(I) A bond is a debt security that promises to make payments periodically for a specified period of time. (II) A stock is a security that is a claim on the earnings and assets of a corporation.

Student Answer: (I) is true, (II) false

(I) is false, (II) true

Both are true

Both are false

Question2.Question :Financial markets and institutions

Student Answer: affect the types of goods and services produced in an economy.

affect the profits of businesses

involve the movement of huge quantities of money

do all of the above

Question3.Question :The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) iscommonly referred to as the:

Student Answer: aggregate price level

inflation rate

exchange rate

interest rate

Question4.Question :Interest rates are important to financial institutions since an interest rate increase ________ the cost of acquiring funds and _________ the income from assets.

Student Answer: increases, decreases

decreases, decreases

increases, increases

decreases, increases

Question5.Question :The price of one country's currency in terms of another's is called:

Student Answer: the interest rate

the exchange rate

the dow Jones industrial average

none of the above

Question6.Question :A stronger dollar benefits _______ and hurts _______

Student Answer: foreign businesses, American consumers

American businesses, American consumers

American businesses, foreign businesses

American consumers, American businesses

Question7.Question :Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. They:

Student Answer: act as middlemen, borrowing funds from those who have saved and lending these funds to others.

play an important role in determining the quantity of money in the economy.

help promote a more efficient and dynamic economy.

do all of the above.

Question8.Question :The largest financial intermediaries are:

Student Answer: banks

finance companies

insurance companies

pension funds

Question9.Question :Monetary policy affects:

Student Answer: interest rates

business cycles

inflation

all of the above

Points Received:2 of 2

Comments:

Question10.Question :Banks, savings and loan associations, mutual savings banks, and credit unions:

Student Answer: have been adept at innovating in response to changes in the regulatory environment.

have been providing services only to small depositors since deregulation.

are no longer important players in financial intermediation.

all of the above.

Question11.Question :Every financial market performs the following function:

Student Answer: It allows common stock to be traded.

It channels funds from lenders to borrowers

It allows loans to be made

It determines the level of interest rates.

Question12.Question :Financial markets have the basic function of:

Student Answer: assuring that governments need never resort to printing money.

assuring that the swings in the business cycle are less pronounced.

bringing together people with funds to lend and people who want to borrow.

preventing greed and corruption.

Question13.Question :Which of the following are securities?

Student Answer: A share of common stock.

A treasury bill

A certificate of deposit

All of the above

Question14.Question :Which of the following are primary markets?

Student Answer: The U.S. Government Bond market

The over the counter stock market

The New York Stock Exchange

None of the above

Question15.Question :Long term debt and equity instruments are traded in the _______ market.

Student Answer: capital

secondary

primary

money

Question16.Question :Bonds that are sold in a foreign country and are denominated in that country's currency are known as:

Student Answer: Eurodollars

Eurocurrencies

Eurobonds

foreign bonds

Question17.Question :The main sources of financing for businesses, in order of importance, are:

Student Answer: issuing stocks, issuing bonds, financial intermediaries.

financial intermediaries, issuing bonds, issuing stocks

issuing bonds, issuing stocks, financial intermediaries

issuing stocks, issuing bonds, financial intermediaries

Question18.Question :Which of the following is a contractual savings institution?

Student Answer: Savings and loan institution

Mutual fund

Life insurance company

Credit union

Question19.Question :The country whose banks are the most restricted in the range of assets they may hold is:

Student Answer: United States

Japan

Canada

Germany

Question20.Question :A ___________ is when one party in a financial contract has incentives to act in its own interests rather than in the interests of the other party.

