money and financial systems test 2 (ch 9-12)

If you default on your auto loan, your car will be repossessed because it has been pledged as ________ for the loan. A. collateral B. interest C. dividend D. commodity

A. Collateral

To prevent bank runs and the consequent bank failures, the United States established the ________ in 1934 to provide deposit insurance. A. FDIC B. ATM C. SEC D. Federal Reserve

A. FDIC

The legislation that separated investment banking from commercial banking until its repeal in 1999 is known as the: A. Glass − Steagall Act. B. McFadden Act. C. National Bank Act of 1863. D. Federal Reserve Act of 1913.

A. Glass - Steagall Act

The legislation that effectively prohibited banks from branching across state lines and forced all national banks to conform to the branching regulations in the state in which they reside is the A. McFadden Act. B. National Bank Act. C. Garn − St.Germain Act. D. Glass − Steagall Act.

A. McFadden Act

If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of A. adverse selection. B. adverse credit risk. C. lemon lenders. D. moral hazard.

A. adverse selection

The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem. A. adverse selection; moral hazard B. moral hazard; moral hazard C. adverse selection; adverse selection D. moral hazard; adverse selection

A. adverse selection; moral hazard

The government safety net creates ________ problem because risk − loving entrepreneurs might find banking an attractive industry. A. an adverse selection B. a lemons C. a moral hazard D. a revenue

A. an adverse selection

The leverage ratio is the ratio of a bank's A. capital divided by its total assets. D. assets divided by its liabilities. C. capital divided by its total liabilities. D. income divided by its assets.

A. capital divide by its total assets

Net worth can perform a similar role to ________. A. collateral B. intermediation C. diversification D. economies of scale

A. collateral

Since they require less monitoring of firms, ________ contracts are used more frequently than ________ contracts to raise capital. A. debt; equity B. equity; debt C. debt; loan D. equity; stock

A. debt; equity

Assuming that the average duration of First National Bank's $100 million of assets is five years while the average duration of its $80 million of liabilities is three years, then a 5-percentage-point increase in interest rates will cause the net worth of First National Bank to _______ by $_______ million. A. decrease; 13 B. decline; 5 C. increase; 15 D. increase; 25

A. decrease; 13

When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending in a process called A. deleveraging. B. deflation. C. releveraging. D. capitulation.

A. deleveraging

Government regulations designed to reduce the moral hazard problem include A. laws that force firms to adhere to standard accounting principles. B. state verification subsidies. C. state licensing restrictions. D. light sentences for those who commit the fraud of hiding and stealing profits.

A. laws that force firms to adhere to standard accounting principles

The free − rider problem occurs because A. people who do not pay for information use it. B. it is never profitable to produce information. C. people who pay for information use it freely. D. information can never be sold at any price.

A. people who do not pay for information use it

Consumer protection legislation includes legislation to A. reduce discrimination in credit markets. B. require banks to make loans to everyone who applies. C. require banks to make periodic reports to the Better Business Bureau. D. reduce the amount of interest that bank's can charge on loans.

A. reduce discrimination in credit markets

Net profit after taxes per dollar of assets is a basic measure of bank profitability called A. return on assets. B. return on equity. C. return on capital. D. return on investment.

A. return on assets

________ is a process of bundling together smaller loans (like mortgages) into standard debt securities. A. Securitization B. Distribution C. Debt deflation D. Origination

A. securitization

For a given return on assets, the lower is bank capital, A. the higher is the return for the owners of the bank. B. the lower is the return for the owners of the bank. C. the lower the possibility of bank failure. D. the lower is the credit risk for the owners of the bank.

A. the higher is the return for the owners of the bank

The concept of adverse selection helps to explain all of the following except A. why direct finance is more important than indirect finance as a source of business finance. B. why the financial system is so heavily regulated. C. why indirect finance is more important than direct finance as a source of business finance. D. why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities

A. why direct finance is more important than indirect finance as a source of business finance

If a borrower takes out a $200 million loan in a repo agreement and is asked to post $220 million of mortgage − backed securities as collateral, the "haircut" is A. 20%. B. 10%. C. 50%. D. 5%.

B. 10%

A serious consequence of a financial crisis is A. an increase in asset prices. B. a contraction in economic activity. C. financial globalization. D. financial engineering.

B. a contraction in economic activity

For restrictive covenants to help reduce the moral hazard problem, they must be ________ by the lender. A. written in all capitals B. monitored and enforced C. easily changed D. impossible to remove

B. monitored and enforced

If a bank has ________ rate − sensitive assets than liabilities, then ________ in interest rates will increase bank profits. A. fewer; a surge B. more; an increase C. more; a decline D. fewer; an increase

B. more; an increase

The originate − to − distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk. A. debt deflation B. principal − agent C. collateralized debt D. democratization of credit

B. principal - agent

Moral hazard is an important concern of insurance arrangements because the existence of insurance A. causes the private cost of the insured activity to increase. B. provides increased incentives for risk taking. C. is a hindrance to efficient risk taking. D. creates an adverse selection problem but no moral hazard problem.

