FiNaL SHiiitZ
10) Americans are the biggest users of checks in the world but nonetheless are ahead of Europeans in the proportion of noncash payments that are made by electronic means.
Answer: FALSE
10) Decreased transparency of the monetary policy strategy through communication with the public and the markets about the plans and objectives of monetary policymakers is an element of inflation targeting.
Answer: FALSE
10) Several academic research studies show that investors earn higher returns by investing in mutual funds that charge higher fees.
Answer: FALSE
10) The value-at-risk method for estimating a bank's risk exposure measures the losses a bank could incur under a worst-case scenario.
Answer: FALSE
13) Quantitative easing and credit easing are essentially the same thing.
Answer: FALSE
14) In the long run, the price stability goal is inconsistent with other goals, such as economics growth, stability of financial markets, etc.
Answer: FALSE
4) Money markets are referred to as retail markets because small individual investors are the primary buyers of money market securities.
Answer: FALSE
4) To be classified as a well-capitalized bank, a bank's leverage ratio must exceed 8 percent.
Answer: FALSE
7) Given a bank's return on assets, the higher the bank capital, the higher the return for the owners of the bank.
Answer: FALSE
8) Inflation targeting makes the central bank less accountable.
Answer: FALSE
10) Registered bonds have now been largely replaced by bearer bonds, which do not have coupons.
Answer: FALSE (bearer bonds have largely been replaced by registered bonds with no coupons)
5) The U.S. Treasury Department is the single most influential participant in the U.S. money market.
Answer: FALSE (it's the Fed)
18) Commercial paper has been used in various forms since the 1930s.
Answer: FALSE (since the 20s)
12) SEC research suggests that about three-fourths of mutual funds let privileged shareholders engage in market timing.
Answer: TRUE
16) Mutual funds are regulated under four federal laws designed to protect investors.
Answer: TRUE
5) Bank holding companies that have begun to rival the money center banks in size but whose headquarters are not based in one of the money center cities are called superregional banks.
Answer: TRUE
5) Once a bank has been chartered, it is required to file periodic call reports that reveal the bank's assets and liabilities, income, ownership, and other details.
Answer: TRUE
5) Open market purchases by the Fed increase the supply of nonborrowed reserves.
Answer: TRUE
5) Open-end mutual funds are more common than closed-end funds.
Answer: TRUE
5) To sell an old bond when rates have risen, the holder will have to discount the bond until the yield to the buyer is the same as the market rate.
Answer: TRUE
6) "Truth in lending" was mandated under the Consumer Protection Act of 1969 and requires all lenders to reveal the annual percentage rate, or APR, on loans.
Answer: TRUE
6) A bank maintains bank capital to lessen the chance that it will become insolvent.
Answer: TRUE
6) The U.S. Treasury Department is the single largest borrower in the U.S. money market.
Answer: TRUE
7) Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation.
Answer: TRUE
7) Probably the most important feature of FDICIA is its prompt corrective action provisions which require the FDIC to intervene earlier and more vigorously when a bank gets into trouble.
Answer: TRUE
7) Restrictions on commercial banks' securities and insurance activities put American banks at a competitive disadvantage relative to foreign banks.
Answer: TRUE
51) Checking accounts that earn interest (such as NOW accounts) were not available until ________. A) 1962 B) 1972 C) 1982 D) 1992
B) 1972
1) The modern commercial banking system began in America when the A) Bank of the United States was chartered in New York in 1801. B) Bank of North America was chartered in Philadelphia in 1782. C) Bank of the United States was chartered in Philadelphia in 1801. D) Bank of North America was chartered in New York in 1782.
B) Bank of North America was chartered in Philadelphia in 1782.
21) State banks that are not members of the Federal Reserve System are most likely to be examined by the A) Federal Reserve System. B) Federal Deposit Insurance Corporation. C) Federal Home Loan Bank System. D) Comptroller of the Currency.
B) Federal Deposit Insurance Corporation.
27) Which of the following bank assets are the most liquid? A) Consumer loans B) Reserves C) Cash items in process of collection D) U.S. government securities
B) Reserves
29) If the Fed wants to temporarily drain reserves from the banking system, it will engage in A) a repurchase agreement. B) a matched sale-purchase transaction. C) a "pump" agreement. D) none of the above.
B) a matched sale-purchase transaction.
76) Discount loans are also known as ________. A) interest-free loans B) advances C) credits D) market loans
B) advances
28) The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem. A) adverse selection; adverse selection B) adverse selection; moral hazard C) moral hazard; adverse selection D) moral hazard; moral hazard
B) adverse selection; moral hazard
23) The security with the longest maturity is a Treasury A) note. B) bond. C) acceptance. D) bill.
B) bond.
69) An argument that supports a regulated minimum capital requirement is that banks that hold too little capital A) are unprofitable. B) impose costs on other banks because they are more likely to fail. C) have an unfair competitive advantage over savings and loans. D) includes all of the above.
B) impose costs on other banks because they are more likely to fail.
19) In the generalized dividend valuation model, a stock's value depends only on A) its future dividend payments and its future price. B) its future dividend payments and the required return on equity. C) its future price and the required return on investments on equity. D) its future dividend payments.
B) its future dividend payments and the required return on equity.
16) People who take their money out of insured bank deposits to invest in uninsured money market mutual funds have ________ risk because money market funds invest in ________ assets. A) high; long-term B) low; short-term C) high; short-term D) low; long-term
B) low; short-term
36) An impact of the Garn-St. Germain Act of 1982 has been to A) put savings and loans at a competitive disadvantage. B) make the banking system more competitive. C) give money market mutual funds a competitive advantage. D) do both A and B of the above. E) do both A and C of the above.
B) make the banking system more competitive.
31) If the Fed wants to raise the federal funds interest rate, it will ________ securities to ________ the banking system. A) sell; add reserves to B) sell; remove reserves from C) buy; add reserves to D) buy; remove reserves from
B) sell; remove reserves from
31) In general, banks make profits by selling ________ liabilities and buying ________ assets. A) long-term; shorter-term B) short-term; longer-term C) illiquid; liquid D) risky; risk-free
B) short-term; longer-term
3) (I) Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders, but after that of bondholders. (II) Firms issue preferred stock in far greater amounts than common stock. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
A) (I) is true, (II) false.
94) Deposits in European banks denominated in dollars for the purpose of international transactions are known as ________. A) Eurodollars B) European Currency Units C) Euros D) International Monetary Units
A) Eurodollars
51) Which of the following do banks hold as insurance against the high cost of deposit outflows? A) Excess reserves B) Secondary reserves C) Bank equity capital D) All of the above E) Only A and B of the above
A) Excess reserves
52) Which is the least costly way for a bank to handle deposit outflows? A) Hold excess reserves. B) Borrow from other banks. C) Sell securities. D) Call in loans.
A) Hold excess reserves.
51) What role did the credit-rating agencies play leading up to the start of the financial crisis in 2007? A) Inaccurate ratings provided by credit-rating agencies helped promote risk taking throughout the financial system. B) The credit-rating agencies were the first to see signs of trouble, and they developed more stringent standards as the housing bubble evolved. C) Solid ratings provided by credit-rating agencies helped limit risk taking throughout the financial system. D) The credit-rating agencies were largely uninvolved with the financial crisis.
A) Inaccurate ratings provided by credit-rating agencies helped promote risk taking throughout the financial system.
95) The main center of the Eurodollar market is ________. A) London B) Basel C) Paris D) New York
A) London
73) The legislation that effectively prohibited banks from branching across state lines and forced all national banks to conform to the branching regulations of the state in which they reside is the A) McFadden Act. B) National Banking Act. C) Glass-Steagall Act. D) Garn-St. Germain Act.
A) McFadden Act.
45) In 1977, ________ pioneered the concept of selling new public issues of junk bonds for companies that had not yet achieved investment-grade status. A) Michael Milken B) Roger Milliken C) Ivan Boskey D) Carl Ichan
A) Michael Milken
103) What is the key difference between an S&L and a mutual savings bank? A) Mutual savings banks are jointly owned by depositors, whereas S&Ls aren't. B) The FDIC insures an S&L's deposits, but not those of mutual savings banks. C) Both A and B are correct. D) Neither A nor B is correct.
A) Mutual savings banks are jointly owned by depositors, whereas S&Ls aren't.
102) In September of 2008, the money market mutual fund Reserve Primary Fund had a price of less than $1.00 for a dollar invested. How did this happen? A) The fund invested in debt of Lehman Brothers, which was worthless when Lehman went broke. B) The fund invested in high-yield junk bonds, which defaulted. C) The fund invested in Treasuries, which yielded less than 0% returns. D) This actually didn't happen. It cannot happen since the fund only invested in low-risk debt.
A) The fund invested in debt of Lehman Brothers, which was worthless when Lehman went broke.
48) Which of the following is a potential operating target for the Fed? A) The monetary base B) The M1 money supply C) Nominal GDP D) The discount rate
A) The monetary base
18) Money market instruments issued by the U.S. Treasury are called A) Treasury bills. B) Treasury notes. C) Treasury bonds. D) Treasury strips.
A) Treasury bills.
38) A requirement in the bond indenture that the firm pay off a portion of the bond issue each year is called A) a sinking fund. B) a call provision. C) a restrictive covenant. D) a shelf registration.
A) a sinking fund.
3) The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the A) central bank. B) commercial bank. C) bank of settlement. D) Treasury Department.
A) central bank.
14) Finance companies raise funds in the money market by selling A) commercial paper. B) federal funds. C) negotiable certificates of deposit. D) Eurodollars.
A) commercial paper.( p. 256 top)
34) The 2001 terrorist attacks and the Enron financial scandal caused anticipated dividend growth to ________, investors' required return on equity to ________, and stock prices to ________. A) decrease; increase; decrease B) decrease; increase; increase C) increase; decrease; decrease D) increase; decrease; increase
A) decrease; increase; decrease
43) Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by A) encouraging firms to invest and people to save. B) encouraging firms to limit their price increases. C) encouraging people to consume. D) all of the above. E) only A and C of the above.
A) encouraging firms to invest and people to save.
15) Finance companies play a unique role in money markets by A) giving consumers indirect access to money markets. B) combining consumers' investments to purchase money market securities on their behalf. C) borrowing in capital markets to finance purchases of money market securities. D) assisting the government in its sales of U.S. Treasury securities.
A) giving consumers indirect access to money markets.
4) Mutual funds offer investors all of the following except A) greater-than-average returns. B) diversified portfolios. C) lower transaction costs. D) professional investment management
A) greater-than-average returns.
13) The largest purchasers of capital market securities are A) households. B) corporations. C) governments. D) central banks.
A) households.
12) The majority of mutual fund assets are now owned by A) individual investors. B) institutional investors. C) fiduciaries. D) business organizations. E) retirees.
A) individual investors.
10) The most influential participant(s) in the U.S. money market A) is the Federal Reserve. B) is the U.S. Treasury Department. C) are the large money center banks. D) are the investment banks that underwrite securities.
A) is the Federal Reserve.
47) Asset-backed commercial paper differs from conventional commercial paper in that A) it is backed (secured) by some bundle of assets. B) its maturity usually extends well beyond 1 year. C) both A and B of the above. D) neither A nor B of the above.
A) it is backed (secured) by some bundle of assets.
34) When you deposit $50 in currency at the Old National Bank, A) its assets increase by $50. B) its reserves increase by less than $50 because of reserve requirements. C) its liabilities decrease by $50. D) only A and B of the above occur.
A) its assets increase by $50.
11) Because passbook savings are ________ liquid for the depositor than checking accounts, they earn ________ interest rates. A) less; higher B) less; lower C) more; higher D) more; lower
A) less; higher
71) Examples of off-balance-sheet activities include A) loan sales. B) extending loans to depositors. C) borrowing from other banks. D) all of the above.
A) loan sales.
41) "Stripping" a Treasury bond A) means selling each of its future payments as a separate zero-coupon bond. B) decreases the total present discounted value of future payments. C) both A and B. D) none of the above.
A) means selling each of its future payments as a separate zero-coupon bond.
29) A bank's largest source of funds is its A) nontransaction deposits. B) checking deposits. C) borrowing from the Fed. D) federal funds.
A) nontransaction deposits.
59) By the time the subprime financial crisis hit in force, Fannie and Freddie had ________ subprime and Alt-A assets on their books. A) over $1 trillion of B) very few C) been prohibited from holding D) none of the above
A) over $1 trillion of
90) Since the passage of the International Banking Act of 1978, the competitive advantage enjoyed by foreign banks has been ________. A) reduced B) mildly expanded C) completely eliminated D) greatly expanded
A) reduced
33) Policies that limit the discretion of managers as a way of protecting bondholders' interests are called A) restrictive covenants. B) debentures. C) sinking funds. D) bond indentures.
A) restrictive covenants.
65) Net profit after taxes per dollar of assets is a basic measure of bank profitability called A) return on assets. B) return on capital. C) return on equity. D) return after taxes.
A) return on assets.
17) In the one-period valuation model, a stock's value will be higher A) the higher its expected future price is. B) the lower its dividend is. C) the higher the required return on investments in equity is. D) all of the above.
A) the higher its expected future price is.
10) The discount rate is A) the interest rate on loans from the Fed to a bank. B) the price the Fed pays for government securities. C) the interest rate on loans of reserves from one bank to another. D) the price banks pay the Fed for government securities. E) the interest rate on loans from a bank to the federal government.
A) the interest rate on loans from the Fed to a bank.
52) Corporations may enter the capital markets because A) they do not have sufficient capital to fund their investment opportunities. B) they want to preserve their capital to protect against expected needs. C) it is required by the Securities and Exchange Commission (SEC). D) none of the above.
A) they do not have sufficient capital to fund their investment opportunities.
81) In 2009 provisions for loan losses reached a new peak of ________ of total operating expenses. A) 60% B) 50% C) 33% D) 13%
C) 33%
47) Just prior to the global financial crisis, mortgage loans known as NINJA loans were issued to borrowers. What is a NINJA loan? A) A loan issued by a Japanese bank, thus avoiding U.S. regulation. B) A loan document originated by a mortgage banker named Bruce Lee. C) A loan issued to borrowers with no income, employment, nor assets to speak of. D) A loan issued with a "martial arts" clause.
C) A loan issued to borrowers with no income, employment, nor assets to speak of.
39) Which of the following is not a financial innovation stimulated by information technology? A) Credit card B) Debit card C) Adjustable-rate mortgage D) Electronic banking
C) Adjustable-rate mortgage
43) What is the primary argument for not giving depositors greater incentive to monitor financial institutions? A) Experts do not believe that depositors are capable of monitoring banks and imposing discipline on them. B) Banks could be subject to more frequent runs by nervous depositors. C) Both A and B are correct. D) Neither A nor B is correct.
C) Both A and B are correct.
74) Which of the following is an advantage of forming a bank holding company? A) It allows ownership of several banks where branching is prohibited. B) It allows owners to engage in activities related to banking that are prohibited to banks. C) Both A and B of the above. D) None of the above.
C) Both A and B of the above.
15) (I) There are two types of exchanges in the secondary market for capital securities: organized exchanges and over-the-counter exchanges. (II) When firms sell securities for the very first time, the issue is an initial public offering. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
C) Both are true.
39) All ________ are open-end investment funds that invest only in money market securities. A) Stock funds B) Bond funds C) Money market mutual funds D) all of the above
C) Money market mutual funds
25) Of the following assets, the one which has the highest capital requirement under the Basel Accord is A) municipal bonds. B) residential mortgages. C) commercial paper. D) securities issued by industrialized countries' governments.
C) commercial paper.
9) Securities not listed on one of the exchanges trade in the over-the-counter market. In this exchange, dealers "make a market" by A) buying stocks for inventory when investors want to sell. B) selling stocks from inventory when investors want to buy. C) doing both of the above. D) doing neither of the above.
C) doing both of the above.
66) The amount of assets per dollar of equity capital is called the A) asset ratio. B) equity ratio. C) equity multiplier. D) asset multiplier. E) return on equity.
C) equity multiplier.
1) Assets on the Fed's balance sheet include A) government securities and currency in circulation. B) discount loans and reserves. C) government securities and discount loans. D) currency in circulation and reserves.
C) government securities and discount loans.
53) The ________ the costs associated with deposit outflows are, the ________ excess reserves banks will want to hold. A) lower; more B) higher; less C) higher; more D) none of the above, since deposit outflows cannot be anticipated
C) higher; more
8) Although federal banking legislation in the 1860s attempted to eliminate state-chartered banks by imposing a prohibitive tax on banknotes, these banks have been able to stay in business by A) issuing credit cards. B) ignoring the regulations. C) issuing deposits. D) branching into other states.
C) issuing deposits.
42) So-called fallen angels differ from junk bonds in that A) junk bonds refer to previously issued bonds which have had their credit ratings fall below Baa. B) fallen angels refer to newly issued bonds with low credit ratings. C) junk bonds refer to newly issued bonds with low credit ratings. D) they are both A and B of the above.
C) junk bonds refer to newly issued bonds with low credit ratings.
25) The most important category of assets on a bank's balance sheet is A) discount loans. B) securities. C) loans. D) cash items in the process of collection.
C) loans.
15) The Federal Reserve Act required all ________ banks to become members of the Federal Reserve System, while ________ banks could choose to become members of the system. A) state; national B) state; municipal C) national; state D) national; municipal
C) national; state
26) New computer technology has A) increased the cost of financial innovation. B) increased the demand for financial innovation. C) reduced the cost of financial innovation. D) reduced the demand for financial innovation.
C) reduced the cost of financial innovation.
46) The practice of creating marketable debt instruments that are backed by otherwise illiquid assets is known as ________. A) standardization B) homogenization C) securitization D) adverse selection
C) securitization
7) The share of checkable deposits in total bank liabilities has A) expanded moderately over time. B) expanded dramatically over time. C) shrunk over time. D) remained virtually unchanged since 1960.
C) shrunk over time.
56) It now appears that the predominant delivery system for banking services in the future will be A) Internet-only banks. B) traditional banks. C) traditional banks supplemented with online services. D) none of the above.
C) traditional banks supplemented with online services.
15) The supply curve for reserves is ________ when the federal funds rate is below the discount rate and ________ when the federal funds rate is above the discount rate. A) upward sloping; horizontal B) upward sloping; vertical C) vertical; horizontal D) vertical; downward sloping
C) vertical; horizontal
16) With the creation of the Federal Deposit Insurance Corporation, member banks of the Federal Reserve System ________ to purchase FDIC insurance for their depositors, while nonmember commercial banks ________ to buy deposit insurance. A) could choose; were required B) could choose; were given the option C) were required; could choose D) were required; were required
C) were required; could choose
What forms does bank supervision take and how does it help promote a safe and sound banking system?
Bank supervision involves bank examinations in which bank examiners assess six areas of the bank represented in the CAMELS rating. A low score on the CAMELS rating allows the supervisors to declare a bank to be a "problem bank" making it more subject to frequent examinations and to sanctions to reduce the amount of risk taking it is engaged in. Bank examiners also check that the bank is following the rules and regulations and is not holding securities or loans that are too risky. All of these measure help to ensure that banks are not taking on too much risk, and thus promote a safer and sounder banking system.
Why are bankers acceptances so popular for international transactions?
Bankers acceptances substitue the creditworthiness of a bank for that of a business. When a company sells a product to a company it is unfamiliar with, it often prefers to have the promise of a bank that payment will be made.
Why do banks not eliminate the need for money markets?
Banks have higher costs than than the money market owing to the need to maintain reserve requirements. The lower cost structure of the money markets, coupled with the economies of scale resulting from high volume and large denomination securities allows for higher interest rates for investors.
Why do investment banking firms ofter form syndicates for selling securities to the public?
By forming a syndicate the risk of the issue is spread among many different firms and more brokers will be attempting to sell the securities.