Student Answer: risk

conflict of interest

moral hazard

financial panic

A loan that requires the borrower to make the same payment every period until the maturity date is called a:

Student Answer: same payment loan

simple loan

fixed payment loan

discount loan

Question2.Question :A credit market instrument that pays the owner the face value of the security at the maturity date and nothing prior to then is called a :

Student Answer: fixed payment loan

coupon bond

discount bond

simple loan

Question3.Question :An $8,000 coupon bond with a $400 annual coupon payment has a coupon rate of:

Student Answer: 8%

10%

5%

40%

Question4.Question :With an interest rate of 5%, the present value of $100 received one year from now is approximately:

Student Answer: $90

$95

$100

$105

Question5.Question :The interest rate that equates the present value of the cash flow received from a debt instrument with its market price today is the:

Student Answer: yield to maturity

discount rate

real interest rate

simple interest rate

Question6.Question :If a $10,000 face value discount bond maturing on one year is selling for $9,000, then its yield to maturity is:

Student Answer: 9%

10%

11%

12%

Question7.Question :The change in the bond's price relative to the initial purchase price is:

Student Answer: the current yield

rate of capital gain

coupon payment

yield to maturity

Question8.Question :The supply curve for bonds has the usual upward slope, indicating that as the price _________, ceteris paribus, the ________ increases.

Student Answer: rises, quantity supplied

falls, supply

falls, quantity supplied

rises, supply

Question9.Question :When the price of a bond is above the equilibrium price, there isexcess _________ in the market and the price will _________.

Student Answer: supply, rise

demand, rise

supply, fall

demand, fall

Question10.Question :When prices in the stock market become more uncertain, the demand curve for bonds shifts to the ______ and the interest rate______.

Student Answer: right, rises

left, falls

left, rises

right, falls

Question11.Question :When the economy enters into a boom, normally the demand for bonds _______, the supply of bonds ________, and the interest rate _______ .

Student Answer: decreases, decreases, falls

increases, decreases, rises

decreases, increases, rises

increases, increases, rises

Question12.Question :A higher level of income causes the demand for money to ________ and the interest rate to __________ .

Student Answer: increase, decrease

increase, increase

decrease, increase

decrease, decrease

Question13.Question :If the Fed wants to permanently lower interest rates, then it should raise the rate of money growth if:

Student Answer: there is slow adjustment of expected inflation.

there is fast adjustment of expected inflation.

the liquidity effect is larger than the other effects.

the liquidity effect is smaller than the expected inflation effect.

Question14.Question :The risk structure of interest rates is:

Student Answer: the relationship among interest rates of different bonds witht the same maturity.

the structure of how interest rates move over time.

the relationship among the terms to maturity of different bonds.

the relationship among interest rates on bonds with different maturities.

Question15.Question :Holding everything else constant, if a corporation begins to suffer large losses, then the default risk on its bonds will _______ and the expected return on those bonds will _______ .

Student Answer: decrease, increase

increase, increase

decrease, decrease

increase, decrease

Question16.Question :If the expected path of one year interest rates over the next four years is 5%, 4%, 2%, and 1%, then the pure expectations theory predicts that today's interest rate on the four year bond is:

Student Answer: 4%

2%

1%

none of the above

Question17.Question :Typically, yield curves are:

Student Answer: gently downward sloping

mound shaped

gently upward sloping

bowl shaped

Question18.Question :Of the four theories that explain how interest rates on bonds with different terms to maturity are related, the one that views long term interest rates as equaling the average of future short term rates expected to occur over the life of the bond is the:

Student Answer: pure expectations theory

liquidity premium theory

preferred habitat theory

segmented markets theory

Question19.Question :A bond rating of A or AA would mean that the quality of the bond is:

Student Answer: speculative

high

the highest

medium grade

Question20.Question :If a bond has favorable tax treatment, its interest rate:

Student Answer: will not be effected

will be lower

will be higher

all of the above could happen

1.Question :Of the following sources of external finance for American nonfinancial businesses, the least important is:

Student Answer: stocks

bonds and commercial paper

loans from banks

nonbank loans

Question2.Question :Which of the following is not one of the eight basic facts about financial structure?

Student Answer: Financial intermediaries are the most important source of external funds to finance businesses.

Issuing marketable securities is the primary way businesses finance their operations.

The financial system is among the most heavily regulated sectors of the economy.

Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses get funds directly from lenders in financial markets.

Question3.Question :Because of the lemons problem in the used car market, the average quality of used cars offered for sale will be _________, which gives rise to the problem of ________.

Student Answer: low, adverse selection

high, adverse selection

low, moral hazard

high, moral hazard

Question4.Question :Because of the adverse selection problem:

Student Answer: good credit risks are more likely to seek loans, causing lenders to make a disproportionate amount of loans to good credit risks.

lenders are reluctant to make loans that are not secured by collateral.

lenders may refuse loans to individuals with high net worth because of their greater proclivity to "skip town."

all of the above.

