1) A FICO score below 660 is considered good while a score above 720 is likely to
cause problems in obtaining a loan.
2) Credit rationing occurs when lenders charge higher interest rates on the loans they
make to riskier borrowers.
3) The foreign exchange market is organized as an over-the-counter market in which
deposits denominated in foreign currencies are bought and sold.
4) Futures contracts are standardized.
5) According to the interest parity condition, if the domestic interest rate is 12 percent
and the foreign interest rate is 10 percent, then the expected appreciation of the foreign
currency must be 2 percent.
6) The Internet stock market bubble of the late 1990s led to one of the worst financial
crises in U.S. history. Banks lost billions of dollars as Internet companies went
bankrupt.
7) In an emerging market economy, the financial globalization process further weakens
the credit culture by allowing domestic banks to borrow abroad.
8) Because asset markets are relatively small in an emerging market, they play less of a
prominent role in a financial crisis in those economies.
9) Required reserves are insurance against the costs associated with deposit outflows.
The higher the costs associated with deposit outflows, the more required reserves banks
will want to hold.
10) The current yield is the yearly coupon payment divided by the current market price.
11) An increase in the marginal tax rate would likely increase the demand for municipal
bonds, and decrease the demand for U.S. government bonds.
12) A bond denominated in euros and issued in a country that uses the euro as its
currency is an example of a Eurobond.
13) The more liquid an asset is relative to alternative assets, holding everything else
unchanged, the more desirable it is, and the greater the quantity demanded.
14) Banks face the problem of adverse selection in loan markets because bad credit
risks are the ones most likely to seek bank loans.
15) When a firm issues stock for the first time in an initial public offering, it is difficult
for an investment bank to determine what the correct price should be.
16) As the relative expected return on dollar deposits increases, Americans will want to
hold fewer dollar deposits and more foreign deposits.
17) Once a bank has been chartered, it is required to file periodic call reports that reveal
the bank’s assets and liabilities, income, ownership, and other details.
18) A loan commitment is an agreement to provide a loan up to a certain dollar amount
if a customer requests the loan during a specific time period.
19) In over-the-counter markets, dealers increase the liquidity of thinly traded
securities.
20) Government securities dealers frequently engage in repos to
A) manage liquidity
B) take advantage of anticipated changes in interest rates
C) lend or borrow for a day or two with what is essentially a collateralized loan
D) do all of the above
E) do only A and B of the above
21) In 2010, the NYSE traded ________ shares on an average trading day.
A) 4 billion
B) 7 billion
C) 10 billion
D) 12 billion
22) 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 below
the par value
D) All of the above are true
E) Only A and B of the above are true
23) Investment bankers have been active in the mergers and acquisitions market since
the 1960s. Their contributions have included
A) helping firms that want to acquire another firm locate a firm to pursue
B) helping would-be acquirers solicit shareholders through a tender offer
C) helping target firms ward off undesired takeover attempts
D) all of the above
E) only A and B of the above
24) A venture capital firm protects its equity investment from moral hazard through
which of the following means?
A) It places people on the board of directors to better monitor the borrowing firm’s
activities
B) It writes contracts that prohibit the sale of an equity investment to anyone but the
venture capital firm
C) It prohibits the borrowing firm from replacing its management
D) It does both A and B of the above
E) It does both A and C of the above
25) Which of the following are true for the current yield?
A) The current yield is defined as the yearly coupon payment divided by the price of the
security
B) The current yield and the yield to maturity always move together
C) The formula for the current yield is identical to the formula describing the yield to
maturity for a discount bond
D) All of the above are true
E) Only A and B of the above are true
26) The euro is unlikely to seriously challenge the dollar as a reserve currency as long
as
A) the European Union’s share of world GDP remains significantly smaller than that of
the United States
B) the European Union’s share of world exports remains significantly smaller than that
of the United States
C) Europe neglects to integrate its financial markets
D) the European Union is unable to function as a cohesive political entity
27) Although the goals of high employment and economic growth are closely related,
policies can be specifically aimed at encouraging economic growth by
A) encouraging firms to invest and people to save
B) encouraging firms to limit their price increases
C) encouraging people to consume
D) all of the above
E) only A and C of the above
28) According to the liquidity premium theory of the term structure, when the yield
curve has its usual slope, the market expects
A) short-term interest rates to rise sharply
B) short-term interest rates to drop sharply
C) short-term interest rates to stay near their current levels
D) none of the above
29) Suppose that you purchase a 182-day Treasury bill for $9,850 that is worth $10,000
when it matures. The security’s annualized yield if held to maturity is about
A) 1.5%
B) 2%
C) 3%
D) 6%
30) The price specified in an option contract at which the holder can buy or sell the
underlying asset is called the ________.
A) premium
B) strike price
C) exercise price
D) both B and C of the above
31) An increase in the expected rate of inflation causes the demand for bonds to
________ and the supply for bonds to ________.
A) fall; fall
B) fall; rise
C) rise; fall
D) rise; rise
32) When people begin to expect a large stock market decline, the demand curve for
bonds shifts to the ________ and the interest rate ________.
