1) To reduce the interest-rate risk of holding a portfolio of bonds, Treasury bond futures
contracts should be bought.
2) An unsterilized intervention in which domestic currency is sold to purchase foreign
assets leads to a gain in international reserves.
3) Every financial market allows loans to be made.
4) Investment bankers perform a number of tasks required to sell securities to the
public, among them pricing the security, preparing the filings required by the SEC,
arranging for the security to be rated, and marketing the security through their contacts
with brokerage houses.
5) The “too-big-to-fail” policy reduces the adverse selection problem in bank
regulation.
6) The government organization responsible for the conduct of monetary policy in the
United States is the U.S. Treasury.
7) All else being equal, the greater the interest rate the greater the duration is.
8) The Global Legal Settlement of 2002 arose out of a lawsuit brought by New York
Attorney General Eliot Spitzer against the ten largest investment banks.
9) One problem with a futures contract is finding a counterparty.
10) Corporations that issue new securities to raise capital now conduct more of this
business in financial markets in Europe and Asia than in the U.S.
11) Banks are unusual participants in the money market because they buy, but do not
sell, money market instruments.
12) In the short run, the quantity of dollars supplied is relatively fixed, and is best
represented with a vertical supply curve.
13) The difference between merchandise exports and imports is called the current
account balance.
14) Open-end mutual funds are more common than closed-end funds.
15) Adjustable-rate mortgages generally have lower initial interest rates than fixed-rate
mortgages.
16) The size of the asset-backed commercial paper market nearly doubled between
2004 and 2007 to about $1 trillion.
17) A person who is risk averse prefers to hold assets that are more, not less, risky.
18) Banks are important to the study of money and the economy because they
A) provide a channel for linking those who want to save with those who want to invest
B) have been a source of financial innovation that is expanding the alternatives
available to those wanting to invest their money
C) are the only financial institution to play a role in determining the quantity of money
in the economy
D) do all of the above
E) do only A and B of the above
19) A company’s pension plan promises employees a specific amount of income when
they retire. However, the plan does not have the assets to meet these future obligations
to employees. This plan represents a defined-________ plan that is ________.
A) benefit; underfunded
B) benefit; overfunded
C) contribution; underfunded
D) contribution; overfunded
20) Holding everything else constant, an increase in the money supply causes
A) interest rates to decline initially
B) interest rates to increase initially
C) bond prices to decline initially
D) both A and C of the above
E) both B and C of the above
21) When the interest rate on a bond is ________ the equilibrium interest rate, there is
excess ________ in the bond market and the interest rate will ________.
A) above; demand; fall
B) above; demand; rise
C) below; supply; fall
D) above; supply; rise
22) Asset-backed commercial paper differs from conventional commercial paper in that
A) it is backed (secured) by some bundle of assets
B) its maturity usually extends well beyond 1 year
C) both A and B of the above
D) neither A nor B of the above
23) In a direct placement
A) the issuer bypasses the dealer and sells indirectly to the end investor
B) the dealer sells directly to the end investor
C) the issuer bypasses the dealer and sells directly to the end investor
D) none of the above
24) The seller of an option has the ________ to buy or sell the underlying asset, while
the purchaser of an option has the ________ to buy or sell the asset.
A) obligation; right
B) right; obligation
C) obligation; obligation
D) right; right
25) (I) In the United States, nonbank loans are the most important source of external
funds for nonfinancial businesses.
(II) In Germany and Japan, issuing stocks and bonds is the most important source of
external for nonfinancial businesses.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
26) Which of the following statements about financial markets and securities are
TRUE?
A) A bond is a long-term security that promises to make periodic payments called
dividends to the firm’s residual claimants
B) A debt instrument is intermediate term if its maturity is less than one year
C) A debt instrument is long term if its maturity is ten years or longer
D) The maturity of a debt instrument is the time (term) that has elapsed since it was
issued
27) Of the sources of external funds for nonfinancial businesses in the United States,
stocks account for approximately ________ of the total.
A) 10%
B) 20%
C) 30%
D) 40%
28) (I) Capital market securities fall into two categories: bonds and stocks.
(II) Long-term bonds include government bonds and long-term notes, municipal bonds,
and corporate bonds.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
29) Successful financial intermediaries have higher earnings on their investments
because they are better equipped than individuals to screen out good from bad risks,
thereby reducing losses due to
A) moral hazard
B) adverse selection
C) bad luck
D) financial panics
30) By law, investors must be given a portion of the registration statement before they
can invest in a new security. This document is called a ________.
A) prospectus
B) proxy statement
C) fiduciary warrant
D) debenture
31) When Americans and foreigners expect the return on ________ deposits to be high
relative to the return on ________ deposits, there is a higher demand for dollar deposits
and a correspondingly lower demand for foreign deposits.
A) dollar; dollar
B) dollar; foreign
C) foreign; dollar
D) foreign; foreign
32) ________ is the total resources owned by an individual, including all assets.
A) Expected return
B) Wealth
C) Liquidity
D) Risk
33) The growing use and proliferation of ATMs has been stimulated by
A) lower transaction costs
B) greater customer convenience
C) declining cost of the ATM equipment
D) all of the above
34) Financial intermediaries
A) exist because there are substantial information and transaction costs in the economy
B) improve the lot of the small saver
C) are involved in the process of indirect finance
D) do all of the above
E) do only A and B of the above
35) Which of the following statements about venture capital funding is not correct?
