1) The term structure of interest rates describes how interest rates move over time.
2) To sell an old bond when rates have risen, the holder will have to discount the bond
until the yield to the buyer is the same as the market rate.
3) Option premiums increase as the term to maturity increases.
4) The concept of adverse selection helps explain why collateral is an important feature
of many debt contracts.
5) Measuring the sensitivity of bank profits to changes in interest rates by multiplying
the gap for several maturity subintervals by the change in the interest rate is called
duration analysis.
6) According to some economists, Congress made a mistake when it passed the FDICIA
of not requiring the FDIC to assess risk-based insurance premiums.
7) Social Security is a
A) fully funded pension plan
B) federally insured private pension plan
C) government sponsored private pension plan
D) “pay-as-you-go” system
8) The fastest growing financial intermediary is ________.
A) commercial banks
B) pension plans
C) life insurance companies
D) mutual funds
9) When the corporate bond market becomes less 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
10) Economies of scope refer to cost savings that arise when the
A) size of financial transactions increase
B) size of financial transactions decrease
C) number of different activities undertaken increases
D) number of different activities undertaken decreases
11) Inflation targeting involves
A) a public announcement of medium-term numerical targets for inflation
B) increased accountability of the central bank for attaining its inflation objectives
C) an information-inclusive approach in which many variables are used in making
decisions about monetary policy
D) all of the above
12) Insurance management tools that give policyholders incentives to avoid accidents
insured against include ________.
A) deductibles
B) risk-based premiums
C) coinsurance
D) all of the above
13) In the United States, the government agency requiring that firms, which sell
securities in public markets, adhere to standard accounting principles and disclose
information about their sales, assets, and earnings is the
A) Federal Corporate Securities Commission
B) Federal Trade Commission
C) Securities and Exchange Commission
D) U.S. Treasury Department
E) Federal Reserve System
14) Corporations may enter the capital markets because
A) they do not have sufficient capital to fund their investment opportunities
B) they want to preserve their capital to protect against expected needs
C) it is required by the Securities and Exchange Commission (SEC)
D) none of the above
15) If automobile insurance companies were prevented from charging risk-based
premiums, but could selectively screen potential policyholders, the likely effect would
be to
A) increase the number of young men obtaining insurance coverage relative to young
women
B) decrease the number of young women obtaining insurance coverage relative to
young men
C) decrease the number of young men obtaining insurance coverage relative to young
women
D) do both A and B of the above
16) Prior to the financial crisis in Mexico in 1994, Mexico ran a budget deficit of
around ________ of GDP.
A) 120%
B) 40%
C) 15%
D) 1%
17) When bond prices become more volatile, the demand for bonds ________ and the
interest rate ________.
A) increases; rises
B) increases; falls
C) decreases; falls
D) decreases; rises
18) Of the following sources of external finance for American nonfinancial businesses,
the least important is
A) loans from banks
B) stocks
C) bonds and commercial paper
D) nonbank loans
19) From an investment banker’s perspective, the best outcome occurs when a new
issue is ________.
A) undersubscribed
B) fully subscribed
C) oversubscribed
D) syndicated
20) The directors of a district bank are classified into three categories: A, B, and C. The
three B directors are
A) professional bankers
B) prominent leaders from industry, labor, agriculture, or the consumer sector
C) elected by the board of governors to represent the public interest
D) all of the above
21) Which of the following is an example of a financial innovation introduced to avoid
regulations?
A) securitization
B) junk bond
C) debit card
D) sweep account
22) Of the following methods that banks might use to reduce moral hazard problems,
the one not legally permitted in the United States is the requirement that
A) firms keep compensating balances at the banks from which they obtain their loans
B) firms place on their board of directors an officer from the bank
C) loan contracts include restrictive covenants
D) individuals provide detailed credit histories to bank loan officers
23) In one sense, ________ appears surprising since it means that the bank is not
________ its portfolio of loans and thus is exposing itself to more risk.
A) specialization in lending; diversifying
B) specialization in lending; rationing
C) credit rationing; diversifying
D) screening; rationing
24) The policy of ________ exacerbated ________ problems as savings and loans took
on increasingly huge levels of risk on the slim chance of returning to solvency.