A) right; falls
B) right; rises
C) left; falls
D) left; rises
33) Conflicts of interest in the Arthur Andersen accounting firm intensified when
________ became the firm’s largest source of profits and large clients pressured
________ office managers to give favorable audits.
A) consulting; regional
B) consulting; national
C) auditing; regional
D) auditing; national
34) Banks’ holding of deposits in accounts with the Fed, plus currency that is physically
held in banks are called
A) the monetary base
B) government securities
C) open market operations
D) reserves
35) Although the goals of high employment and economic growth are closely related,
policies can be specifically aimed at encouraging economic growth by
A) encouraging firms to invest
B) encouraging people to save
C) both A and B of the above
D) neither A nor B of the above
36) Growing-equity mortgages (GEMs)
A) help the borrower pay off the loan in a shorter time
B) have such low payments in the first few years that the principal balance increases
C) offer borrowers payments that are initially lower than the payments on a
conventional mortgage
D) do all of the above
E) do only A and B of the above
37) When the value of the dollar changes from £0.50 to £0.75, the pound has ________
and the dollar has ________.
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
38) The three largest Federal Reserve banks in terms of assets are those of New York,
Chicago, and
A) Atlanta
B) Los Angeles
C) Baltimore
D) San Francisco
39) Which of the following is checkable deposits?
A) savings accounts
B) Small-denomination time deposits
C) Money market deposit accounts
D) Certificates of deposit
40) (I) An increase in default risk on corporate bonds shifts the demand curve for
corporate bonds to the right.
(II) An increase in default risk on corporate bonds shifts the demand curve for Treasury
bonds to the left.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
41) Auditors attempt to reduce information asymmetry between a firm’s managers and
its
A) customers
B) owners
C) employees
D) competitors
42) In his liquidity preference framework, Keynes assumed that money has a zero rate
of return; thus, when interest rates ________ the expected return on money falls relative
to the expected return on bonds, causing the demand for money to ________.
A) rise; fall
B) rise; rise
C) fall; fall
D) fall; rise
43) With regard to external sources of financing for nonfinancial businesses in the
United States, which of the following are accurate statements?
A) Direct finance is used in less than 5% of the external financing of American
businesses
B) Only large, well-established corporations have access to securities markets to
finance their activities
C) Loans from banks and other financial intermediaries in the United States provide
five times more financing of corporate activities than do stock markets
D) All of the above
E) Only A and B of the above
44) Provisions in loan contracts that proscribe borrowers from engaging in specified
risky activities are called ________.
A) proscription bonds
B) collateral clauses
C) restrictive covenants
D) liens
45) Which of the following statements is an accurate description of modern liability
management?
A) Greater flexibility in liability management has allowed banks to increase the
proportion of their assets held in loans
B) New financial instruments enable banks to acquire funds quickly
C) The introduction of negotiable CDs have significantly reduced the percentage of
funds that banks borrow from one another to finance loans
D) All of the above have occurred since 1960
E) Only A and B of the above have occurred since 1960
46) What accounts for the problems facing China’s four largest banks?
A) large loans to inefficient, state-owned enterprises
B) closing of unprofitable branches and laying off unproductive employees
C) selling shares in the bank overseas to raise capital
D) all of the above
47) The too-big-to-fail policy
A) exacerbates moral hazard problems
B) puts large banks at a competitive disadvantage in attracting large deposits
C) treats large depositors of small banks inequitably when compared to depositors of
large banks
D) does only A and C of the above
48) Credit unions’ main type of loans is ________.
A) mortgages
B) automobile
C) credit cards
D) nonresidential real estate
49) When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and
the bank chooses not to hold any excess reserves but instead makes loans, then in the
bank’s final balance sheet,
A) the assets at the bank increase by $200,000
B) the liabilities of the bank increase by $200,000
C) reserves increase by $200,000
D) all of the above occur
50) In an advanced economy, a financial crisis can begin in several ways, including:
A) mismanagement of financial liberalization or innovation
B) asset pricing booms and busts
C) an increase in uncertainty caused by failure of financial institutions
D) all of the above
51) Which of the following pensions does not promise employees a specific retirement
benefit?
A) defined-benefit plan
B) defined-contribution plan
C) overfunded plan
D) underfunded plan
52) A share of common stock in a firm represents an ownership interest in that firm and
allows stockholders to
A) vote
B) receive dividends
C) receive interest payments
D) only A and B of the above
53) The ________ rate is the rate of interest that the issuer must pay.
A) market
B) coupon
C) discount
D) funds
54) High-yield bonds rated below investment grade by the bond-rating agencies are
frequently referred to as ________.
A) municipal bonds
B) Yankee bonds
C) “fallen angels”
D) junk bonds
55) If you sell 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
56) A conflict of interest between providing impartial research about companies issuing
securities and selling those same securities arises in
A) investment banking
B) commercial banking
C) accounting firms
D) mutual funds
57) When one party to a transaction has incentives to engage in activities detrimental to
the other party, there exists a problem of
A) moral hazard
B) split incentives
C) ex ante shirking
D) precontractual opportunism
58) The percentage of the total loan paid back immediately when a mortgage loan is
obtained, which lowers the annual interest rate on the debt, is called
A) discount points
B) loan terms
C) collateral
D) down payment