(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.

StudentAnswer:

(I) is false, (II) true

Both are true

Both are false

Question2.Question:

StudentAnswer:

affectthetypesofgoodsandservicesproducedinaneconomy.

involvethemovementofhugequantitiesofmoney

doalloftheabove

Question3.Question:
StudentAnswer:

Thepricepaidfortherentalofborrowedfunds(usuallyexpressedasapercentageofthe
rentalof$100peryear)iscommonlyreferredtoasthe:
aggregatepricelevel
inflationrate

exchangerate

interestrate

Question4.Question:

Financialmarketsandinstitutions

affecttheprofitsofbusinesses

(I) is true, (II) false

StudentAnswer:

Question5.Question:

StudentAnswer:

Question6.Question:

Interestratesareimportanttofinancialinstitutionssinceaninterestrateincrease________
thecostofacquiringfundsand_________theincomefromassets.
increases,decreases
decreases,decreases
increases,increases
decreases,increases

Thepriceofonecountry'scurrencyintermsofanother'siscalled:
theinterestrate
theexchangerate
thedowJonesindustrialaverage
noneoftheabove

Astrongerdollarbenefits_______andhurts_______

StudentAnswer:

Americanbusinesses,Americanconsumers

Americanbusinesses,foreignbusinesses

Americanconsumers,Americanbusinesses

Question7.Question:

StudentAnswer:

doalloftheabove.

Question8.Question:

StudentAnswer:

Thelargestfinancialintermediariesare:
banks
financecompanies

insurancecompanies

pensionfunds

Question9.Question:

StudentAnswer:

Monetarypolicyaffects:
interestrates
businesscycles

inflation

alloftheabove

PointsReceived:

Comments:

Question10.Question:

StudentAnswer:

actasmiddlemen,borrowingfundsfromthosewhohavesavedandlendingthesefunds
toothers.

helppromoteamoreefficientanddynamiceconomy.

Economistsgroupcommercialbanks,savingsandloanassociations,creditunions,mutual
funds,mutualsavingsbanks,insurancecompanies,pensionfunds,andfinancecompanies
togetherundertheheadingfinancialintermediaries.They:

playanimportantroleindeterminingthequantityofmoneyintheeconomy.

foreignbusinesses,Americanconsumers

2of2

Banks,savingsandloanassociations,mutualsavingsbanks,andcreditunions:
havebeenadeptatinnovatinginresponsetochangesintheregulatoryenvironment.
havebeenprovidingservicesonlytosmalldepositorssincederegulation.
arenolongerimportantplayersinfinancialintermediation.
alloftheabove.

Question11.Question:

StudentAnswer:

Itallowsloanstobemade

Itdeterminesthelevelofinterestrates.

Question12.Question:

StudentAnswer:

Financialmarketshavethebasicfunctionof:
assuringthatgovernmentsneedneverresorttoprintingmoney.
assuringthattheswingsinthebusinesscyclearelesspronounced.

bringingtogetherpeoplewithfundstolendandpeoplewhowanttoborrow.

preventinggreedandcorruption.

Question13.Question:

StudentAnswer:

Whichofthefollowingaresecurities?
Ashareofcommonstock.
Atreasurybill

Acertificateofdeposit

Alloftheabove

Question14.Question:

StudentAnswer:

Whichofthefollowingareprimarymarkets?
TheU.S.GovernmentBondmarket
Theoverthecounterstockmarket

TheNewYorkStockExchange

Noneoftheabove

Question15.Question:

StudentAnswer:

Longtermdebtandequityinstrumentsaretradedinthe_______market.
capital
secondary

primary

money

Question16.Question:

Itallowscommonstocktobetraded.
Itchannelsfundsfromlenderstoborrowers

Everyfinancialmarketperformsthefollowingfunction:

StudentAnswer:

Bondsthataresoldinaforeigncountryandaredenominatedinthatcountry'scurrencyare
knownas:
Eurodollars
Eurocurrencies

Eurobonds

foreignbonds

Question17.Question:

StudentAnswer:

issuingstocks,issuingbonds,financialintermediaries.
financialintermediaries,issuingbonds,issuingstocks

issuingbonds,issuingstocks,financialintermediaries

issuingstocks,issuingbonds,financialintermediaries

Question18.Question:

StudentAnswer:

Whichofthefollowingisacontractualsavingsinstitution?
Savingsandloaninstitution
Mutualfund

Lifeinsurancecompany

Creditunion

Question19.Question:

StudentAnswer:

Thecountrywhosebanksarethemostrestrictedintherangeofassetstheymayholdis:
UnitedStates
Japan

Canada

Germany

Question20.Question:

Themainsourcesoffinancingforbusinesses,inorderofimportance,are:

StudentAnswer:

A___________iswhenonepartyinafinancialcontracthasincentivestoactinitsown
interestsratherthanintheinterestsoftheotherparty.
risk
conflictofinterest

moralhazard

financialpanic
Aloanthatrequirestheborrowertomakethesamepaymenteveryperioduntilthematurity
dateiscalleda:

