Exam 1 Quiz Question's (Ch. 1-4)

In addition to commercial banks, ________ also showed a decline in their shares of total FI assets between 1948 and 2016. A) thrifts B) pension funds C) investment banks D) mutual funds

A) thrifts

The _______________ is a nationwide network jointly operated by the Fed and private institutions that electronically process credit and debit transfers of funds. -CHIPS -NASDAQ -Fedwire -SWIFT -ACH

ACH

Which of the following are capital market instruments?: -15-year U.S. government agency bonds -10-year corporate bonds -20-year Treasury bonds -All of these choices are correct -30-year mortgages

All of these choices are correct

According to the unbiased expectations theory, A. the term structure will most often be upward sloping. B. liquidity premiums are negative and time varying. C. the long-term spot rate is an average of the current and expected future short-term interest rates. D. markets are segmented and buyers stay in their own segment. E. forward rates are less than the expected future spot rates.

B. the long-term spot rate is an average of the current and expected future short-term interest rates.

What are the intended consequences from charging an interest on excess reserves by Central banks? -Interest rates increase. -Banks deposits increase. -All of these choices are correct. -Banks lend less money. -Banks lend more money.

Banks lend more money

The passage of the Securities Act of 1933 stated that the main emphasis of SEC regulations should be focused on A) protecting investors from poor investing decisions B) enforcing the Volcker Rule C) ensuring the full and fair disclosure of securities information D) detecting and prosecuting insider trading

C) ensuring the full and fair disclosure of securities information

Which of the following is the correct ranking from largest to smallest dollar value in capital markets in 2016? A) stocks; corporate bonds; mortgages B) mortgages; corporate bonds; stocks C) stocks; mortgages; corporate bonds D) mortgages; stocks; corporate bonds

C) stocks; mortgages; corporate bonds

Financial intermediaries (FIs) can offer savers a safer, more liquid investment than a capital market security, even though the intermediary invests in risky illiquid instruments because: -the federal government requires them to do so. -FIs can diversify away some of their risk and the federal government requires them to do so. -FIs closely monitor the riskiness of their assets. -FIs can diversify away some of their risk and closely monitor the riskiness of their assets. -FIs can diversify away some of their risk.

FIs can diversify away some of their risk and closely monitor the riskiness of their assets.

Which of the following is the major monetary policy-making body of the U.S. Federal Reserve System? -FOMC -FRB bank presidents -Group of Eight -OCC -U.S. Congress

FOMC

As the liquidity of corporate bonds decrease, the risk premium required on those bonds decrease as well. T/F

False

Federal Reserve interest rate decisions can be vetoed by the U.S. president or the Congress. T/F

False

The average cost incurred by financial institutions to collect information is larger than that of individuals. T/F

False

The unbiased expectations hypothesis of the term structure posits that long-term interest rates are unrelated to expected future short-term rates. T/F

False

The Fed's Quantitative Easing Program implemented between 2009 and 2014 involved the purchase of

Fannie Mae and Freddie Mac mortgage-backed securities & long-term Treasury securities

The _____________ is a network linking over 9,000 banks with the Federal Reserve that is used to transfer deposits and make loan payments between participants. -Fedwire -NASDAQ -CHIPS -ACH -SWIFT

Fedwire

Which of the following bond terms are generally positively related to bond price volatility? I. Coupon rate II. Maturity III. YTM IV. Payment frequency

II only

A decrease in interest rates will

Increase the bonds duration

The Federal Reserve does all but which one of the following? -Insures deposits -Conducts monetary policy -Operates check clearing and wire transfer facilities -Serves as the commercial bank for the U.S. Treasury -Supervises and regulates bank activities

Insures deposits

Which of the following bond types pays interest that is exempt from federal taxation?

Municipal bonds

Which of the following is/are money market instrument(s)?

Negotiable CDs

The required rate of return on a bond is: -inversely related to a bond's risk and coupon. -equivalent to the current yield for nonpar bonds. -None of these choices are correct. -less than the E(r) for discount bonds and greater than the E(r) for premium bonds. -the interest rate that equates the current market price of the bond with -the present value of all future cash flows received.

None of these choices are correct

Which of the following is not a goal of monetary policy? -High employment. -Stable interest rates. -Stable prices. -Moderate long-term interest rates. -All of these choices are correct.

Stable interest rates.

The relationship between maturity and yield to maturity is called the __________________. -term structure -loan covenant -Fisher effect -bond indenture -DRP structure

Term Structure

A bond that you held to maturity had a realized return of 8 percent, but when you bought it, it had an expected return of 6 percent. If no default occurred, which one of the following must be true?

