1) When yield curves are downward-sloping, long-term interest rates are above
short-term interest rates.
2) A financial intermediary’s risk-sharing activities are also referred to as asset
transformation.
3) Economies of scope come from increasing the size of a given financial activity and
economies of scale come from combining different activities to lower their costs.
4) A problem that initially hindered the marketability of mortgages in a secondary
market was that they were not standardized.
5) The principal-agent problem is an example of the adverse selection problem that can
result from asymmetric information.
6) Bonds with the lowest risk of default are often referred to as junk bonds.
7) Vesting refers to the length of time that a person must be enrolled in a pension plan
before being entitled to receive benefits.
8) A pension fund is not a contractual savings institution.
9) The current yield goes up as the price of a bond falls.
10) A change in the financial environment will stimulate a search by financial
institutions for innovations that are likely to be profitable.
11) Activity in money markets increased significantly in the late 1970s and early 1980s
because of
A) rising short-term interest rates
B) regulations that limited what banks could pay for deposits
C) both A and B of the above
D) neither A nor B of the above
12) Banks face the problem of ________ in loan markets because bad credit risks are
the ones most likely to seek bank loans.
A) adverse selection
B) moral hazard
C) moral suasion
D) intentional fraud
13) Moral hazard and adverse selection problems increased in prominence in the 1980s
A) as deregulation opened up more avenues for savings and loans and mutual savings
banks to take on more risk
B) following a burst of financial innovation in the 1970s and early 1980s that produced
new financial instruments and markets, thereby widening the scope for risk taking
C) following a decrease in federal deposit insurance from $100,000 to $40,000
D) because of all of the above
E) because of only A and B of the above
14) Between 2000 and 2005, home prices increased an average of ________ per year.
A) 2%
B) 4%
C) 8%
D) 12%
15) In the 1950s, the interest rate on three-month Treasury bills fluctuated between
1.0% and 3.5%. In the 1980s, the three-month Treasury bill rate ranged from 5% to over
15%. From this, one could predict that in the 1980s interest-rate risk was ________ and
the demand for financial innovation was ________.
A) greater; lower
B) greater; greater
C) lower; lower
D) lower; greater
16) Which of the following are useful for home buyers who expect their income to rise
in the future?
A) GPMs
B) RAMs
C) GEMs
D) Only A and B are useful
E) Only A and C are useful
17) Factors that cause the demand curve for bonds to shift to the left include
A) a decrease in the inflation rate
B) an increase in the volatility of stock prices
C) an increase in the liquidity of stocks
D) all of the above
E) only A and B of the above
18) During the 2007-2009 financial crisis, state and local governments now found their
interest costs rising. Which of the following were causes of this?
A) lower tax revenues because of the weaker economy
B) weakened value of monoline insurance guarantees on their debt
C) both A and B
D) none of the above
19) If the French demand for American exports rises at the same time that U.S.
productivity rises relative to French productivity, then, in the long run,
A) the euro should appreciate relative to the dollar
B) the dollar should depreciate relative to the euro
C) the dollar should appreciate relative to the euro
D) it is not clear whether the euro should appreciate or depreciate relative to the dollar
20) How expectations are formed is important because expectations influence
A) the demand for assets
B) bond prices
C) the risk structure of interest rates
D) the term structure of interest rates
E) all of the above
21) The ________ of the volume handled by brokers and dealers is in the publicly held
securities.
A) vast majority
B) low percentage
C) total amount
D) none of the above
22) During the last years of a balloon mortgage loan, the lender applies
A) most of the monthly payment to the outstanding principal balance
B) all of the monthly payment to the outstanding principal balance
C) most of the monthly payment to interest on the loan
D) all of the monthly payment to interest on the loan
E) the monthly payment equally to interest on the loan and the outstanding principal
balance
23) The spread between interest rates on low-quality corporate bonds and U.S.
government bonds ________ during the Great Depression.
A) was reversed
B) narrowed significantly
C) widened significantly
D) did not change
24) When the demand for bonds ________ or the supply of bonds ________, bond
prices fall.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
25) The largest share of life insurance companies’ assets are ________.