StudentAnswer:

samepaymentloan
simpleloan
fixedpaymentloan
discountloan

Question2.Question:

StudentAnswer:

discountbond

simpleloan

Question3.Question:

StudentAnswer:

8%

5%

40%

Question4.Question:
StudentAnswer:

Withaninterestrateof5%,thepresentvalueof$100receivedoneyearfromnowis
approximately:
$90
$95

$100

$105

Question5.Question:
StudentAnswer:

Theinterestratethatequatesthepresentvalueofthecashflowreceivedfromadebt
instrumentwithitsmarketpricetodayisthe:
yieldtomaturity
discountrate

realinterestrate

simpleinterestrate

Question6.Question:

An$8,000couponbondwitha$400annualcouponpaymenthasacouponrateof:

10%

fixedpaymentloan
couponbond

Acreditmarketinstrumentthatpaystheownerthefacevalueofthesecurityatthematurity
dateandnothingpriortotheniscalleda:

StudentAnswer:

Question7.Question:

Ifa$10,000facevaluediscountbondmaturingononeyearissellingfor$9,000,thenits
yieldtomaturityis:
9%
10%
11%
12%

Thechangeinthebond'spricerelativetotheinitialpurchasepriceis:

StudentAnswer:

rateofcapitalgain

couponpayment

yieldtomaturity

Question8.Question:

StudentAnswer:

rises,supply

Question9.Question:
StudentAnswer:

Whenthepriceofabondisabovetheequilibriumprice,thereisexcess_________inthe
marketandthepricewill_________.
supply,rise
demand,rise

supply,fall

demand,fall

Question10.Question:
StudentAnswer:

Whenpricesinthestockmarketbecomemoreuncertain,thedemandcurveforbondsshifts
tothe______andtheinterestrate______.
right,rises
left,falls

left,rises

right,falls

Question11.Question:

rises,quantitysupplied

falls,quantitysupplied

Thesupplycurveforbondshastheusualupwardslope,indicatingthatastheprice
_________,ceterisparibus,the________increases.

falls,supply

thecurrentyield

StudentAnswer:

Question12.Question:

Whentheeconomyentersintoaboom,normallythedemandforbonds_______,thesupply
ofbonds________,andtheinterestrate_______.
decreases,decreases,falls
increases,decreases,rises
decreases,increases,rises
increases,increases,rises

Ahigherlevelofincomecausesthedemandformoneyto________andtheinterestrateto
__________.

StudentAnswer:

increase,increase

decrease,increase

decrease,decrease

Question13.Question:

StudentAnswer:

thereisslowadjustmentofexpectedinflation.

theliquidityeffectislargerthantheothereffects.

theliquidityeffectissmallerthantheexpectedinflationeffect.

Question14.Question:

StudentAnswer:

Theriskstructureofinterestratesis:
therelationshipamonginterestratesofdifferentbondswithtthesamematurity.
thestructureofhowinterestratesmoveovertime.

therelationshipamongthetermstomaturityofdifferentbonds.

therelationshipamonginterestratesonbondswithdifferentmaturities.

Question15.Question:
StudentAnswer:

Holdingeverythingelseconstant,ifacorporationbeginstosufferlargelosses,thenthe
defaultriskonitsbondswill_______andtheexpectedreturnonthosebondswill_______.
decrease,increase
increase,increase

decrease,decrease

increase,decrease

Question16.Question:

IftheFedwantstopermanentlylowerinterestrates,thenitshouldraisetherateofmoney
growthif:

thereisfastadjustmentofexpectedinflation.

increase,decrease

StudentAnswer:

Question17.Question:

StudentAnswer:

Iftheexpectedpathofoneyearinterestratesoverthenextfouryearsis5%,4%,2%,and
1%,thenthepureexpectationstheorypredictsthattoday'sinterestrateonthefouryearbond
is:
4%
2%
1%
noneoftheabove

Typically,yieldcurvesare:
gentlydownwardsloping

moundshaped

gentlyupwardsloping

bowlshaped

Question18.Question:

StudentAnswer:

preferredhabitattheory

segmentedmarketstheory

Question19.Question:

StudentAnswer:

AbondratingofAorAAwouldmeanthatthequalityofthebondis:
speculative
high

thehighest

mediumgrade

Question20.Question:

StudentAnswer:

Ifabondhasfavorabletaxtreatment,itsinterestrate:
willnotbeeffected
willbelower

willbehigher

alloftheabovecouldhappen

1.