Question5.Question :An audit certifies that:

Student Answer: a firm abides by standard accounting principles.

a firm's securities are safe investments.

a firm's loans will be repaid.

the information reported in a firm's accounting statements is correct.

Question6.Question :The majority of household debt in the United States consists of:

Student Answer: unsecured loans, such as student loans

collateralized loans

credit card debt

consumer installment debt

Question7.Question :One financial intermediary in our financial structure that helps to reduce the moral hazard arising from the principal agent problem is the:

Student Answer: venture capital firm

money market mutual fund

savings and loan association

independent bank

Question8.Question :A debt contract is said to be incentive compatible if:

Student Answer: the borrower's net worth reduces the probability of moral hazard.

the restrictive covenants limit the type of activities that can be undertaken by the borrower.

both of the above

none of the above

Question9.Question :Which of the following events would be least likely to be the initiating cause of a financial crisis?

Student Answer: bank panic

stock market decline

increase in interest rates

increase in uncertainty

Question10.Question :Liquidity services are services that:

Student Answer: increase transaction costs

make it easier for customers to conduct transactions

conducts transactions for the customer

all of the above

Question11.Question :Financial crises

Student Answer: are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms.

occur when adverse selection and moral hazard problems in financial markets become more significant.

frequently lead to sharp contractions in economic activity.

are all of the above.

are only A and B of the above.

Question12.Question :What is a credit boom?

Student Answer: an explosion in a credit cycle, which can increase or decrease lending in the short-run

essentially a lending spree on the part of banks and other financial institutions

when credit card receivables rise due to low initial interest rates

the signal of the end of a credit spree, with credit contracting rapidly

Question13.Question :In an advanced economy, a financial crisis can begin in several ways, including:

Student Answer: mismanagement of financial liberalization or innovation.

asset pricing booms and busts.

an increase in uncertainty caused by failure of financial institutions.

all of the above.

Question14.Question :The process of deleveraging refers to

Student Answer: cutbacks in lending by financial institutions.

a reduction in debt owed by banks.

both A and B.

none of the above.

Question15.Question :Stage Three of a financial crisis in an advanced economy features

Student Answer: a general increase in inflation.

debt deflation.

an increase in general price levels.

a full-fledged financial crisis.

Question16.Question :Factors that lead to worsening conditions in financial markets include

Student Answer: increases in interest rates.

declining stock prices.

increasing uncertainty in financial markets.

all of the above.

only A and B of the above.

Question17.Question :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.

Student Answer: increasing; increasing

increasing; decreasing

decreasing; increasing

decreasing; decreasing

Question18.Question :Which of the following led to the U.S. financial crisis of 2007-2009?

Student Answer: financial innovation in mortgage markets

agency problems in mortgage markets

an increase in moral hazard at credit rating agencies

all of the above

only A and B of the above

Question19.Question :The impact of the 2007-2009 financial crisis was widespread, including

Student Answer: the first major bank failure in the UK in over 100 years.

the failure of Bear Stearns, the fifth-largest U.S. investment bank.

the bailout of Fannie Mae and Freddie Mac by the U.S. Treasury.

all of the above.

only B and C of the above.

Question20.Question :When asset prices fall following a boom,

Student Answer: moral hazard may increase in companies that have lost net worth in the bust.

financial institutions may see the assets on their balance sheets deteriorate, leading to deleveraging.

both A and B are correct.

none of the above are correct.

1.Question :Financial markets and institutions

Student Answer: affect the types of goods and services produced in an economy.

affect the profits of businesses

involve the movement of huge quantities of money

do all of the above

Question2.Question :Interest rates are important to financial institutions since an interest rate increase ________ the cost of acquiring funds and _________ the income from assets.

Student Answer: increases, decreases

decreases, decreases

increases, increases

decreases, increases

Question3.Question :A stronger dollar benefits _______ and hurts _______

Student Answer: foreign businesses, American consumers

American businesses, American consumers

American businesses, foreign businesses

American consumers, American businesses

Question4.Question :Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. They:

Student Answer: act as middlemen, borrowing funds from those who have saved and lending these funds to others.

play an important role in determining the quantity of money in the economy.

help promote a more efficient and dynamic economy.

do all of the above.