Finance companies raise funds in the money market by selling
Commercial paper
The riskiest capital market security is
Common Stock
49) The usual maturity range for fed funds is ________. A) 1 to 270 days B) 1 to 15 days C) 4, 13, and 26 weeks D) 1 to 7 days
D) 1 to 7 days
89) Which of the following is a reason for the rapid expansion of international banking? A) The rapid growth in international trade B) The growth of multinational corporations C) The desire of U.S. banks to expand D) All of the above
D) All of the above
11) ________ funds are the simplest type of investment funds to manage. A) Balanced B) Global equity C) Growth D) Index
D) Index
40) Which of the following is an example of a financial innovation introduced to avoid regulations? A) Securitization B) Junk bond C) Debit card D) Sweep account
D) Sweep account
33) Stock values computed by valuation models may differ from actual market prices because it is difficult to A) estimate future dividend growth rates. B) estimate the risk of a stock. C) forecast a stock's future dividends. D) all of the above are true.
D) all of the above are true.
57) A bank fails when the value of its ________ falls below the value of ________, causing the bank to become insolvent. A) reserves; required reserves B) loans; secondary reserves C) securities; deposit liabilities D) assets; liabilities
D) assets; liabilities
12) The distribution of a firm's capital between debt and equity is its A) current ratio. B) liability structure. C) acid ratio. D) capital structure.
D) capital structure.
40) Long-term unsecured bonds that are backed only by the general creditworthiness of the issuer are called A) junk bonds. B) callable bonds. C) convertible bonds. D) debentures.
D) debentures.
3) An open market purchase of securities by the Fed will A) increase assets of the nonbank public and increase assets of the banking system. B) decrease assets of the nonbank public and increase assets of the Fed. C) decrease assets of the banking system and increase assets of the Fed. D) have no effect on assets of the nonbank public but increase assets of the Fed. E) increase assets of the banking system and decrease assets of the Fed.
D) have no effect on assets of the nonbank public but increase assets of the Fed.
7) A discount loan by the Fed to a bank causes a(n) ________ in reserves in the banking system and a(n) ________ in the monetary base. A) increase; decrease B) decrease; decrease C) decrease; increase D) increase; increase
D) increase; increase
32) The main cause of fluctuations in stock prices is changes in A) tax laws. B) errors in technical stock analysis. C) daily trading volume in stock markets. D) information available to investors. E) total household wealth in the economy.
D) information available to investors.
61) The largest operating expense for a bank is A) salaries and employee benefits. B) interest paid on discount loans. C) interest paid on federal funds borrowed from other banks. D) interest paid on deposits.
D) interest paid on deposits.
56) The risk on an agency bond is A) high. B) zero. C) moderate. D) low.
D) low.
10) Because checking accounts are ________ liquid for the depositor than passbook savings, they earn ________ interest rates. A) less; higher B) less; lower C) more; higher D) more; lower
D) more; lower
29) The PE ratio approach to valuing stock is especially useful for valuing A) publicly held corporations. B) firms that regularly pay dividends. C) both A and B of the above. D) neither A nor B of the above.
D) neither A nor B of the above.
8) Checkable deposits and money market deposit accounts are A) payable on demand. B) liabilities of the banks. C) assets of the banks. D) only A and B of the above. E) only A and C of the above
D) only A and B of the above.
41) A secured bond is backed by A) the general creditworthiness of the borrower. B) an insurance company's financial guarantee. C) the expected future earnings of the borrower. D) specific collateral.
D) specific collateral.
What law separated investment banking from commercial banking?
Glass Steagall Act
Assets on the Fed's balance sheet includes
Government securities and discount loans
19) Which of the following statements are true of Treasury bills? A) The market for Treasury bills is extremely deep and liquid. B) Occasionally, investors find that earnings on T-bills do not compensate them for changes in purchasing power due to inflation. C) By volume, most Treasury bills are sold to individuals who submit noncompetitive bids. D) All of the above are true. E) Only A and B of the above are true.
E) Only A and B of the above are true.
47) Which of the following are true for the current yield? A) The current yield is defined as the yearly coupon payment divided by the price of the security. B) The current yield and the yield to maturity always move together. C) The formula for the current yield is identical to the formula describing the yield to maturity for a discount bond. D) All of the above are true. E) Only A and B of the above are true.
E) Only A and B of the above are true.
40) Eurodollars A) are time deposits with fixed maturities and are, therefore, somewhat illiquid. B) may offer the borrower a lower interest rate than can be received in the domestic market. C) are limited to London banks. D) are all of the above. E) are only A and B of the above.
E) are only A and B of the above.
68) The most important developments that have reduced banks' income advantages in the past twenty years include A) the growth of the commercial paper market. B) the growth of the junk bond market. C) the elimination of Regulation Q ceilings. D) all of the above. E) only A and B of the above.
E) only A and B of the above.
What do 12b-1 fees pay and what is the maximum amount these fees can be?
12b-1 fees pay the mutual fund for marketing and advertising. They are limited to 1% of the funds average new assets per year
Holding other things constant, a stock's value will be highest if its dividend growth rate is
15% (highest choice)
Bank panics in 1819, 1837, 1857, 1873, 1884, 1893, and 1907 convinced many that
A central bank was needed to prevent future financial panics
How are deferred loads usually structured?
A deferred load is a fee charged when money is withdrawn tom a fund. They are usually 5% and fall by 1% for each year the investment is left in the account.
At its inception, the Federal Reserve was intended to be
A lender of last resort
What is load fund?
A load fund charges a fee for accepting investments. The fees may be at the beginning of the investment or may be charged when the funds are withdrawn
48) If a bank has $10 million of deposits, a required reserve ratio of 10 percent, and $2 million in reserves, then it does not have enough reserves to support a deposit outflow of A) $1.2 million. B) $1.1 million. C) $1 million. D) either A or B of the above.
A) $1.2 million.
22) During QE1, the Fed purchased ________. A) $1.25 trillion in mortgage-backed securities B) $600 billion in long-term Treasury securities C) $40 billion in mortgage-backed securities and $45 billion in long-term Treasuries (to start) D) $500 billion in U.S. corporate debt
A) $1.25 trillion in mortgage-backed securities
21) According to the Gordon growth model, what is an investor's valuation of a stock whose current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10 percent over a long period of time and the investor's required return is 11 percent? A) $110 B) $100 C) $11 D) $10 E) $5.24
A) $110 (1x1.1)/.11-10)
77) As of June 2013, the consolidated balance sheet of the Federal Reserve System included about ________ in assets. A) $3.5 trillion B) $2.0 trillion C) $1.5 trillion D) $500 billion
A) $3.5 trillion
47) If a bank has $200,000 of deposits, a required reserve ratio of 20 percent, and $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $50,000. B) $40,000. C) $30,000. D) $25,000.
A) $50,000.
20) (I) The coupon rate is the rate of interest that the issuer of the bond must pay. (II) The coupon rate on old bonds fluctuates with market interest rates so they will remain attractive to investors. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
A) (I) is true, (II) false.
7) (I) The largest of the organized stock exchanges in the United States is the New York Stock Exchange. (II) To be listed on the NYSE, a firm must have a minimum of $100 million in market value or $10 million in revenues. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
A) (I) is true, (II) false.
31) (I) Most corporate bonds have a face value of $1,000, pay interest semiannually, and can be redeemed anytime the issuer wishes. (II) Registered bonds have now been largely replaced by bearer bonds, which do not have coupons. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
A) (I) is true, (II) false. (actually can't be redeemed "anytime" but after a specified time, go with it.)
48) The usual maturity range for commercial paper is ________. A) 1 to 270 days B) 1 to 15 days C) 4, 13, and 26 weeks D) 1 to 7 days
A) 1 to 270 days
23) Holding other things constant, a stock's value will be highest if its dividend growth rate is A) 15%. B) 10%. C) 5%. D) 2%.
A) 15%.
1) At the beginning of 2013, mutual funds held about ________ of the U.S. stock market was held by mutual funds. A) 30% B) 50% C) 10% D) 70%
A) 30%
37) In 2010, the NYSE traded ________ shares on an average trading day. A) 4 billion B) 7 billion C) 10 billion D) 12 billion
A) 4 billion
25) Over ________ of the total daily volume in stocks is due to institutions initiating trades. A) 70% B) 50% C) 25% D) 90%
A) 70%
2) Which of the following statements is true? A) A bank's assets are its uses of funds. B) A bank's assets are its sources of funds. C) A bank's liabilities are its uses of funds. D) Only B and C of the above are true.
A) A bank's assets are its uses of funds.
15) Some view that Dodd-Frank eliminated the too-big-to-fail problem. How did it achieve this? A) By making it harder for the Federal Reserve to bail out financial institutions B) By eliminating the Volcker rule C) By reducing the regulation of SIFIs D) All of the above.
A) By making it harder for the Federal Reserve to bail out financial institutions
74) Which of the following statements is true? A) Credit-driven asset bubbles are particularly dangerous. When asset prices fall, the deleveraging of credit markets reduces economic activity. B) Bubbles driven soley by irrational exuberance lead to a failure of financial institutions. C) Both A and B are correct. D) Neither A nor B is correct.
A) Credit-driven asset bubbles are particularly dangerous. When asset prices fall, the deleveraging of credit markets reduces economic activity.
6) Which of the following are reported as liabilities on a bank's balance sheet? A) Discount loans B) Cash items in the process of collection C) State government securities D) All of the above E) Only B and C of the above
A) Discount loans
27) Which of the following is true regarding the Gordon growth model? A) Dividends are assumed to grow at a constant rate forever. B) The dividend growth rate is assumed to be greater than the required return on equity. C) Both A and B of the above. D) Neither A nor B of the above.
A) Dividends are assumed to grow at a constant rate forever.
2) The origins of mutual funds can be traced back to the mid to late 1800s in ________. A) England and Scotland B) New York City C) Boston D) Germany
A) England and Scotland
82) The prohibition against banks underwriting corporate securities and engaging in brokerage, real estate, and insurance activities was repealed by the A) Gramm-Leach-Bliley Financial Services Modernization Act. B) Competitive Equality in Banking Act. C) Depositary Institution Deregulation and Monetary Control Act. D) Glass-Steagall Act.
A) Gramm-Leach-Bliley Financial Services Modernization Act.
55) Which of the following is not a reason for the disappointing revenue growth and profits of Internet-only banks? A) High cost per transaction B) Security concerns C) Customer preferences D) Technical problems
A) High cost per transaction
38) ________ bonds combine stocks into one fund. A) Hybrid B) Money market C) Municipal D) Equity
A) Hybrid
45) What accounts for the problems facing China's four largest banks? A) Large loans to inefficient, state-owned enterprises B) Closing of unprofitable branches and laying off unproductive employees C) Selling shares in the bank overseas to raise capital D) All of the above
A) Large loans to inefficient, state-owned enterprises
92) U.S. banks have most of their foreign branches in A) Latin America, the Far East, the Caribbean, and London. B) Latin America, the Middle East, the Caribbean, and London. C) Mexico, the Middle East, the Caribbean, and London. D) South America, the Middle East, the Caribbean, and Canada.
A) Latin America, the Far East, the Caribbean, and London.
33) ________ means the investors can convert their investment into cash quickly at a low cost. A) Liquidity intermediation B) Denomination intermediation C) Diversification D) Managerial expertise
A) Liquidity intermediation
10) To eliminate the abuses of the state-chartered banks, the ________ created a new banking system of federally chartered banks, supervised by the ________. A) National Banking Act of 1863; Office of the Comptroller of the Currency B) Federal Reserve Act of 1863; Office of the Comptroller of the Currency C) National Banking Act of 1863; Office of Thrift Supervision D) Federal Reserve Act of 1863; Office of Thrift Supervision
A) National Banking Act of 1863; Office of the Comptroller of the Currency
10) The most active stock exchange in the world is the A) Nikkei Stock Exchange. B) London Stock Exchange. C) Shanghai Stock Exchange. D) New York Stock Exchange.
A) Nikkei Stock Exchange.
5) The Second Bank of the United States was denied a new charter by A) President Andrew Jackson. B) Vice President John Calhoun. C) President Benjamin Harrison. D) President John Q. Adams.
A) President Andrew Jackson.
75) If the Fed wants to "prick" an asset-pricing bubble driven by a credit boom, what is the primary tool for accomplishing this? A) Raising interest rates B) Lowering interest rates C) Increasing reserve requirements D) Taking a short position in the overpriced asset
A) Raising interest rates
24) Secondary reserves ________. A) can be converted into cash with low transaction costs B) are not easily converted into cash and are, therefore, of secondary importance to banks C) count toward meeting required reserves, but only at a rate of $0.50 per dollar of secondary reserves D) of none of the above.
A) can be converted into cash with low transaction costs
48) Which of the following categories is not part of the Dodd-Frank legislation of 2010? A) capital requirements B) consumer protection C) "Volcker Rule" D) derivatives
A) capital requirements
38) Holding all else constant, when a bank receives the funds for a deposited check, A) cash items in process of collection fall by the amount of the check. B) bank assets increase by the amount of the check. C) bank liabilities decrease by the amount of the check. D) all of the above occur.
A) cash items in process of collection fall by the amount of the check.
2) The monetary base consists of A) currency in circulation and reserves. B) government securities held by the Fed and discount loans. C) government securities held by the Fed and currency in circulation. D) discount loans and reserves.
A) currency in circulation and reserves.
46) The nearer a bond's price is to its par value and the longer the maturity of the bond, the more closely the ________ approximates the ________. A) current yield; yield to maturity B) current yield; coupon rate C) yield to maturity; current yield D) yield to maturity; coupon rate
A) current yield; yield to maturity
4) An open market sale of securities by the Fed will A) decrease liabilities of the Fed and not affect assets of the banking system. B) decrease assets of the nonbank public and decrease assets of the Fed. C) increase liabilities of the banking system and increase assets of the Fed. D) have no effect on assets of the nonbank public but increase liabilities of the Fed. E) decrease assets of the banking system and increase assets of the Fed.
A) decrease liabilities of the Fed and not affect assets of the banking system.
10) The net asset value of a mutual fund is A) determined by subtracting the fund's liabilities from its assets and dividing by the number of shares outstanding. B) determined by calculating the net price of the assets owned by the fund. C) calculated every 15 minutes and used for transactions occurring during the next 15-minute interval. D) calculated as the difference between the fund's assets and its lia
A) determined by subtracting the fund's liabilities from its assets and dividing by the number of shares outstanding.
19) One way for bank regulators to assure depositors that a bank is not taking on too much risk is to require the bank to A) diversify its loan portfolio. B) reduce its equity capital. C) reduce the size of its loan portfolio. D) do both A and B of the above. E) do both B and C of the above.
A) diversify its loan portfolio.
93) Eurodollars are A) dollar-denominated deposits held in banks outside the United States. B) deposits held by U.S. banks in Europe. C) deposits held by U.S. banks in foreign countries. D) dollar-denominated deposits held in U.S. banks by Europeans.
A) dollar-denominated deposits held in banks outside the United States.
72) The McFadden Act of 1927 A) effectively prohibited banks from branching across state lines. B) required that banks maintain bank capital equal to at least 6 percent of their assets. C) effectively required that banks maintain a correspondent relationship with large money center banks. D) did all of the above.
A) effectively prohibited banks from branching across state lines.
20) Over the past twenty years, mutual fund fees have ________, largely because ________. A) fallen; SEC fee disclosure rules have led to greater competition B) risen; investors have learned that funds with high fees provide better performance C) risen; there has been collusion between large mutual fund companies D) fallen; advances in information technology have lowered transaction costs
A) fallen; SEC fee disclosure rules have led to greater competition
68) The Bank of England, as well as the ECB, put price stability first among all goals. This is known as a ________. A) hierarchical mandate B) dual mandate C) singular mandate D) ubiquitous mandate
A) hierarchical mandate
41) A ________ PE may indicate that the market feels the firm's earnings are very ________ risk and is therefore willing to pay a ________ for them. A) high; low; premium B) high; high; discount C) low; low; discount D) high; high; premium
A) high; low; premium
7) A firm will borrow long-term A) if the extra interest cost of borrowing long-term is less than the expected cost of rising interest rates before it retires its debt. B) if the extra interest cost of borrowing short-term due to rising interest rates does not exceed the expected premium that is paid for borrowing long-term. C) if short-term interest rates are expected to decline during the term of the debt. D) if long-term interest rates are expected to decline during the term of the debt.
A) if the extra interest cost of borrowing long-term is less than the expected cost of rising interest rates before it retires its debt.
57) If the Fed uses the federal funds rate as an interest rate target, an increase in the demand for reserves will result in a(n) ________ in ________. A) increase; nonborrowed reserves B) decrease; nonborrowed reserves C) increase; the federal funds interest rate D) decrease; the federal funds interest rate
A) increase; nonborrowed reserves
28) The Federal Reserve will engage in an outright purchase if it wants to ________ reserves ________ in the banking system. A) increase; permanently B) increase; temporarily C) decrease; temporarily D) decrease; permanently
A) increase; permanently
37) Price stability is desirable because A) inflation creates uncertainty, making it difficult to plan for the future. B) everyone is better off when prices are stable. C) price stability increases the profitability of the Fed. D) it guarantees full employment.
A) inflation creates uncertainty, making it difficult to plan for the future.
42) The Federal Deposit Insurance Corporation Improvement Act of 1991 A) instructed the FDIC to come up with risk-based deposit insurance premiums. B) expanded the FDIC's ability to use the "too-big-to-fail" policy. C) instructed the FDIC to wait longer before intervening when a bank gets into trouble. D) did all of the above.
A) instructed the FDIC to come up with risk-based deposit insurance premiums.
43) In its simplest form, a credit default swap provides A) insurance against default in the principle and interest payments of a credit instrument. B) an alternative method for bond issuers to pay principle and interest payments via a swap. C) bond investors with a method to swap interest payments for principle payments during a "credit event." D) the government with a guarantee that certain bond issues will not run into credit problems.
A) insurance against default in the principle and interest payments of a credit instrument.
60) The largest source of bank income is A) interest on loans. B) interest on securities. C) service charges on deposit accounts. D) noninterest income.
A) interest on loans.
37) Unlike most money market securities, commercial paper A) is not generally traded in a secondary market. B) usually has a term to maturity that is longer than a year. C) is not popular with most money market investors because of the high default risk. D) all of the above. E) only A and B of the above.
A) is not generally traded in a secondary market.(p. 264 first full paragraph. A strong secondary market for commercial paper does not exist)
43) So-called fallen angels differ from junk bonds in that A) junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to previously issued bonds which have had their credit ratings fall below Baa. B) junk bonds refer to previously issued bonds which have had their credit ratings fall below Baa, whereas fallen angels refer to newly issued bonds with low credit ratings. C) junk bonds have ratings below Baa, whereas fallen angels have ratings below C. D) fallen angels have ratings below Baa, whereas junk bonds have ratings below C.
A) junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to previously issued bonds which have had their credit ratings fall below Baa.
2) When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of A) moral hazard. B) split incentives. C) ex ante shirking. D) precontractual opportunism.
A) moral hazard.
46) An advantage of an intermediate targeting strategy is that it provides the Fed with A) more timely information regarding the effect of monetary policy. B) a slow adjustment process. C) a target that is precisely correlated with economic activity. D) all of the above. E) only A and B of the above.
A) more timely information regarding the effect of monetary policy.
63) On a bank's income statement, the amount available to keep as retained earnings or pay to the stockholders in dividends is the bank's A) net income. B) net operating income. C) net extraordinary items. D) net interest margin.
A) net income.
56) If the Fed uses the federal funds rate as an interest rate target, fluctuations in the reserves demand curve will cause ________ to fluctuate. A) nonborrowed reserves B) the federal funds interest rate C) Treasury bill interest rates D) the inflation rate
A) nonborrowed reserves
74) A bank A) obtains funds by borrowing and by issuing liabilities. B) makes profits by charging an interest rate on their asset holdings of securities and loans that is lower than the interest and other expenses on their liabilities. C) does both A and B of the above. D) does neither A nor B of the above.