Question:

StudentAnswer:

Question2.Question:

StudentAnswer:

pureexpectationstheory
liquiditypremiumtheory

Ofthefourtheoriesthatexplainhowinterestratesonbondswithdifferenttermstomaturity
arerelated,theonethatviewslongterminterestratesasequalingtheaverageoffutureshort
termratesexpectedtooccuroverthelifeofthebondisthe:

OfthefollowingsourcesofexternalfinanceforAmericannonfinancialbusinesses,theleast
importantis:
stocks
bondsandcommercialpaper
loansfrombanks
nonbankloans

Whichofthefollowingisnotoneoftheeightbasicfactsaboutfinancialstructure?
Financialintermediariesarethemostimportantsourceofexternalfundstofinance
businesses.
Issuingmarketablesecuritiesistheprimarywaybusinessesfinancetheiroperations.
Thefinancialsystemisamongthemostheavilyregulatedsectorsoftheeconomy.

Indirectfinance,whichinvolvestheactivitiesoffinancialintermediaries,ismanytimes
moreimportantthandirectfinance,inwhichbusinessesgetfundsdirectlyfromlendersin
financialmarkets.

Question3.Question:

StudentAnswer:

low,moralhazard

high,moralhazard

Question4.Question:

StudentAnswer:

goodcreditrisksaremorelikelytoseekloans,causinglenderstomakea
disproportionateamountofloanstogoodcreditrisks.

lendersmayrefuseloanstoindividualswithhighnetworthbecauseoftheirgreater
proclivityto"skiptown."

alloftheabove.

Question5.Question:

StudentAnswer:

Anauditcertifiesthat:
afirmabidesbystandardaccountingprinciples.
afirm'ssecuritiesaresafeinvestments.

afirm'sloanswillberepaid.

theinformationreportedinafirm'saccountingstatementsiscorrect.

Question6.Question:

StudentAnswer:

ThemajorityofhouseholddebtintheUnitedStatesconsistsof:
unsecuredloans,suchasstudentloans
collateralizedloans

creditcarddebt

consumerinstallmentdebt

Question7.Question:

Becauseoftheadverseselectionproblem:

lendersarereluctanttomakeloansthatarenotsecuredbycollateral.

low,adverseselection
high,adverseselection

Becauseofthelemonsproblemintheusedcarmarket,theaveragequalityofusedcars
offeredforsalewillbe_________,whichgivesrisetotheproblemof________.

StudentAnswer:

Onefinancialintermediaryinourfinancialstructurethathelpstoreducethemoralhazard
arisingfromtheprincipalagentproblemisthe:
venturecapitalfirm
moneymarketmutualfund
savingsandloanassociation

independentbank

Question8.Question:

StudentAnswer:

bothoftheabove

noneoftheabove

Question9.Question:
StudentAnswer:

Question10.Question:

StudentAnswer:

Question11.Question:

StudentAnswer:

Question12.Question:

StudentAnswer:

theborrower'snetworthreducestheprobabilityofmoralhazard.
therestrictivecovenantslimitthetypeofactivitiesthatcanbeundertakenbythe
borrower.

Adebtcontractissaidtobeincentivecompatibleif:

Whichofthefollowingeventswouldbeleastlikelytobetheinitiatingcauseofafinancial
crisis?
bankpanic
stockmarketdecline
increaseininterestrates
increaseinuncertainty

Liquidityservicesareservicesthat:
increasetransactioncosts
makeiteasierforcustomerstoconducttransactions
conductstransactionsforthecustomer
alloftheabove

Financialcrises
aremajordisruptionsinfinancialmarketsthatarecharacterizedbysharpdeclinesin
assetpricesandthefailuresofmanyfinancialandnonfinancialfirms.
occurwhenadverseselectionandmoralhazardproblemsinfinancialmarketsbecome
moresignificant.
frequentlyleadtosharpcontractionsineconomicactivity.
arealloftheabove.
areonlyAandBoftheabove.

Whatisacreditboom?
anexplosioninacreditcycle,whichcanincreaseordecreaselendingintheshortrun
essentiallyalendingspreeonthepartofbanksandotherfinancialinstitutions
whencreditcardreceivablesriseduetolowinitialinterestrates

10

thesignaloftheendofacreditspree,withcreditcontractingrapidly

Question13.Question:

StudentAnswer:

anincreaseinuncertaintycausedbyfailureoffinancialinstitutions.

alloftheabove.

Question14.Question:

StudentAnswer:

noneoftheabove.

Question15.Question:

StudentAnswer:

StageThreeofafinancialcrisisinanadvancedeconomyfeatures
ageneralincreaseininflation.
debtdeflation.

anincreaseingeneralpricelevels.

afullfledgedfinancialcrisis.

Question16.Question:

StudentAnswer:

Factorsthatleadtoworseningconditionsinfinancialmarketsinclude
increasesininterestrates.
decliningstockprices.

increasinguncertaintyinfinancialmarkets.

alloftheabove.

onlyAandBoftheabove.

Question17.Question:

cutbacksinlendingbyfinancialinstitutions.

bothAandB.

