1) The Securities Acts Amendment of 1975 abolished fixed commissions.
2) Changes in interest rates make investments in long-term bonds risky.
3) If Friendly Finance Company has more rate-sensitive assets than rate-sensitive
liabilities, it may reduce risk with a swap.
4) It is probably a good use of an investor’s time to watch as many shows featuring
technical analysts as possible.
5) Rapid money supply growth and uncontrollable inflation were among the factors
which motivated the creation of the Federal Reserve System.
6) Bonds with a maturity that is longer than the holding period have no interest-rate
risk.
7) The net asset value of a mutual fund is the average market price of the stocks, bonds,
and other assets the fund owns.
8) One disadvantage of the private placement of securities issues is the high cost of
registering the issue.
9) When an economy grows out of a recession, normally the demand for bonds
increases and the supply of bonds increases.
10) Most credit unions today have federal charters.
11) Money is anything accepted by anyone as payment for services or goods.
12) The Federal Reserve banks act as liaisons between the business community and the
Federal Reserve System.
13) Governments never issue stock because they cannot sell ownership claims.
14) Social Security is a “pay-as-you-go” system.
15) Today, the United States has a dual banking system in which banks supervised by
the federal government and banks supervised by the states operate side by side.
16) Flexibility is a requirement in selecting an intermediate target.
17) If the current account balance shows a surplus, and capital account receipts exceed
capital account payments, then the net change in government international reserves
must be ________, indicating a(n) ________ in U.S. international reserves.
A) positive; increase
B) negative; increase
C) negative; decrease
D) positive; decrease
18) ________ are an example of a financial institution.
A) Banks
B) Insurance companies
C) Finance companies
D) All of the above
19) Keogh plans and IRAs are
A) individual pension plans
B) government pension plans
C) corporate pension plans
D) public pension plans
20) Intermediaries who link buyers and sellers by buying and selling securities at stated
prices are called
A) investment bankers
B) traders
C) brokers
D) dealers
E) none of the above
21) Duration analysis involves comparing the average duration of the bank’s ________
to the average duration of its ________.
A) securities portfolio; nondeposit liabilities
B) loan portfolio; nondeposit liabilities
C) loan portfolio; rate-sensitive liabilities
D) rate-sensitive assets; rate-sensitive liabilities
E) assets; liabilities
22) If Moody’s or Standard and Poor’s downgrades its rating on a corporate bond, the
demand for the bond ________ and its yield ________.
A) increases; decreases
B) decreases; increases
C) increases; increases
D) decreases; decreases
23) An unsterilized intervention in which domestic currency is sold to purchase foreign
assets leads to
A) a gain in international reserves
B) an increase in the money supply
C) an appreciation in the domestic currency
D) all of the above
E) only A and B of the above
24) Which of the following do banks hold as insurance against the high cost of deposit
outflows?
A) excess reserves
B) secondary reserves
C) bank equity capital
D) all of the above
E) only A and B of the above
25) The difference between merchandise exports and imports is called the
A) current account balance
B) capital account balance
C) balance of payments
D) trade balance
26) If a bank has $10 million of deposits, a required reserve ratio of 10 percent, and $2
million in reserves, then it does not have enough reserves to support a deposit outflow
of
A) $1.2 million
B) $1.1 million
C) $1 million
D) either A or B of the above
27) The agency which regulates futures options is the
A) Securities and Exchange Commission
B) Commodities Futures Trading Commission
C) Federal Trade Commission
D) Both A and B are true
28) A full-service broker offers its clients all of the following except
A) execution of trades on request
B) low transaction fees
C) research and investment advice
D) development of long-term customer relationships
29) New computer technology has
A) increased the cost of financial innovation
B) increased the demand for financial innovation
C) reduced the cost of financial innovation
D) reduced the demand for financial innovation
30) Increased demand for a country’s ________ causes its currency to appreciate in the
long run, while increased demand for ________ causes its currency to depreciate.
A) imports; imports
B) imports; exports
C) exports; imports
D) exports; exports
31) A foreign exchange intervention with an offsetting open market operation that
leaves the monetary base unchanged is called
A) an unsterilized foreign exchange intervention
B) a sterilized foreign exchange intervention
C) an exchange rate feedback rule
D) a money-neutral foreign exchange intervention
32) Collateral is
A) property that is pledged to the lender if a borrower cannot make his or her debt
payments
B) a prevalent feature of debt contracts for households
C) a prevalent feature of debt contracts for businesses
D) all of the above
E) only A and C of the above
33) When the expected inflation rate decreases, the demand for bonds ________, the
supply of bonds ________, and the interest rate ________.