A) obtains funds by borrowing and by issuing liabilities.
78) Before the 1960s, A) over half of the sources of bank funds were obtained through checkable deposits that by law could not pay any interest. B) banks mostly borrowed from other banks to meet their reserve needs. C) both A and B occurred. D) neither A nor B occurred.
A) over half of the sources of bank funds were obtained through checkable deposits that by law could not pay any interest.
22) Treasury bills do not A) pay interest. B) have a maturity date. C) have a face amount. D) have an active secondary market
A) pay interest.
32) Discount loans to healthy banks, who may borrow as much as they wish from the Fed, are called A) primary credit. B) secondary credit. C) seasonal credit. D) lender-of-last-resort credit.
A) primary credit.
35) Credit cards date back to A) prior to World War II. B) just after World War II. C) the early 1950s. D) the late 1950s.
A) prior to World War II.
3) Moral hazard is an important consequence of insurance arrangements because the existence of insurance A) provides increased incentives for risk taking. B) impedes efficient risk taking. C) causes the private cost of the insured activity to increase. D) does both A and B of the above. E) does both B and C of the above
A) provides increased incentives for risk taking.
5) If the Federal Reserve wants to expand reserves in the banking system, it will A) purchase government securities. B) raise the discount rate. C) sell government securities. D) raise reserve requirements.
A) purchase government securities.
5) 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. A) rise B) fall C) become more volatile D) become more stable
A) rise
25) To sell an old bond when interest rates have ________, the holder will have to ________ the price of the bond until the yield to the buyer is the same as the market rate. A) risen; lower B) risen; raise C) fallen; lower D) risen; inflate
A) risen; lower
53) The Federal Reserve's Regulation Q A) set maximum interest rates banks could pay on deposits. B) set minimum interest rates banks could pay on deposits. C) set maximum interest rates banks could charge on loans. D) discouraged disintermediation.
A) set maximum interest rates banks could pay on deposits.
14) An open market purchase A) shifts the supply curve for reserves to the right and causes the federal funds rate to fall. B) shifts the demand curve for reserves to the right and causes the federal funds rate to rise. C) shifts the supply curve for reserves to the left and causes the federal funds rate to rise. D) shifts the demand curve for reserves to the left and causes the federal funds rate to fall.
A) shifts the supply curve for reserves to the right and causes the federal funds rate to fall.
23) The increased integration of financial markets across countries and the need to make the playing field equal for banks from different countries led to the Basel Accord agreement to A) standardize bank capital requirements internationally. B) reduce, across the board, bank capital requirements in all countries. C) sever the link between risk and capital requirements. D) do all of the above.
A) standardize bank capital requirements internationally.
49) In an effort to control the use of derivatives by financial institutions, the Dodd-Frank legislation of 2010 requires ________. A) standardized derivatives products B) over-the-counter trading (instead of exchange trading) of derivatives products C) an increase in counterparty risk D) all of the above
A) standardized derivatives products
24) The largest share of total investment in mutual funds is in A) stock funds. B) hybrid funds. C) bond funds. D) money market funds.
A) stock funds.
38) A smart card is a form of A) stored-value card. B) credit card. C) debit card. D) e-cash card.
A) stored-value card.
40) When there is a mismatch between job requirements and the skills of available workers, the resulting unemployment is called A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) underemployment.
A) structural unemployment.
5) Although the FDIC was created to prevent bank failures, its existence encourages banks to A) take too much risk. B) hold too much capital. C) open too many branches. D) buy too much stock.
A) take too much risk.
50) Bank managers look on reserve requirements as a A) tax on deposits. B) subsidy on deposits. C) subsidy on loans. D) tax on loans.
A) tax on deposits.
36) When a $10 check written on the First National Bank is deposited in an account at the Second National Bank, then A) the liabilities of the First National Bank decrease by $10. B) the reserves of the First National Bank increase by $10. C) the liabilities of the Second National Bank decrease by $10. D) the assets of Second National Bank decrease by $10.
A) the liabilities of the First National Bank decrease by $10.
5) In situations where asymmetric information problems are not severe, A) the money markets have a distinct cost advantage over banks in providing short-term funds. B) the money markets have a distinct cost advantage over banks in providing long-term funds. C) banks have a distinct cost advantage over the money markets in providing short-term funds. D) the money markets cannot allocate short-term funds as efficiently as banks can.
A) the money markets have a distinct cost advantage over banks in providing short-term funds.
14) A basic principle of finance is that the value of any investment is A) the present value of all future net cash flows generated by the investment. B) the undiscounted sum of all future net cash flows generated by the investment. C) unrelated to the future net cash flows generated by the investment. D) unrelated to the degree of risk associated with the future net cash flows generated by the investment.
A) the present value of all future net cash flows generated by the investment.
52) Burdensome regulations, along with inflation and rising interest rates, help to explain A) the rapid pace of financial innovations in banking in the 1960s and 1970s. B) the low rate of bank failures in the 1980s. C) both A and B of the above. D) neither A nor B of the above.
A) the rapid pace of financial innovations in banking in the 1960s and 1970s.
21) When regulators engage in microprudential regulation, they focus on ________. A) the safety and soundness of individual financial institutions B) the credit standards of individual loans C) the safety and soundness of each customer of a financial institution D) the safety and soundness of each asset the financial institution holds
A) the safety and soundness of individual financial institutions
33) Disadvantages of using reserve requirements to control the money supply include A) their overly-powerful impact on the money supply. B) creating potential liquidity problems for banks with high levels of excess reserves. C) their overly-powerful impact on the monetary base. D) all of the above.
A) their overly-powerful impact on the money supply.
9) Governments never issue stock because A) they cannot sell ownership claims. B) the Constitution expressly forbids it. C) both A and B of the above. D) neither A nor B of the above.
A) they cannot sell ownership claims.
44) The main role of investment companies in the money market is to A) trade on behalf of commercial accounts. B) mediate the symmetric information problem between server-lender and borrower-spenders. C) both A and B of the above. D) neither A nor B of the above.
A) trade on behalf of commercial accounts. see chart p.254
85) In a ________ banking system, commercial banks provide a full range of banking, securities, and insurance services, all within a single legal entity. A) universal B) British-style universal C) barrier-free D) seamless
A) universal
11) When the payoff method is used to resolve a failed bank, both large and small depositors are protected from suffering losses.
Answer: FALSE
12) An important lesson from the global financial crisis is that central banks and other regulators should have a laissez-faire attitude and let credit-driven bubbles proceed without any reaction. Intervention is always a mistake.
Answer: FALSE
12) Disintermediation occurs when funds are deposited into banks and lent to borrowers.
Answer: FALSE
12) Since a bank's assets exceed its equity capital, the return on assets always exceeds the return on equity.
Answer: FALSE
13) One factor explaining the rapid growth in mutual funds is that they are financial intermediaries that are not regulated by the federal government.
Answer: FALSE
13) The Dodd-Frank legislation of 2010 finally resolved the status of GSEs such as Freddie Mac.
Answer: FALSE
14) Economies of scope come from increasing the size of a given financial activity and economies of scale come from combining different activities to lower their costs.
Answer: FALSE
16) The current yield on a bond is a good approximation of the bond's yield to maturity when the bond matures in five years or less and its price differs from its par value by a large amount.
Answer: FALSE
17) In general, money market instruments are low-risk, high-yield securities.
Answer: FALSE
17) The secondary market is where new issues of stocks and bonds are introduced.
Answer: FALSE
18) General obligation bonds have specific assets pledged as security or specific sources of revenue allocated for their repayment.
Answer: FALSE
19) The Treasury accepts noncompetitive bids in ascending order of yield until the accepted bids reach the offering amount.
Answer: FALSE
19) Unlike commercial banks, S&Ls can only be chartered by the federal government.
Answer: FALSE
2) Bank holding companies are regulated by the FDIC.
Answer: FALSE
2) Deposits that banks keep in accounts at the Federal Reserve less vault cash is called reserves.
Answer: FALSE
2) The increase in the number of defined contribution pension funds has slowed the growth of mutual funds.
Answer: FALSE
3) The discount rate is an operating target.
Answer: FALSE
3) The existence of large numbers of banks in the United States indicates the presence of vigorous competition.
Answer: FALSE
4) Among the investors in mutual funds, only about 25% cite preparing for retirement as one of their main reasons for holding shares.
Answer: FALSE
6) The future structure of the U.S. banking industry is likely to be characterized by many more smaller banks, as customers demand neighborhood banks operated by people they know personally.
Answer: FALSE
6) The net asset value of a mutual fund is the average market price of the stocks, bonds, and other assets the fund owns.
Answer: FALSE
7) A mutual fund's board of directors picks the securities that will be held and makes buy and sell decisions.
Answer: FALSE
7) Banks are unusual participants in the money market because they buy, but do not sell, money market instruments.
Answer: FALSE
7) Flexibility is a requirement in selecting an intermediate target.
Answer: FALSE
8) According to some economists, Congress made a mistake when it passed the FDICIA of not requiring the FDIC to assess risk-based insurance premiums.
Answer: FALSE
8) Loan loss reserves are an asset on a bank's balance sheet.
Answer: FALSE
9) An open market sale leads to an expansion of reserves and deposits in the banking system and hence to a decline in the monetary base and the money supply.
Answer: FALSE
9) Financial innovation has widened the cost advantages that banks have in acquiring funds, helping to explain why bank profitability has soared in recent years.
Answer: FALSE
9) Most corporate bonds have a face value of $1,000, are sold at a discount, and can only be redeemed at the maturity date.
Answer: FALSE
9) The "too-big-to-fail" policy reduces the adverse selection problem in bank regulation.
Answer: FALSE
9) The market for U.S. Treasury bills is a shallow market because so few individual investors buy T-bills.
Answer: FALSE
2) The primary issuers of capital market securities are local governments and corporations.
Answer: FALSE (Federal and local governments and corporations)
5) Required reserves are insurance against the costs associated with deposit outflows. The higher the costs associated with deposit outflows, the more required reserves banks will want to hold.
Answer: FALSE (the more excess reserves)
6) Most of the time, the interest rate on Treasury notes is below that on money market securities because of their low default risk.
Answer: FALSE (treasury notes are 1-10 maturity. They require higher interest rates because of their interest rate risk)
6) Open market purchases by the Fed cause the federal funds rate to rise.
Answer: FALSE --graph p. 211
1) An objective of the Federal Reserve in its conduct of monetary policy is high employment.
Answer: TRUE
1) Firms and individuals use the money markets primarily to warehouse funds for short periods of time until a more important need or a more productive use for the funds arises.
Answer: TRUE
1) Money market securities are short-term instruments with an original maturity of less than one year.
Answer: TRUE
1) Since their introduction in 1961, negotiable CDs have become an important source of bank funds.
Answer: TRUE
1) The larger the number of shares traded in a stock transaction, the lower the transaction costs per share.
Answer: TRUE
1) To understand banking regulation in the United States, it is helpful to understand the concepts of asymmetric information, adverse selection, and moral hazard.
Answer: TRUE
1) Today, the United States has a dual banking system in which banks supervised by the federal government and banks supervised by the states operate side by side.
Answer: TRUE
10) A better capitalized bank has more to lose when it fails and is less likely to take less risk.
Answer: TRUE
10) The T-bill is not an investment to be used for anything but temporary storage of excess funds because it barely keeps up with inflation.
Answer: TRUE
11) A sinking fund is a requirement in the bond indenture that the firm pay off a portion of the bond issue each year.
Answer: TRUE
11) Hedge funds have a minimum investment requirement of between $100,000 and $20 million, with the typical minimum investment being $1 million.
Answer: TRUE
11) Securitization is the process of transforming illiquid financial assets such as residential mortgages into marketable securities.
Answer: TRUE
11) The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate.
Answer: TRUE
11) The main purpose of federal funds is to provide banks with an immediate infusion of reserves should they be short.
Answer: TRUE
11) The share of bank operating income earned from off-balance-sheet activities has increased over the past two decades.
Answer: TRUE
12) Debentures are long-term unsecured bonds that are backed only by the general creditworthiness of the issuer.
Answer: TRUE
12) In the years just prior to the global financial crisis, mortgage loans were issued to borrowers with no income or employment.
Answer: TRUE
12) The Fed can influence the federal funds rate by adjusting the level of reserves in the banking system.
Answer: TRUE
13) A loan commitment is an agreement to provide a loan up to a certain dollar amount if a customer requests the loan during a specific time period.
Answer: TRUE
13) Commercial paper securities are unsecured promissory notes, issued by corporations, that mature in no more than 270 days.
Answer: TRUE
13) In a leveraged buy-out, a firm greatly increases its debt level by issuing junk bonds to finance the purchase of another firm's stock.
Answer: TRUE
13) The principle underlying Treasury strips is that an investor will earn a higher interest rate when reinvestment risk is eliminated.
Answer: TRUE
14) A banker's acceptance is an order to pay a specified amount of money to the bearer on a given date. Banker's acceptances have been used since the twelfth century.
Answer: TRUE
14) A financial guarantee ensures that the lender (bond purchaser) will be paid both principal and interest in the event the issuer defaults.
Answer: TRUE
14) Nontransaction deposits are the primary source of bank funds.
Answer: TRUE
14) Prior to the global financial crisis, inaccurate ratings provided by credit rating agencies helped promote risk taking throughout the financial system.
Answer: TRUE
14) Whether a fund is organized as a closed- or an open-end fund, is will have the same basic organizational structure.
Answer: TRUE
15) Checkable deposits, a traditional source of low-cost funds for banks, have declined dramatically in importance, falling from over 60 percent of bank liabilities to less than 10 percent today.
Answer: TRUE
15) Interest rates on banker's acceptances are low because the risk of default is very low.
Answer: TRUE
15) Owners cannot write checks on nontransaction deposits, but the interest rate paid on these deposits are usually higher than those on checkable deposits.
Answer: TRUE
15) The Commodity Futures Modernization Act (2000) removed derivative securities, such as credit default swaps, from regulatory oversight.
Answer: TRUE
15) The natural rate of unemployment is not lowered by high inflation, so higher inflation cannot produce lower unemployment or more employment in the long run.
Answer: TRUE
15) The primary purpose of loads is to provide compensation for sales brokers.
Answer: TRUE
16) A change in the financial environment will stimulate a search by financial institutions for innovations that are likely to be profitable.
Answer: TRUE
16) In the short run, price stability often conflicts with the goals of high employment and interest-rate stability.
Answer: TRUE
16) The size of the asset-backed commercial paper market nearly doubled between 2004 and 2007 to about $1 trillion.
Answer: TRUE
17) Reserve requirements that force banks to keep a certain fraction of their deposits as reserves and restrictions on the interest rates that can be paid on deposits have been the major forces behind financial innovation.
Answer: TRUE
18) An alternative corporate structure for U.S. banks that operate overseas is the Edge Act corporation, a special subsidiary engaged primarily in international banking.
Answer: TRUE
2) Because asymmetric information problems in the banking industry are a fact of life throughout the world, bank regulation in other countries is similar to that in the United States.
Answer: TRUE
2) Money market securities include Treasury bills, commercial paper, federal funds, repurchase agreements, negotiable certificates of deposit, banker's acceptances, and Eurodollars.
Answer: TRUE
2) When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called frictional unemployment.
Answer: TRUE
20) Not all commercial banks deal in the secondary money market for their customers.
Answer: TRUE
3) Capital market securities are less liquid and have longer maturities than money market securities.
Answer: TRUE
3) Mutual funds accounted for $5.3 trillion, or 27%, of the $19.5 trillion U.S. retirement market at the beginning of 2013.
Answer: TRUE
3) The failure of one bank can hasten the failure of others in what is referred to as a contagion effect.
Answer: TRUE
3) The term money market is actually a misnomer, because liquid securities are traded in these markets rather than money.
Answer: TRUE
3) When a bank receives additional deposits, it gains an equal amount of reserves; when it loses deposits, it loses an equal amount of reserves.
Answer: TRUE
4) Even when an ATM is owned by a bank, states typically have special provisions that allow wider establishment of ATMs than is permissible for traditional "brick and mortar" branches.
Answer: TRUE
4) Governments never issue stock because they cannot sell ownership claims.
Answer: TRUE
4) The federal funds rate is an operating target.
Answer: TRUE
4) To keep enough cash on hand to meet depositors' demand for withdrawals, banks must engage in liquidity management.
Answer: TRUE
8) Eurodollars are created when deposits in accounts in the United States are transferred to a bank outside the country and are kept in the form of dollars.
Answer: TRUE
8) Money market mutual funds originated when the brokerage firm Merrill Lynch offered its customers an account from which funds could be taken to purchase securities and into which funds could be deposited when securities were sold.
Answer: TRUE
8) Money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds.
Answer: TRUE
8) Most municipal bonds are revenue bonds rather than general obligation bonds.
Answer: TRUE
9) A deferred load is a fee charged when shares in a mutual fund are redeemed.
Answer: TRUE
9) Off-balance-sheet activities consist of trading financial instruments and generating income from fees and loan sales, all of which affect bank profits but are not visible on bank balance sheets.
Answer: TRUE
104) Because their members share a common bond, credit unions are typically quite small; most hold less than ________ of assets. A) $500,000 B) $10 million C) $100 million D) $1 billion
B) $10 million
46) If a bank has $100,000 of deposits, a required reserve ratio of 20 percent, and $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $30,000. B) $25,000. C) $20,000. D) $10,000.
B) $25,000.
15) A stock currently sells for $25 per share and pays $0.24 per year in dividends. What is an investor's valuation of this stock if she expects it to be selling for $30 in one year and requires a 15 percent return on equity investments? A) $30.24 B) $26.30 C) $26.09 D) $27.74
B) $26.30 ((.24/1+.15) + 30/1+.15)
26) Suppose the average industry PE ratio for auto parts retailers is 20. What is the current price of Auto Zone stock if the retailer's earnings per share is projected to be $1.85? A) $21.85 B) $37 C) $10.81 D) $9.25
B) $37
24) Holding other things constant, a stock's value will be highest if its most recent dividend is A) $2.00. B) $5.00. C) $0.50. D) $1.00.
B) $5.00.
23) During QE2, the Fed purchased ________. A) $1.25 trillion in mortgage-backed securities B) $600 billion in long-term Treasury securities C) $40 billion in mortgage-backed securities and $45 billion in long-term Treasuries (to start) D) $500 billion in U.S. corporate debt
B) $600 billion in long-term Treasury securities
31) (I) The market price of a security at a given time is the highest value any investor puts on the security. (II) Superior information about a security increases its value by reducing its risk. A) (I) is true, (II) is false. B) (I) is false, (II) is true. C) Both are true. D) Both are false.
B) (I) is false, (II) is true.
28) (I) Because interest rates on Treasury bills are more volatile than rates on long-term securities, the return on short-term Treasury securities is usually above that on longer-term Treasury securities. (II) A Treasury STRIP separates the periodic interest payments from the final principal repayment. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
B) (I) is false, (II) true.