Theprocessofdeleveragingrefersto

areductionindebtowedbybanks.

mismanagementoffinancialliberalizationorinnovation.
assetpricingboomsandbusts.

Inanadvancedeconomy,afinancialcrisiscanbegininseveralways,including:

StudentAnswer:

Inadditiontohavingadirecteffectonincreasingadverseselectionproblems,increasesin
interestratesalsopromotefinancialcrisesby________firms'andhouseholds'interest
payments,thereby________theircashflow.
increasing;increasing
increasing;decreasing
decreasing;increasing
decreasing;decreasing

11

Question18.Question:

StudentAnswer:

anincreaseinmoralhazardatcreditratingagencies

alloftheabove

onlyAandBoftheabove

Question19.Question:

StudentAnswer:

Theimpactofthe20072009financialcrisiswaswidespread,including
thefirstmajorbankfailureintheUKinover100years.
thefailureofBearStearns,thefifthlargestU.S.investmentbank.

thebailoutofFannieMaeandFreddieMacbytheU.S.Treasury.

alloftheabove.

onlyBandCoftheabove.

Question20.Question:

StudentAnswer:

Whenassetpricesfallfollowingaboom,
moralhazardmayincreaseincompaniesthathavelostnetworthinthebust.
financialinstitutionsmayseetheassetsontheirbalancesheetsdeteriorate,leadingto
deleveraging.

bothAandBarecorrect.

noneoftheabovearecorrect.
Question:
StudentAnswer:

Financialmarketsandinstitutions
affectthetypesofgoodsandservicesproducedinaneconomy.
affecttheprofitsofbusinesses

involvethemovementofhugequantitiesofmoney

doalloftheabove

Question2.Question:

financialinnovationinmortgagemarkets
agencyproblemsinmortgagemarkets

1.

WhichofthefollowingledtotheU.S.financialcrisisof20072009?

StudentAnswer:

Question3.Question:

Interestratesareimportanttofinancialinstitutionssinceaninterestrateincrease________
thecostofacquiringfundsand_________theincomefromassets.
increases,decreases
decreases,decreases
increases,increases
decreases,increases

Astrongerdollarbenefits_______andhurts_______

12

StudentAnswer:

Americanbusinesses,Americanconsumers

Americanbusinesses,foreignbusinesses

Americanconsumers,Americanbusinesses

Question4.Question:

StudentAnswer:

Question5.Question:

StudentAnswer:

Question6.Question:

StudentAnswer:

Question7.Question:

StudentAnswer:

Question8.Question:

StudentAnswer:

foreignbusinesses,Americanconsumers

Economistsgroupcommercialbanks,savingsandloanassociations,creditunions,mutual
funds,mutualsavingsbanks,insurancecompanies,pensionfunds,andfinancecompanies
togetherundertheheadingfinancialintermediaries.They:
actasmiddlemen,borrowingfundsfromthosewhohavesavedandlendingthesefunds
toothers.
playanimportantroleindeterminingthequantityofmoneyintheeconomy.
helppromoteamoreefficientanddynamiceconomy.
doalloftheabove.

Thelargestfinancialintermediariesare:
banks
financecompanies
insurancecompanies
pensionfunds

Monetarypolicyaffects:
interestrates
businesscycles
inflation
alloftheabove

Banks,savingsandloanassociations,mutualsavingsbanks,andcreditunions:
havebeenadeptatinnovatinginresponsetochangesintheregulatoryenvironment.
havebeenprovidingservicesonlytosmalldepositorssincederegulation.
arenolongerimportantplayersinfinancialintermediation.
alloftheabove.

Everyfinancialmarketperformsthefollowingfunction:
Itallowscommonstocktobetraded.
Itchannelsfundsfromlenderstoborrowers

13

Itallowsloanstobemade

Itdeterminesthelevelofinterestrates.

Question9.Question:

StudentAnswer:

bringingtogetherpeoplewithfundstolendandpeoplewhowanttoborrow.

preventinggreedandcorruption.

Question10.Question:

StudentAnswer:

Alloftheabove

Question11.Question:

StudentAnswer:

Whichofthefollowingareprimarymarkets?
TheU.S.GovernmentBondmarket
Theoverthecounterstockmarket

TheNewYorkStockExchange

Noneoftheabove

Question12.Question:

StudentAnswer:

Longtermdebtandequityinstrumentsaretradedinthe_______market.
capital
secondary

primary

money

Question13.Question:

Ashareofcommonstock.

Acertificateofdeposit

Whichofthefollowingaresecurities?

Atreasurybill

assuringthatgovernmentsneedneverresorttoprintingmoney.
assuringthattheswingsinthebusinesscyclearelesspronounced.