Question5.Question :The largest financial intermediaries are:

Student Answer: banks

finance companies

insurance companies

pension funds

Question6.Question :Monetary policy affects:

Student Answer: interest rates

business cycles

inflation

all of the above

Question7.Question :Banks, savings and loan associations, mutual savings banks, and credit unions:

Student Answer: have been adept at innovating in response to changes in the regulatory environment.

have been providing services only to small depositors since deregulation.

are no longer important players in financial intermediation.

all of the above.

Question8.Question :Every financial market performs the following function:

Student Answer: It allows common stock to be traded.

It channels funds from lenders to borrowers

It allows loans to be made

It determines the level of interest rates.

Question9.Question :Financial markets have the basic function of:

Student Answer: assuring that governments need never resort to printing money.

assuring that the swings in the business cycle are less pronounced.

bringing together people with funds to lend and people who want to borrow.

preventing greed and corruption.

Question10.Question :Which of the following are securities?

Student Answer: A share of common stock.

A treasury bill

A certificate of deposit

All of the above

Question11.Question :Which of the following are primary markets?

Student Answer: The U.S. Government Bond market

The over the counter stock market

The New York Stock Exchange

None of the above

Question12.Question :Long term debt and equity instruments are traded in the _______ market.

Student Answer: capital

secondary

primary

money

Question13.Question :Bonds that are sold in a foreign country and are denominated in that country's currency are known as:

Student Answer: Eurodollars

Eurocurrencies

Eurobonds

foreign bonds

Question14.Question :The country whose banks are the most restricted in the range of assets they may hold is:

Student Answer: United States

Japan

Canada

Germany

Question15.Question :A ___________ is when one party in a financial contract has incentives to act in its own interests rather than in the interests of the other party.

Student Answer: risk

conflict of interest

moral hazard

financial panic

Question16.Question :A loan that requires the borrower to make the same payment every period until the maturity date is called a:

Student Answer: same payment loan

simple loan

fixed payment loan

discount loan

Question17.Question :An $8,000 coupon bond with a $400 annual coupon payment has a coupon rate of:

Student Answer: 8%

10%

5%

40%

Question18.Question :With an interest rate of 5%, the present value of $100 received one year from now is approximately:

Student Answer: $90

$95

$100

$105

Question19.Question :The interest rate that equates the present value of the cash flow received from a debt instrument with its market price today is the:

Student Answer: yield to maturity

discount rate

real interest rate

simple interest rate

Question20.Question :If a $10,000 face value discount bond maturing on one year is selling for $9,000, then its yield to maturity is:

Student Answer: 9%

10%

11%

12%

Question21.Question :The supply curve for bonds has the usual upward slope, indicating that as the price _________, ceteris paribus, the ________ increases.

Student Answer: rises, quantity supplied

falls, supply

falls, quantity supplied

rises, supply

Question22.Question :When the price of a bond is above the equilibrium price, there isexcess _________ in the market and the price will _________.

Student Answer: supply, rise

demand, rise

supply, fall

demand, fall

Question23.Question :When prices in the stock market become more uncertain, the demand curve for bonds shifts to the ______ and the interest rate______.

Student Answer: right, rises

left, falls

left, rises

right, falls

Question24.Question :When the economy enters into a boom, normally the demand for bonds _______, the supply of bonds ________, and the interest rate _______ .

Student Answer: decreases, decreases, falls

increases, decreases, rises

decreases, increases, rises

increases, increases, rises

Question25.Question :A higher level of income causes the demand for money to ________ and the interest rate to __________ .

Student Answer: increase, decrease

increase, increase

decrease, increase

decrease, decrease

Question26.Question :If the Fed wants to permanently lower interest rates, then it should raise the rate of money growth if:

Student Answer: there is slow adjustment of expected inflation.

there is fast adjustment of expected inflation.

the liquidity effect is larger than the other effects.

the liquidity effect is smaller than the expected inflation effect.

Question27.Question :Holding everything else constant, if a corporation begins to suffer large losses, then the default risk on its bonds will _______ and the expected return on those bonds will _______ .

