls and pay off depositors.
5) Futures contracts are subject to default risk.
6) A movement along the demand (or supply) curve occurs when the quantity demanded
(or supplied) changes at each given price (or interest rate) of the bond in response to a
change in some other factor besides the bond’s price or interest rate.
7) The future structure of the U.S. banking industry is likely to be characterized by
many more smaller banks, as customers demand neighborhood banks operated by
people they know personally.
8) Interest-rate risk is the uncertainty that an investor faces because the interest rate at
which a bond’s future coupon payments can be invested is unknown.
9) Most people’s involvement with the financial system is through financial
intermediaries rather than financial markets.
10) An investment pool is formed to manipulate the market for a stock by spreading
FALSE rumors about the health of the firm.
11) Each member of the seven-member Board is appointed by the president and
confirmed by the Senate to serve 14-year terms.
12) Monetary policy is set by the Board of Governors.
13) Money markets are used extensively by businesses both to warehouse surplus funds
and to raise short-term funds.
14) A forward contract is more flexible than a futures contract.
15) The spread between the interest rates on bonds with default risk and default-free
bonds is called the risk premium.
16) The congressionally imposed cap on the interest rate that S&Ls could pay on
savings accounts became a serious problem for them in the 1970s when inflation rose.
17) An option that can be exercised at any time up to maturity is called a(n) ________.
A) swap
B) stock option
C) European option
D) American option
18) All ________ are open-end investment funds that invest only in money market
securities.
A) Stock funds
B) Bond funds
C) Money market mutual funds
D) all of the above
19) Typically, yield curves are
A) gently upward-sloping
B) gently downward-sloping
C) flat
D) bowl shaped
E) mound shaped
20) With regard to external sources of financing for nonfinancial businesses in the
United States, which of the following are accurate statements?
A) Marketable securities account for a larger share of external business financing in the
United States than in most other countries
B) Since 1970, less than 5% of newly issued corporate bonds and commercial paper
have been sold directly to American households
C) The stock market accounted for the largest share of the financing of American
businesses in the 1970-2000 period
D) All of the above
E) Only A and B of the above
21) If a firm is due to be paid in euros in two months, to hedge against exchange rate
risk the firm should
A) sell foreign exchange futures short
B) buy foreign exchange futures long
C) stay out of the exchange futures market
D) do none of the above
22) When the demand for bonds ________ or the supply of bonds ________, interest
rates rise.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
23) The net asset value of a mutual fund is
A) determined by subtracting the fund’s liabilities from its assets and dividing by the
number of shares outstanding
B) determined by calculating the net price of the assets owned by the fund
C) calculated every 15 minutes and used for transactions occurring during the next
15-minute interval
D) calculated as the difference between the fund’s assets and its liabilities
24) The registration statement the securities underwriter files with the SEC contains
information about
A) the firm’s financial condition, management, competition, industry, and experience
B) how the funds will be used
C) management’s assessment of the risk of the securities
D) all of the above
E) only A and B of the above
25) So-called fallen angels differ from junk bonds in that
A) junk bonds refer to newly issued bonds with low credit ratings, whereas fallen
angels refer to previously issued bonds which have had their credit ratings fall below
Baa
B) junk bonds refer to previously issued bonds which have had their credit ratings fall
below Baa, whereas fallen angels refer to newly issued bonds with low credit ratings
C) junk bonds have ratings below Baa, whereas fallen angels have ratings below C
D) fallen angels have ratings below Baa, whereas junk bonds have ratings below C
26) When the price of a bond is above the equilibrium price, there is excess ________
in the bond market and the price will ________.
A) demand; rise
B) demand; fall
C) supply; fall
D) supply; rise
27) When prices in the stock market become more uncertain, 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) If the demand for ________ goods decreases relative to ________ goods, the
domestic currency will depreciate.
A) foreign; domestic
B) foreign; foreign
C) domestic; domestic
D) domestic; foreign
29) In which of the following situations would you prefer to be borrowing?
A) The interest rate is 9 percent and the expected inflation rate is 7 percent
B) The interest rate is 4 percent and the expected inflation rate is 1 percent
C) The interest rate is 13 percent and the expected inflation rate is 15 percent
D) The interest rate is 25 percent and the expected inflation rate is 50 percent
30) What goals are continually mentioned by central bank officials when discussing the
objectives of monetary policy?
A) High unemployment
B) Instability in foreign exchange markets
C) Interest-rate stability
D) All of the above
31) (I) A share of common stock in a firm represents an ownership interest in that firm.