16) (I) Capital market securities fall into two categories: bonds and stocks. (II) Long-term bonds include government bonds and long-term notes, municipal bonds, and corporate bonds. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
B) (I) is false, (II) true. (capital markets include bonds, stock and mortgages p. 273 introduction)
61) Bank failures and mergers have caused the number of commercial banks in the U.S. to decline from around ________ in the 1970s to below ________ today. A) 25,000; 10,000 B) 15,000; 8,000 C) 25,000; 20,000 D) 15,000; 5,000
B) 15,000; 8,000
69) One factor contributing to the decline in income advantages that banks once had is the increased competition from the commercial paper market, which has grown in size to over ________ percent of commercial and industrial bank loans today. A) 20 B) 30 C) 40 D) 50
B) 30
58) Since 1974, commercial banks' importance as a source of funds for borrowers has shrunk dramatically, from around ________ percent of total credit advanced to near ________ percent by 2012. A) 60; 30 B) 40; 22 C) 25; 20 D) 30; 15
B) 40; 22
100) There are approximately how many commercial banks in the United States currently? A) 5,000 B) 6,200 C) 1,000 D) 1,250
B) 6,200
64) One factor contributing to the decline in cost advantages that banks once had is the decline in the importance of checkable deposits from over ________ percent of banks' source of funds to ________ percent today. A) 70; 30 B) 60; 5 C) 50; 20 D) 40; 15
B) 60; 5
7) At the end of 2012 there were over ________ separate mutual funds with total assets over ________. A) 800; $10 trillion B) 7,500; $13 trillion C) 10,000; $10 trillion D) 1,000; $7 trillion
B) 7,500; $13 trillion
101) Regulations restricting branching have promoted the development of what two financial innovations? A) Bank consolidation and nationwide banking B) Bank holding companies and automated teller machines C) Money market mutual funds and sweep accounts D) Reserve requirements and restrictions on interest paid on deposits
B) Bank holding companies and automated teller machines
22) Which of the following are not reported as assets on a bank's balance sheet? A) Cash items in the process of collection B) Borrowings C) U.S. Treasury securities D) Reserves
B) Borrowings
86) In a ________ banking system, commercial banks engage in securities underwriting, but separate subsidiaries conduct the different activities. Also, banking and insurance are not typically undertaken together in this system. A) universal B) British-style universal C) divided D) compartmentalized E) severable
B) British-style universal
5) Which of the following are reported as liabilities on a bank's balance sheet? A) Reserves B) Checkable deposits C) Loans D) Deposits with other banks
B) Checkable deposits
9) Which of the following statements is false? A) Checkable deposits are usually the lowest-cost source of bank funds. B) Checkable deposits are the primary source of bank funds. C) Checkable deposits are payable on demand. D) Checkable deposits include NOW accounts.
B) Checkable deposits are the primary source of bank funds
34) At the start of 2014, one share of Berkshire Hathaway's A-shares was trading at over $150,000. ________ in an mutual fund gives a small investor access to these shares. A) Liquidity intermediation B) Denomination intermediation C) Diversification D) Managerial expertise
B) Denomination intermediation
11) Which of the following statements about trading operations in an organized exchange is correct? A) Floor traders all deal in a wide variety of stocks. B) In most trades, specialists match buy and sell orders. C) In most trades, specialists buy for or sell from their own inventories. D) The SuperDOT system is used to expedite large trades of over 100,000 shares.
B) In most trades, specialists match buy and sell orders.
87) A major difference between the United States and Japanese banking systems is that A) American banks are allowed to hold substantial equity stakes in commercial firms, whereas Japanese banks cannot. B) Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas American banks cannot. C) bank holding companies are illegal in the United States. D) both A and C of the above E) both B and C of the above
B) Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas American banks cannot.
18) Which of the following are reported as assets on a bank's balance sheet? A) Discount loans from the Fed B) Loans C) Borrowings D) Only A and B of the above
B) Loans
26) Which of the following bank assets are the least liquid? A) Reserves B) Mortgage loans C) Cash items in process of collection D) Deposits with other banks
B) Mortgage loans
17) Which of the following would substitute for discount loans? A) Loans to businesses B) Repurchase agreements C) Investing in Eurodollars D) Loans to bank holding companies E) Reverse repurchase agreements
B) Repurchase agreements
20) Which of the following are reported as assets on a bank's balance sheet? A) Borrowings B) Reserves C) Savings deposits D) Bank capital E) Only A and B of the above
B) Reserves
44) The Fed's monetary policy strategy can be described as follows: A) 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. B) 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. C) 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. D) None of the above.
B) 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.
24) Which of the following statements concerning bank regulation in the United States are true? A) The Office of the Comptroller of the Currency has the primary responsibility for state banks that are members of the Federal Reserve System. B) The Federal Reserve and the state banking authorities jointly have responsibility for state banks that are members of the Federal Reserve System. C) The Office of the Comptroller of the Currency has sole regulatory responsibility over bank holding companies. D) All of the above are true. E) Only A and B of the above are true.
B) The Federal Reserve and the state banking authorities jointly have responsibility for state banks that are members of the Federal Reserve System.
12) Commercial banks are large holders of ________ and are the major issuer of ________. A) negotiable certificates of deposit; U.S. government securities B) U.S. government securities; negotiable certificates of deposit C) commercial paper; Eurodollars D) Eurodollars; commercial paper
B) U.S. government securities; negotiable certificates of deposit
35) When the Federal Reserve was created, its most important role was intended to be A) a storage facility for the nation's gold. B) a lender of last resort. C) a regulator of bank holding companies. D) none of the above.
B) a lender of last resort.
30) If the Fed wants to lower the federal funds interest rate, it will ________ the banking system by ________ securities. A) add reserves to; selling B) add reserves to; buying C) remove reserves from; selling D) remove reserves from; buying
B) add reserves to; buying
46) World Bank research on the effects of deposit insurance concludes that A) adoption of deposit insurance will promote stability and efficiency in the banking systems of emerging-market economies. B) adoption of explicit government deposit insurance is associated with a higher incidence of banking crises. C) adoption of deposit insurance has the greatest benefits in countries that have weaker institutional environments. D) none of the above are true.
B) adoption of explicit government deposit insurance is associated with a higher incidence of banking crises.
30) Regular bank examinations and restrictions on asset holdings indirectly help to reduce the ________ problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from entering the banking industry. A) moral hazard B) adverse selection C) ex post shirking D) post-contractual opportunism
B) adverse selection
6) When bad drivers line up to purchase collision insurance, automobile insurers are subject to the A) moral hazard problem. B) adverse selection problem. C) assigned risk problem. D) ill queue problem.
B) adverse selection problem.
29) The chartering process is especially designed to deal with the ________ problem, and restrictions on asset holdings help to reduce the ________ problem. A) adverse selection; adverse selection B) adverse selection; moral hazard C) moral hazard; adverse selection D) moral hazard; moral hazard
B) adverse selection; moral hazard
35) Which of the following is not an objective of the Securities and Exchange Commission? A) maintain integrity of the securities markets B) advise investors about which particular stocks are good buys C) require firms to provide specific information to investors D) regulate major participants in securities markets
B) advise investors about which particular stocks are good buys
29) Late trading is the practice of allowing orders received ________ to trade at the ________ net asset value. A) before 4:00 PM; 4:00 PM B) after 4:00 PM; 4:00 PM C) after 4:00 PM; next day's D) before 4:00 PM; previous day's
B) after 4:00 PM; 4:00 PM
49) In the usual GNMA pass-through security, the ________ has direct ownership of a pro-rata share of the portfolio of mortgage loans. A) seller B) buyer C) financial institution issuing the mortgage loan D) financial institution securitizing the mortgage loan
B) buyer
6) The riskiest capital market security is A) preferred stock. B) common stock. C) corporate bonds. D) Treasury bonds.
B) common stock.
35) Mutual fund companies frequently offer a number of separate mutual funds called ________. A) indexes B) complexes C) components D) actuaries
B) complexes
11) The Fed is an active participant in money markets mainly because of its responsibility to A) lower borrowing costs to encourage capital investment. B) control the money supply. C) increase the interest income of retirees holding money market instruments. D) assist the Securities and Exchange Commission in regulating the behavior of other money market participants.
B) control the money supply.
18) The ________ rate is the rate of interest that the issuer must pay. A) market B) coupon C) discount D) funds
B) coupon
8) When a bank repays a discount loan to the Fed, there is a(n) ________ in reserves in the banking system and a(n) ________ in the monetary base. A) increase; decrease B) decrease; decrease C) decrease; increase D) increase; increase
B) decrease; decrease
16) Bank loans from the Federal Reserve are called ________ and represent a ________ of funds. A) discount loans; use B) discount loans; source C) fed funds; use D) fed funds; source
B) discount loans; source
69) The Fed puts price stability along with maximum employment as its primary goals. This is known as a ________. A) hierarchical mandate B) dual mandate C) singular mandate
B) dual mandate
98) A form of electronic money used on the Internet to pay for goods and services is A) e-money. B) e-cash. C) a smart card. D) a virtual bank
B) e-cash.
78) A bank with a large credit-card customer base can market other financial products to these customers at a low cost. This is an example of A) economies of scale. B) economies of scope. C) becoming a superregional bank. D) none of the above.
B) economies of scope.
19) The Glass-Steagall Act prohibited commercial banks from A) issuing equity to finance bank expansion. B) engaging in underwriting of and dealing in corporate securities. C) selling new issues of government securities. D) purchasing any debt securities.
B) engaging in underwriting of and dealing in corporate securities.
14) From largest to smallest in terms of total assets, the four classes of mutual funds are A) equity funds, bond funds, hybrid funds, money market funds. B) equity funds, money market funds, bond funds, hybrid funds. C) money market funds, equity funds, hybrid funds, bond funds. D) bond funds, money market funds, equity funds, hybrid funds.
B) equity funds, money market funds, bond funds, hybrid funds.
11) Holding everything else constant, if the federal funds rate rises, then the demand for A) excess reserves rises because they have a higher return. B) excess reserves falls because they have a higher cost. C) required reserves falls because the cost of borrowing from the Fed is relatively higher. D) required reserves rises because the cost of borrowing from the Fed is relatively lower. E) reserves will not change because the Fed sets the level of required reserves.
B) excess reserves falls because they have a higher cost.
12) Holding everything else constant, if the federal funds rate falls, then the demand for A) excess reserves falls because they have a lower return. B) excess reserves rises because they have a lower cost. C) required reserves rises because the cost of borrowing from the Fed is relatively higher. D) required reserves rises because the cost of borrowing from the Fed is relatively lower. E) reserves will not change because the Fed sets the level of required reserves.
B) excess reserves rises because they have a lower cost.
37) Call provisions will be exercised when interest rates ________ and bond values ________. A) rise; rise B) fall; rise C) rise; fall D) fall; fall
B) fall; rise (if market rates fall, your bond, having a higher rate, would sell at a premium)
51) When it comes to choosing an operating target, both the ________ rate and ________ aggregates are easily controllable using the Fed's policy tools. A) federal funds; monetary B) federal funds; reserve C) three-month Treasury bill; monetary D) ten-year Treasury bond; reserve
B) federal funds; reserve
39) When workers voluntarily quit a job or decline a job offer so they can search for a better one, the resulting unemployment is called A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) underemployment.
B) frictional unemployment.
96) In 1975, financial institutions developed financial derivatives that included ________. A) adjustable-rate mortgages B) futures contracts C) financial engineering D) virtual banks
B) futures contracts
46) The advantage of mutual funds is that they A) require no cash up front. B) give investors with relatively small amounts of cash to invest access to large-denomination securities. C) always yield the highest returns. D) both A and B of the above.
B) give investors with relatively small amounts of cash to invest access to large-denomination securities.
29) In the 1950s, the interest rate on three-month Treasury bills fluctuated between 1.0% and 3.5%. In the 1980s, the three-month Treasury bill rate ranged from 5% to over 15%. From this, one could predict that in the 1980s interest-rate risk was ________ and the demand for financial innovation was ________. A) greater; lower B) greater; greater C) lower; lower D) lower; greater
B) greater; greater
16) The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is that the FDIC A) guarantees all deposits, not just those under the $250,000 limit, when it uses the "payoff" method. B) guarantees all deposits, not just those under the $250,000 limit, when it uses the "purchase and assumption" method. C) is more likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. D) does both A and B of the above. E) does both B and C of the above.
B) guarantees all deposits, not just those under the $250,000 limit, when it uses the "purchase and assumption" method.
59) Thrift institutions' importance as a source of funds for borrowers A) has shrunk from around 40 percent of total credit advanced in the late 1970s to below 30 percent today. B) has shrunk from over 20 percent of total credit advanced in the late 1970s to below 10 percent today. C) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 25 percent today. D) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 30 percent today.
B) has shrunk from over 20 percent of total credit advanced in the late 1970s to below 10 percent today.
57) The first step in finding the value of a bond is to A) discount back the cash flows using an interest rate that represents the yield available on other bonds of like risk and maturity. B) identify the cash flows the holder of the bond will receive. C) contact the holder of the bond. D) none of the above.
B) identify the cash flows the holder of the bond will receive.
27) Rising interest-rate risk ________ the ________ financial innovation. A) increased; cost of B) increased; demand for C) reduced; cost of D) reduced; demand for
B) increased; demand for
11) One problem of the too-big-to-fail policy is that it ________ the incentives for ________ by big banks. A) reduces; moral hazard by big banks B) increases; moral hazard by big banks C) reduces; adverse selection by big banks D) increases; adverse selection by big banks
B) increases; moral hazard by big banks
43) Two important characteristics of any financial market are flexibility and A) risk. B) innovation. C) tolerance. D) capital.
B) innovation.
52) If the desired intermediate target is an interest rate, then the preferred operating target will be a(n) ________ variable like the ________. A) interest rate; three-month Treasury bill rate B) interest rate; federal funds rate C) reserve aggregate; monetary base D) reserve aggregate; nonborrowed base
B) interest rate; federal funds rate
33) When you deposit $50 in the First National Bank, A) its liabilities decrease by $50. B) its assets increase by $50. C) its reserves decrease by $50. D) only B and C of the above occur.
B) its assets increase by $50.
42) Bankers' concern regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings from other banks to deal with deposit outflows is an example of A) liability management. B) liquidity management. C) managing interest-rate risk. D) none of the above.
B) liquidity management.
62) The traditional financial intermediation role of banking has been to make ________-term loans and to fund them with ________-term deposits. A) short; long B) long; short C) short; short D) long; long
B) long; short
1) Compared to money market securities, capital market securities have A) more liquidity. B) longer maturities. C) lower yields. D) less risk.
B) longer maturities.
13) The primary function of large diversified brokerage firms in the money market is to A) sell money market securities to the Federal Reserve for its open market operations. B) make a market for money market securities by maintaining an inventory from which to buy or sell. C) buy money market securities from corporations that need liquidity. D) buy T-bills from the U.S. Treasury Department.
B) make a market for money market securities by maintaining an inventory from which to buy or sell.
17) With the creation of the Federal Deposit Insurance Corporation, A) member banks of the Federal Reserve System were given the option to purchase FDIC insurance for their depositors, while nonmember commercial banks were required to buy deposit insurance. B) member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors, while nonmember commercial banks could choose to buy deposit insurance. C) both member and nonmember banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors. D) both member and nonmember banks of the Federal Reserve System could choose, but were not required, to purchase FDIC insurance for their depositors.
B) member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors, while nonmember commercial banks could choose to buy deposit insurance.
2) Money market securities have all the following characteristics except they are not A) short term. B) money. C) low risk. D) very liquid.
B) money.
8) Most mutual funds are structured in two ways. The most common structure is a(n) ________ fund, from which shares can be redeemed at any time at a price that is tied to the asset value of the fund. A(n) ________ fund has a fixed number of nonredeemable shares that are traded in the over-the-counter market. A) closed-end; open-end B) open-end; closed-end C) no-load; closed-end D) no-load; load E) load; no-load
B) open-end; closed-end
70) Hierarchical mandates can cause a problem that Mervyn King, Governor of the Bank of England, refers to as an "inflation nutter," that can lead to large ________. A) inflation spikes B) output fluctuations C) unemployment rates D) economic growth
B) output fluctuations
51) When an old bond's market value is above its par value, the bond is selling at a ________. This occurs because the old bond's coupon rate is ________ the coupon rates of new bonds with similar risk. A) premium; below B) premium; above C) discount; below D) discount; above
B) premium; above
23) If your competitive bid for a Treasury bill is successful, then you will A) certainly pay less than if you had submitted a noncompetitive bid. B) probably pay more than if you had submitted a noncompetitive bid. C) pay the average of prices offered in other successful competitive bids. D) pay the same as other successful competitive bidders.
B) probably pay more than if you had submitted a noncompetitive bid.
6) The primary reason that individuals and firms choose to borrow long-term is to A) reduce the risk that interest rates will fall before they pay off their debt. B) reduce the risk that interest rates will rise before they pay off their debt. C) reduce monthly interest payments, as interest rates tend to be higher on short-term than long-term debt instruments. D) reduce total interest payments over the life of the debt.
B) reduce the risk that interest rates will rise before they pay off their debt.
23) The Securities Acts of 1933 and 1934 did not A) regulate the activities of investment funds. B) require funds to register with the SEC. C) include antifraud rules covering the purchase and sale of fund shares. D) apply to investment funds.
B) require funds to register with the SEC.
31) Discount loans to banks experiencing severe liquidity problems are called A) primary credit. B) secondary credit. C) seasonal credit. D) lender-of-last-resort credit.
B) secondary credit.
44) Corporate bonds are less risky if they are ________ bonds and municipal bonds are less risky if they are ________ bonds. A) secured; revenue B) secured; general obligation C) unsecured; revenue D) unsecured; general obligation
B) secured; general obligation (revenue bonds based on the revenue stream of a project, could default...G.O.s are based on the full faith and credit of the issuer)
48) The current yield is a less accurate approximation of the yield to maturity the ________ the time to maturity of the bond and the ________ the price is from/to the par value. A) shorter; closer B) shorter; farther C) longer; closer D) longer; farther
B) shorter; farther
15) Measured by assets, the most popular type of bond fund is the ________ bond fund. A) state municipal B) strategic income C) government D) high-yield
B) strategic income
30) Market timing A) takes advantage of time differences between the east and west coasts of the United States. B) takes advantage of arbitrage opportunities in foreign stocks. C) takes advantage of the time lag between the receipt and execution of orders. D) is discouraged by the stiff fees mutual funds charge every investor for buying and then selling shares on the same day.
B) takes advantage of arbitrage opportunities in foreign stocks.
20) The actual execution of open market operations is done at A) the Board of Governors in Washington, D.C. B) the Federal Reserve Bank of New York. C) the Federal Reserve Bank of Philadelphia. D) the Federal Reserve Bank of Boston.
B) the Federal Reserve Bank of New York.
66) The most important developments that have reduced banks' cost advantages in the past twenty years include A) the growth of the junk bond market. B) the competition from money market mutual funds. C) the growth of securitization. D) all of the above. E) only A and B of the above.
B) the competition from money market mutual funds.
64) The type of open market operation intended to offset movements in other factors that affect reserves and the monetary base is A) the dynamic open market operations. B) the defensive open market operations. C) the reserve requirements. D) market equilibrium.
B) the defensive open market operations.
30) The most significant change in the economic environment that changed the demand for financial products since 1970 has been A) the aging of the baby-boomer generation. B) the dramatic increase in the volatility of interest rates. C) the dramatic increase in competition from foreign banks. D) the deregulation of financial institutions.
B) the dramatic increase in the volatility of interest rates.
8) The primary issuers of capital market securities include A) the federal and local governments. B) the federal and local governments, and corporations. C) the federal and local governments, corporations, and financial institutions. D) local governments and corporations.
B) the federal and local governments, and corporations.
54) If the Fed uses nonborrowed reserves, a reserve aggregate, as a target, fluctuations in the reserves demand curve will cause ________ to fluctuate. A) nonborrowed reserves B) the federal funds interest rate C) monetary aggregates D) the inflation rate
B) the federal funds interest rate
67) For a given return on assets, the lower the bank capital is, A) the lower the return for the owners of the bank will be. B) the higher the return for the owners of the bank will be. C) the lower the credit risk for the owners of the bank will be. D) both A and C of the above will happen.
B) the higher the return for the owners of the bank will be.
44) When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but instead makes loans, then in the bank's final balance sheet, A) the assets at the bank increase by $800,000. B) the liabilities of the bank increase by $1,000,000. C) the liabilities of the bank increase by $800,000. D) reserves increase by $160,000.
B) the liabilities of the bank increase by $1,000,000.
37) The entry of Sears, AT&T, and GM into the credit card business is an indication of A) government's efforts to deregulate the provision of financial services. B) the rising profitability of credit card operations. C) the reduction in costs of credit card operations since 1990. D) the sale of unprofitable operations by Bank of America and Citicorp.