Student Answer: decrease, increase

increase, increase

decrease, decrease

increase, decrease

Question28.Question :If the expected path of one year interest rates over the next four years is 5%, 4%, 2%, and 1%, then the pure expectations theory predicts that today's interest rate on the four year bond is:

Student Answer: 4%

2%

1%

none of the above

Question29.Question :A bond rating of A or AA would mean that the quality of the bond is:

Student Answer: speculative

high

the highest

medium grade

Question30.Question :If a bond has favorable tax treatment, its interest rate:

Student Answer: will not be effected

will be lower

will be higher

all of the above could happen

Question31.Question :The risk structure of interest rates is explained by:

Student Answer: the default risk

liquidity

tax considerations

all of the above

Question32.Question :What is a credit boom?

Student Answer: an explosion in a credit cycle, which can increase or decrease lending in the short-run

essentially a lending spree on the part of banks and other financial institutions

when credit card receivables rise due to low initial interest rates

the signal of the end of a credit spree, with credit contracting rapidly

Question33.Question :In an advanced economy, a financial crisis can begin in several ways, including:

Student Answer: mismanagement of financial liberalization or innovation.

asset pricing booms and busts.

an increase in uncertainty caused by failure of financial institutions.

all of the above.

Question34.Question :The process of deleveraging refers to

Student Answer: cutbacks in lending by financial institutions.

a reduction in debt owed by banks.

both A and B.

none of the above.

Question35.Question :Which of the following events would be least likely to be the initiating cause of a financial crisis?

Student Answer: bank panic

stock market decline

increase in interest rates

increase in uncertainty

Question36.Question :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.

Student Answer: increasing; increasing

increasing; decreasing

decreasing; increasing

decreasing; decreasing

Question37.Question :Which of the following led to the U.S. financial crisis of 2007-2009?

Student Answer: financial innovation in mortgage markets

agency problems in mortgage markets

an increase in moral hazard at credit rating agencies

all of the above

only A and B of the above

Question38.Question :The majority of household debt in the United States consists of:

Student Answer: unsecured loans, such as student loans

collateralized loans

credit card debt

consumer installment debt

Question39.Question :Which of the following is not an entity of the Federal Reserve System:

Student Answer: Federal Reserve banks

The FDIC

The FOMC

The Federal Advisory Council

Question40.Question :The power within the Federal Reserve was effectively transferred to the board of governors by:

Student Answer: Supreme court decisions in the 1950s

the banking legislation of the great depression

the Treasury-Federal Reserve accord of 1951

the Depository Institutions Deregulation and Monetary Control Act of 1980.

Question41.Question :A trend in recent years is that more and more governments:

Student Answer: have been reducing the interdependence of their central banks to make them more accountable for poor economic performance.

have been granting greater independence to their central banks.

have mandated that their central banks give up multiple policy goals to focus strictly on inflation.

have required their central banks to coordinate policies with their ministers of finance.

Question42.Question :Of the following central banks, the one that enjoys the least degree of independence is the:

Student Answer: Swiss National Bank

U.S. Federal Reserve System

Bank of Italy

Deutsche Bundersbank

Question43.Question :Which of the following central banks has the greatest degree of independence:

Student Answer: Bank of Japan

Bank of Canada

Swiss National Bank

Bank of England

Question44.Question :The twelve Federal Reserve banks are involved in monetary policy in several ways:

Student Answer: their directors select one commercial banker from each bank's district to serve on the Federal Advisory Council.

their directors establish the discount rate.

they decide which banks can obtain discount loans from the Federal Reserve Bank

all of the above

Question45.Question :The monetary base consists of:

Student Answer: discount loans and reserves

government securities held by the Fed and currency in circulation

Currency in circulation and reserves

government securities held by the Fed and discount loans

Question46.Question :The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the:

Student Answer: ideal level of unemployment

frictional level of unemployment

natural rate level of unemployment

structural level of unemployment

Question47.Question :The Fed's monetary policy strategy can be described as follows:

Student Answer: The Fed uses its operating targets to adjust its intermediate targets that directly impact its policy tools in a way that allows the Fed to achieve its goals.