Financialmarketshavethebasicfunctionof:

StudentAnswer:

Bondsthataresoldinaforeigncountryandaredenominatedinthatcountry'scurrencyare
knownas:
Eurodollars
Eurocurrencies
Eurobonds
foreignbonds

14

Question14.Question:

StudentAnswer:

Canada

Germany

Question15.Question:
StudentAnswer:

risk

moralhazard

financialpanic

Question16.Question:
StudentAnswer:

Aloanthatrequirestheborrowertomakethesamepaymenteveryperioduntilthematurity
dateiscalleda:
samepaymentloan
simpleloan

fixedpaymentloan

discountloan

Question17.Question:

StudentAnswer:

An$8,000couponbondwitha$400annualcouponpaymenthasacouponrateof:
8%
10%

5%

40%

Question18.Question:

A___________iswhenonepartyinafinancialcontracthasincentivestoactinitsown
interestsratherthanintheinterestsoftheotherparty.

conflictofinterest

UnitedStates
Japan

Thecountrywhosebanksarethemostrestrictedintherangeofassetstheymayholdis:

StudentAnswer:

Question19.Question:

Withaninterestrateof5%,thepresentvalueof$100receivedoneyearfromnowis
approximately:
$90
$95
$100
$105

Theinterestratethatequatesthepresentvalueofthecashflowreceivedfromadebt
instrumentwithitsmarketpricetodayisthe:

15

StudentAnswer:

discountrate

realinterestrate

simpleinterestrate

Question20.Question:

StudentAnswer:

12%

Question21.Question:
StudentAnswer:

Thesupplycurveforbondshastheusualupwardslope,indicatingthatastheprice
_________,ceterisparibus,the________increases.
rises,quantitysupplied
falls,supply

falls,quantitysupplied

rises,supply

Question22.Question:
StudentAnswer:

Whenthepriceofabondisabovetheequilibriumprice,thereisexcess_________inthe
marketandthepricewill_________.
supply,rise
demand,rise

supply,fall

demand,fall

Question23.Question:

9%

11%

Ifa$10,000facevaluediscountbondmaturingononeyearissellingfor$9,000,thenits
yieldtomaturityis:

10%

yieldtomaturity

StudentAnswer:

Question24.Question:

Whenpricesinthestockmarketbecomemoreuncertain,thedemandcurveforbondsshifts
tothe______andtheinterestrate______.
right,rises
left,falls
left,rises
right,falls

Whentheeconomyentersintoaboom,normallythedemandforbonds_______,thesupply
ofbonds________,andtheinterestrate_______.

16

StudentAnswer:

increases,decreases,rises

decreases,increases,rises

increases,increases,rises

Question25.Question:

StudentAnswer:

decrease,decrease

Question26.Question:
StudentAnswer:

IftheFedwantstopermanentlylowerinterestrates,thenitshouldraisetherateofmoney
growthif:
thereisslowadjustmentofexpectedinflation.
thereisfastadjustmentofexpectedinflation.

theliquidityeffectislargerthantheothereffects.

theliquidityeffectissmallerthantheexpectedinflationeffect.

Question27.Question:
StudentAnswer:

Holdingeverythingelseconstant,ifacorporationbeginstosufferlargelosses,thenthe
defaultriskonitsbondswill_______andtheexpectedreturnonthosebondswill_______.
decrease,increase
increase,increase

decrease,decrease

increase,decrease

Question28.Question:

increase,decrease

decrease,increase

Ahigherlevelofincomecausesthedemandformoneyto________andtheinterestrateto
__________.

increase,increase

decreases,decreases,falls

StudentAnswer:

Question29.Question:

Iftheexpectedpathofoneyearinterestratesoverthenextfouryearsis5%,4%,2%,and
1%,thenthepureexpectationstheorypredictsthattoday'sinterestrateonthefouryearbond
is:
4%
2%
1%
noneoftheabove

AbondratingofAorAAwouldmeanthatthequalityofthebondis:

17

StudentAnswer:

Question30.Question:

StudentAnswer:

Question31.Question:

StudentAnswer:

Question32.Question:

StudentAnswer:

Question33.Question:

StudentAnswer:

Question34.Question:

StudentAnswer:

speculative
high
thehighest
mediumgrade

Ifabondhasfavorabletaxtreatment,itsinterestrate:
willnotbeeffected
willbelower
willbehigher
alloftheabovecouldhappen

Theriskstructureofinterestratesisexplainedby:
thedefaultrisk
liquidity
taxconsiderations
alloftheabove

Whatisacreditboom?
anexplosioninacreditcycle,whichcanincreaseordecreaselendingintheshortrun
essentiallyalendingspreeonthepartofbanksandotherfinancialinstitutions
whencreditcardreceivablesriseduetolowinitialinterestrates
thesignaloftheendofacreditspree,withcreditcontractingrapidly

Inanadvancedeconomy,afinancialcrisiscanbegininseveralways,including:
mismanagementoffinancialliberalizationorinnovation.
assetpricingboomsandbusts.
anincreaseinuncertaintycausedbyfailureoffinancialinstitutions.
alloftheabove.

