Archives: Quiz

1) If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is immediate, then the A) interest rate will fall B) interest rate will rise C) interest rate will fall immediately below the initial […]

1) The payments system is A) the method of conducting transactions in the economy B) used by union officials to set salary caps C) an illegal method of rewarding contracts D) used by your employer to determine salary increases 2) […]

1) ________ is the process of researching and developing profitable new products and services by financial institutions. A) Financial engineering B) Financial manipulation C) Customer manipulation D) Customer engineering 2) Net worth can perform a similar role to A) diversification […]

1) The nominal interest rate minus the expected rate of inflation A) defines the real interest rate B) is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate C) is a less […]

1) 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 servicing accounts have been approximately ________ of operating expenses. A) 45 percent; 55 […]

1) The agreement to provide a standardized commodity to a buyer on a specific date at a specific future price is A) a put option B) a call option C) a futures contract D) a mortgage-backed security 2) If initially […]

1) Financial institutions search for ________ has resulted in many financial innovations. A) higher profits B) regulations C) respect D) higher risk 2) If the required reserve ratio is 15 percent, the simple deposit multiplier is A) 15.0 B) 1.5 […]

1) A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system A) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently B) allows for a […]

1) Assume you are holding Treasury securities and have sold futures to hedge against interest-rate risk. If interest rates rise A) the increase in the value of the securities equals the decrease in the value of the futures contracts B) […]

1) The total amount of required reserves in the banking system is equal to the ________ the required reserve ratio and checkable deposits. A) sum of B) difference between C) product of D) ratio between 2) Members of Congress are […]

1) Which of the following does not appear in the current account part of the balance of payments? A) A loan of $1 million from Bank of America to Brazil B) Foreign aid to El Salvador C) An Air France […]

1) The primary goal of the European Central Bank is A) price stability B) exchange rate stability C) interest rate stability D) high employment 2) Analysis of adverse selection indicates that financial intermediaries, especially banks, A) have advantages in overcoming […]

1) Which of the following is not one of the eight basic puzzles about financial structure? A) Stocks are the most important source of finance for American businesses B) Issuing marketable securities is not the primary way businesses finance their […]

1) The contagion effect refers to the fact that A) deposit insurance has eliminated the problem of bank failures B) bank runs involve only sound banks C) bank runs involve only insolvent banks D) the failure of one bank can […]

1) Financial innovation has caused A) banks to suffer declines in their cost advantages in acquiring funds, although it has not caused a decline in income advantages B) banks to suffer a simultaneous decline of cost and income advantages C) […]

1) Interest-rate risk is the riskiness of an asset’s returns due to A) interest-rate changes B) changes in the coupon rate C) default of the borrower D) changes in the asset’s maturity 2) For simple loans, the simple interest rate […]

1) Equity contracts account for a small fraction of external funds raised by American businesses because A) costly state verification makes the equity contract less desirable than the debt contract B) of the reduced scope for moral hazard problems under […]

1) Methods of financing government spending are described by an expression called the government budget constraint, which states the following: A) the government budget deficit must equal the sum of the change in the monetary base and the change in […]

1) The increase in the currency ratio during World War II was due to A) bank panics B) a drop in the rate of interest paid on checking deposits C) the spread of ATMs D) high taxes and illegal activities […]

1) Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause ________ in the unemployment rate in […]

1) If nominal GDP is $10 trillion, and velocity is 10, the money supply is A) $1 trillion B) $5 trillion C) $10 trillion D) $100 trillion 2) Assuming initially that rr = 10%, c = 40%, and e = […]

1) One of the criticisms of Basel 2 is that it is procyclical. That means that A) banks may be required to hold more capital during times when capital is short B) banks may become professional at a cyclical response […]

1) With an interest rate of 6 percent, the present value of $100 next year is approximately A) $106 B) $100 C) $94 D) $92 2) The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to […]

1) According to rational expectations theory, forecast errors of expectations A) are more likely to be negative than positive B) are more likely to be positive than negative C) tend to be persistently high or low D) are unpredictable 2) […]

1) Holding all other factors constant, the quantity demanded of an asset is A) positively related to wealth B) negatively related to its expected return relative to alternative assets C) positively related to the risk of its returns relative to […]

1) From 1950-2011 the price level in the United States increased more than A) twofold B) threefold C) sixfold D) ninefold 2) The Keynesian theory of money demand predicts that people will increase their money holdings if they believe that […]

1) Under a fixed exchange rate regime, if the domestic currency is initially overvalued, that is, below par, the central bank must intervene to purchase the ________ currency by selling ________ assets. A) domestic; foreign B) domestic; domestic C) foreign; […]