B. provides increased incentives for risk taking

When banks offer borrowers smaller loans than they have requested, banks are said to A. rediscount the loan. B. ration credit. C. shave credit. D. raze credit.

B. ration credit

If mortgage brokers fo not make a strong effort to evaluate whether the borrower can pay off a loan, this creates a A. decline in mortgage applications. B. severe adverse selection problem. C. call to deregulate the industry. D. decrease in the demand for houses.

B. severe adverse selection problem

The legislation overturning the Glass − Steagall Act is A. the Riegle − Neal Act. B. the Gramm − Leach − Bliley Act. C. the McFadden Act. D. the Garn − St. Germain Act

B. the Gram - Leach - Bliley Act

The legislation that overturned the prohibition on interstate banking is A. the McFadden Act. B. the Riegle − Neal Act C. the Gramm − Leach − Bliley Act. D. the Glass − Steagall Act

B. the Riegle - Neal Act

Increased size of financial institutions resulting from financial consolidation increases the ________ problem, because there are now more large institutions whose failure would expose the financial system to systemic risk. A. economies of scale B. too-big-to-fail C. asset transformation D. transactions costs

B. too big to fail

With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is A. $10. B. $110. C. $90. D. $100.

C. $90

The reduction in transactions costs per dollar of investment as the size of transactions increases is A. diversification. B. discounting. C. economies of scale. D. economies of trade.

C. economies of scale

Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves. A. high; long − term B. low; long − term C. high; short − term D. low; short − term

C. high; short - term

Newly − issued high − yield bonds rated below investment grade by the bond − rating agencies are frequently referred to as A. Yankee bonds. B. "fallen angels." C. junk bonds. D. municipal bonds.

C. junk bonds

________ occurs when an informed party takes a hidden (unobserved) action that harms the less − informed party. A. adverse selection B. transactions costs C. moral hazard D. free-riding

C. moral hazard

A well − capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities. A. more; more B. less; less C. more; less D. less; more

C. more; less

Banks hold excess and secondary reserves to A. reduce the interest − rate risk problem. B. achieve higher earnings than they can with loans. C. provide for unexpected deposit outflows. D. satisfy margin requirements.

C. provide for unexpected deposit outflows

Because of securitization, a new class of residential mortgages offered to borrowers with less − than − stellar credit records developed. These mortgages are known as A. adjustable-rate mortgages. B. bundled mortgages. C. subprime mortgages. D. risk-enhanced mortgages.

C. subprime mortgages

The ________ that required separation of commercial and investment banking was repealed in 1999. A. the Federal Reserve Act. B. the Monetary Control Act. C. the Glass − Steagall Act. D. the Bank Holding Company Act.

C. the Glass - steagall Act

The driving force behind the securitization of mortgages and automobile loans has been A. the relaxation of regulatory restrictions on credit card operations. B. the rising regulatory constraints on substitute financial instruments. C. the improvement in information technology. D. the desire of mortgage and auto lenders to exit this field of lending

C. the improvement in information technology

Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history? A. Merrill Lynch B. Goldman Sachs C. Bear Stearns D. Lehman Brothers

D. Lehman Brothers

Debt deflation occurs when A. lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral. B. corporations pay back their loans before the scheduled maturity date. C. rising interest rates worsen adverse selection and moral hazard problems. D. an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness

D. an economic downturn causes the price Lebel to fall and a deterioration in firms' net worth because of the increased burden of indebtedness

When asset prices rise above their fundamental economic values, a(n) ________ occurs. A. liability war B. decline in lending C. decrease in moral hazard D. asset − price bubble

D. asset - price bubble

A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called A. adverse selection. B. noncollateralized risk. C. moral hazard. D. asymmetric information.

D. asymmetric information

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called A. gap − exposure analysis. B. interest − exposure analysis. C. basic duration analysis. D. basic gap analysis.

D. basic gap analysis

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. generally have higher initial interest rates than on conventional fixed − rate mortgages. D. benefit homeowners when interest rates are falling.

D. benefit homeowners when the interest rates and falling

When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a A. deleveraging. B. market race. C. credit bust. D. credit boom.

D. credit boom

Regulations designed to provide information to the marketplace so that investors can make informed decisions are called A. capital requirements. B. asset restrictions. C. efficient market requirements. D. disclosure requirements.

D. disclosure requirements

Allowing bank branching across state lines gives banks greater ability to coordinate bank operations. This makes it easier for them to receive the benefits of A. disintermediation. B. interest − rate irregularities. C. the dual banking system. D. economies of scale.

D. economies of scale

Uncertainty about interest − rate movements and returns is called ________. A. market potential B. financial creativity C. interest − rate irregularities D. interest − rate risk

D. interest - rate risk