Theprocessofdeleveragingrefersto
cutbacksinlendingbyfinancialinstitutions.
areductionindebtowedbybanks.
bothAandB.
noneoftheabove.

18

Question35.Question:

StudentAnswer:

increaseininterestrates

increaseinuncertainty

Question36.Question:
StudentAnswer:

Question37.Question:

StudentAnswer:

Question38.Question:

StudentAnswer:

Question39.Question:

StudentAnswer:

bankpanic
stockmarketdecline

Whichofthefollowingeventswouldbeleastlikelytobetheinitiatingcauseofafinancial
crisis?

Inadditiontohavingadirecteffectonincreasingadverseselectionproblems,increasesin
interestratesalsopromotefinancialcrisesby________firms'andhouseholds'interest
payments,thereby________theircashflow.
increasing;increasing
increasing;decreasing
decreasing;increasing
decreasing;decreasing

WhichofthefollowingledtotheU.S.financialcrisisof20072009?
financialinnovationinmortgagemarkets
agencyproblemsinmortgagemarkets
anincreaseinmoralhazardatcreditratingagencies
alloftheabove
onlyAandBoftheabove

ThemajorityofhouseholddebtintheUnitedStatesconsistsof:
unsecuredloans,suchasstudentloans
collateralizedloans
creditcarddebt
consumerinstallmentdebt

WhichofthefollowingisnotanentityoftheFederalReserveSystem:
FederalReservebanks
TheFDIC
TheFOMC
TheFederalAdvisoryCouncil

19

Question40.Question:

StudentAnswer:

Question41.Question:

StudentAnswer:

Question42.Question:

StudentAnswer:

Question43.Question:

StudentAnswer:

Question44.Question:

StudentAnswer:

ThepowerwithintheFederalReservewaseffectivelytransferredtotheboardofgovernors
by:
Supremecourtdecisionsinthe1950s
thebankinglegislationofthegreatdepression
theTreasuryFederalReserveaccordof1951
theDepositoryInstitutionsDeregulationandMonetaryControlActof1980.

Atrendinrecentyearsisthatmoreandmoregovernments:
havebeenreducingtheinterdependenceoftheircentralbankstomakethemmore
accountableforpooreconomicperformance.
havebeengrantinggreaterindependencetotheircentralbanks.
havemandatedthattheircentralbanksgiveupmultiplepolicygoalstofocusstrictlyon
inflation.
haverequiredtheircentralbankstocoordinatepolicieswiththeirministersoffinance.

Ofthefollowingcentralbanks,theonethatenjoystheleastdegreeofindependenceisthe:
SwissNationalBank
U.S.FederalReserveSystem
BankofItaly
DeutscheBundersbank

Whichofthefollowingcentralbankshasthegreatestdegreeofindependence:
BankofJapan
BankofCanada
SwissNationalBank
BankofEngland

ThetwelveFederalReservebanksareinvolvedinmonetarypolicyinseveralways:
theirdirectorsselectonecommercialbankerfromeachbank'sdistricttoserveonthe
FederalAdvisoryCouncil.
theirdirectorsestablishthediscountrate.
theydecidewhichbankscanobtaindiscountloansfromtheFederalReserveBank
alloftheabove

20

Question45.Question:

StudentAnswer:

discountloansandreserves
governmentsecuritiesheldbytheFedandcurrencyincirculation

Currencyincirculationandreserves

governmentsecuritiesheldbytheFedanddiscountloans

Question46.Question:

Themonetarybaseconsistsof:

StudentAnswer:

Question47.Question:

StudentAnswer:

Question48.Question:

StudentAnswer:

Question49.Question:

StudentAnswer:

Question50.Question:

Thegoalforhighemploymentshouldbealevelofunemploymentatwhichthedemandfor
laborequalsthesupplyoflabor.Economistscallthislevelofunemploymentthe:
ideallevelofunemployment
frictionallevelofunemployment
naturalratelevelofunemployment
structurallevelofunemployment

TheFed'smonetarypolicystrategycanbedescribedasfollows:
TheFedusesitsoperatingtargetstoadjustitsintermediatetargetsthatdirectlyimpact
itspolicytoolsinawaythatallowstheFedtoachieveitsgoals.
TheFedusesitspolicytoolstoadjustintermediatetargetsthatdirectlyimpactits
operatingtargetsinawaythatallowstheFedtoachieveitsgoals.
TheFedusesitspolicytoolstoadjustoperatingtargetsthatdirectlyimpactits
intermediatetargetsinawaythatallowstheFedtoachieveitsgoals.
Noneoftheabove

WhichofthefollowingisapotentialoperatingtargetfortheFed?
TheFederalFundsRate
Themonetarybase
Nonborrowedreserves
alloftheabove

Thefederalfundsrateis:
thepricebankspaytheFedfoegovernmentsecurities
thepricetheFedpaysforgovernmentsecurities
theinterestrateonloansfromabanktothefederalgovernment
theinterestrateonloansofreservesfromonebanktoanother.

