Chapter 11
All of the following types of securities normally mature within one year or less, EXCEPT [A] Treasury Bonds [B] Commercial Paper [C] Municipal Notes [D] Treasury Bills
[A] Treasury Bonds EXPLANATION Treasury Bonds have initial maturities of 10 to 30 years.
Which of the following is the most frequent user of federal funds? [A] Investment banking firms. [B] Commercial banks. [C] Insurance companies. [D] State chartered savings banks
[B] Commercial banks. EXPLANATION Federal funds are those that are lent from one bank to another, so Commercial Banks would be the most frequent user.
When inflation increases, the market value of outstanding fixed income securities will MOST likely: [A] Increase [B] Decrease [C] Remain the same [D] Become very volatile
[B] Decrease EXPLANATION Generally, when inflation is increasing, interest rates are rising, too. When interest rates go up, the market value of fixed income securities, such as preferred stocks and bonds, will decline. There is an inverse relationship between interest rates and the market value of outstanding fixed income securities.
Instruments with short-term maturities of less than two years issued by banks outside the U.S. which pay all of their interest and principal in U.S. dollars are known as which of the following? [A] Eurodollar bonds [B] Eurodollar certificates of deposit [C] Eurodollars [D] Eurocurrency
[B] Eurodollar certificates of deposit EXPLANATION Eurodollar dollar "CDs" are short-term instruments issued outside the U.S. which pay principal and interest in U.S. dollars.
Which of the following is true regarding the Inter-bank Market? [A] It is the market for federal funds between banks. [B] It helps establish the spot rate for foreign currencies. [C] It administers loans to foreign countries. [D] It is the guarantor of foreign currency options.
[B] It helps establish the spot rate for foreign currencies. EXPLANATION The Interbank market is an unregulated, decentralized market which trades currencies and debt obligations such as Eurobonds. It does not administer loans or guarantee foreign currency options.
All of the following are characteristics of commercial paper EXCEPT: [A] It is normally issued at a discount. [B] It is a non-negotiable promissory note issued by a corporation. [C] It can be issued directly by the issuer. [D] The maximum maturity is normally 270 days.
[B] It is a non-negotiable promissory note issued by a corporation. EXPLANATION Commercial paper is an unsecured promissory note issued by corporations that can be traded negotiable in the secondary market. All of the other choices are correct.
If the rate of inflation declines rapidly, what is the effect on the market price of a bond? [A] It will decrease. [B] It will increase. [C] It will cause substantial fluctuations in the price. [D] It will have no effect.
[B] It will increase. EXPLANATION During periods of inflation interest rates increase, thus causing bond prices to decrease. If inflation declines, rates go down), then bond prices would increase.
Generally, a normal or ascending yield curve would indicate which of the following? [A] Short-term maturities are yielding more than long-term maturities and investors should consider investing in short and intermediate instruments. [B] Short-term maturities are yielding less than long-term maturities and investors should consider investing in intermediate and long-term instruments. [C] Short-term maturities are yielding less than long-term maturities and investors should consider investing in short-term instruments. [D] Short-term maturities are yielding more than long-term maturities and investors should consider investing in long-term instruments.
[B] Short-term maturities are yielding less than long-term maturities and investors should consider investing in intermediate and long-term instruments. EXPLANATION A normal or ascending yield curve indicates that investors should buy long term maturities and lock in the higher yield.
Free floating interest rates are controlled by which of the following? [A] The U.S. Treasury [B] Supply and demand [C] Government mandate [D] Congress
[B] Supply and demand EXPLANATION Free floating interest rates are supply and demand in the market place.
If the U.S. Economy has been experiencing a prolonged period of inflation, which of the following would probably happen? [A] The Federal Reserve would buy government securities [B] The Federal Reserve would sell government securities [C] Government spending would be increased substantially [D] Margin requirements would be decreased by the Federal Reserve
[B] The Federal Reserve would sell government securities EXPLANATION To end an inflationary period, the Fed would tighten the money supply and sell government securities through open market operations.
Raising capital through use of the Eurodollar Bond market provides all of the following EXCEPT: [A] Interest costs are usually less [B] To provide more legal protection for investors [C] The Eurodollar bond market is less regulated [D] To diversify the sources of obtaining financing
[B] To provide more legal protection for investors EXPLANATION The Euro-markets are not as regulated as U.S. markets.
Which type of security is most frequently purchased or sold by the Federal Open Market Committee (FOMC) trading desk when it enters the open market? [A] Federal Agency [B] Treasury Bills [C] Government Bonds [D] Municipal Bonds
[B] Treasury Bills EXPLANATION Treasury Bills are the securities that are most often traded by the FOMC - Federal Open Market Committee.