A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; falls
D) decreases; increases; rises
34) A credit market instrument that pays the owner the face value of the security at the
maturity date and nothing prior to then is called a
A) simple loan
B) fixed-payment loan
C) coupon bond
D) discount bond
35) Regulations restricting branching have promoted the development of what two
financial innovations?
A) bank consolidation and nationwide banking
B) bank holding companies and automated teller machines
C) money market mutual funds and sweep accounts
D) reserve requirements and restrictions on interest paid on deposits
36) Of the four theories that explain how interest rates on bonds with different terms to
maturity are related, the one that views long-term interest rates as equaling the average
of future short-term rates expected to occur over the life of the bond is the
A) pure expectations theory
B) preferred habitat theory
C) liquidity premium theory
D) segmented markets theory
37) In general, banks make profits by selling ________ liabilities and buying ________
assets.
A) long-term; shorter-term
B) short-term; longer-term
C) illiquid; liquid
D) risky; risk-free
38) The largest share of assets held by money market mutual funds is
A) Treasury bills
B) certificates of deposit
C) commercial paper
D) repurchase agreements
39) Higher tariffs and quotas cause a country’s currency to ________ in the ________
run.
A) depreciate; short
B) appreciate; short
C) depreciate; long
D) appreciate; long
40) An advantage of an intermediate targeting strategy is that it provides the Fed with
A) more timely information regarding the effect of monetary policy
B) a slow adjustment process
C) a target that is precisely correlated with economic activity
D) all of the above
E) only A and B of the above
41) If income tax rates were lowered, then
A) the interest rate on municipal bonds would fall
B) the interest rate on Treasury bonds would rise
C) the interest rate on municipal bonds would rise
D) the price of Treasury bonds would fall
42) Which of the following are true for a coupon bond?
A) When the coupon bond is priced at its face value, the yield to maturity equals the
coupon rate
B) The price of a coupon bond and the yield to maturity are negatively related
C) The yield to maturity is greater than the coupon rate when the bond price is above
the par value
D) All of the above are true
E) Only A and B of the above are true
43) In general, banks would prefer to meet deposit outflows by ________ rather than
________
A) selling loans; selling securities
B) selling loans; borrowing from the Fed
C) borrowing from the Fed; selling loans
D) “calling in” loans; selling securities
44) The federal funds rate is
A) the interest rate on loans from the Fed to a bank
B) the price the Fed pays for government securities
C) the interest rate on loans of reserves from one bank to another
D) the price banks pay the Fed for government securities
E) the interest rate on loans from a bank to the federal government
45) Members of Congress are able to influence monetary policy, albeit indirectly,
through their ability to
A) withhold appropriations from the Board of Governors
B) withhold appropriations from the Federal Open Market Committee
C) propose legislation that would force the Fed to submit budget requests to Congress,
as must other government agencies
D) do all of the above
46) A high price earnings ratio (PE) gives what interpretation?
A) The market expects earnings to fall in the future
B) The market feels the firm’s earnings are very high risk and are willing to pay a
premium for them
C) The market expects the earnings to rise in the future
D) The firm is not paying a dividend
47) Each member of the seven-member Board of Governors is appointed by the
president and confirmed by the Senate to serve
A) 4-year terms
B) 6-year terms
C) 14-year terms
D) as long as the appointing president remains in office
48) When the price of a bond is below 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
49) Evidence from the United States during the period 1973-2010 indicates the
correspondence between nominal interest rates and exchange rate movements is
A) much closer than that between real interest rates and exchange rate movements
B) not nearly as close as that between government spending and exchange rate
movements
C) not nearly as close as that between government deficits and exchange rate
movements
D) not nearly as close as that between real interest rates and exchange rate movements
50) When bond prices become less volatile, the demand for bonds ________ and the
interest rate ________.
A) increases; rises
B) increases; falls
C) decreases; falls
D) decreases; rises
51) Important implications of the efficient market hypothesis include which of the
following?
A) Future changes in stock prices should, for all practical purposes, be unpredictable
B) Stock prices will respond to announcements only when the information in these
announcements is new
C) Sometimes a stock price declines when good news is announced
D) All of the above
E) Only A and B of the above
52) Conflicts arise in the mutual funds industry because ________ cannot effectively
monitor ________.
A) investment advisers; directors
B) directors; shareholders
C) shareholders; investment advisers
D) investment advisers; stocks that will outperform the overall market
53) Moody’s and Standard and Poor’s are agencies that
A) help investors collect when corporations default on their bonds
B) advise municipal bond issuers on the tax exempt status of their bonds
C) produce information about the probability of default on corporate bonds
D) maintain liquid markets for corporate bonds
54) If a $10,000 face value discount bond maturing in one year is selling for $8,000,
then its yield to maturity is
A) 10 percent
B) 20 percent
C) 25 percent
D) 40 percent