Thetypeofopenmarketoperationintendedtooffsetmovementsinotherfactorsthataffect
reservesandthemonetarybaseis:

21

StudentAnswer:

thereserverequirements
thedefensiveopenmarketoperations

thedynamicopenmarketoperations

marketequilibrium

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

StudentAnswer:

are the investment banks

are the large money center banks

is the Treasury Department

Question2.Question:

StudentAnswer:

negotiable certificates of deposit, U.S. government securities

Question3.Question:
StudentAnswer:

Question4.Question:

StudentAnswer:

Question5.Question:

StudentAnswer:

commercial paper, Eurodollars

Eurodollars, commercial paper

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

U.S. government securities, negotiable certificates of deposit

is the Federal Reserve

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

buy, add reserves to

buy, remove reserves from
sell, remove reserves from
sell, add reserves to

Banker's acceptances:

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

The riskiest capital market security is:

corporate bonds
treasury bonds
preferred stock
common stock

22

Question6.Question:

StudentAnswer:

Shanghai Stock Exchange

Nikkei stock Exchange

New York Stock Exchange

London Stock Exchange

Question7.Question:

The most active stock exchange in the world is the:

StudentAnswer:

Question8.Question:

StudentAnswer:

Question9.Question:

StudentAnswer:

Question10.Question:

StudentAnswer:

Question11.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%?

$33.50
$33.93
$34.50
$38

A high price earnings ratio (PE) gives what interpretation?

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.

Compared to money market securities, capital market securities have:

longer maturities
less risk
more liquidity
lower yields

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

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.

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

23

StudentAnswer:

unsecured, revenue

secured, general obligation

secured, revenue

Question12.Question:

StudentAnswer:

Question13.Question:

StudentAnswer:

is false, (II) true.

Both

are true.

Both

are false.

A basic principle of finance is that the value of any investment is

the

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

to the future net cash flows generated by the investment.

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

StudentAnswer:

Holding other things constant, a stock's value will be highest if its dividend
growth rate is
15%.
10%.

5%.

2%.

Question15.Question:

(I)

unrelated

is true, (II) false.

unrelated

Question14.Question:

(I)

undiscounted sum of all future net cash flows generated by the

investment.

(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.

the

unsecured, general obligation

StudentAnswer:

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.
rise
fall
become more

volatile

become more

stable
24

Question16.Question:

StudentAnswer:

The largest purchasers of capital market securities are

households.
corporations.

governments.

central

Question17.Question:

StudentAnswer:

banks.

(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.
(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 mortgage markets differ from the stock and bond markets?

StudentAnswer:

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:

StudentAnswer:

20

PointsReceived:

Comments:

Question3.Question:

15

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

10

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

StudentAnswer:

2of2

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

GEMs
RAMs
GPMs
All of the above

25

Question4.Question:

StudentAnswer:

are securities collateralized by both insured and uninsured mortgages

all of the above

Question5.Question:

StudentAnswer:

all of the above

Question6.Question:
StudentAnswer:

Subprime mortgages

Question7.Question:
StudentAnswer:

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 _______.

depreciated, appreciated
appreciated, appreciated

depreciated, depreciated

appreciated, depreciated

Question8.Question:

Securitized mortgages

Mortgage backed mutual funds

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?

Private pass throughs

Outstanding debt

past payment history

What factors are used in determining a person's FICO score?

Length of credit history

are securities collateralized by a pool of mortgages

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

Mortgage backed securities:

StudentAnswer:

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.

Gresham's law
purchasing power parity
the law of one price
arbitrage

26

Question9.Question:

StudentAnswer:

difference in
ratio of

product

sum of

Question10.Question:

StudentAnswer:

The interest parity condition:

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:

StudentAnswer:

Quotas:

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:

StudentAnswer:

In the long term _________ affect the exchange rate.

productivity
relative price levels

tariffs and quotas

all of the above

Question13.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.

StudentAnswer:

Question14.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.

purchase, sale, decline

sale, purchase, decline
purchase, sale, increase
sale, sale, increase

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.

27

StudentAnswer:

purchase, decrease

sale, increase

purchase, increase

Question15.Question:

StudentAnswer:

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.

Central settlements bank

World bank

European exchange rate mechanism (ERM)

International Money Fund (IMF)

Question16.Question:

StudentAnswer:

Revaluation of a currency's value occurs when:

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:

sale, decrease

StudentAnswer:

Question18.Question:

StudentAnswer:

Question19.Question:

StudentAnswer:

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

receipts, positive
payments, positive
receipts, negative
payments, negative

The official reserve transactions balance:

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 in the capital account.
has an important impact on the money supply.
all of the above.

A dirty float is:

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

28

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.

Whichofthefollowingstatementsisfalse?

StudentAnswer:

abank'sassetsareitsusesoffunds.

abankissuesliabilitiestoacquirefunds.

bankcapitalisanassetonthebankbalancesheet.

