FIN 307 Ch 1,3,4 Practice MCQ

Interest rates that are adjusted by subtracting expected inflation are known as: A. coupon rates. B. ex ante (or, expected) real interest rates. C. ex post real interest rates. D. nominal interest rates.

B. ex ante (or, expected) real interest rates.

Financial instruments used primarily as stores of value include each of the following, except: A. bonds. B. futures contracts. C. stocks. D. home mortgages.

B. futures contracts.

The process of financial intermediation: A. creates a net cost to an economy. B. increases the economy's ability to produce. C. is always used when a borrower needs to obtain funds. D. is used primarily in underdeveloped countries.

B. increases the economy's ability to produce.

The primary use of derivative contracts is: A. for IRA and other pension plans since they only have value well into the future. B. to shift risk among investors. C. for investors seeking a greater return by taking greater risk. D. to add to the profits an investor obtains through information asymmetry.

B. to shift risk among investors.

Most financial markets in the United States operate under a system: A. without any formal rules or regulation. B. with many rules and regulations to manage market processes. C. where it depends on which state where the financial market is located since some states do not have any regulations. D. that is totally controlled by the federal government.

B. with many rules and regulations to manage market processes.

Which of the following best expresses the future value of $100 left in a savings account earning 4.5% for three and a half years? A. $100(1.045)^3.5 B. $100(0.45)^3.5 C. $100 × 3.5 × (1.045) D. $100(1.045)^3/2

A. $100(1.045)^3.5

What is the present value of $100 promised one year from now at 10% annual interest? A. $89.50 B. $90.00 C. $90.91 D. $91.25

C. $90.91

A monthly growth rate of 0.5% is an annual growth rate of: A. 6.00% B. 5.00% C. 6.17% D. 6.50%

C. 6.17%

Identify which item is not one of the six parts of the financial system. A. Financial markets B. Central banks C. Credit cards D. Financial institutions

C. Credit cards

Tom obtains a car loan from Old Town Bank. A. The car loan is Tom's asset and the bank's liability. B. The car loan is Tom's asset, but the liability belongs to the bank's depositors. C. The car loan is Tom's liability and an asset for Old Town Bank. D. The car loan is Tom's liability and a liability of the bank until Tom pays it off.

C. The car loan is Tom's liability and an asset for Old Town Bank.

A financial instrument would include: A. only a written obligation and a transfer of value. B. only a written obligation and a specified date. C. a written obligation, a transfer of value, a future date, and certain conditions. D. a written obligation, a transfer of value, a specific date for payment, uncertain conditions.

C. a written obligation, a transfer of value, a future date, and certain conditions.

A promise of a $100 payment to be received one year from today is: A. more valuable than receiving the payment today. B. less valuable than receiving the payment two years from now. C. equally valuable as a payment received today if the interest rate is zero. D. not enough information is provided to answer the question.

C. equally valuable as a payment received today if the interest rate is zero.

Which of the following is an example of a financial market? A. A local coffeehouse where people regularly buy and sell financial instruments. B. A bank that only accepts deposits and issues loans. C. An electronic network used for buying and selling textbooks. D. A central bank used for raising taxes and borrowing on behalf of the government.

A. A local coffeehouse where people regularly buy and sell financial instruments.

Which of the following statements is most correct? A. We can always compute the ex post real interest rate but not always the ex ante real rate. B. We cannot compute either the ex post or ex ante real interest rates accurately. C. We can accurately compute the ex ante real interest rate but not the ex post real rate. D. None of the statements are correct.

A. We can always compute the ex post real interest rate but not always the ex ante real rate.

U.S. monetary policy is best described as: A. aimed at keeping inflation low and stable and growth high and stable. B. determining the denominations of a country's currency. C. one of the most important functions of congress. D. attempting to keep inflation constant at zero percent.

A. aimed at keeping inflation low and stable and growth high and stable.

Juan purchases automobile insurance; the insurance contract is a: A. financial instrument. B. form of money. C. transfer of risk from the insurance company to Juan. D. financial intermediary.

A. financial instrument.

Suppose Tom receives a one-year loan from ABC Bank for $5,000.00. At the end of the year, Tom repays $5,400.00 to ABC Bank. Assuming the simple calculation of interest, the interest rate on Tom's loan was: A. $400 B. 8.00% C. 7.41% D. 20%

B. 8.00%

Which of the following statements best describes financial instruments? A. All financial instruments are a means of payment. B. Financial instruments can transfer resources between people but not risk. C. Financial instruments can transfer resources and risk between people. D. Financial instruments can transfer risk but not resources between people.

B. Financial instruments can transfer resources between people but not risk.

Many financial instruments are standardized because: A. it is believed that most parties to a contract do not read them anyway. B. complexity is costly, the more complex a contract, the more it costs to create. C. the standardization of contracts makes them harder to understand. D. it is required by the government.

B. complexity is costly, the more complex a contract, the more it costs to create.

An investment carrying a current cost of $120,000 is going to generate $50,000 of revenue for each of the next three years. To calculate the internal rate of return we need to: A. calculate the present value of each of the $50,000 payments and multiply these and set this equal to $120,000. B. find the interest rate at which the present value of $150,000 for three years from now equals $120,000. C. find the interest rate at which the sum of the present values of $50,000 for each of the next three years equals $120,000. D. subtract $120,000 from $150,000 and set this difference equal to the interest rate.

C. find the interest rate at which the sum of the present values of $50,000 for each of the next three years equals $120,000.

Which formula below best expresses the expected real interest rate, (r)? A. i = r - π^e B. r = i + π^e C. r = i - π^e D. π^e = i + r

C. r = i - π^e

Mutual funds have: A. been created for very wealthy individuals with a lot of money to invest. B. increased the risks associated with constructing a portfolio. C. reduced the costs associated with gathering information on stocks and bonds. D. increased the transactions costs associated with participating in financial markets.

C. reduced the costs associated with gathering information on stocks and bonds.

A lender is promised a $100 payment (including interest) one year from today. If the lender has a 6% opportunity cost of money, he/she should be willing to lend what amount today? A. $100.00 B. $106.20 C. $96.40 D. $94.34

D. $94.34

Which of the following is not a reason why interbank lending dramatically decreased during the financial crisis of 2007-2009? A. Banks preferred to hold on to their liquid assets in case their own need for them increased. B. Banks grew increasingly concerned about the ability of their trading partners to repay the loans. C. The increased cost of loans. D. The Fed grew increasingly wary of making liquidity available to banks.

D. The Fed grew increasingly wary of making liquidity available to banks.

The better the information provided to financial markets the: A. less the amount of funds transferred between savers and borrowers. B. greater the amount of funds transferred between savers and borrowers though risk increases. C. higher the return required by lenders. D. greater will be the flow of funds in these markets.

D. greater will be the flow of funds in these markets.

The largest regulatory change in U.S. financial markets since 1930 is known as: A. Basel III. B. the Fred-Bob Act. C. the Gramm-Leach-Bliley Act. D. the Dodd-Frank Act of January 2010

D. the Dodd-Frank Act of January 2010