A) corporate stock
B) corporate bonds
C) government securities
D) cash reserves
26) Late trading and market timing
A) allow large, favored investors in a mutual fund to profit at the expense of other
investors in the fund
B) hurt ordinary investors by increasing the number of fund shares and diluting the
fund’s net asset value
C) are both A and B of the above
D) are none of the above
27) To take advantage of anticipated stock price decreases, an investor would use
________.
A) a market order
B) a limit order
C) a short sell
D) margin credit
28) In an emerging market economy, a country typically faces a ________ fiscal policy
before a crisis initiates.
A) solid
B) poor
C) weakening
D) uncertain
29) Which of the following are generally true of all bonds?
A) The only bond whose return equals the initial yield to maturity is one whose time to
maturity is the same as the holding period
B) A rise in interest rates is associated with a fall in bond prices, resulting in capital
losses on bonds whose term to maturities are longer than the holding period
C) The longer a bond’s maturity, the greater is the price change associated with a given
interest rate change
D) All of the above are true
E) Only A and B of the above are true
30) A discount bond
A) is also called a coupon bond
B) is also called a zero-coupon bond
C) is also called a fixed-payment bond
D) is also called a corporate bond
31) What is the primary disadvantage of an ETF?
A) ETFs tend to have lower management fees than comparable index mutual bonds
B) ETFs usually have no minimum investment amount
C) Investors have to pay a broker commission each time they buy or sell shares
D) None of the above are disadvantages of an ETF
32) Because sterilized interventions mean offsetting open market operations,
A) there is no impact on the monetary base
B) there is no impact on the money supply
C) there is no effect on the exchange rate
D) all of the above occur
E) only A and B of the above occur
33) When taking a particular course of action for a private equity firm, the CEO of a
privately held company needs to convince ________ that it is a good decision.
A) the shareholders
B) the managing partners
C) no one
D) both A and B
34) Adverse selection is a problem associated with equity and debt contracts arising
from
A) the lender’s relative lack of information about the borrower’s potential returns and
risks of his investment activities
B) the lender’s inability to legally require sufficient collateral to cover a 100 percent
loss if the borrower defaults
C) the borrower’s lack of incentive to seek a loan for highly risky investments
D) none of the above
35) A ________ prefers stock in a less risky asset than in a riskier asset.
A) risk preferrer
B) risk-averse person
C) risk lover
D) risk-favorable person
36) Discount loans to banks experiencing severe liquidity problems are called
A) primary credit
B) secondary credit
C) seasonal credit
D) lender-of-last-resort credit
37) A bank’s largest source of funds is its
A) nontransaction deposits
B) checking deposits
C) borrowing from the Fed
D) federal funds
38) When comparing the loanable funds and liquidity preference frameworks of interest
rate determination, which of the following is true?
A) The liquidity preference framework is easier to use when analyzing the effects of
changes in expected inflation
B) The loanable funds framework provides a simpler analysis of the effects of changes
in income, the price level, and the supply of money
C) In most instances, the two approaches to interest rate determination yield the same
predictions
D) All of the above are true
E) Only A and B of the above are true
39) Banks earn profits by selling ________ with attractive combinations of liquidity,
risk, and return, and using the proceeds to buy ________ with a different set of
characteristics.
A) loans; deposits
B) securities; deposits
C) liabilities; assets
D) assets; liabilities
40) Finance companies raise funds in the money market by selling
A) commercial paper
B) federal funds
C) negotiable certificates of deposit
D) Eurodollars
41) A trend in recent years is that more and more governments
A) have been granting greater independence to their central banks
B) have been reducing the independence of their central banks to make them more
accountable for poor economic performance
C) have mandated that their central banks give up multiple policy goals to focus strictly
on inflation
D) have required their central banks to coordinate policies with their ministers of
finance
42) The largest U.S. underwriter of global debt and equity issues, as of 2009, was
________.
A) Merrill Lynch
B) J.P. Morgan
C) Morgan Stanley
D) Goldman Sachs
43) Checkable deposits and money market deposit accounts are
A) payable on demand
B) liabilities of the banks
C) assets of the banks
D) only A and B of the above
E) only A and C of the above