The coupons were reinvested at a higher rate than expected.

According to the market segmentation theory, short-term investors will not normally switch to intermediate- or long-term investments. T/F

True

An increase in the marginal tax rates for all U.S. taxpayers would probably result in reduced supply of funds by households. T/F

True

Central governments sometimes indirectly intervene in foreign exchange markets by affecting foreign exchange rates through raising or lowering interest rates. T/F

True

For any positive interest rate the present value of a given annuity will be less than the sum of the cash flows, and the future value of the same annuity will be greater than the sum of the cash flows. T/F

True

Households generally supply more funds to the markets as their income and wealth increase, ceteris paribus. T/F

True

Money markets are the markets for securities with an original maturity of one year or less. T/F

True

One of the factors responsible for globalization of financial markets and institutions is deregulation. T/F

True

Primary markets are markets in which users of funds raise cash by selling securities to funds suppliers. T/F

True

Simple interest calculations assume that interest earned is never reinvested. T/F

True

The NYSE is an example of a secondary market. T/F

True

The risk that a security cannot be sold at a predictable price with low transaction costs at short notice is called liquidity risk.

True

The term structure of interest rates is the relationship between interest rates on bonds similar in terms except for maturity. T/F

True

The traditional liquidity premium theory states that long-term interest rates are greater than the average of current and expected future short-term interest rates. T/F

True

With a zero interest rate both the present value and the future value of an N payment annuity would equal N × payment. T/F

True

The major asset of the Federal Reserve is -depository institution reserves. -currency outside banks. -U.S. Treasury securities. -vault cash of commercial banks. -gold and foreign exchange.

U.S. Treasury securities

A negotiable CD is

a marketable bank-issued time deposit that specifies the interest rate earned and a fixed maturity date

IBM creates and sells additional stock to the investment banker Morgan Stanley. Morgan Stanley then resells the issue to the U.S. public through its mutual funds. Morgan Stanley is acting as a(n):

asset transformer.

Bond issuers usually set a bond's coupon rate close to the required rate of return at the time of issuance so the bond will initially sell

at PAR value

Depository institutions include: -banks. -thrifts. -all of these choices are correct. -finance companies. -banks and thrifts.

banks and thrifts.

The fed funds rate is the rate that -banks charge to lend foreign exchange to customers. -banks charge each other on loans of excess reserves. -banks charge for loans to corporate customers. -banks charge securities dealers to finance their inventory. -the Federal Reserve charges on emergency loans to commercial banks.

banks charge each other on loans of excess reserves

When the Federal Reserve implements monetary policy by targeting the money supply (currency and bank reserves), movement of the demand curve for money around a fixed supply curve causes interest rates to...

be volatile

From October 1983 to July 1993, the Federal Reserve targeted: -M3. -nonborrowed reserves. -borrowed reserves. -the Fed funds rate. -M1.

borrowed reserves.

If the Fed is targeting interest rates and money demand increases, an appropriate policy response would be to -increase reserve requirements. -increase government spending. -None of these choices are correct. -increase the discount rate. -buy U.S. Treasury securities from government bond dealers.

buy U.S. Treasury securities from government bond dealers.

The Federal Reserve serves as the ___________ for the U.S. Treasury, holding the deposit accounts and collateral for government agencies.

commercial bank

A corporation seeking to sell new equity securities to the public for the first time in order to raise cash for capital investment would most likely: -place an ad in the Wall Street Journal soliciting retail suppliers of funds. -conduct an IPO with the assistance of an investment banker. -issue bonds with the assistance of a dealer. -engage in a secondary market sale of equity. -conduct a private placement to a large number of potential buyers.

conduct an IPO with the assistance of an investment banker.

The Federal Reserve System is charged with -setting bank prime rates. -conducting monetary policy and providing payment and other services to a variety of institutions. -conducting monetary policy. -providing payment and other services to a variety of institutions. -regulating securities exchanges.

conducting monetary policy and providing payment and other services to a variety of institutions.

Throughout the life of the bond, the ______ remains constant but the ______ may change due to the arrival of new information.

coupon rate; required rate of return

The Federal Reserve Banks distribute new ______ to meet the public's need for _______ : savings bonds; retirement savings currency; cash coins; collectibles government securities; investment

currency; cash

The Securities Exchange Commission (SEC) does not: -attempt to reduce excessive price fluctuations. -monitor the major securities exchanges. -require exchanges to monitor trading to prevent insider trading. -decide whether a public issue is fairly priced. -decide whether a firm making a public issue has provided enough information for investors to decide whether the issue is fairly priced.

decide whether a public issue is fairly priced.