A) regulatory forbearance; moral hazard
B) regulatory forbearance; adverse selection
C) regulatory stringency; moral hazard
D) regulatory stringency; adverse selection
25) When you deposit $50 in the First National Bank,
A) its liabilities decrease by $50
B) its assets increase by $50
C) its reserves decrease by $50
D) only B and C of the above occur
26) Late trading is the practice of allowing orders received ________ to trade at the
________ net asset value.
A) before 4:00 pm; 4:00 pm
B) after 4:00 pm; 4:00 pm
C) after 4:00 pm; next day’s
D) before 4:00 pm; previous day’s
27) The foreign exchange market
A) is organized as an over-the-counter market in which several hundred dealers stand
ready to buy and sell deposits denominated in foreign currencies
B) is very competitive
C) functions no differently from a centralized market
D) all of the above
28) Banks subject to reserve requirements set by the Federal Reserve System include
A) only state-chartered banks
B) only nationally chartered banks
C) only banks with less than $100 million in assets
D) only banks with less than $500 million in assets
E) all banks whether or not they are members of the Federal Reserve System
29) Two growth areas for consumer finance companies are
A) first mortgages and vacation financing
B) marine vessel loans and auto loans
C) home equity loans and educational loans
D) home equity loans and “private label” retail credit cards
30) A borrower who takes out a loan usually has better information about the potential
returns and risks of the investment projects he plans to undertake than the lender does.
This inequality of information is called
A) moral hazard
B) asymmetric information
C) noncollateralized risk
D) adverse selection
31) When the central bank allows the purchase or sale of domestic currency to have an
effect on the monetary base, it is called
A) a sterilized foreign exchange intervention
B) an unsterilized foreign exchange intervention
C) an exchange rate feedback rule
D) a money-neutral foreign exchange intervention
32) An increase in the exercise price, all other things held constant, will ________ the
premium on call options.
A) increase
B) decrease
C) not affect
D) Not enough information is given
33) According to the theory of bureaucratic behavior, the objective of bureaucracy is
A) to maximize its own welfare, meaning that it seeks additional power and prestige
B) to maximize consumers’ surplus, meaning that it seeks additional regulatory powers
C) to protect the industry it regulates, meaning that it seeks additional regulatory
powers
D) none of the above
34) A moderately upward-sloping yield curve indicates that short-term interest rates are
expected to
A) neither rise nor fall in the near future
B) remain relatively unchanged, but that long-term rates are expected to fall
C) neither rise nor fall, but that long-term rates are expected to rise moderately
D) rise moderately in the near future
35) Asymmetric information can lead to widespread collapse of financial
intermediaries, referred to as a
A) bank holiday
B) financial panic
C) financial disintermediation
D) financial collapse
36) Moral hazard is a problem associated with debt and equity contracts arising from
A) the borrower’s incentive to undertake highly risky investments
B) the owners’ inability to ensure that managers will act in the owners’ interest
C) the difficulty lenders have in sorting out good credit risks from bad credit risks
D) all of the above
E) only A and B of the above
37) During an economic expansion, the supply of bonds ________ and the supply curve
shifts to the ________.
A) increases, left
B) increases, right
C) decreases, left
D) decreases, right
38) Since 1980, the number of credit unions has ________.
A) declined substantially
B) remained steady
C) increased substantially
D) increased slightly
39) The share of the mortgage market held by commercial banks is approximately
A) 50 percent
B) 25 percent
C) 15 percent
D) 5 percent
40) If you buy a futures contract on the S&P 500 Index at a price of 450 and the index
rises to 500, you will ________.
A) lose $12,500
B) gain $12,500
C) lose $50
D) gain $50