B) the rising profitability of credit card operations.
2) A major controversy involving the U.S. banking industry in its early years was A) whether banks should both accept deposits and make loans or whether these functions should be separated into different institutions. B) whether the federal government or the states should charter banks. C) what percent of deposits banks should hold as fractional reserves. D) whether banks should be allowed to issue their own bank notes.
B) whether the federal government or the states should charter banks.
55) STRIPS (Separate Trading of Registered Interest and Principal Securities) are also called A) interest-based securities. B) zero-coupon securities. C) leveraged securities. D) covenant securities.
B) zero-coupon securities. (each interest and principle payment becomes a zero coupon bond)
Why was the United States one of the last of the major industrialized countries to have a central bank?
Agricultural and other interests in the US were quite suspicious of centralized power and thus opposed the creation of a central bank
Distinguish between an open and closed-end mutual fund
An open end mutual fund is continuously issuing new shares as new funds are received. A closed end fund only issues shares once
19) (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. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
C) Both are true.
2) (I) Securities that have an original maturity greater than one year are traded in capital markets. (II) The best known capital market securities are stocks and bonds. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
C) Both are true.
24) (I) To sell an old bond when interest rates have risen, the holder will have to discount the bond until the yield to the buyer is the same as the market rate. (II) The risk that the value of a bond will fall when market interest rates rise is called interest-rate risk. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
C) Both are true.
30) (I) Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation. (II) General obligation bonds do not have specific assets pledged as security or a specific source of revenue allocated for their repayment. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
C) Both are true.
39) (I) Callable bonds usually have a higher yield than comparable noncallable bonds. (II) Convertible bonds are attractive to bondholders and sell for a higher price than comparable nonconvertible bonds. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
C) Both are true.
4) (I) Firms and individuals use the capital markets for long-term investments. (II) Capital markets provide an alternative to investment in assets such as real estate and gold. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
C) Both are true.
4) (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. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
C) Both are true.
5) (I) Firms issue common stock in far greater amounts than preferred stock. (II) In a given year, the total volume of stock issued is much less than the volume of bonds issued. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
C) Both are true.
36) (I) Restrictive covenants often limit the amount of dividends that firms can pay the stockholders. (II) Most corporate indentures include a call provision, which states that the issuer has the right to force the holder to sell the bond back. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
C) Both are true. (the indenture is the contract associated with a corporate bond. Corporate bonds usually contain call provision)
27) (I) In most years, the rate of return on short-term Treasury bills is below that on the 20-year Treasury bond. (II) Interest rates on Treasury bills are more volatile than rates on long-term Treasury securities. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
C) Both are true.(short term rates are more volatile than long term rates p.277)
3) ________ intermediation means that small investors can pool their funds with other investors to purchase high face value securities. A) Liquidity B) Financial C) Denomination D) Share
C) Denomination
63) Which type of open market operation is intended to change the level of reserves? A) Defensive open market operations B) Reserve requirements C) Dynamic open market operations D) Market equilibrium
C) Dynamic open market operations
47) Which of the following is not a requirement in selecting an intermediate target? A) Measurability B) Controllability C) Flexibility D) Predictability
C) Flexibility
32) The legislation that separated commercial banking from the securities industry is known as the ________. A) National Bank Act B) Federal Reserve Act C) Glass-Steagall Act D) McFadden Act
C) Glass-Steagall Act
81) The legislation that separated investment banking from commercial banking was the A) National Bank Act. B) Federal Reserve Act. C) Glass-Steagall Act. D) McFadden Act.
C) Glass-Steagall Act.
65) What goals are continually mentioned by central bank officials when discussing the objectives of monetary policy? A) High unemployment B) Instability in foreign exchange markets C) Interest-rate stability D) All of the above
C) Interest-rate stability
39) What is the primary disadvantage of an ETF? A) ETFs tend to have lower management fees than comparable index mutual bonds. B) ETFs usually have no minimum investment amount. C) Investors have to pay a broker commission each time they buy or sell shares. D) None of the above are disadvantages of an ETF.
C) Investors have to pay a broker commission each time they buy or sell shares.
12) Which of the following is checkable deposits? A) Savings accounts B) Small-denomination time deposits C) Money market deposit accounts D) Certificates of deposit
C) Money market deposit accounts
44) Which of the following is least likely to accompany financial consolidation and the development of large, complex banking organizations? A) More financial institutions will be considered too big to fail. B) The government safety net will be extended to include nonbanking activities. C) Moral hazard problems will become less important. D) Banks will have greater incentives and opportunities to take on more risk.
C) Moral hazard problems will become less important.
14) Which of the following are checkable deposits? A) Savings accounts B) Small-denomination time deposits C) Negotiable order of withdrawal accounts D) Certificates of deposit
C) Negotiable order of withdrawal accounts
67) Which of the following statements is correct, concerning price stability as a monetary goal? A) In the long run, inconsistencies exists between the price stability goal and the other goals, such as high unemployment. B) In the short run price stability does not conflict with the goals of high employment and interest-rate stability. C) Neither A nor B is true. D) Both A and B are correct.
C) Neither A nor B is true.
25) The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of government securities, but these purchases or sales are executed by the Federal Reserve Bank of A) Chicago. B) Boston. C) New York. D) San Francisco.
C) New York.
76) In response to an asset-price bubble, macroprudential regulation appears to be the right tool. What is macroprudential regulation? A) Increasing the federal funds rate across the macroeconomy B) The use of tax incentives to capture some of the gains from bubbles C) Regulatory policy to affect what is happening in credit markets in the aggregate D) None of the above is correct.
C) Regulatory policy to affect what is happening in credit markets in the aggregate
75) ________ were once the most common type of nontransaction deposit. A) Checking accounts B) Time deposits C) Savings accounts D) none of the above
C) Savings accounts
4) Because of the abuses by state banks and the clear need for a central bank to help the federal government raise funds during the War of 1812, Congress created the A) First Bank of the United States in 1812. B) Bank of North America in 1814. C) Second Bank of the United States in 1816. D) Federal Reserve System in 1813.
C) Second Bank of the United States in 1816.
22) Which regulatory body charters national banks? A) The Federal Reserve B) The Federal Deposit Insurance Corporation C) The Comptroller of the Currency D) None of the above
C) The Comptroller of the Currency
17) Which of the following is the largest borrower in the money markets? A) Commercial banks B) Large corporations C) The U.S. Treasury D) U.S. firms engaged in foreign trade
C) The U.S. Treasury
9) Which of the following is an advantage to investors of an open-end mutual fund? A) Once all the shares have been sold, the investor does not have to put in more money. B) The investors can sell their shares in the over-the-counter market with low transaction fees. C) The fund agrees to redeem shares at any time. D) The market value of the fund's shares may be higher than the value of the assets held by the fund.
C) The fund agrees to redeem shares at any time.
40) A high price earnings ratio (PE) gives what interpretation? A) The market expects earnings to fall in the future. B) The market feels the firm's earnings are very high risk and are willing to pay a premium for them. C) The market expects the earnings to rise in the future. D) The firm is not paying a dividend.
C) The market expects the earnings to rise in the future.
36) At its inception, the Federal Reserve was intended to be A) the Treasury's banker. B) the issuer of government debt. C) a lender of last resort. D) a regulator of bank holding companies.
C) a lender of last resort.
28) The Federal Reserve can influence the federal funds interest rate by buying securities, which ________ reserves, thereby ________ the federal funds rate. A) adds; raising B) removes; lowering C) adds; lowering D) removes; raising
C) adds; lowering
10) If the FDIC uses the purchase and assumption method to handle a failed bank, A) all deposits will suffer losses. B) small deposits will be paid in full but deposits over the insurance limit will not. C) all deposits will be paid in full. D) none of the above will occur.
C) all deposits will be paid in full.
58) A change in the current yield ________ signals a change in the same direction of the yield to maturity. A) never B) rarely C) always D) often
C) always
91) A special subsidiary of a U.S. bank that is engaged in international banking is called A) an international banking facility. B) an agency office. C) an Edge Act corporation. D) a foreign bank subsidiary.
C) an Edge Act corporation.
97) An electronic machine that allows customers to make deposits, get cash, transfer funds from one account to another, and check balances is A) an automated banking machine. B) the virtual bank. C) an automated teller machine. D) a smart card.
C) an automated teller machine.
22) When investors switch between funds within the same fund family, mutual funds may charge A) a contingent deferred sales charge. B) a redemption fee. C) an exchange fee. D) 12b-1 fees. E) an account maintenance fee.
C) an exchange fee.
31) Late trading and market timing A) allow large, favored investors in a mutual fund to profit at the expense of other investors in the fund. B) hurt ordinary investors by increasing the number of fund shares and diluting the fund's net asset value. C) are both A and B of the above. D) are none of the above.
C) are both A and B of the above.
42) Money market transactions A) do not take place in any one particular location or building. B) are usually arranged purchases and sales between participants over the phone by traders and completed electronically. C) are both A and B of the above. D) are none the the above.
C) are both A and B of the above.
22) The prices of Treasury notes, bonds, and bills are quoted A) as a percentage of the coupon rate. B) as a percentage of the previous day's closing value. C) as a percentage of $100 face value. D) as a multiple of the annual interest paid.
C) as a percentage of $100 face value.
56) Banks fail when the value of bank ________ falls below the value of ________, causing the bank to become insolvent. A) reserves; required reserves B) loans; secondary reserves C) assets; liabilities D) income; expenses
C) assets; liabilities
6) Before 1863, A) federally chartered banks had regulatory advantages not granted to state-chartered banks. B) the number of federally chartered banks grew at a much faster rate than at any other time since the end of the Civil War. C) banks acquired funds by issuing banknotes. D) the Federal Reserve System regulated only federally chartered banks. E) the Comptroller of the Currency regulated both state and federally chartered banks
C) banks acquired funds by issuing banknotes.
50) In general, banks would prefer to meet deposit outflows by ________ rather than ________. A) selling loans; selling securities B) selling loans; borrowing from the Fed C) borrowing from the Fed; selling loans D) "calling in" loans; selling securities
C) borrowing from the Fed; selling loans
1) Activity in money markets increased significantly in the late 1970s and early 1980s because of A) rising short-term interest rates. B) regulations that limited what banks could pay for deposits. C) both A and B of the above. D) neither A nor B of the above.
C) both A and B of the above.
28) The PE ratio approach to valuing stock is especially useful for valuing A) privately held firms. B) firms that don't pay dividends. C) both A and B of the above. D) neither A nor B of the above.
C) both A and B of the above.
42) Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by A) encouraging firms to invest. B) encouraging people to save. C) both A and B of the above. D) neither A nor B of the above.
C) both A and B of the above.
53) Capital market trading occurs in A) the primary market. B) the secondary market. C) both A and B of the above. D) none of the above.
C) both A and B of the above.
24) Under the Basel plan, A) assets and off-balance sheet activities are assigned to various categories to reflect the degree of credit risk. B) a bank's total capital must equal or exceed 8 percent of total risk-weighted assets. C) both of the above occur. D) none of the above occur.
C) both of the above occur.
16) When inflation rose in the late 1970s, A) consumers moved money out of money market mutual funds because their returns did not keep pace with inflation. B) banks solidified their advantage over money markets by offering higher deposit rates. C) brokerage houses introduced highly popular money market mutual funds, which drew significant amounts of money out of bank deposits. D) consumers were unable to take advantage of higher rates in money markets because of the requirement of large transaction sizes.
C) brokerage houses introduced highly popular money market mutual funds, which drew significant amounts of money out of bank deposits.
37) Government bonds are essentially default risk-free, ________ returns. A) and will yield high B) and will yield the highest C) but will have relatively low D) none of the above
C) but will have relatively low
29) The Fed can lower the federal funds interest rate by ________ securities, thereby ________ reserves. A) selling; adding B) selling; lowering C) buying; adding D) buying; lowering
C) buying; adding
17) The largest share of assets held by money market mutual funds is A) Treasury bills. B) certificates of deposit. C) commercial paper. D) repurchase agreements.
C) commercial paper.
2) Preferred stockholders hold a claim on assets that has priority over the claims of A) both common stockholders and bondholders. B) neither common stockholders nor bondholders. C) common stockholders, but after that of bondholders. D) bondholders, but after that of common stockholders.
C) common stockholders, but after that of bondholders
1) During the boom years of the 1920s, bank failures were quite A) uncommon, averaging less than 30 per year. B) uncommon, averaging less than 100 per year. C) common, averaging about 600 per year. D) common, averaging about 2,000 per year.
C) common, averaging about 600 per year.
13) Capital appreciation funds select stocks of ________ and tend to be ________ risky than total return funds. A) large, established companies that pay dividends regularly; more B) large, established companies that pay dividends regularly; less C) companies expected to grow rapidly; more D) companies expected to grow rapidly; less
C) companies expected to grow rapidly; more
8) The possibility that the failure of one bank can hasten the failure of other banks is called the A) bank run effect. B) moral hazard effect. C) contagion effect. D) adverse selection effect.
C) contagion effect.
30) The Federal Reserve will engage in a matched sale-purchase transaction when it wants to ________ reserves ________ in the banking system. A) increase; permanently B) increase; temporarily C) decrease; temporarily D) decrease; permanently
C) decrease; temporarily
63) The process in which people seeking higher interest rates take their money out of financial institutions is called ________. A) capital mobility B) loophole mining C) disintermediation D) deposit jumping
C) disintermediation
16) The supply curve for reserves shifts to the left and the federal funds rate rises when the Fed A) raises reserves requirements. B) does an open market purchase. C) does an open market sale. D) raises the discount rate.
C) does an open market sale.
26) An open market transaction intended to change the level of bank reserves is a A) repurchase agreement. B) reverse repo. C) dynamic operation. D) defensive operation.
C) dynamic operation.
13) Today the United States has a dual banking system in which banks supervised by the ________ and by the ________ operate side by side. A) federal government; municipalities B) state governments; municipalities C) federal government; states D) municipalities; states
C) federal government; states
79) As a result of restrictive banking regulations, the United States A) has too few banks when compared to other industrialized countries. B) has banks that are quite large relative to those in other countries. C) has too many banks when compared to other industrialized countries. D) has both A and B of the above.
C) has too many banks when compared to other industrialized countries.
23) Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves. A) low; short-term B) low; long-term C) high; short-term D) high; long-term
C) high; short-term
58) Bank failure is less likely to occur when a bank A) holds less in U.S. government securities. B) suffers large deposit outflows. C) holds more excess reserves. D) has less bank capital.
C) holds more excess reserves.
33) The most important source of the changes in supply conditions that stimulate financial innovation has been the A) aging of the baby-boomer generation. B) dramatic increase in the volatility of interest rates. C) improvement in information technology. D) dramatic increase in competition from foreign banks. E) deregulation of financial institutions.
C) improvement in information technology.
55) If the Fed uses nonborrowed reserves, a reserve aggregate, as a target, an increase in the demand for reserves will result in a(n) ________ in ________. A) increase; nonborrowed reserves B) decrease; nonborrowed reserves C) increase; the federal funds interest rate D) decrease; the federal funds interest rate
C) increase; the federal funds interest rate
21) Treasury bonds are subject to ________ risk but are free of ________ risk. A) default; interest-rate B) default; underwriting C) interest-rate; default D) interest-rate; underwriting
C) interest-rate; default
35) When you deposit $50 in currency at the Old National Bank, A) its assets increase by less than $50 because of reserve requirements. B) its reserves increase by less than $50 because of reserve requirements. C) its liabilities increase by $50. D) only A and B of the above occur.
C) its liabilities increase by $50.
58) Under inflation targeting, a central bank must pursue policies that A) keep the inflation rate at a target value of zero. B) keep the inflation rate at some specific target value. C) keep the inflation rate within a specific target range. D) lower the inflation rate, provided this can be done without raising the unemployment rate above a specified target value.
C) keep the inflation rate within a specific target range.
30) 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. A) loans; deposits B) securities; deposits C) liabilities; assets D) assets; liabilities
C) liabilities; assets
34) Typically, the interest rate on corporate bonds will be ________ the more restrictions are placed on management through restrictive covenants, because ________. A) higher; corporate earnings will be limited by the restrictions B) higher; the bonds will be considered safer by bondholders C) lower; the bonds will be considered safer by buyers D) lower; corporate earnings will be higher with more restrictions in place
C) lower; the bonds will be considered safer by buyers
35) As a way of stemming the decline in the number of savings and loans and mutual savings banks, the Garn-St. Germain Act of 1982 allowed A) money market certificates. B) money market mutual funds. C) money market deposit accounts. D) negotiable order of withdrawal accounts.
C) money market deposit accounts.
14) The Federal Reserve Act of 1913 required that A) state banks be subject to the same regulations as national banks. B) national banks establish branches in the cities containing Federal Reserve banks. C) national banks join the Federal Reserve System. D) all of the above be done.
C) national banks join the Federal Reserve System.
41) 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 A) frictional rate of unemployment. B) structural rate of unemployment. C) natural rate of unemployment. D) ideal rate of unemployment.
C) natural rate of unemployment.
15) Large-denomination CDs are ________, so that like a bond they can be resold in a ________ market before they mature. A) nonnegotiable; secondary B) nonnegotiable; primary C) negotiable; secondary D) negotiable; primary
C) negotiable; secondary
18) Under usual circumstances, an increase in the discount rate causes A) the federal funds rate to fall. B) the federal funds rate to rise. C) no change in the federal funds rate. D) the supply of reserves to increase. E) the supply of reserves to decrease.
C) no change in the federal funds rate. most changes in the discount rate have no effect on the fed funds rate.
71) The presence of so many commercial banks in the United States is most likely the result of A) consumers' strong preference for dealing with only local banks. B) adverse selection and moral hazard problems that give local banks a competitive advantage over larger banks. C) regulations that restrict the ability of banks to open branches. D) all of the above.
C) regulations that restrict the ability of banks to open branches.
18) In the one-period valuation model, a stock's value falls if the ________ rises. A) dividend B) expected future price C) required return on equity D) current price
C) required return on equity
53) If the desired intermediate target is a monetary aggregate, then the preferred operating target will be a(n) ________ variable like the ________. A) interest rate; three-month Treasury bill rate B) interest rate; federal funds rate C) reserve aggregate; monetary base D) reserve aggregate; nonborrowed reserves
C) reserve aggregate; monetary base
43) When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but instead makes loans, then in the bank's final balance sheet, A) the assets at the bank increase by $200,000. B) the liabilities of the bank increase by $200,000. C) reserves increase by $200,000. D) all of the above occur.
C) reserves increase by $200,000.
64) Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called A) return on assets. B) return after taxes. C) return on equity. D) equity multiplier.
C) return on equity.
27) If the Federal Reserve wants to drain reserves from the banking system, it will A) purchase government securities. B) lower the discount rate. C) sell government securities. D) raise reserve requirements.
C) sell government securities.
6) If the Federal Reserve wants to lower the monetary base and the money supply, it will A) increase bank reserves. B) lower the discount rate. C) sell government securities. D) lower reserve requirements.
C) sell government securities.
28) Conflicts arise in the mutual funds industry because ________ cannot effectively monitor ________. A) investment advisers; directors B) directors; shareholders C) shareholders; investment advisers D) investment advisers; stocks that will outperform the overall market
C) shareholders; investment advisers
99) A financial innovation that enables banks to avoid the "tax" from reserve requirements by taking any balances above a certain amount in a corporation's checking account at the end of the business day and investing them in overnight securities that pay interest is called a ________. A) money market mutual fund B) deposit rate ceiling C) sweep account D) disintermediation
C) sweep account
9) The belief that bank failures were regularly caused by fraud or the lack of sufficient bank capital explains, in part, the passage of A) the National Bank Charter Amendments of 1918. B) the Glass-St. Germain Act of 1982. C) the National Bank Act of 1863. D) none of the above.