The Fed uses its policy tools to adjust intermediate targets that directly impact its operating targets in a way that allows the Fed to achieve its goals.

The Fed uses its policy tools to adjust operating targets that directly impact its intermediate targets in a way that allows the Fed to achieve its goals.

None of the above

Question48.Question :Which of the following is a potential operating target for the Fed?

Student Answer: The Federal Funds Rate

The monetary base

Nonborrowed reserves

all of the above

Question49.Question :The federal funds rate is:

Student Answer: the price banks pay the Fed foe government securities

the price the Fed pays for government securities

the interest rate on loans from a bank to the federal government

the interest rate on loans of reserves from one bank to another.

Question50.Question :The type of open market operation intended to offset movements in other factors that affect reserves and the monetary base is:

Student Answer: the reserve requirements

the defensive open market operations

the dynamic open market operations

market equilibrium

The most influential participant(s) in the U.S. money market:

Student Answer: is the Federal Reserve

are the investment banks

are the large money center banks

is the Treasury Department

Question2.Question :Commercial banks are large holders of ________ and are the major issuer of ________.

Student Answer: commercial paper, Eurodollars

U.S. government securities, negotiable certificates of deposit

Eurodollars, commercial paper

negotiable certificates of deposit, U.S. government securities

Question3.Question :If the Fed wants to raise the federal funds interest rate, it will ________ securities to ______ the banking system.

Student Answer: buy, add reserves to

buy, remove reserves from

sell, remove reserves from

sell, add reserves to

Question4.Question :Banker's acceptances:

Student Answer: carry low interest rates because of the very low default risk.

are issued only by large money center banks

can be bought and sold until they mature

are all of the above

Question5.Question :The riskiest capital market security is:

Student Answer: corporate bonds

treasury bonds

preferred stock

common stock

Question6.Question :The most active stock exchange in the world is the:

Student Answer: Shanghai Stock Exchange

Nikkei stock Exchange

New York Stock Exchange

London Stock Exchange

Question7.Question :A stock currently sells for $30 per share and pays $1 in dividends. What is an investor's valuation of this stock if he expects it to be selling for $37 in one year and requires 12%?

Student Answer: $33.50

$33.93

$34.50

$38

Question8.Question :A high price earnings ratio (PE) gives what interpretation?

Student Answer: The market expects earnings to fall in the future.

The market feels the firm's earnings are very high risk and are willing to pay a premium for them.

The firm is not paying a dividend.

The market expects the earnings to rise in the future.

Question9.Question :Compared to money market securities, capital market securities have:

Student Answer: longer maturities

less risk

more liquidity

lower yields

Question10.Question :The price of Treasury notes, bonds, and bills are quoted:

Student Answer: as a percentage of the coupon rate.

as a multiple of the annual interest paid.

as a percentage of $100 face value.

as a percentage of the prior day's closing value.

Question11.Question :Corporate bonds are less risky if they are ________ bonds, and municipal bonds are less risky if they are ________ bonds.

Student Answer: unsecured, general obligation

unsecured, revenue

secured, general obligation

secured, revenue

Question12.Question :(I) Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders. (II) Bondholders hold a claim on assets that has priority over the claims of preferred stockholders.

Student Answer: (I) is true, (II) false.

(I) is false, (II) true.

Both are true.

Both are false.

Question13.Question :A basic principle of finance is that the value of any investment is

Student Answer: the present value of all future net cash flows generated by the investment.

the undiscounted sum of all future net cash flows generated by the investment.

unrelated to the future net cash flows generated by the investment.

unrelated to the degree of risk associated with the future net cash flows generated by the investment.

Question14.Question :Holding other things constant, a stock's value will be highest if its dividend growth rate is

Student Answer: 15%.

10%.

5%.

2%.

Question15.Question :The primary reason that individuals and firms choose to borrow long-term is to reduce the risk that interest rates will ________ before they pay off their debt.

Student Answer: rise

fall

become more volatile

become more stable

Question16.Question :The largest purchasers of capital market securities are

Student Answer: households.

corporations.

governments.

central banks.

Question17.Question :(I) The coupon rate is the rate of interest that the issuer of the bond must pay.(II) The coupon rate is usually fixed for the duration of the bond and does not fluctuate with market interest rates.