(II) A share of preferred stock is as much like a bond as it is like common stock.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
32) A country whose financial markets function poorly is likely to
A) efficiently allocate its capital resources
B) enjoy high productivity
C) experience economic hardship and financial crises
D) increase its standard of living
33) Politicians in a democratic society may be shortsighted because of their desire to
win reelection; thus, the political process can
A) impart an inflationary bias to monetary policy
B) impart a deflationary bias to monetary policy
C) generate a political business cycle in which, just before an election, expansionary
policies are pursued to lower unemployment and interest rates
D) cause both A and C of the above to occur
34) The most significant change in the economic environment that changed the demand
for financial products since 1970 has been
A) the aging of the baby-boomer generation
B) the dramatic increase in the volatility of interest rates
C) the dramatic increase in competition from foreign banks
D) the deregulation of financial institutions
35) When the quantity of bonds demanded equals the quantity of bonds supplied, there
is
A) excess supply
B) excess demand
C) a market equilibrium
D) an asset market approach
36) The actual execution of open market operations is done at
A) the Board of Governors in Washington, D.C
B) the Federal Reserve Bank of New York
C) the Federal Reserve Bank of Philadelphia
D) the Federal Reserve Bank of Boston
37) If the Federal Reserve wants to expand reserves in the banking system, it will
A) purchase government securities
B) raise the discount rate
C) sell government securities
D) raise reserve requirements
38) The Federal Deposit Insurance Corporation Improvement Act of 1991
A) reduced the scope of deposit insurance in several ways
B) eliminated restrictions on nationwide banking
C) allowed well-capitalized banks to do some securities underwriting
D) did only A and B of the above
E) did only A and C of the above
39) The danger of banks engaging in activities such as trading in financial futures and
interest-rate swaps is that these activities allow banks to
A) increase profits
B) decrease risks
C) avoid bank regulations
D) engage in speculation
40) When the growth rate of the money supply is decreased, interest rates will rise
immediately if the liquidity effect is ________ than the other effects and if there is
________ adjustment of expected inflation.
A) larger; rapid
B) larger; slow
C) smaller; slow
D) smaller; rapid
41) Which of the following are not checkable deposits?
A) savings accounts
B) small-denomination time deposits
C) negotiable order of withdrawal accounts
D) all of the above
E) only A and B of the above
42) If the Fed wants to permanently lower interest rates, then it should lower the rate of
money growth if
A) there is fast adjustment of expected inflation
B) there is slow adjustment of expected inflation
C) the liquidity effect is smaller than the expected inflation effect
D) the liquidity effect is larger than the other effects
43) A swap that involves the exchange of a set of payments in one currency for a set of
payments in another currency is a(n) ________.
A) interest-rate swap
B) currency swap
C) swaption
D) notional swap
44) Compensating balances
A) are a particular form of collateral commonly required on commercial loans
B) are a required minimum amount of funds that a borrower (i.e., a firm receiving a
loan) must keep in a checking account at the bank
C) allow banks to monitor firms’ check payment practices, which can yield information
about their borrowers’ financial conditions
D) are all of the above
45) In a recession when income and wealth are falling, the demand for bonds ________
and the demand curve shifts to the ________.
A) falls; right
B) falls; left
C) rises; right
D) rises; left
46) The largest share of total investment in mutual funds is in
A) stock funds
B) hybrid funds
C) bond funds
D) money market funds
47) Disadvantages of using reserve requirements to control the money supply include
A) their overly-powerful impact on the money supply
B) creating potential liquidity problems for banks with high levels of excess reserves
C) their overly-powerful impact on the monetary base
D) all of the above
48) The case for Federal Reserve independence does not include the idea that
A) political pressure would impart an inflationary bias to monetary policy
B) the principal-agent problem is perhaps worse for the Fed than for congressmen since
the former does not answer to the voters on election day
C) a politically insulated Fed would be more concerned with long-run objectives and
thus be a defender of a sound dollar and a stable price level
D) a Federal Reserve under the control of Congress or the president might make the
so-called political business cycle more pronounced
49) A loan that requires the borrower to make the same payment every period until the
maturity date is called a
A) simple loan
B) fixed-payment loan
C) discount loan
D) same-payment loan
E) none of the above
50) The small-firm effect refers to the observation that small firms’ stocks
A) follow a random walk but large firms’ stocks do not
B) have earned abnormally low returns given their greater risk
C) have earned abnormally high returns even taking into account their greater risk
D) sell for lower prices than do large firms’ stocks