1) The Dow Jones Industrial Average is the broadest and best indicator of the stock
market’s day-to-day performance.
2) The New York Stock Exchange is an example of a primary market.
3) Federal legislation allows credit unions representing groups with different common
bonds to merge into a single credit union.
4) The fact that insurance companies charge young males higher automobile insurance
premiums than young females is an example of coinsurance.
5) The government agency that insures each depositor at a commercial bank, savings
and loan association, or mutual savings bank up to a loss of $100,000 per account
($250,000 for individual retirement accounts) is the Securities and Exchange
Commission (SEC).
6) In an efficient market, abnormal returns are not possible, even using inside
information.
7) The mutual form of ownership accentuates the principal-agent problem that exists in
corporations.
8) Factors that can lead to worsening conditions in financial markets include increasing
interest rates and asset price booms.
9) An undersubscribed issue occurs when sales agents have been unable to generate
sufficient interest among their customers to sell all the securities by the issue date.
10) SEC research suggests that about three-fourths of mutual funds let privileged
shareholders engage in market timing.
11) An increase in the federal government budget deficit will raise the interest rate on
bonds.
12) The financial system is one of the most heavily regulated sectors of the economy.
13) During a bank panic, many banks fail in a very short time period.
14) Consumer finance companies make loans to borrowers who would not qualify for
bank loans due to low income or poor credit.
15) Commercial paper has been used in various forms since the 1930s.
16) 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 formula for the current yield is identical to the formula describing the yield to
maturity for a discount bond
C) The current yield is always a poor approximation for the yield to maturity
D) All of the above are true
E) Only A and B of the above are true
17) The problem created by asymmetric information before the transaction occurs is
called ________, while the problem created after the transaction occurs is called
________.
A) adverse selection; moral hazard
B) moral hazard; adverse selection
C) costly state verification; free-riding
D) free-riding; costly state verification
18) During the last years of an amortizing 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
19) The strongest argument for an independent Federal Reserve rests on the view that
subjecting the Fed to more political pressures would impart
A) an inflationary bias to monetary policy
B) a deflationary bias to monetary policy
C) a disinflationary bias to monetary policy
D) a countercyclical bias to monetary policy
20) Long-term unsecured bonds that are backed only by the general creditworthiness of
the issuer are called
A) junk bonds
B) callable bonds
C) convertible bonds
D) debentures
21) Factors that provide the Federal Reserve with a high degree of independence
include
A) 14-year terms for members of the Board of Governors
B) a four-year term for the chairman of the Board of Governors that is not coincident
with the president’s term of office
C) constitutional independence from Congress and the president
D) all of the above
E) only A and B of the above
22) If the Fed wants to lower the federal funds interest rate, it will ________ the
banking system by ________ securities.
A) add reserves to; selling
B) add reserves to; buying
C) remove reserves from; selling
D) remove reserves from; buying
23) That most used cars are sold by intermediaries (i.e., used car dealers) provides
evidence that these intermediaries
A) provide information that is valued by consumers of used cars
B) are able to prevent others from free-riding off the information that they provide
C) can profit by becoming experts in determining whether an automobile is a good car
or a lemon
D) do all of the above
24) According to the interest parity condition, if the domestic interest rate is ________
the foreign interest rate, then ________.
A) above; there is expected appreciation of the foreign currency
B) above; there is expected depreciation of the foreign currency
C) below; there is expected appreciation of the foreign currency
D) below; the interest parity condition is violated
25) Many believe that the statistical discrepancy is primarily the result of
A) large hidden capital flows into the United States
B) large hidden capital flows out of the United States
C) measurement errors due to exchange rate calculations
D) none of the above
26) ________ is when the domestic currency is backed 100% by a foreign currency and
in which the note-issuing authority establishes a fixed exchange rate to this foreign
currency and stands ready to exchange domestic currency for the foreign currency at
this rate whenever the public requests it.
A) dollarization
B) currency board
C) devaluation
D) revaluation
27) Investment banks serve two client groups,
A) home buyers and mortgage lenders
B) people saving for retirement and pension funds
C) issuers of securities and investors in those securities
D) mutual funds and investors with relatively small amounts to invest
28) Determining asset prices using stocks of assets rather than flow is called
A) asset transformation
B) expected return
C) asset market approach
D) market equilibrium
29) The largest financial intermediaries are
A) insurance companies
B) finance companies
C) banks
D) all of the above
30) What is the key difference between an S&L and a mutual savings bank?