All of the following are money market instruments EXCEPT: [A] Repurchase agreements. [B] Treasury bonds. [C] Tax anticipation notes. [D] Bankers' acceptances.
[B] Treasury bonds. EXPLANATION Treasury bonds are the only investments listed that are not short-term investments.
Of the instruments listed below, which is the most actively traded in the secondary market? [A] certificates of deposit [B] treasury bills [C] commercial paper [D] bankers' acceptances
[B] treasury bills EXPLANATION T-bills are short-term and safe. They have a very active secondary market as compared to the other choices.
All of the following would improve a U.S. Balance of Payments deficit EXCEPT? [A] Spending by foreign tourists in the U.S. [B] An increase of foreign investors in U.S. markets [C] An increase in U.S. loans to foreign countries [D] An increase in U.S. exports to foreign countries.
[C] An increase in U.S. loans to foreign countries EXPLANATION A U.S. balance of deficit would be improved by money coming into the U.S., therefore since choice "c" shows money going out of the country, that action would increase the deficit.
A U.S. Balance of Payments deficit would tend to increase due to which of the following? [A] Commodity exports [B] Spending by foreign tourists in the U.S. [C] Increase in U.S. investment abroad [D] Interest and dividends earned by U.S. citizens on foreign investments abroad
[C] Increase in U.S. investment abroad EXPLANATION The deficit would increase when money is leaving the U.S.
An individual receives her paycheck and pays for her rent and groceries for the month. After all the essential needs are paid for the remaining income is called [A] disposable income [B] gross income [C] discretionary income [D] residual income
[C] discretionary income EXPLANATION An individual's income from employment before taxes are removed is known as their gross income. Taxable income refers to total income less qualified, tax-deferred contributions to retirement plans, etc.. After taxes are removed, this is referred to as the individual's net income. Net income is also known as disposable income, which can be spent on essentials, non-essentials, or it can be saved or invested. Discretionary income refers to money which can be spent after essentials are paid. It is a major economic indicator.
Monies deposited by commercial banks at Federal Reserve Banks, including monies which are in excess of the bank's reserve requirements, are referred to as: [A] jumbo certificates of deposit [B] time deposits [C] federal funds [D] discount funds
[C] federal funds EXPLANATION Excess reserves of commercial banks are referred to as Federal Funds. This would include any funds which are in excess of the bank's reserve requirements.
If the Federal Reserve Board tightens the money supply, this would generally cause interest rates to: [A] remain unaffected [B] decrease [C] increase [D] Stabilize
[C] increase EXPLANATION When money gets tight, it is more difficult to borrow. The cost of borrowing (interest rates) would increase.
Which of the following is a lagging indicator? [A] Housing starts [B] S and P 500 stock index [C] Average workweek [D] Corporate profits
[D] Corporate profits EXPLANATION Corporate profits are considered a lagging indicator.
A bond that pays interest and principal in U.S. dollars held in banks outside the United States and which is initially offered for sale in a foreign country is called a : [A] Foreign exchange bond. [B] Junk bond. [C] Foreign dollar bond. [D] Eurodollar bond.
[D] Eurodollar bond. EXPLANATION A Eurodollar bond is a bond that is denominated in U.S. dollars. It is held in banks outside the U.S. primarily in Europe.
The effects of the Federal Reserve Boards "Open Market Operations" would include which of the following? To contract or expand the volume of excess reserves of member banks To influence interest rates To provide an orderly market for government securities To cause effects on foreign exchange markets and international capital movements [A] I and III [B] II and IV [C] I, II, and III [D] I, II, III, and IV
[D] I, II, III, and IV EXPLANATION All choices represent influences of Open Market Operations of the Federal Reserve Board.
Which of the following would be expected to increase during an expansionary period in a business cycle? Profits Production Employment Demand for goods [A] I and III only [B] II and IV only [C] III and IV only [D] I, II, III, and IV
[D] I, II, III, and IV EXPLANATION During an expansionary or recovery period in a business cycle, demand for goods increases which causes an increase in production which causes an increase in employment, all of which causes an increase in profit.
The Fiscal Policy of the United States Government is set by which of the following? [A] Federal Reserve System [B] United States Treasury Department [C] Office of Management and Budget [D] The Congress of the United States
[D] The Congress of the United States EXPLANATION Congress sets the Fiscal Policy of the United States Government
Which of the following characteristics of Jumbo Certificates of Deposit is not true: [A] They are issued in registered form. [B] They are generally money market instruments. [C] They are guaranteed by banks. [D] They trade at deep discounts in the secondary market.
[D] They trade at deep discounts in the secondary market. EXPLANATION Jumbo "CDs" may trade at discounts, but you could not say that they always trade at "deep" discounts in the secondary market because that is more of a function of what interest rates are doing.