Question2.Question:

StudentAnswer:

less,higher

Question3.Question:

StudentAnswer:

Whichofthefollowingwouldsubstitutefordiscountloans?
loanstobusinesses
repurchaseagreements

reverserepurchaseagreements

loanstobankholdingcompanies

Question4.Question:

StudentAnswer:

Secondaryreservesaresocalledbecause:
theyarenoteasilyconvertedintocashandare,therefore,ofsecondaryimportanceto
banks.
theycanbeconvertedintocashwithlowtransactionscosts.

50%oftheseassetscounttowardmeetingrequiredreserves.

noneoftheabove

Question5.Question:

less,lower

more,higher

Becausecheckingaccountsare____________liquidforthedepositorthatpassbooksavings,
theyearn________interestrates.

more,lower

abank'sassetsprovidesthebankwithincome.

StudentAnswer:

Banksearnprofitsbyselling_________withattractivecombinationsofliquidity,risk,and
return,andusingtheproceedstobuy__________withadifferentsetofcharacteristics.
loans,deposits
assets,liabilities
liabilities,assets

29

securities,deposits

Question6.Question:

StudentAnswer:

equityratio

equitymultiplier

Question7.Question:
StudentAnswer:

settlementbank

Question8.Question:

StudentAnswer:

alloftheabove

Question9.Question:
StudentAnswer:

Thepracticeofcreatingmarketabledebtinstrumentsthatarebackedbyotherwiseliquid
assetsis:
securitization
adverseselection

standardization

homogenization

Question10.Question:

engaginginunderwritingofanddealingincorporatesecurities.

sellingnewissuesofgovernmentsecurities

TheGlassSteagallActprohibitedcommercialbanksfrom:

purchasingdebtsecurities

TreasuryDepartment

centralbank

Thegovernmentinstitutionthathastheresponsibilityfortheamountofmoneyandcredit
suppliedintheeconomyasawholeisthe:

commercialbank

assetratio
returnonequity

Theamountofassetsperdollarofequitycapitaliscalledthe:

StudentAnswer:

Itnowappearsthatthepredominantdeliverysystemforbankingservicesinthefuturewill
be:
traditionalbankssupplimentedwithonlineservices.
traditionalbanks.
internetonlybanks
noneoftheabove

30

Question11.Question:

StudentAnswer:

NationalBankingAct

GarnStGermainAct

Question12.Question:

StudentAnswer:

NewYork

Question13.Question:
StudentAnswer:

precontractualopportunism

Question14.Question:
StudentAnswer:

Theresultofthe"toobigtofail"policyisthat________bankswilltakeon________risks,
makingbankfailuresmorelikely.
large,greater
small,greater

large,fewer

small,fewer

Question15.Question:

exanteshirking

moralhazard

Whenonepartytoatransactionhasincentivestoengageinactivitiesdetrimentaltotheother
party,thereexistsaproblemof:

splitincentives

Paris

London

ThemaincenteroftheEurodollarmarketis:

Basel

GlassSteagallAct
McFaddenAct

Thelegislationthateffectivelyprohibitedbanksfrombranchingacrossstatelinesandforced
allnationalbankstoconformtothebranchingregualtionsofthestateinwhichtheyresideis
the:

StudentAnswer:

Thecharteringprocessisespeciallydesignedtodealwiththe___________problem,and
restrictionsonassetholdingshelptoreducethe_________problem.
adverseselection,adverseselection
moralhazard,adverseselection
adverseselection,moralhazard
moralhazard,moralhazard

31

Question16.Question:

StudentAnswer:

reduce,encouraged

increase,encouraged

Question17.Question:

StudentAnswer:

didalloftheabove.

Question18.Question:

StudentAnswer:

WhataccountsfortheproblemsfacingChina'sfourlargestbanks?
sellingsharesinthebankoverseastoraisecapital.
largeloanstoinefficientstateownedenterprises.

closingofunprofitablebranchesandlayingoffunproductiveemployees.

alloftheabove.

Question19.Question:

instructedtheFDICtowaitlongerbeforeinterveningwhenabankgetsintotrouble.

expandedtheFDIC'sabilitytousethe"toobigtofail"policy.

TheFDICImprovementActof1991:

instructedtheFDICtocomeupwithriskbaseddepositinsurancepremiums.

reduce,discouraged
increase,discouraged

Regularbankexaminationsandrestrictionsonassetholdingsindirectlyhelpto________the
adverseselectionproblembecause,givenfeweropportunitiestotakeonrisk,riskprone
entrepreneurswillbe_________fromenteringthebankingindustry.

StudentAnswer:

Ofthefollowingassets,theonewhichhasthehighestcapitalrequirementundertheBasel
Accordis:
municipalbonds
commercialpaper
residentialmortgages
securitiesissuedbyindustralizedcountries'governments

32