The Fed's Quantitative Easing programs increased the supply of funds to the long-term securities market and thereby _________ long-term interest rates

decreased

The major liability of the Federal Reserve is: -vault cash of commercial banks. -depository institution reserves. -gold and foreign exchange. -U.S. Treasury securities. -currency outside banks.

depository institution reserves

Financial intermediaries' ability to reduce the average cost of collecting information because of their efficient operations allows them to take advantage of

economies of scale.

If an investor buys a share of stock today at the current market price, receives all expected dividends over the life of the investment, and sells the stock at the end of the investment period, they will earn the...

expected rate of return

The dividend pattern for a stock with supernormal dividend growth can be most correctly described as

experiencing a period of non-constant growth followed by constant growth forever.

The ______ of the stock is calculated by discounting the expected dividends and future sale price of the stock at the required rate of return.

fair present value

A decrease in reserve requirements could lead to an: -increase in the discount rate. -increase in bank lending and an increase in the discount rate. -increase in bank lending. -increase in bank lending and an increase in the money supply. -increase in the money supply.

increase in bank lending and an increase in the money supply.

In the "originate and hold" model, financial institutions are exposed to risks, including which of the following: -interest rate risk -liquidity risk -exchange rate risk -credit risk -sovereign risk

interest rate risk, liquidity risk, and credit risk

According to the liquidity premium theory of interest rates, -the term structure must always be upward sloping. -investors prefer certain maturities and will not normally switch out of those maturities. -long-term spot rates are totally unrelated to expectations of future short-term rates. -investors are indifferent between different maturities if the long-term spot rates are equal to the average of current and expected future short-term rates. -long-term spot rates are higher than the average of current and expected future short-term rates.

long-term spot rates are higher than the average of current and expected future short-term rates.

Assume oil prices rise in the United States, generating concerns that inflation may increase. If the Fed wishes to ensure that inflation does not get out of hand, the Fed could -lower the target money supply growth rate. -decrease the discount rate. -reduce reserve requirements at banks. -lower the target Fed funds rate. -intervene in the currency markets to push the value of the dollar down.

lower the target money supply growth rate

The Federal Reserve Bank has approval power over which of the following bank member activities?

mergers and acquisitions & permissible non-bank activities of bank holding companies

The repeated issuing of new loans and creation of new deposits triggered by a change in the reserve requirement results in a total change in bank deposits that is many times different than the original change in reserves. This is called the

multiplier effect

For large interest rate increases, duration _____________ the fall in security prices, and for large interest rate decreases, duration ______________ the rise in security prices. -overpredicts; overpredicts -None of these choices are correct. -underpredicts; overpredicts -overpredicts; underpredicts -underpredicts; underpredicts

overpredicts; underpredicts

Convexity arises because

present values are a nonlinear function of interest rates.

IBM creates and sells additional stock to the investment banker Morgan Stanley. Morgan Stanley then resells the issue to the U.S. public through its mutual funds. This transaction is an example of a(n)

primary market transaction.

The __________ is the return that compensates the investor for the risk undertaken by holding a share of a stock.

required rate of return (Rs)

The interest rate used to find the present value of a financial security is the

required rate of return.

Insolvency risk at a financial intermediary (FI) is the risk:

risk that an FI may not have enough capital to offset a sudden decline in the value of its assets.

The required rate of return is based on the _______ assumed by the owner of the security for which they require to be compensated.

risks

A security has an expected return less than its required return. This security is

selling for more than its PV.

commercial paper is

short term unsecured promissory note issued by a company to raise funds for a short time period

Liquidity risk at a financial intermediary (FI) is the risk

that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices.

Currently the Fed sets monetary policy by targeting -the level of borrowed reserves. -the stock market. -the Fed funds rate. -the level of nonborrowed reserves.

the Fed funds rate.

The discount rate is the rate that: -banks charge each other on loans of excess reserves. -banks charge securities dealers to finance their inventory. -banks charge to lend foreign exchange to customers. -banks charge for loans to corporate customers. -the Federal Reserve charges on loans to commercial banks.

the Federal Reserve charges on loans to commercial banks.

The basic principle of valuation states that the value of any asset is

the present value of all future cash flows generated by the asset.

Duration is

the weighted average time to maturity of the bond's cash flows.

You would want to purchase a security if P ____________ PV or E(r) ____________ r. -≥; ≤ -≤; ≤ -≥; ≥ -≤; ≥

≤; ≥