C) the National Bank Act of 1863.
47) The driving force behind the securitization of mortgages and automobile loans has been A) the rising regulatory constraints on substitute financial instruments. B) the desire of mortgage and auto lenders to exit this field of lending. C) the improvement in computer technology. D) the relaxation of regulatory restrictions on credit card operations.
C) the improvement in computer technology.
9) The federal funds rate is A) the interest rate on loans from the Fed to a bank. B) the price the Fed pays for government securities. C) the interest rate on loans of reserves from one bank to another. D) the price banks pay the Fed for government securities. E) the interest rate on loans from a bank to the federal government.
C) the interest rate on loans of reserves from one bank to another.
45) In a direct placement A) the issuer bypasses the dealer and sells indirectly to the end investor. B) the dealer sells directly to the end investor. C) the issuer bypasses the dealer and sells directly to the end investor. D) none of the above.
C) the issuer bypasses the dealer and sells directly to the end investor. (this is the correct answer. The answer key incorrectly list the answer as A)
22) When regulators engage in macroprudential regulation, they focus on ________. A) the safety and soundness of the entire financial institution B) the credit standards of all loans held by the financial institution C) the safety and soundness of the financial system in aggregate D) the safety and soundness of each liability of the financial institution
C) the safety and soundness of the financial system in aggregate
68) In the absence of regulation, banks would probably hold A) too much capital, reducing the efficiency of the payments system. B) too much capital, reducing the profitability of banks. C) too little capital, increasing the return on equity. D) none of the above.
C) too little capital, increasing the return on equity.
Why has there been such a dramatic increase in bank holding companies?
Because becoming a bank holding company allows a bank to circumvent branching restrictions since it can own a controlling interest in several banks even if branching is not permitted and engage in other activities related to banking that can be highly profitable
Why was the federal reserve system set up with 12 regional federal reserve banks rather than one central bank, as in other countries?
Because of traditional American hostility to a central bank and centralized authority, the system of 12 regional banks was set up to diffuse power along regional lines.
What special problem do off balance sheet activities present to bank regulators and what have they done about it?
Because off balance sheet activities do not appear on bank balance sheet they cannot be dealt with by simple bank capital requirements which are based on bank assets, such as a leverage ratio. Banking regulators have dealt with this problem by imposing an additional risk based bank capital requirement that requires banks to set aside additional bank capital for different kinds of off balance sheet activities
Why has the development of overnight loan markets made it more likely that banks will hold fewer excess reserves?
Because when a deposit outflow occurs a bank is able to borrow reserves in these overnight loan markets quickly; thus, it does not need to acquire reserves at a high cost by calling in or selling off loans. The presence of overnight loan markets thus reduces the costs associated with deposit outflow, so banks will hold fewer excess reserves.
Why does imposing bank capital requirements on banks help limit risk taking?
Because with higher amounts of capital banks have more to lose if they take on too much risk. Thus capital requirements make it less likely that banks will take on excessive risk.
The Federal Reserve entity that determines monetary policy strategy is the
Board of Governors
The security with the longest maturity is a Treasury
Bond
22) According to the Gordon growth model, what is an investor's valuation of a stock whose current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10 percent over a long period of time and the investor's required return is 15 percent? A) $20 B) $11 C) $22 D) $7.33 E) $4.40
C) $22
24) During QE3, the Fed purchased ________. A) $1.25 trillion in mortgage-backed securities B) $600 billion in long-term Treasury securities C) $40 billion in mortgage-backed securities and $45 billion in long-term Treasuries (to start) D) $500 billion in U.S. corporate debt
C) $40 billion in mortgage-backed securities and $45 billion in long-term Treasuries (to start)
50) The current yield on a $5,000, 8 percent coupon bond selling for $4,000 is A) 5%. B) 8%. C) 10%. D) 20%. E) none of the above.
C) 10%.
49) The current yield on a $6,000, 10 percent coupon bond selling for $5,000 is A) 5%. B) 10%. C) 12%. D) 15%.
C) 12%.
21) Suppose that you purchase a 182-day Treasury bill for $9,850 that is worth $10,000 when it matures. The security's annualized yield if held to maturity is about A) 1.5%. B) 2%. C) 3%. D) 6%.
C) 3%.
20) Suppose that you purchase a 91-day Treasury bill for $9,850 that is worth $10,000 when it matures. The security's annualized yield if held to maturity is about A) 4 percent. B) 5 percent. C) 6 percent. D) 7 percent.
C) 6 percent.
1) Which of the following statements is true? A) A bank's assets are its sources of funds. B) A bank's liabilities are its uses of funds. C) A bank's balance sheet shows that total assets equal total liabilities plus equity capital. D) All of the above are true.
C) A bank's balance sheet shows that total assets equal total liabilities plus equity capital.
1) (I) A share of common stock in a firm represents an ownership interest in that firm. (II) A share of preferred stock is as much like a bond as it is like common stock. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
C) Both are true.
10) (I) The primary issuers of capital market securities are federal and local governments, and corporations. (II) Governments never issue stock because they cannot sell ownership claims. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
C) Both are true.
What bank regulation is designed to reduce adverse selection problems for deposit insurance? Will it always work?
Chartering banks is the bank regulation that helps reduce the adverse selection problem because it attempts to screen proposals for new banks to prevent risk prone entrepreneurs and crooks from controlling them. It will not always work because risk prone entrepreneurs and cooks have incentives to hide their true nature and thus may slip through the chartering process
The _____ rate is the rate of interest that the issuer must pay
Coupon
16) A stock currently sells for $30 per share and pays $1.00 per year 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 a 12 percent return on equity investments? A) $38 B) $33.50 C) $34.50 D) $33.93
D) $33.93
60) Since the late 1970s, thrift institutions' importance as a source of funds for borrowers has shrunk markedly, from above ________ percent of total credit advanced to below ________ percent today. A) 30; 20 B) 30; 15 C) 40; 5 D) 20; 10
D) 20; 10
25) Holding other things constant, a stock's value will be highest if the investor's required return on investments in equity is A) 20%. B) 15%. C) 10%. D) 5%.
D) 5%.
25) Which of the following are important factors in determining the degree and timing of financial innovation? A) Changes in technology B) Changes in financial market conditions C) Changes in regulation D) All of the above E) Only A and B of the above
D) All of the above
36) Equity funds can be placed in which class according to the Investment Company Institute? A) Capital appreciation funds B) World funds C) Total return funds D) All of the above
D) All of the above
40) A bank manager has which of the following concerns? A) To acquire funds at low cost B) To minimize risk by diversifying asset holdings C) To have enough ready cash to meet deposit outflows D) All of the above
D) All of the above
41) Which of the following are primary concerns of a bank manager? A) Maintaining sufficient reserves to minimize the cost to the bank of deposit outflows B) Extending loans to borrowers who will pay high interest rates, but who are also good credit risks C) Acquiring funds at a relatively low cost, so that profitable lending opportunities can be realized D) All of the above
D) All of the above
49) Which of the following is a potential operating target for the Fed? A) Nonborrowed reserves B) The federal funds rate C) The monetary base D) All of the above
D) All of the above
23) Which of the following statements concerning bank regulation in the United States is true? A) The Office of the Comptroller of the Currency has the primary responsibility for national banks. B) The Federal Reserve and the state banking authorities jointly have responsibility for state banks that are members of the Federal Reserve System. C) The Fed has sole regulatory responsibility over bank holding companies. D) All of the above are true. E) Only A and B of the above are true.
D) All of the above are true.
41) Which of the following statements about money market securities are true? A) The interest rates on all money market instruments move very closely together over time. B) The secondary market for Treasury bills is extensive and well developed. C) There is no well-developed secondary market for commercial paper. D) All of the above are true. E) Only A and B of the above are true.
D) All of the above are true.
8) Which of the following statements about the money markets are true? A) Most money market securities do not pay interest. Instead, the investor pays less for the security than it will be worth when it matures. B) Pension funds invest a portion of their assets in the money market to have sufficient liquidity to meet their obligations. C) Unlike most participants in the money market, the U.S. Treasury Department is always a demander of money market funds and never a supplier. D) All of the above are true. E) Only A and B of the above are true.
D) All of the above are true.
9) Which of the following are true statements about participants in the money markets? A) Large banks participate in the money markets by selling large negotiable CDs. B) The U.S. government and corporations borrow in the money markets because cash inflows and outflows are rarely synchronized. C) The Federal Reserve is the single most influential participant in the U.S. money market. D) All of the above are true. E) Only A and B of the above are true.
D) All of the above are true.
14) Which of the following solutions have been proposed to solve the too-big-to-fail problem? A) Break up large, systemically important financial institutions. B) Impose higher capital requirements on large, systemically important financial institutions. C) Do nothing, since Dodd-Frank effectively eliminated the problem. D) All of the above have been proposed.
D) All of the above have been proposed.
18) Which of the following is a feature of index funds? A) They have lower fees. B) They select and hold stocks to match the performance of a stock index. C) They do not require managers to select stocks and decide when to buy and sell. D) All of the above.
D) All of the above.
38) Exchange traded funds (ETFs) have which of the following features? A) They are listed and traded as individual stocks on a stock exchange. B) They are indexed rather than actively managed. C) Their value is based on the underlying net asset value of the stocks held in the index basket. D) All of the above.
D) All of the above.
3) Which of the following statements is false? A) A bank's assets are its uses of funds. B) A bank issues liabilities to acquire funds. C) A bank's assets provide the bank with income. D) Bank capital is an asset on the bank balance sheet.
D) Bank capital is an asset on the bank balance sheet.
66) Which of the following statements is correct, concerning price stability as a monetary goal? A) In the long run, no inconsistency exists between the price stability goal and the other goals, such as high unemployment. B) In the short run price stability often conflicts with the goals of high employment and interest-rate stability. C) Neither A nor B is true. D) Both A and B are correct.
D) Both A and B are correct.
11) (I) The primary issuers of capital market securities are financial institutions. (II) The largest purchasers of capital market securities are corporations. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
D) Both are false.
3) (I) Securities that have an original maturity greater than one year are traded in money markets. (II) The best known money market securities are stocks and bonds. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
D) Both are false.
21) Which of the following are not reported as assets on a bank's balance sheet? A) Cash items in the process of collection B) Deposits with other banks C) U.S. Treasury securities D) Checkable deposits
D) Checkable deposits
50) Which of the following is not an operating target? A) Nonborrowed reserves B) Monetary base C) Federal funds interest rate D) Discount rate E) All are operating targets
D) Discount rate
13) Which of the following statements is false regarding Electronic Communications Networks (ECNs)? A) Archipelago and Instinet are two examples of ECNs. B) Competition from ECNs has forced NASDAQ to cut its fees. C) Traders benefit from lower trading costs and faster service. D) ECNs allow institutional investors, but not individuals, to trade after hours.
D) ECNs allow institutional investors, but not individuals, to trade after hours.
12) Which of the following is not an advantage of Electronic Communications Networks (ECNs)? A) All unfilled orders are available for review by ECN traders. B) Transactions costs are lower for ECN trades. C) Trades are made and confirmed faster. D) ECNs work well for thinly traded stocks.
D) ECNs work well for thinly traded stocks.
32) Which of the following is not a proposal to deal with abuses in the mutual fund industry? A) Strictly enforce the 4:00 PM net asset value rule. B) Make redemption fees mandatory. C) Disclose compensation arrangements for investment advisers. D) Increase the number of dependent directors.
D) Increase the number of dependent directors.
21) Which of the following is most likely to be a no-load fund? A) Value funds B) Hedge funds C) Growth funds D) Index funds
D) Index funds
26) Which of the following is not true regarding the Basel 2 proposal to reform the original 1988 Basel Accord? A) It attempts to link capital requirements more closely to actual risk by expanding the number of risk categories. B) It focuses on assessing the quality of risk management in banking institutions. C) It attempts to improve market discipline by requiring increased disclosure of pertinent information about banks. D) It has been well received by banks and national regulatory agencies.
D) It has been well received by banks and national regulatory agencies.
59) The first country to mandate that its central bank adopt inflation targeting was A) the United States. B) the United Kingdom. C) Canada. D) New Zealand.
D) New Zealand.
6) ________ enables mutual funds to consistently outperform a randomly selected group of stocks. A) Managerial expertise B) Diversification C) Denomination intermediation D) None of the above
D) None of the above
20) Which bank regulatory agency has the sole regulatory authority over bank holding companies? A) The Federal Deposit Insurance Corporation B) The Comptroller of the Currency C) The Federal Bank Holding Company Agency D) The Federal Reserve System
D) The Federal Reserve System
50) An SIV, or structured investment vehicle, is an off-balance-sheet entity that shields a sponsoring institution from risk. What happened to some of these SIVs when they ran into financial problems? A) The SIV sued the sponsoring institution to pay, in full, all liabilities of the SIV. B) The SIV still remained off-balance-sheet, but investors did sue sponsoring institutions. C) Nothing! The SIV status as off-balance-sheet remained, a nice example of a financial structure that worked during the financial crisis. D) Troubled SIVs became an asset of the sponsoring institution — the off-balance-sheet status was meaningless.
D) Troubled SIVs became an asset of the sponsoring institution — the off-balance-sheet status was meaningless.
27) The near collapse of Long Term Capital Management was caused by A) the high management fees charged by the fund's two Nobel Prize winners. B) the fund's high leverage ratio of 20 to 1. C) a sharp decrease in the spread between corporate bonds and Treasury bonds. D) a sharp increase in the spread between corporate bonds and Treasury bonds. E) the fund's shift away from a market-neutral investment strategy.
D) a sharp increase in the spread between corporate bonds and Treasury bonds.
4) The banking industry A) should have an efficiency advantage in gathering information that would eliminate the need for the money markets. B) exists primarily to mediate the asymmetric information problem between saver-lenders and borrower-spenders. C) is subject to more regulations and governmental costs than the money markets. D) all of the above are true. E) only A and B of the above are true.
D) all of the above are true.
59) A bank failure is more likely to occur when A) a bank holds less in U.S. government securities. B) a bank suffers large deposit outflows. C) a bank holds less equity capital. D) all of the above occur. E) only A and B of the above occur.
D) all of the above occur.
79) With large banks beginning to explore ways in which the liabilities on their balance sheets could provide them with reserves and liquidity, this led to A) the expansion of overnight loan markets. B) the development of negotiable CDs. C) the ability of money center banks to acquire funds quickly. D) all of the above occurring.
D) all of the above occurring.
13) Bank reserves can be categorized as A) vault cash and deposits at the Fed. B) required reserves and excess reserves. C) borrowed reserves and nonborrowed reserves. D) all of the above.
D) all of the above.
26) Federal funds are A) usually overnight investments. B) borrowed by banks that have a deficit of reserves. C) lent by banks that have an excess of reserves. D) all of the above. E) only A and B of the above.
D) all of the above.
27) Ways in which bank regulations reduce the adverse selection and moral hazard problems in banking include A) a chartering process designed to prevent crooks from getting control of a bank. B) restrictions that prevent banks from acquiring certain risky assets, such as common stocks. C) high bank capital requirements to increase the cost of bank failure to the owners. D) all of the above. E) only A and B of the above.
D) all of the above.
28) Large fluctuations in interest rates lead to A) substantial capital gains and losses to owners of securities. B) greater uncertainty about returns on investments. C) greater interest-rate risk. D) all of the above.
D) all of the above.
33) Repos are A) usually low-risk loans. B) usually collateralized with Treasury securities. C) low interest rate loans. D) all of the above. E) only A and B of the above.
D) all of the above.
34) A negotiable certificate of deposit A) is a term security because it has a specified maturity date. B) is a bearer instrument, meaning whoever holds the certificate at maturity receives the principal and interest. C) can be bought and sold until maturity. D) all of the above. E) only A and B of the above.
D) all of the above.
36) Commercial paper securities A) are issued only by the largest and most creditworthy corporations, as they are unsecured. B) carry an interest rate that varies according to the firm's level of risk. C) never have a term to maturity that exceeds 270 days. D) all of the above. E) only A and B of the above.
D) all of the above.
57) The growing use and proliferation of ATMs has been stimulated by A) lower transaction costs. B) greater customer convenience. C) declining cost of the ATM equipment. D) all of the above.
D) all of the above.
67) The most important developments that have reduced banks' income advantages in the past twenty years include A) the growth of the commercial paper market. B) the growth of the junk bond market. C) the growth of securitization. D) all of the above. E) only A and B of the above.
D) all of the above.
70) Examples of off-balance-sheet activities include A) loan sales. B) foreign exchange market transactions. C) trading in financial futures. D) all of the above. E) only A and B of the above.
D) all of the above.
72) During the 2007-2009 financial crisis, what actions did the Fed take to limit the scope of the crisis? A) The Fed lowered the spread on the discount rate to 50 basis points, and then to 25. B) The Fed set up the Term Auction Facility to provide further liquidity to banks. C) The Fed purchased assets of Bear Stearns to facilitate the purchase of Bear Stearns by J.P. Morgan. D) all of the above.
D) all of the above.
80) In the late 1960s, A) money market banks no longer needed to depend on checkable deposits as the primary source of bank funds. B) banks aggressively set target goals for their asset growth. C) the new management of liabilities created more flexibility. D) all of the above.
D) all of the above.
25) Federal funds A) are short-term funds transferred between financial institutions, usually for a period of one day. B) actually have nothing to do with the federal government. C) provide banks with an immediate infusion of reserves. D) are all of the above. E) are only A and B of the above.
D) are all of the above.
39) Banker's acceptances A) can be bought and sold until they mature. B) are issued only by large money center banks. C) carry low interest rates because of the very low default risk. D) are all of the above. E) are only A and B of the above.
D) are all of the above.
3) Money market instruments A) are usually sold in large denominations. B) have low default risk. C) mature in one year or less. D) are characterized by all of the above. E) are characterized by only A and B of the above.
D) are characterized by all of the above.
30) A weakness of the PE approach to valuing stock is that it is A) difficult to estimate the constant growth rate of a firm's dividends. B) difficult to estimate the required return on equity. C) difficult to predict how much a firm will pay in dividends. D) based on industry averages rather than firm-specific factors.
D) based on industry averages rather than firm-specific factors.
37) Moral hazard and adverse selection problems increased in prominence in the 1980s A) as deregulation opened up more avenues for savings and loans and mutual savings banks to take on more risk. B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking. C) following an increase in federal deposit insurance from $40,000 to $100,000. D) because of all of the above. E) because of only A and B of the above.
D) because of all of the above.
32) The bond contract that states the lender's rights and privileges and the borrower's obligations is called the A) bond syndicate. B) restrictive covenant. C) bond covenant. D) bond indenture.
D) bond indenture.
38) The Federal Reserve desires interest rate stability because A) it allows for less uncertainty about future planning. B) interest rate volatility often leads to demands to curtail the Fed's power. C) it guarantees full employment. D) both A and B of the above.
D) both A and B of the above.
17) The demand curve for reserves shifts to the left and the federal funds rate falls when the Fed A) decreases reserve requirements or does an open market purchase. B) lowers the discount rate. C) lowers the discount rate or does an open market purchase. D) decreases reserves requirements. E) does an open market sale.
D) decreases reserves requirements.
34) The Depository Institutions Deregulation and Monetary Control Act of 1980 A) approved NOW accounts nationwide. B) imposed uniform reserve requirements. C) mandated the phase out of interest-rate ceilings on deposits. D) did all of the above. E) did only A and B of the above.
D) did all of the above.
41) The Federal Deposit Insurance Corporation Improvement Act of 1991 A) reduced the scope of deposit insurance in several ways. B) limited the FDIC's ability to use the "too-big-to-fail" policy. C) requires the FDIC to intervene earlier when a bank gets into trouble. D) did all of the above.
D) did all of the above.
70) Rising market interest rates in the 1960s and the 1970s, combined with regulated deposit rate ceilings, A) worked in the short-run to give mortgage-issuing institutions a source of low-cost funds. B) led eventually to an outflow of deposits from depository institutions. C) led to financial innovations that worked to avoid these regulations. D) did all of the above. E) did only A and C of the above.