Student Answer: (I) is true, (II) false.

(I) is false, (II) true.

Both are true.

Both are false.

Which of the following are important ways in which mortgagemarkets differ from thestock and bond markets?

Student Answer: Because mortgages are made for different amounts and maturities, developing a secondary market has been more difficult.

Most mortgages are secured by real estate, whereas the majority of capital market borrowing is unsecured.

The usual borrowers in capital markets are government entities and business, whereas the usual borrowers in the mortgage markets are individuals.

all of the above

Question2.Question :Typically, discount points should not be paid if the borrower will pay off the loan in ______ years or less.

Student Answer: 5

10

15

20

Points Received:2 of 2

Comments:

Question3.Question :Which of the following are useful for home buyers who expect their income to fall in the future?

Student Answer: GEMs

RAMs

GPMs

All of the above

Question4.Question :Mortgage backed securities:

Student Answer: are securities collateralized by a pool of mortgages

have been characterized by fraud as institutional investors look for attractive investment opportunities

are securities collateralized by both insured and uninsured mortgages

all of the above

Question5.Question :What factors are used in determining a person's FICO score?

Student Answer: Outstanding debt

Length of credit history

past payment history

all of the above

Question6.Question :What new debt instruments compete for funds with government bonds, corporate bonds, and stocks that are low risk securities that have higher yields than comparable government bonds and attract funds from around the world?

Student Answer: Securitized mortgages

Private pass throughs

Mortgage backed mutual funds

Subprime mortgages

Question7.Question :When the exchange rate changes from 1.0 Euros to the Dollar to 1.2 Euros to the Dollar than the Euro has _________ and the Dollar has _______.

Student Answer: depreciated, appreciated

appreciated, appreciated

depreciated, depreciated

appreciated, depreciated

Question8.Question :The starting point for understanding how exchange rates are determined is a simple idea called _______, which states that if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it.

Student Answer: Gresham's law

purchasing power parity

the law of one price

arbitrage

Question9.Question :The expected return on dollar deposits in terms of foreign currency is the _________ the interest rate on dollar deposits and the expected appreciation of the dollar.

Student Answer: difference in

ratio of

product

sum of

Question10.Question :The interest parity condition:

Student Answer: can be used to explain how the exchange rate is determined.

simply means that the expected returns on both dollar assets and foreign assets.

both of the above.

none of the above.

Question11.Question :Quotas:

Student Answer: are restrictions placed on the quantity of foreign goods that can be exported.

are restrictions places on the quality of foreign goods that can be imported.

fees placed on imported goods.

none of the above.

Question12.Question :In the long term _________ affect the exchange rate.

Student Answer: productivity

relative price levels

tariffs and quotas

all of the above

Question13.Question :A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal ________ in its international reserves and the monetary base.

Student Answer: purchase, sale, decline

sale, purchase, decline

purchase, sale, increase

sale, sale, increase

Question14.Question :A Federal Reserve decision to purchase dollars by selling foreign assets in the foreign exchange market has the same effect as an open market ________ of bonds to ________ the monetary base and the money supply.

Student Answer: sale, decrease

purchase, decrease

sale, increase

purchase, increase

Question15.Question :The Bretton Woods agreement set up the ________,which currently provides long term loans to assist developing countries to build dams, roads, and other physical capital that contributes to economic development.

Student Answer: Central settlements bank

World bank

European exchange rate mechanism (ERM)

International Money Fund (IMF)

Question16.Question :Revaluation of a currency's value occurs when:

Student Answer: a fixed exchange rate is adjusted downward.

a fixed exchange rate is adjusted upward.

a floating exchange rate adjusts upward.

a floating exchange rate adjusts downward.

Question17.Question :In the balance of payments accounting system, capital inflows are entered in the ________ column with a __________ sign.

Student Answer: receipts, positive

payments, positive

receipts, negative

payments, negative

Question18.Question :The official reserve transactions balance:

Student Answer: tells us the net amount of international reserves that must move between central banks in order to finance international transactions.

equals the current account balance plus the items inthe capital account.

has an important impact on the money supply.

all of the above.