A) Exiting an investment can occur through an initial public offering or by merger or
acquisition
B) Venture capital investing is highly risky
C) Venture capital firms may focus on a limited geographic area or on specific
industries to facilitate monitoring their investments
D) Firms hope to exit a start-up firm in 3-5 years
36) Reinvestment risk is the risk that
A) a bond’s value may fall in the future
B) a bond’s future coupon payments may have to be invested at a rate lower than the
bond’s yield to maturity
C) an investor’s holding period will be short and equal in length to the maturity of the
bonds he or she holds
D) a bond’s issuer may fail to make the future coupon payments and the investor will
have no cash to reinvest
37) The major provisions of the Competitive Equality in Banking Act of 1987 included
A) abolishing the Federal Home Loan Bank Board and the FSLIC
B) transferring the regulatory role of the Federal Home Loan Bank Board to the Office
of Thrift Supervision, a bureau within the U.S. Treasury Department
C) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts
placed in conservatorship or receivership
D) all of the above
E) none of the above
38) (I) The largest of the organized stock exchanges in the United States is the New
York Stock Exchange.
(II) To be listed on the NYSE, a firm must have a minimum of $100 million in market
value or $10 million in revenues
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
39) If you buy an option to sell Treasury futures at 115, and at expiration the market
price is 110,
A) the call will be exercised
B) the put will be exercised
C) the call will not be exercised
D) the put will not be exercised
40) A bank
A) has the ability to profit from the information it produces
B) avoids the free-rider problem by primarily making private loans rather than by
purchasing securities that are traded in the open market
C) becomes an expert in determining good firms from bad firms
D) all of the above
41) Regulations making it obligatory for depository institutions to keep a certain
fraction of their deposits in accounts with the Fed are
A) open market operations
B) federal funds rate
C) required reserve ratio
D) reserve requirements
42) Which of the following is not a proposal to deal with abuses in the mutual fund
industry?
A) Strictly enforce the 4:00 pm net asset value rule
B) Make redemption fees mandatory
C) Disclose compensation arrangements for investment advisers
D) Increase the number of dependent directors
43) An audit certifies that
A) a firm’s loans will be repaid
B) a firm’s securities are safe investments
C) a firm abides by standard accounting principles
D) the information reported in a firm’s accounting statements is correct
44) In the 1980s, thrift institutions, which had been almost entirely restricted to making
loans for home mortgages only, were allowed by regulators to
A) finance acquisitions in commercial real estate
B) extend consumer loans
C) purchase junk bonds
D) do all of the above
E) do only A and B of the above
45) Although the FDIC was created to prevent bank failures, its existence encourages
banks to
A) take too much risk
B) hold too much capital
C) open too many branches
D) buy too much stock
46) Which of the following are important ways in which mortgage markets differ from
the stock and bond markets?
A) The usual borrowers in the capital markets are government entities and businesses,
whereas the usual borrowers in the mortgage markets are individuals
B) Most mortgages are secured by real estate, whereas the majority of capital market
borrowing is unsecured
C) Because mortgages are made for different amounts and different maturities,
developing a secondary market has been more difficult
D) All of the above are important differences
E) Only A and B of the above are important differences
47) An analysis of the political economy of the savings and loan crisis helps one to
understand
A) why politicians hampered the efforts of thrift regulators, cutting regulatory
appropriations and encouraging regulatory forbearance
B) why thrift regulators were reluctant to admit that any problem even existed in the
thrift industry
C) why thrift regulators willingly acceded to pressures placed upon them by members
of Congress
D) all of the above
E) only A and B of the above
48) Deposit insurance
A) attracts risk-prone entrepreneurs to the banking industry
B) encourages bank managers to take on greater risks than they otherwise would
C) reduces the incentives of depositors to monitor the riskiness of their banks’ asset
portfolios
D) does all of the above
E) does only A and B of the above
49) In recent years, the interest paid on checkable and time deposits has accounted for
around ________ of total bank operating expenses, while the costs involved in running
the bank have been approximately ________ of total operating expenses.
A) 50%; 50%
B) 50%; 25%
C) 30%; 50%
D) 25%; 75%
50) The presence of so many commercial banks in the United States is most likely the
result of
A) consumers’ strong preference for dealing with only local banks
B) adverse selection and moral hazard problems that give local banks a competitive
advantage over larger banks
C) regulations that restrict the ability of banks to open branches
D) all of the above
51) If borrowers take on big risks after obtaining a loan, then lenders face the problem
of
A) free-riding
B) adverse selection
C) moral hazard
D) costly state verification
52) Eurodollars are
A) dollar-denominated deposits held in banks outside the United States
B) deposits held by U.S. banks in Europe
C) deposits held by U.S. banks in foreign countries
D) dollar-denominated deposits held in U.S. banks by Europeans
53) The practice of creating marketable debt instruments that are backed by otherwise
illiquid assets is known as ________.
A) standardization
B) homogenization
C) securitization
D) adverse selection
54) Which of the following protects the mortgage lender’s right to sell property if the
underlying loan defaults?
A) a lien
B) a down payment
C) private mortgage insurance
D) borrower qualification
E) amortization
55) The process of underwriting a stock or bond issue requires that the investment bank
A) assure investors that the issue will provide them a high return
B) purchase the entire issue at a predetermined price if the quantity demanded by
consumers is insufficient at the predetermined price
C) purchase the entire issue at a predetermined price and then resell it in the market
D) do both A and B of the above