1) The yield to maturity of a one-year, simple loan of $500 that requires an interest
payment of $40 is
A) 5 percent
B) 8 percent
C) 12 percent
D) 12.5 percent
2) The use of financial derivatives by financial institutions to hedge can decrease risk.
However, they can also increase risk. Which of the following examples illustrates this?
A) Financial derivatives allow financial institutions to increase their leverage
B) Some institutions such huge amounts of derivatives that the amounts exceed capital
C) All of the above are valid examples
D) None of the above are valid examples
3) Which of the following is not a feature of the Terrorism Risk Insurance Act of 2002?
A) Losses that exceed $100 billion are not covered
B) The law does not apply to acts of international terrorism when losses are less than $5
million
C) Government pays 50 percent of losses in excess of $100 billion
D) Government pays 90 percent of the losses
4) When the least desirable credit risks are the ones most likely to seek loans, lenders
are subject to the
A) moral hazard problem
B) adverse selection problem
C) shirking problem
D) free-rider problem
E) principal-agent problem
5) According to the expectations theory of the term structure,
A) when the yield curve is steeply upward-sloping, short-term interest rates are
expected to rise in the future
B) when the yield curve is downward-sloping, short-term interest rates are expected to
decline in the future
C) buyers of bonds prefer short-term to long-term bonds
D) all of the above
E) only A and B of the above
6) Through risk-sharing activities, a financial intermediary ________ its own risk and
________ the risks of its customers.
A) reduces; increases
B) increases; reduces
C) reduces; reduces
D) increases; increases
7) The advantage of a “buy and hold strategy” is that
A) net profits will tend to be higher because there will be fewer brokerage commissions
B) losses will eventually be eliminated
C) the longer a stock is held, the higher its price will be
D) only B and C of the above are true
8) If the Federal Reserve wants to drain reserves from the banking system, it will
A) purchase government securities
B) lower the discount rate
C) sell government securities
D) raise reserve requirements
9) Which of the following are reported as liabilities on a bank’s balance sheet?
A) discount loans
B) cash items in the process of collection
C) state government securities
D) all of the above
E) only B and C of the above
10) If a central bank does not want to see its currency fall in value, it may pursue
________ monetary policy to ________ the domestic interest rate, thereby
strengthening its currency.
A) expansionary; raise
B) contractionary; raise
C) expansionary; lower
D) contractionary; lower
11) The Glass-Steagall Act prohibited commercial banks from
A) issuing equity to finance bank expansion
B) engaging in underwriting of and dealing in corporate securities
C) selling new issues of government securities
D) purchasing any debt securities
12) If the dollar appreciates relative to the Swiss franc,
A) Swiss chocolate will become more expensive in the United States
B) American computers will become less expensive in Switzerland
C) Swiss chocolate will become cheaper in the United States
D) both A and B of the above will happen
13) The power within the Federal Reserve was effectively transferred to the Board of
Governors by
A) the banking legislation of the Great Depression
B) Supreme Court decisions in the 1950s
C) the Depository Institutions Deregulation and Monetary Control Act of 1980
D) the Treasury-Federal Reserve Accord of 1951
14) In actual practice, short-term interest rates are just as likely to fall as to rise; this is
the major shortcoming of the
A) market segmentation theory
B) expectations theory
C) liquidity premium theory
D) separable markets theory
15) In the early stages of the banking crisis in the 1980s, financial institutions were
especially hurt by
A) the sharp increases in interest rates from late 1979 until 1981
B) the severe recession in 1981-82
C) the sharp decline in the price level from mid-1980 to early 1983
D) all of the above
E) only A and B of the above
16) The bailout of the savings and loan industry was much delayed and, therefore, much
more costly to taxpayers because
A) regulators initially attempted to downplay the seriousness of problems within the
thrift industry
B) politicians who received generous campaign contributions from the savings and loan
industry hoped that the problems in the industry would ease over time
C) Congress did not wait long enough for many of the problems in the thrift industry to
correct themselves
D) of all of the above
E) of only A and B of the above
17) From the standpoint of ________, specialization in lending is surprising but makes
perfect sense when one considers the ________ problem.
A) moral hazard; diversification
B) diversification; moral hazard
C) adverse selection; diversification
D) diversification; adverse selection
18) In the case of an insurance policy, ________ occurs when the existence of insurance
encourages the insured party to take risks that increase the likelihood of an insurance
payoff.
A) moral hazard
B) opportunism
C) adverse selection
D) shirking
19) A major difference between the United States and Japanese banking systems is that
A) American banks are allowed to hold substantial equity stakes in commercial firms,
whereas Japanese banks cannot
B) Japanese banks are allowed to hold substantial equity stakes in commercial firms,
whereas American banks cannot
C) bank holding companies are illegal in the United States
D) both A and C of the above
E) both B and C of the above
20) Because of the adverse selection problem,
A) lenders may make a disproportionate amount of loans to bad credit risks
B) lenders may refuse loans to individuals with low net worth
C) lenders are reluctant to make loans that are not secured by collateral
D) all of the above
21) Money is defined as
A) anything that is generally accepted in payment for goods and services or in the
repayment of debt
B) bills of exchange
C) a riskless repository of spending power
D) all of the above
E) only A and B of the above
22) Since 1974, commercial banks’ importance as a source of funds for borrowers has
shrunk dramatically, from around ________ percent of total credit advanced to near
________ percent by 2009 .
A) 60; 30
B) 40; 25
C) 25; 20
D) 30; 15
23) Although the Federal Open Market Committee does not have formal authority to set
________ and the ________, it does possess the authority in practice.
A) margin requirements; discount rate
B) margin requirements; federal funds rate
C) reserve requirements; discount rate
D) reserve requirements; federal funds rate
24) Which is not a problem of forward contracts?
A) a lack of liquidity
B) a lack of flexibility
C) the difficulty of finding a counterparty
D) default risk
25) Treasury bills do not
A) pay interest
B) have a maturity date
C) have a face amount
D) have an active secondary market
26) A contract that requires the investor to sell securities on a future date is called a
________.
A) short contract
B) long contract
C) hedge
D) micro hedge