A) Mutual savings banks are jointly owned by depositors, whereas S&Ls aren’t
B) The FDIC insures an S&L’s deposits, but not those of mutual savings banks
C) Both A and B are correct
D) Neither A nor B is correct
31) In addition to having a direct effect on increasing adverse selection problems,
increases in interest rates also promote financial crises by ________ firms’ and
households’ interest payments, thereby ________ their cash flow.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing
32) Which Federal Reserve Bank president always has a vote in the Federal Open
Market Committee?
A) Philadelphia
B) New York
C) Boston
D) San Francisco
33) During the boom years of the 1920s, bank failures were quite
A) uncommon, averaging less than 30 per year
B) uncommon, averaging less than 100 per year
C) common, averaging about 600 per year
D) common, averaging about 2,000 per year
34) Evidence against market efficiency does not include
A) the small-firm effect
B) technical analysis
C) excessive volatility
D) mean reversion
35) Because of the moral hazard problem,
A) lenders will write debt contracts that restrict certain activities of borrowers
B) lenders will more readily lend to borrowers with high net worth
C) debt contracts are used less frequently to raise capital than equity contracts
D) all of the above
E) only A and B of the above
36) Markets in which funds are transferred from those who have excess funds available
to those who have a shortage of available funds are called
A) commodity markets
B) funds markets
C) derivative exchange markets
D) financial markets
37) The elimination of a riskless profit opportunity in a market is called
A) the efficient market hypothesis
B) random walk
C) arbitrage
D) market fundamentals
38) Which of the following $1,000 face value securities has the highest yield to
maturity?
A) A 5 percent coupon bond selling for $1,000
B) A 10 percent coupon bond selling for $1,000
C) A 12 percent coupon bond selling for $1,000
D) A 12 percent coupon bond selling for $1,100
39) When the demand for bonds ________ or the supply of bonds ________, bond
prices rise.
A) increases; decreases
B) decreases; increases
C) decreases; decreases
D) increases; increases
40) The organization responsible for the conduct of monetary policy in the United
States is the
A) Comptroller of the Currency
B) U.S. Treasury
C) Federal Reserve System
D) Bureau of Monetary Affairs
41) The number of contracts outstanding in a particular financial future is the
________.
A) demand coefficient
B) open interest
C) index level
D) outstanding balance
42) The concept of adverse selection helps to explain
A) why collateral is not a common feature of many debt contracts
B) why large, well-established corporations find it so difficult to borrow funds in
securities markets
C) why financial markets are among the most heavily regulated sectors of the economy
D) all of the above
43) Investment banks sell ________ securities to the public, and brokerage firms sell
________ securities to the public.
A) new; existing
B) new and existing; existing
C) existing; new
D) existing; new and existing
44) Under inflation targeting, a central bank must pursue policies that
A) keep the inflation rate at a target value of zero
B) keep the inflation rate at some specific target value
C) keep the inflation rate within a specific target range
D) lower the inflation rate, provided this can be done without raising the unemployment
rate above a specified target value
45) According to the textbook authors,
A) the Fed appears to be remarkably free of the political pressures that influence other
government agencies
B) since the president can protect the Fed from Congress, the Fed may be responsive to
the president’s policy preferences
C) the Fed appears to be more responsive to the political pressures that influence other
government agencies
D) both A and B of the above
E) both B and C of the above
46) Which of the following statements regarding the funding of Social Security is false?
A) In 2004, workers contributed 6.2% of their wages up to a maximum of $87,900
B) Employers contribute an amount equal to the workers’ contributions
C) Interest, dividend, rent, and royalty income are also taxed to provide supplemental
funds for Social Security
D) Contributions exceeding the amounts paid to current Social Security recipients are
invested in Treasury bonds to build up a Social Security trust fund
47) Which of the following are not investment intermediaries?
A) A life insurance company
B) A pension fund
C) A mutual fund
D) Only A and B of the above