D) did all of the above.
77) The McFadden Act's prohibition against interstate branching A) was weakened by the introduction of shared electronic banking facilities that provide banking services nationwide. B) was weakened by regional compacts that allowed banks to own banks in other states in their region. C) impeded banks' ability to diversify their loans and take advantage of economies of scale. D) did all of the above.
D) did all of the above.
39) The Federal Deposit Insurance Corporation Improvement Act of 1991 A) increased the FDIC's ability to borrow from the Treasury to deal with failed banks. B) reduced the scope of deposit insurance in several ways. C) eliminated governmentally administered deposit insurance. D) did only A and B of the above.
D) did only A and B of the above.
27) The Fed can influence the federal funds interest rate by adjusting the level of reserves available to banks. The Fed can A) lower the federal funds interest rate by adding reserves. B) raise the federal funds interest rate by removing reserves. C) remove reserves by selling securities. D) do all of the above. E) do only A and B of the above.
D) do all of the above.
28) Loans A) are the largest category of bank assets. B) provide most of the bank's revenues. C) earn the highest return of all bank assets. D) do all of the above. E) are only A and B of the above.
D) do all of the above.
32) Government securities dealers frequently engage in repos to A) manage liquidity. B) take advantage of anticipated changes in interest rates. C) lend or borrow for a day or two with what is essentially a collateralized loan. D) do all of the above. E) do only A and B of the above.
D) do all of the above.
35) Restrictive covenants can A) limit the amount of dividends the firm can pay. B) limit the ability of the firm to issue additional debt. C) restrict the ability of the firm to enter into a merger agreement. D) do all of the above. E) do only A and B of the above.
D) do all of the above.
42) Financial guarantees A) are insurance policies to back bond issues. B) are purchased by financially weaker security issuers. C) lower the risk of the bonds covered by the guarantee. D) do all of the above. E) do only A and B of the above.
D) do all of the above.
5) Mutual funds A) pool the resources of many small investors by selling these investors shares and using the proceeds to buy securities. B) allow small investors to obtain the benefits of lower transaction costs in purchasing securities. C) provide small investors a diversified portfolio that reduces risk. D) do all of the above. E) do only A and B of the above.
D) do all of the above.
84) In recent years, commercial banks have been allowed to A) invest in real estate. B) enter certain insurance markets. C) underwrite stocks. D) do all of the above. E) do only A and B of the above.
D) do all of the above.
32) Adjustable-rate mortgages A) benefit homeowners when interest rates are falling. B) reduce financial institutions' interest-rate risk. C) reduce households' risk of having to pay higher mortgage payments when interest rates rise. D) do only A and B of the above.
D) do only A and B of the above.
7) Deposit insurance A) attracts risk-prone entrepreneurs to the banking industry. B) encourages bank managers to take on greater risks than they otherwise would. C) reduces the incentives of depositors to monitor the riskiness of their banks' asset portfolios. D) does all of the above. E) does only A and B of the above.
D) does all of the above.
13) The too-big-to-fail policy A) exacerbates moral hazard problems. B) puts large banks at a competitive disadvantage in attracting large deposits. C) treats large depositors of small banks inequitably when compared to depositors of large banks. D) does only A and C of the above.
D) does only A and C of the above.
49) Banks can protect themselves from the disruption caused by deposit outflows by A) holding excess reserves. B) selling securities. C) "calling in" loans. D) doing all of the above. E) doing only A and B of the above.
D) doing all of the above.
12) The regulatory system that has evolved in the United States whereby banks are regulated at the state level, the national level, or both, is known as a A) bilateral regulatory system. B) tiered regulatory system. C) two-tiered regulatory system. D) dual banking system.
D) dual banking system.
45) If a bank has $1 million of deposits, a required reserve ratio of 20 percent, and $300,000 in reserves, it need not rearrange its balance sheet if there is a deposit outflow of A) $50,000. B) $75,000. C) $150,000. D) either A or B of the above.
D) either A or B of the above.
72) The danger of banks engaging in activities such as trading in financial futures and interest-rate swaps is that these activities allow banks to A) increase profits. B) decrease risks. C) avoid bank regulations. D) engage in speculation.
D) engage in speculation.
62) On a bank's income statement, the provision for loan losses is an ________ item and represents the amount of ________ in the bank's loan loss reserves. A) income; decrease B) income; increase C) expense; decrease D) expense; increase
D) expense; increase
17) The ________ value of a bond is the amount that the issuer must pay at maturity. A) market B) present C) discounted D) face
D) face
19) If the Fed increases reserve requirements, the demand for reserves ________ and the equilibrium federal funds rate ________. A) increases; drops B) decreases; rises C) decreases; drops D) increases; rises
D) increases; rises p. 211
77) Bank capital A) is raised by selling new equity. B) is a cushion against a drop in the value of its assets. C) comes from retained earnings. D) is all of the above.
D) is all of the above.
44) High-yield bonds rated below investment grade by the bond-rating agencies are frequently referred to as ________. A) municipal bonds B) Yankee bonds C) "fallen angels" D) junk bonds
D) junk bonds
12) The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely. A) small; fewer B) small; greater C) large; fewer D) large; greater
D) large; greater
54) When disintermediation occurs, the banking system ________ deposits and bank lending ________. A) gains; increases B) gains; decreases C) loses; increases D) loses; decreases
D) loses; decreases (p.459)
7) Before 1863, A) the Federal Reserve System regulated only federally chartered banks. B) the Comptroller of the Currency regulated both state and federally chartered banks. C) the number of federally chartered banks grew at a much faster rate than at any other time since the end of the Civil War. D) none of the above occurred.
D) none of the above occurred.
34) The Fed is reluctant to use reserve requirements to control the money supply because A) of their overly-powerful impact on the money supply. B) they have the potential to create liquidity problems for banks with low excess reserves. C) frequent changes in reserve requirements complicate liquidity management for banks. D) of all of the above. E) of only A and B of the above.
D) of all of the above.
36) A share of common stock in a firm represents an ownership interest in that firm and allows stockholders to A) vote. B) receive dividends. C) receive interest payments. D) only A and B of the above.
D) only A and B of the above.
32) When you deposit $50 in the First National Bank, A) its liabilities decrease by $50. B) its assets increase by $50. C) its reserves increase by $50. D) only B and C of the above occur.
D) only B and C of the above occur.
83) The Riegle-Neal Act of 1994 A) required all banks to become universal banks. B) removed ceilings on bank deposit interest rates. C) allowed banks to underwrite insurance and securities and engage in real estate activities. D) overturned prohibitions on interstate banking and branching.
D) overturned prohibitions on interstate banking and branching.
24) If your noncompetitive bid for a Treasury bill is successful, then you will A) certainly pay less than if you had submitted a competitive bid. B) certainly pay more than if you had submitted a competitive bid. C) pay the average of prices offered in other noncompetitive bids. D) pay the same as other successful noncompetitive bidders.
D) pay the same as other successful noncompetitive bidders.
9) If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses. A) payoff; large B) payoff; no C) purchase and assumption; large D) purchase and assumption; no
D) purchase and assumption; no
61) An open market ________ leads to a(n) ________ of reserves and deposits in the banking system and hence to a(n) ________ of the monetary base and the money supply. A) sale; expansion; contraction B) purchase; expansion; contraction C) sale; expansion; expansion D) purchase; expansion; expansion
D) purchase; expansion; expansion
31) 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. A) increase; encouraged B) increase; discouraged C) reduce; encouraged D) reduce; discouraged
D) reduce; discouraged
62) Regulations making it obligatory for depository institutions to keep a certain fraction of their deposits in accounts with the Fed are A) open market operations. B) federal funds rate. C) required reserve ratio. D) reserve requirements.
D) reserve requirements.
60) Banks' holding of deposits in accounts with the Fed, plus currency that is physically held in banks are called A) the monetary base. B) government securities. C) open market operations. D) reserves.
D) reserves.
18) Investment banking activities of the commercial banks were blamed for many bank failures. This led to A) the passage of the National Bank Charter Amendments Act of 1918. B) the passage of the Garn-St. Germain Act of 1982. C) the passage of the National Bank Act of 1863. D) the passage of the Glass-Steagall Act of 1933. E) the establishment of the Federal Deposit Insurance Corporation in 1933.
D) the passage of the Glass-Steagall Act of 1933.
20) Which of the following is not an element of the Gordon growth model of stock valuation? A) the stock's most recent dividend paid B) the expected constant growth rate of dividends C) the required return on investments in equity D) the stock's expected future price
D) the stock's expected future price
19) A deferred-load mutual fund charges a commission A) when shares are purchased. B) when shares are sold. C) both when shares are purchased and when they are sold. D) when shares are redeemed.
D) when shares are redeemed.
Long term unsecured bonds that are backed by only the general creditworthiness of the issuer are called
Debentures
"Unemployment is a bad thing and the government should make every effort to eliminate it." Agree or disagree
Disagree. Some unemployment is beneficial to the economy because the availability of vacant jobs makes it more likely that a worker will find the right job and that the employer will find the right worker for the job.
21) During 2007 as the global financial crisis started, the Fed implemented several new lending programs to increase liquidity, including ________. A) expansion of the discount window B) setting up the Term Auction Facility, making loans through competitive auctions C) lending to investment banks D) only A and B above. E) A, B, and C, are all correct.
E) A, B, and C, are all correct.
13) Which of the following are not checkable deposits? A) Savings accounts B) Small-denomination time deposits C) Negotiable order of withdrawal accounts D) All of the above E) Only A and B of the above
E) Only A and B of the above
19) Which of the following are reported as assets on a bank's balance sheet? A) Cash items in the process of collection B) Deposits with other banks C) Checkable deposits D) Bank capital E) Only A and B of the above
E) Only A and B of the above
7) Which of the following statements about the money markets are true? A) Not all commercial banks deal for their customers in the secondary market. B) Money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds. C) The single most influential participant in the U.S. money market is the U.S. Treasury Department. D) All of the above are true. E) Only A and B of the above are true.
E) Only A and B of the above are true.
75) Which of the following are true statements concerning bank holding companies? A) Bank holding companies own almost all large banks. B) Bank holding companies have experienced dramatic growth in the past twenty-five years. C) Through a loophole in the McFadden Act, bank holding companies have successfully evaded interstate branching restrictions. D) All of the above are true. E) Only A and B of the above are true.
E) Only A and B of the above are true.
55) Which of the following statements is an accurate description of modern liability management? A) Greater flexibility in liability management has allowed banks to increase the proportion of their assets held in loans. B) New financial instruments enable banks to acquire funds quickly. C) The introduction of negotiable CDs have significantly reduced the percentage of funds that banks borrow from one another to finance loans. D) All of the above have occurred since 1960. E) Only A and B of the above have occurred since 1960.
E) Only A and B of the above have occurred since 1960.
35) Negotiable certificates of deposit A) are bearer instruments because their holders earn the interest and principal at maturity. B) typically have a maturity of one to four months. C) are usually denominated at $100,000. D) are all of the above. E) are only A and B of the above.
E) are only A and B of the above.(denominations range from 100K to 10M)
38) Moral hazard and adverse selection problems increased in prominence in the 1980s A) as deregulation opened up more avenues for savings and loans and mutual savings banks to take on more risk. B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking. C) following a decrease in federal deposit insurance from $100,000 to $40,000. D) because of all of the above. E) because of only A and B of the above.
E) because of only A and B of the above.
73) When a bank sells all or part of the cash stream from a specific loan, A) it removes the loan from its balance sheet. B) it usually does so at a loss. C) it usually does so at a profit. D) both A and B of the above occur. E) both A and C of the above occur.
E) both A and C of the above occur.
88) Major differences between the United States and Japanese banking systems include: A) American banks are allowed to hold substantial equity stakes in commercial firms, whereas Japanese banks cannot. B) Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas American banks cannot. C) bank holding companies are illegal in Japan. D) both A and C of the above. E) both B and C of the above.
E) both B and C of the above.
11) The National Banking Act of 1863, and subsequent amendments to it, A) created a banking system of federally chartered banks. B) established the Office of the Comptroller of the Currency. C) broadened the regulatory powers of the Federal Reserve. D) did all of the above. E) did only A and B of the above.
E) did only A and B of the above.
40) The Federal Deposit Insurance Corporation Improvement Act of 1991 A) reduced the scope of deposit insurance in several ways. B) eliminated restrictions on nationwide banking. C) allowed well-capitalized banks to do some securities underwriting. D) did only A and B of the above. E) did only A and C of the above.
E) did only A and C of the above.
31) Adjustable-rate mortgages A) protect households against higher mortgage payments when interest rates rise. B) keep financial institutions' earnings high even when interest rates are falling. C) have many attractive attributes, explaining why so few households now seek fixed-rate mortgages. D) do only A and B of the above. E) do none of the above.
E) do none of the above.
17) The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is that the FDIC A) guarantees all deposits, not just those under the $250,000 limit, when it uses the "payoff" method. B) guarantees all deposits, not just those under the $250,000 limit, when it uses the "purchase and assumption" method. C) is less likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. D) does both A and B of the above. E) does both B and C of the above.
E) does both B and C of the above.
4) A bank's balance sheet A) shows that total assets equal total liabilities plus equity capital. B) lists sources and uses of bank funds. C) indicates whether or not the bank is profitable. D) does all of the above. E) does only A and B of the above.
E) does only A and B of the above.
18) Regulators attempt to reduce the riskiness of banks' asset portfolios by A) limiting the amount of loans in particular categories or to individual borrowers. B) prohibiting banks from holding risky assets such as common stocks. C) establishing a minimum interest rate floor that banks can earn on certain assets. D) doing all of the above. E) doing only A and B of the above.
E) doing only A and B of the above.
54) A bank can reduce its total amount of loans outstanding by A) "calling in" loans; that is, by not renewing some loans when they come due. B) selling loans to other banks. C) selling loans to the Federal Reserve. D) doing all of the above. E) doing only A and B of the above.
E) doing only A and B of the above.
6) Brokerage firms that offered money market security accounts in the 1970s had a cost advantage over banks in attracting funds because the brokerage firms A) were not subject to deposit reserve requirements. B) were not subject to the deposit interest rate ceilings. C) were not limited in how much they could borrow from depositors. D) had the advantage of all the above. E) had the advantage of only A and B of the above.
E) had the advantage of only A and B of the above.
26) Hedge funds are A) low risk because they are market-neutral. B) low risk if they buy Treasury bonds. C) low risk because they hedge their investments. D) high risk because they are market-neutral. E) high risk, even though they may be market-neutral.
E) high risk, even though they may be market-neutral.
8) To list on the NYSE, a firm must A) have earnings of at least $10 million per year. B) have at least $500 million in outstanding debt. C) have a total of $100 million in market value. D) meet all of the above requirements. E) meet A and C of the above requirements.
E) meet A and C of the above requirements.
37) When a $10 check written on the First National Bank is deposited in an account at the Second National Bank, then A) the liabilities of the First National Bank decrease by $10. B) the liabilities of the Second National Bank increase by $10. C) the reserves of the First National Bank increase by $10. D) all of the above occur. E) only A and B of the above occur.
E) only A and B of the above occur.
39) Holding all else constant, when a bank receives the funds for a deposited check, A) cash items in process of collection fall by the amount of the check. B) bank assets remain unchanged. C) bank liabilities decrease by the amount of the check. D) all of the above occur. E) only A and B of the above occur.
E) only A and B of the above occur.
14) Individuals and households frequently purchase capital market securities through financial institutions such as A) mutual funds. B) pension funds. C) money market mutual funds. D) all of the above. E) only A and B of the above.
E) only A and B of the above.
20) Banks do not want to hold too much capital because A) they do not bear fully the costs of bank failures. B) higher returns on equity are earned when bank capital is smaller, all else equal. C) higher capital levels attract the scrutiny of regulators. D) all of the above. E) only A and B of the above.
E) only A and B of the above.
34) Examples of financial services that became practical realities as the result of new computer technology include A) credit cards. B) electronic banking facilities. C) checking accounts. D) all of the above. E) only A and B of the above.
E) only A and B of the above.
36) A firm issuing credit cards earns income from A) loans it makes to credit card holders. B) payments made to it by stores on credit card purchases. C) payments made to it by manufacturers of the products sold in stores on credit card purchases. D) all of the above. E) only A and B of the above.
E) only A and B of the above.
38) A banker's acceptance is A) used to finance goods that have not yet been transferred from the seller to the buyer. B) an order to pay a specified amount of money to the bearer on a given date. C) a relatively new money market security that arose in the 1960s as international trade expanded. D) all of the above. E) only A and B of the above.
E) only A and B of the above.
65) The most important developments that have reduced banks' cost advantages in the past twenty years include A) the elimination of Regulation Q ceilings. B) the competition from money market mutual funds. C) the growth of securitization. D) all of the above. E) only A and B of the above.
E) only A and B of the above.
48) The bundling of mortgages into a saleable security (usually for large institutional investors) is called ________. A) disintermediation B) quasi-intermediation C) futures bundling D) hedge optioning E) securitization
E) securitization
Do you think that eliminating or limiting the amount of deposit insurance would be a good idea?
Eliminating or limiting the amount of deposit insurance would help reduce the moral hazard of excess risk taking on the part of banks. It would, however, make bank failures and panics more likely so it might not be a very good idea.
How does an index fund differ from an actively managed fund?
Index funds are not actively managed. They simply hold the stocks in the index. They usually have significantly lower fees than actively managed funds
Federal Reserve independence is thought to
Introduce longer-run considerations to monetary policymaking
What are the primary services that an investment banker will provide a firm issuing securities?
Investment bankers offer advice, help with filing documents, and assistance with the marketing issue
Discuss why a mutual fund family may find it beneficial to offer 50 to 60 different stock mutual funds
Investors have different job objectives, goals, and tastes in securities. Mutual funds attempt to offer a selection of funds to attract as many dollars as possible. Each different fund will have some attribute that separates it from others in the family
Contrast investors use of capital markets with their use of money markets
Investors use capital markets for long-term investment purposes. they use money markets, which have lower yields, primarily for temporary or transaction purposes.
Is it better for a security issue to be fully subscribed or oversubscribed?
It is better to be fully subscribed because oversubscription indicates that the investment bankers priced the security too low
"The commercial banking industry in Canada is less competitive than the commercial banking industry in the US because in Canada only a few large banks dominate the industry while in the US there are around 8,175 commercial banks." True, false, uncertain?
False. Although there are many more banks in the US than Canada, this does not mean the American banking system is more competitive. The reason for the large number of US banks is anticompetitive regulations such as restrictions on banking
"Bank managers should always seek the highest return possible on their assets" True, false, or uncertain?
False. If an asset has a lot of risk a bank manager might not want to hold it even if it has a higher return than other assets. Thus a bank manager has to consider risk as well as the expected return when deciding to hold an asset.
"Discounting is no longer needed because the presence of the FDIC eliminates the possibility of bank panics." True, false, uncertain?
False. The FDIC would not be effective in eliminating bank panics without Fed discounting to troubled banks in order to keep bank failures from spreading.
Who issues federal funds, and what is the usual purpose of these funds?
Federal funds are sold by banks to other banks. They are used to invest excess reserves and to raise reserves if a bank is short.
Banks required to be members of the Federal Reserve System
Federally charted banks
Who issues commercial paper and for what purpose?
Large businesses with very good credit standings sell commercial paper to raise short term funds. The most common use of these funds is to extend short term loans to customers for the purchase of the firms products.
Why are more funds from property and casualty insurance companies than funds from life insurance companies invested in the money markets?
Life insurance companies can invest for the long term because the timing for their liabilities is known with reasonable accuracy. Property and casualty insurance companies cannot predict the natural disasters that cause large payouts on policies.
What distinguishes a hedge fund from other types of mutual funds?