Question19.Question :A dirty float is:

Student Answer: When the value of a currency is pegged relative to the value on one other currency.

When countries intervene in foreign exchange markets in an attempt to influence their exchange rates by buying and selling foreign assets.

When the value of a currency is allowed to fluctuate against all other currencies.

When the value of a currency is pegged relatively to an anchor currency.

Which of the following statements is false?

Student Answer: a bank's assets provides the bank with income.

a bank's assets are its uses of funds.

a bank issues liabilities to acquire funds.

bank capital is an asset on the bank balance sheet.

Question2.Question :Because checking accounts are ____________ liquid for the depositor that passbook savings, they earn ________ interest rates.

Student Answer: less, lower

more, lower

more, higher

less, higher

Question3.Question :Which of the following would substitute for discount loans?

Student Answer: loans to businesses

repurchase agreements

reverse repurchase agreements

loans to bank holding companies

Question4.Question :Secondary reserves are so-called because:

Student Answer: they are not easily converted into cash and are, therefore, of secondary importance to banks.

they can be converted into cash with low transactions costs.

50% of these assets count toward meeting required reserves.

none of the above

Question5.Question :Banks earn profits by selling _________ with attractive combinations of liquidity, risk, and return, and using the proceeds to buy __________ with a different set of characteristics.

Student Answer: loans, deposits

assets, liabilities

liabilities, assets

securities, deposits

Question6.Question :The amount of assets per dollar of equity capital is called the:

Student Answer: asset ratio

return on equity

equity ratio

equity multiplier

Question7.Question :The government institution that has the responsibility for the amount of money and credit supplied in the economy as a whole is the:

Student Answer: Treasury Department

commercial bank

central bank

settlement bank

Question8.Question :The Glass-Steagall Act prohibited commercial banks from:

Student Answer: engaging in underwriting of and dealing in corporate securities.

purchasing debt securities

selling new issues of government securities

all of the above

Question9.Question :The practice of creating marketable debt instruments that are backed by otherwise liquid assets is:

Student Answer: securitization

adverse selection

standardization

homogenization

Question10.Question :It now appears that the predominant delivery system for banking services in the future will be:

Student Answer: traditional banks supplimented with online services.

traditional banks.

internet only banks

none of the above

Question11.Question :The legislation that effectively prohibited banks from branching across state lines and forced all national banks to conform to the branching regualtions of the state in which they reside is the:

Student Answer: Glass-Steagall Act

McFadden Act

National Banking Act

Garn-St Germain Act

Question12.Question :The main center of the Eurodollar market is:

Student Answer: Paris

Basel

London

New York

Question13.Question :When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of:

Student Answer: exante shirking

split incentives

moral hazard

pre-contractual opportunism

Question14.Question :The result of the "too big to fail" policy is that ________ banks will take on ________ risks, making bank failures more likely.

Student Answer: large, greater

small, greater

large, fewer

small, fewer

Question15.Question :The chartering process is especially designed to deal with the ___________ problem, and restrictions on asset holdings help to reduce the _________ problem.

Student Answer: adverse selection, adverse selection

moral hazard, adverse selection

adverse selection, moral hazard

moral hazard, moral hazard

Question16.Question :Regular bank examinations and restrictions on asset holdings indirectly help to ________ the adverse selection problem because, given fewer opportunities to take on risk, risk prone entrepreneurs will be _________ from entering the banking industry.

Student Answer: reduce, discouraged

increase, discouraged

reduce, encouraged

increase, encouraged

Question17.Question :The FDIC Improvement Act of 1991:

Student Answer: instructed the FDIC to wait longer before intervening when a bank gets into trouble.

instructed the FDIC to come up with risk-based deposit insurance premiums.

expanded the FDIC's ability to use the "too big to fail" policy.

did all of the above.

Question18.Question :What accounts for the problems facing China's four largest banks?

Student Answer: selling shares in the bank overseas to raise capital.

large loans to inefficient state owned enterprises.

closing of unprofitable branches and laying off unproductive employees.

all of the above.

Question19.Question :Of the following assets, the one which has the highest capital requirement under the Basel Accord is:

Student Answer: municipal bonds

commercial paper

residential mortgages

securities issued by industralized countries' governments

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