1) As the banking system in the United States evolves, it is expected that A) the number and importance of small banks will increase B) the number and importance of large banks will decrease C) small banks will grow at […]

1) When financial institutions are able to reduce the costs of information for each service they offer by applying the same information source to each service, we say that the financial institution is realizing A) economies of scope B) economies […]

1) According to Edward Kane, because the banking industry is one of the most ________ industries in America, it is an industry in which ________ is especially likely to occur. A) competitive; loophole mining B) competitive; innovation C) regulated; loophole […]

1) According to the expectations theory of the term structure A) the interest rate on long-term bonds will exceed the average of short-term interest rates that people expect to occur over the life of the long-term bonds, because of their […]

1) A coupon bond that has no maturity date and no repayment of principal is called a A) consol B) cabinet C) Treasury bill D) Treasury note 2) High interest rates might cause a corporation to ________ building a new […]

1) Everything else held constant, in the market for reserves, decreases in the interest rate paid on excess reserves affect the federal funds rate A) when the funds rate is below the interest rate paid on excess reserves B) when […]

1) Everything else held constant, increased demand for a country’s exports causes its currency to ________ in the long run, while increased demand for imports causes its currency to ________. A) appreciate; appreciate B) appreciate; depreciate C) depreciate; appreciate D) […]

1) The entry of AT&T and GM into the credit card business is an indication of A) government’s efforts to deregulate the provision of financial services B) the rising profitability of credit card operations. C) the reduction in costs of […]

1) State whether the following statement is true or false AND explain why: “An increase in the interest rate paid on excess reserves will always cause an increase in the federal reserve funds rate.” 2) State whether the following statement […]

1) Which of the following is NOT a factor for determining whether to use the active or passive approach to capital structure changes? A.How much the firm faces in flotation costs under the active management approach B.How much the firm […]

1) Most business loans today are __________________. A.Pre-negotiated lines of credit B.Spot loans C.Collateralized lines of credit D.None of these 2) Balance Sheet You are evaluating the balance sheet for Campus Corporation. From the balance sheet you find the following […]

1) Portfolio Beta You own $1,000 of City Steel stock that has a beta of 1.5. You also own $5,000 of Rent-N-Co (beta = 1.8) and $4,000 of Lincoln Corporation (beta = 0.9). What is the beta of your portfolio? […]

1) Your company has a 38% tax rate and has $800 million in assets, currently financed entirely with equity. Equity is worth $60 per share, and book value of equity is equal to market value of equity. Also, let’s assume […]

1) All of the following capital budgeting tools are suitable for non-normal cash flows except ____. A.MIRR B.Profitability Index C.IRR D.NPV 2) Which of the following statements is correct? A.All else the same, an investor will require less return to […]

1) Carrie D’s has 6 million shares of common stock outstanding, 2 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $15 per share, the preferred shares are selling for $28 per […]

1) A firm faces a 30% tax rate and has $200M in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let’s assume that […]

1) Renee’s Boutique, Inc., needs to raise $300 million to finance firm expansion. In discussions with its investment bank, Renee’s learns that the bankers recommend a debt issue with an offer price of $1,000 per bond and they will charge […]

1) Oberon Inc. has a $20 million ($1000 face value) 10-year bond issue selling for 99% of par that pays an annual coupon of 7.25%. What would be Oberon’s before-tax component cost of debt? A.6.12% B.7.02% C.7.40% D.8.15% 2) This […]

1) “The net amount of current assets that the firm has to fund, above and beyond those that someone else funds for them” is referred to as ______________. A.Net working capital B.Excess capacity C.Safety stock D.Unfunded assets 2) Which of […]

1) Accelerated depreciation allows firms to A.receive less of the dollars of depreciation earlier in the asset’s life B.receive more of the dollars of depreciation earlier in the asset’s life C.not pay any taxes during an asset’s life D.receive more […]

1) Which of the following will increase the additional funds needed from external sources? A.The firm’s profit margin increases B.The firm’s dividend payout ratio decreases C.The firm’s debt ratio decreases D.None of these 2) This should be the primary objective […]

1) Free Cash Flow The 2010 income statement for Betty’s Barstools shows that depreciation expense is $100 million, EBIT is $400 million, and taxes are $120 million. At the end of the year, the balance of gross fixed assets was […]

1) Compute the expected return given these three economic states, their likelihoods, and the potential returns: A.3.5% B.7.0% C.7.5% D.12.5% 2) This is a situation that arises when a firm’s equity is close to worthless, and equityholders will prefer to […]