Hedge funds typically require very large investments, do not allow withdrawals, and charge very high fees
What is the difference between a hostile takeover and a merger?
In a hostile takeover, the target firm does not want control to pass to acquiring firm and so its management makes every effort to prevent the takeover from happening. In a merger, both sides work together to expedite the union of the firms
Distinguish between competitive bidding and non competitive bidding for treasury stocks
In competitive bidding for securities, buyers submit bids. In a noncompetitive bidder accepts the average of the rate paid by the competitive bidders.
Do you think that removing the impediments to a nationwide banking system will be beneficial to the economy?
In general, yes. A national banking system will enable banks to diversify their loan portfolios better, thus decreasing the likelihood of bank failures. In addition it may make banks and hence the economy more efficient and will help increase banks profitability which will make them healthier.
A discount loan by the Fed to a bank causes a(n) _____ in reserves in the banking system and a(n) _____ in the monetary base
Increase; increase
How could market value accounting for bank capital requirements benefit the economy? How difficult would it be to implement?
Market-value accounting for bank capital would let the deposit insurance agency know quickly is a bank was falling below its capital requirement so that it could be closed down before it led to substantial losses for the insurance agency. Also it would help keep banks from operating with negative capital when the moral hazard problem becomes especially severe and the bank takes on excessive risk. However, making accurate market-value calculations of bank capital is a complex task since it would require some estimate and approximations. However, even if not fully accurate, if market-vaue accounting provides a more accurate assessment of bank capital than historical-cost accounting, it would lead to lower losses from the deposit insurance agency.
What purpose initially motivated Merrill Lynch to offer money market mutual funds to its customers?
Merrill Lynch initially felt that it could better service its regular customers by making it easier to buy and sell securities from an account held at the brokerage house. The brokerage could offer a market invest rate on these funds by investing them in money markets.
Is a treasury bond issued 29 years ago with six months remaining before it matures a money market interments?
Money market securities have an original maturity of less than one year, so the bond would not be considered a money market securities.
How do disclosure requirements help limit excessive risk taking by banks?
More public information about the risks incurred by banks and the quality of their portfolio helps stockholders, creditors, and depositors to evaluate and monitor banks and pull their funds out if the banks are taking on too much risk. Thus, in order to prevent this from happening banks are likely to take on less risk and this makes bank failures less likely.
If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don't have any excess reserves to loan out? Why or why not? What options are available for you to provide the funds your customer needs?
No. When you turn a customer down you may lose that customers business forever which is extremely costly. Instead, you might go out and borrow from other banks, corporations, or the Fed to obtain duns so that you can make the customers loan. Alternatively, you might sell negotiable CDs or some of your securities to acquire necessary funds.
Treasury bills do not
Pay interest
What bank regulations are designed to reduce moral hazard problems created by deposit insurance? Will they completely eliminate the moral hazard problem?
Regulations that restricts banks from holding risky assets directly decrease the moral hazard of risk taking by the bank. Requirement that force banks to have a large amount of capital also decrease the banks incentives for risk taking because banks now have more to lose if they fail. Such regulations will not completely eliminate moral hazard problem because bankers have incentives to hide their holdings or risky assets from the regulators and to overstate the amount of their capital
What was he motivation behind legislation separating commercial banking from investment banking?
Regulators felt that investment banking was riskier and had led to bank failures during the great depression
"The federal reserve system resembles the US constitution in that it was designed with many checks and balances. Discuss
Like the US constitution, the federal reserve system, originally establish by the federal reserve act, has many checks and balances and is a peculiar American institution. The ability of the 12 regional banks to affect discount policy was viewed as a check on the centralized power of the board of governors, just as states rights are a check on the centralized power of the federal government. The provision that there be three types of directions ( A B C) representing difference groups (professional bankers, business people, and the public) was again intended to prevent any group from dominating the Fed. The Fed's indolence of the federal government and the setting up of the federal reserve banks as incorporated institutions were further intended to restrict government power over the banking industry.
What is meant by liquidity intermediation?
Liquidity intermediation is allowing investors to redeem their shares at any time, despite long-term holdings
What features of mutual funds and the investment environment have led to mutual funds rapid growth in the last two decades?
Liquidity intermediation, denomination intermediation, ease of diversification, cost advantages, and the growth of defined contribution pension plans
10) A stock's market value will be higher the higher its expected dividend stream is, all else being equal.
TRUE
11) The Gordon growth model assumes that a stock's dividend grows at a constant rate forever.
TRUE
13) About 95% of orders to buy or sell on the NYSE are executed using SuperDOT.
TRUE
2) In over-the-counter markets, dealers increase the liquidity of thinly traded securities.
TRUE
5) Common stock is the riskiest corporate security, followed by preferred stock and then bonds.
TRUE
6) The Enron financial scandal increased uncertainty about the quality of accounting information and as a result, increased required return on investment in stocks.
TRUE
8) The Securities and Exchange Commission requires firms to submit various documents to increase the flow of information to investors but does not verify the accuracy of that information.
TRUE
Distinguish between a term security and a demand security
Term securities have a specific maturity date (6 month CD). Demand securities can be redeemed at any time (Checking account).
Does the federal reserve directly settle federal funds interest rate?
The Federal Reserve cannot directly set the federal funds rate of interest. It can influence the interest rate by adding funds to or withdrawing reserves from the economy.
Why does the US government use the money markets?
The US government sells large numbers of securities in the money markets to support government spending. Over the past several decades, the government has spent more each year that it received in tax revenues. It makes up the difference by borrowing. Part of what it borrows comes from money markets.
What are the costs and befits of a too big to fail policy?
The benefits are that it makes panics less likely. The costs are that it increases the incentives of moral hazard by big banks who know that depositors do not have incentives to monitor the bank's risk-taking activities. In addition, it is an unfair policy because it discriminates against small banks
The benefits of using Fed discount operations to prevent bank panics are straightforward. What are the costs?
The costs are that banks that deserve to go out of business because of poor management may survive because of the Fed discounting to prevent panics. This might lead to an ineffective banking system with many poorly run banks.
How could higher deposit insurance premiums for banks with riskier assets benefit the economy?
The economy would benefit from reduced moral hazard; that is, banks would not want to take on too much risk because doing so would increase their deposit insurance premiums. The problem is, however, that it is difficult to monitor the degree of risk in bank assets because often only the bank making the loans knows how risky they are
If reserve requirements were eliminated in the future, as some economists advocate, what effects would this have on the size of money market mutual funds?
The elimination of reserve requirements would decrease the size of money market mutual funds because banks could then offer higher interest rates on their deposits; funds would flow out of money market mutual funds into banks
Which goals of the Fed frequently conflict?
The goal of price stability often conflicts with the goal of high economic growth and employment and interest rate stability. When the economy is expanding along with employment, inflation may rise. In order to pursue the goal of rice stability the Fed may have to pursue contractionary anti inflationary policy that conflicts with the goal of high employment and economic growth. Similarly when the central bank wants to pursue tight monetary policy and raise interest rates in order to contain inflation, this pursuit of the goal of price stability may conflict with the goal of interest rate stability.
Why have banks been losing income advantages on their assets in recent years?
The growth of the commercial paper market and the development of the junk bond market meant that corporations were not able to issue securities rather than borrow from banks, thus eroding the competitive advantage of banks on the lending side. Securitization has enable other financial institutions to originate loans, again taking the away some of the banks loan business
In the one-period valuation model, a stock's value will be higher
The higher the expected future price is
Why would an investment banker advise a firm to issue a security using best efforts rather than underwriting?
The investment banker and the firm may not be able to agree on a price or the issue may be too small for the investment banker to want to invest the time and effort needed to arrive at price
What characteristics define money markets?
The money markets can be characterized as having securities that trade in one year or less, are of large denomination, and are very liquid.
Why have banks been losing cost advantages in acquiring funds in recent years?
The rise of inflation and the resulting higher interest rates on alternatives to checkable deposits meant that banks had a big shrinkage in this low-cost way of raising funds. The innovation of money market mutual funds also meant that the banks lost checking account business. The abolishment of Regulation Q and the appearance of NOW accounts did help decrease disintermediation but raised the cost of funds for American banks, which now had to pay higher interest rates on checkable and other deposits. Foreign banks were also able to tap a large pool of domestic savings, thereby lowering their cost of funds relative to american banks
As interest rates in the market change over time, the market price of bonds rises and falls. The change in the value of bonds due to change in interest rates is a risk incurred by bond investors. What is this risk called?
The risk that a bond's price will change due to changes in market interest rates is called INTEREST RISK RATE.
What valuable service do dealers provide that facilitates transaction trading and keeping the markets liquid?
They make a market by standing ready to buy or sell securities
"Banking has become a more dynamic industry because of more active liability management" True, false, or uncertain?
True. Banks can now pursue new loan business much more agreeably than in the past because when they see profitable loan opportunities hey can use liability management to acquire new funds and expand the banks business.
"If inflation had not risen in the 1960s and 70s the banking industry might be healthier today" True, false, uncertain?
True. Higher inflation helped raise interest rates which caused the disintermediation process to occur and which helped create money market mutual funds. As a result banks lost cost advantages on the liabilities side of their balance sheets and this has lead to a less healthy banking industry. However, improved information technology would still have eroded the banks income advantages on the assets side of their balance sheet, so the decline in banking industry would still have occurred
"The invention of the computer is the major factor behind the decline of the banking industry" True, false, uncertain
Uncertain. The invention of the computer did help lower transaction costs and the costs of collecting information both of which have made other financial institutions more competitive with banks and have allowed corporations to bypass banks and borrow directly from securities markets. Therefore, computers were an important factor in the decline of traditional banking. However, another source of the decline in the traditional banking industry was the loss of cost advantages for the banks in acquiring funds, and this loss was due to factors unrelated to the invention of the computer such as the rise in inflation and its interaction with regulations which produced disintermediation.
A bond provides info abut its par value, coupon interest rate, and maturity date. define each of these.
The par value is the amount the issuer will pay the holder when the bond matures. The coupon interest rate is multiplied times the the par value to determine the interest payment the issuer must make each year. The maturity date is when the issuer must bay the holder the par value.
What political realities might explain why the federal reserve act of 1913 place two federal reserve banks in Missouri?
The placement of the two banks in the midwest farm belt might have been engineered to placate farmers, an important voting block in the early 20th century.
Distinguish between the primary market and the secondary market for securities
The primary market is for securities being issued for the very first time, and the issuer receives the funds paid for the security. The secondary market is for securities that have been issued previously but are being traded smong investors.
A share of common stock in a firm represents an ownership interest in that firm and allows stockholders to
Vote and receive dividends
What does it mean to say that investment bankers underwrite a security offering? How is this different from a best-efforts offering?
When an offering is underwritten, the investment banker purchases the issue at a pre-specified price. In a best-efforts issue, the investment bankers does not take ownership.
Why has the trend in bank supervision moved away from a focus on capital requirements to a focus of risk management?
With the advent of new financial instruments, a bank that is quite healthy at a particular point in time can be driven into insolvency extremely rapidly from risky trading in these instruments. Thus a focus on bank capital at a point in time may not be effective in indicating whether a bank will be taking on excessive risk in the near future. Therefore, to make sure that banks are not taking on too much risk bank supervisors are now focusing more on whether the risk management procedures in banks keep them from excessive risk taking that might make a future bank failure more likely.
Considering the discussion of the market efficiency from chapter 6, discuss whether you should be willing to pay high fees to mutual fund investment managers
You may be willing to pay fees for a mutual fund to provide liquidity intermediation, denomination intermediation, and lower the cost of diversification, but believers in an efficient market will not pay substantial fees for managers to select specific stocks
If you are a banker and expect interest rates to rise in the future, would you want to make short term or long term loans?
You should want to make short term loans. Then, when these loans mature, you will be able to make loans at a higher interest rates which will generate more income for the bank.
Why has new technology made it harder to enforce limitations on bank branching?
New technologies such as electronic banking facilities are frequently shared by several banks so these facilities are not classified as branches. Thus they can be used by banks to escape limitations to offering services in other states and, in effect, to escape limitations from restrictions on branching
Does the fact that a security has passed an SEC review mean that investors can buy the security without having to worry about taking a loss on the investment?
No, an SEC review simply determines if the proper documents have been filed
If the president of a bank told you that the banks was so well run that it has never had to call in loans, sell securities, or borrow as a result of a deposit outflow, would you be willing to buy stock in that bank? Why or why not?
No, because the bank president is not managing the bank well. The fact that the bank has never incurred costs as a result of a deposit outflow means that the bank is holding a lot of reserves that do not earn any interest. Thus the banks profits are low, and stock in the bank is not a good investment
14) The Wall Street Journal reports on 23 different indexes in its "Markets Lineup" column.
FALSE
15) A lower than average PE may mean that the market expects earnings to rise in the future.
FALSE
3) Electronic Communications Networks apply technology to make organized exchanges more efficient and speedy.
FALSE
4) All stocks pay dividends, as that is the only way an investor can profit from holding stock.
FALSE
7) The Dow Jones Industrial Average is the broadest and best indicator of the stock market's day-to-day performance.
FALSE
9) About half of new equity issues are preferred stock.
FALSE
Call provisions will be exercised when interest rates ______ and bond values ______
Fall; rise
45) If the Fed's strategy for conducting monetary policy is thought of as a game plan that proceeds in stages, then the game plan can be summarized as follows: A) The Fed selects its policy goals, then the intermediate targets consistent with achieving its policy goals, then the operating targets consistent with its intermediate targets. Finally, it adjusts its policy tools to effect the desired targets and goals. B) The Fed selects its policy goals, then the operating targets consistent with achieving its policy goals, then the intermediate targets consistent with its operating targets. Finally, it adjusts its policy tools to effect the desired targets and goals. C) The Fed selects its policy goals, then the intermediate targets consistent with achieving its policy goals, then the policy tools consistent with its intermediate targets. Finally, it adjusts its operating targets to effect the desired targets and tools. D) The Fed selects its policy tools, then the operating targets consistent with achieving its policy tools, then the intermediate targets consistent with its operating targets. Finally, it adjusts its policy goals to effect the desired targets and tools. E) None of the above.
A) The Fed selects its policy goals, then the intermediate targets consistent with achieving its policy goals, then the operating targets consistent with its intermediate targets. Finally, it adjusts its policy tools to effect the desired targets and goals.
73) Which of the following statements is true regarding the Fed's procedures for operating the discount window? A) The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate. B) The Fed's operating procedures and paying interest on reserves creates more fluctuation in the federal funds rate than if they simply didn't pay interest on reserves. C) The Fed's operating procedures and paying interest on reserves has no impact on the fluctuation of the federal funds rate. D) None of the above is correct.
A) The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate.
45) Which of the following are true for the current yield? A) The current yield is defined as the yearly coupon payment divided by the price of the security. B) The formula for the current yield is identical to the formula describing the yield to maturity for a discount bond. C) The current yield is always a poor approximation for the yield to maturity. D) All of the above are true. E) Only A and B of the above are true.
A) The current yield is defined as the yearly coupon payment divided by the price of the security.
80) Which of the following is not expected to result from bank consolidation in the U.S.? A) The disappearance of small community banks. B) The acceleration of the decline in the number of banks. C) Banks will be more efficient. D) Banks will be less likely to fail.
A) The disappearance of small community banks.
29) Which of the following statements about Treasury inflation-indexed bonds is not true? A) The principal amount used to compute the interest payment varies with the consumer price index. B) The interest payment rises when inflation occurs. C) The interest rate rises when inflation occurs. D) At maturity, the securities pay the greater of face value or inflation-adjusted principal.
A) The principal amount used to compute the interest payment varies with the consumer price index. (just know this is correct answer...does not make sense based on text p.278)
71) Inflation targeting involves A) a public announcement of medium-term numerical targets for inflation. B) increased accountability of the central bank for attaining its inflation objectives. C) an information-inclusive approach in which many variables are used in making decisions about monetary policy. D) all of the above.
A) a public announcement of medium-term numerical targets for inflation.
26) Most of the time, the interest rate on Treasury notes and bonds is ________ that on money market securities because of ________ risk. A) above; interest-rate B) above; default C) below; interest-rate D) below; default
A) above; interest-rate
42) The subprime financial crisis led to one of the worst bear markets in the last 50 years. Stock prices likely fell due to A) an increase in required returns on equity investments. B) a decline in growth prospects for U.S. companies. C) Both A and B are likely reasons. D) None of the above are correct.
A) an increase in required returns on equity investments.
33) The Depository Institutions Deregulation and Monetary Control Act of 1980 A) approved NOW accounts nationwide. B) restricted the use of ATS accounts. C) imposed interest rate ceilings on bank loans. D) did all of the above.
A) approved NOW accounts nationwide.
4) The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insurance A) are likely to take on greater risks than they otherwise would. B) are likely to be too conservative, reducing the probability of turning a profit. C) are likely to regard deposits as an unattractive source of funds due to depositors' demands for safety. D) are placed at a competitive disadvantage in acquiring funds.
A) are likely to take on greater risks than they otherwise would.
54) Bonds A) are securities that represent a debt owed by the issuer to the investor. B) obligate the issuer to pay a specified amount at a given date, generally without periodic interest payments. C) both A and B of the above. D) none of the above.
A) are securities that represent a debt owed by the issuer to the investor.
76) As a result of shared electronic banking facilities, A) barriers to branching have become less burdensome. B) banking has become less competitive. C) both of the above have occurred. D) neither of the above has occurred.
A) barriers to branching have become less burdensome.
Which regulatory agency has the primary responsibility for supervising the following categories of commercial banks? A. National Banks B. Bank holding companies C. Non-Fderal Reserve member state banks D. Federal Reserve member state banks
A. Office go the Controller of the Currency B. Federal Reserve C. State banking authorities and the FDIC D. Federal Reserve
Federal Funds
Are short term funds transferred between financial institutions, usually for a period of a day, actually have nothing to do with the federal government, provide banks with an immediate infusion of reserves
Money market instruments
Are usually sold in large denominations, have low default risk, and mature in one year or less
Why do businesses use money markets?
Businesses both invest and borrow in money markets. They borrow to meet short term cash flow needs, often by issuing commercial paper. They invest in all types of money market securities as an alternative to holding idle cash balances.
False statement regarding Electronic Communication Networks
ECNs allow institutional investors, but not individuals, to trade after hours
1) More stock trading in the U.S. occurs in over-the-counter markets rather than on organized exchanges.
FALSE
12) A stock's market value will be higher the higher the investor's required rate of return is, all else being equal.
FALSE
What was the purpose motivating regulators to impose interest ceiling on bank savings accounts? What impacts did this eventually have on the money markets?
Following the Great Depression, regulators were primarily concerned with stopping banks from failing. By removing interest rate competition, bank risk was substantially reduced. The problem with these regulations was that when market interest rates rose above the established interest rate ceiling, investors withdrew their funds from banks.
The risk on an agency bond is
Low
Rank the following bank assets from most to least liquid: Commercial loans Securities Reserves Physical Capital
Reserves, securities, commercial loans, physical capital
Activity in money markets increased significantly in the late 1970s and early 1980s because of
Rising short term interest rate and regulations that limited what banks could pay for deposits
Discount loans to banks experiencing severe liquidity problems are called
Secondary credit
If the Federal Reserve wants to lower the monetary base and the money supply, it will
Sell government securities
Functions not performed by any of the 12 regional Federal Reserve banks
Setting interest rates payable on time deposits
What are primary capital market securities, and who are the primary purchasers of these securities?
Stocks and bonds. Most of these are purchased by and owned by households.
Which of the money market securities is the most liquid and consider the most risk free?
Treasury bills are usually viewed as the most liquid and least risky of securities because they are backed by the strength of the US government and trade in extremely large volumes.
The US treasury issues bills, notes, and bonds. How do these three securities differ?
Treasury bills mature in less than 1 year, treasury notes mature in 1 to 10 years, and treasury bonds mature in 10 to 30 years.