Econ 320 Midterm 2
If a bank has $10 million of checkable deposits, a required reserve ratio of 10 percent, and it holds $2 million in reserves, then it will not have enough reserves to support a deposit outflow of A) $1.2 million. B) $1.1 million. C) $1 million. D) $900,000.
A) $1.2 million.
A swap that involves the exchange of one set of interest payments for another set of interest payments is called A) an interest rate swap. B) a currency swap. C) a swaptions. D) an international swap.
A) an interest rate swap.
All other things held constant, premiums on American call options will increase when the A) exercise price falls. B) volatility of the underlying asset falls. C) term to maturity decreases. D) exercise price increases.
A) are less costly than futures.
________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices. A) behavioral finance. B) strategical finance. C) methodical finance. D) procedural finance.
A) behavioral finance.
First National Bank Assets Liabilities Rate-Senstive $40 Mil $50 Mil Fixed-rate $60 Mil $50 Mil If interest rates rise by 5 percentage points, say from 10 to 15%, bank profits (measured using gap analysis) will A) decline by $0.5 million. B) decline by $1.5 million. C) decline by $2.5 million. D) increase by $2.0 million.
A) decline by $0.5 million.
Assuming that the average duration of its assets is four years, while the average duration of its liabilities is three years, then a 5 percentage point increase in interest rates will cause the net worth of First National to ________ by ________ of the total original asset value. A) decline; 5 percent. B) decline; 10 percent. C) decline; 15 percent. D) increase; 20 percent.
A) decline; 5 percent.
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) separated the commercial banks and investment banks.
A) effectively prohibited banks from branching across state lines.
All other things held constant, premiums on call options will increase when the A) exercise price falls. B) volatility of the underlying asset falls. C) term to maturity decreases. D) futures price increases.
A) exercise price falls.
Suppose you are currently in the long position of a long-term bond. In this case, to hedge against a capital loss, you would enter into a ________ contract to ________ a long-term bond in the future. A) interest-rate forward; sell. B) interest-rate forward; buy. C) exchange-rate forward; buy. D) exchange-rate forward; sell.
A) interest-rate forward; sell.
The advantage of a "buy-and-hold strategy" is that A) net profits will tend to be higher because there will be fewer brokerage commissions. B) losses will eventually be eliminated. C) the longer a stock is held, the higher will be its price. D) profits are guaranteed.
A) net profits will tend to be higher because there will be fewer brokerage commissions.
The seller of an option has the ________ to buy or sell the underlying asset while the purchaser of an option has the ________ to buy or sell the asset. A) obligation; right. B) right; obligation. C) obligation; obligation. D) right; right.
A) obligation; right.
The global financial crisis lead to a decline in stock prices because A) of a lowered expected dividend growth rate. B) of a lowered required return on investment in equity. C) higher expected future stock prices. D) higher current dividends.
A) of a lowered expected dividend growth rate.
A type of investment fund that makes long-term investments in companies that are not publicly traded is called a A) private equity fund. B) hedge fund. C) sovereign wealth fund. D) brokerage fund.
A) private equity fund.
If you purchase a $100,000 interest-rate futures contract at a price of 105 points, and the price of the Treasury securities on the expiration date is 108 points, your ________ is ________. A) profit; $3000 B) loss; $3000 C) profit; $8000 D) loss; $8000
A) profit; $3000
If a forecast is made using all available information, then economists say that the expectation formation is A) rational. B) irrational. C) adaptive. D) reasonable.
A) rational.
Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks. A) reduce; screen B) increase; screen C) reduce; increase D) increase; increase
A) reduce; screen
Bank capital has both benefits and costs for the bank owners. Higher bank capital ________ the likelihood of bankruptcy, but higher bank capital ________ the return on equity for a given return on assets. A) reduces; reduces. B) increases; increases. C) reduces; increases. D) increases; reduces.
A) reduces; reduces.
If you bought a long interest-rate futures contract you hope that bond prices A) rise. B) fall. C) are stable. D) fluctuate.
A) rise.
If you sold a short contract on financial futures you hope interest rates A) rise. B) fall. C) are stable. D) fluctuate.
A) rise.
By taking the short position on a futures contract of $100,000 at a price of 115 you are agreeing to ________ a ________ face value security for ________. A) sell; $100,000; $115,000. B) sell; $115,000; $100,000. C) buy; $100,000; $115,000. D) buy; $115,000; $100,000.
A) sell; $100,000; $115,000.
By taking the short position on a futures contract of $100,000 at a price of 96 points you are agreeing to ________ a ________ face value security for ________. A) sell; $100,000; $96,000. B) sell; $96,000; $100,000. C) buy; $100,000; $96,000. D) buy; $96,000; $100,000.
A) sell; $100,000; $96,000.
Using the Gordon growth model, a stock's price will increase if A) the dividend growth rate increases. B) the growth rate of dividends falls. C) the required rate of return on equity rises. D) the expected sales price rises.
A) the dividend growth rate increases.
In the one-period valuation model, the current stock price increases if A) the expected sales price increases. B) the expected sales price falls. C) the required return increases. D) the expected dividends are cut.
A) the expected sales price increases.
When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, 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 Citibank decrease by $10. D) the assets of Citibank decrease by $10.
A) the liabilities of the First National Bank decrease by $10.
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) severable. C) barrier-free. D) dividerless.
A) universal.
Using the one-period valuation model, assuming a year-end dividend of $1.21, an expected sales price of $132, and a required rate of return of 10%, the current price of the stock would be A) $110.11. B) $121.10. C) $100.10. D) $100.11
B) $121.10.
If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $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
If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of A) moral hazard. B) adverse selection. C) free-riding. D) costly state verification.
B) adverse selection.
In order to reduce the ________ problem in loan markets, bankers collect information from prospective borrowers to screen out the bad credit risks from the good ones. A) moral hazard. B) adverse selection. C) moral suasion. D) adverse lending.
B) adverse selection.
All else the same, if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then ________ in interest rates will ________ bank profits. A) an increase; increase. B) an increase; reduce. C) a decline; reduce. D) a decline; not affect.
B) an increase; reduce.
One advantage of using swaps to eliminate interest-rate risk is that swaps A) are less costly than futures. B) are less costly than rearranging balance sheets. C) are more liquid than futures. D) have better accounting treatment than options.
B) are less costly than rearranging balance sheets.
A bank with insufficient reserves can increase its reserves by A) lending federal funds. B) calling in loans. C) buying short-term Treasury securities. D) buying municipal bonds.
B) calling in loans.
Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is A) clearly inconsistent with the efficient markets hypothesis. B) consistent with the efficient markets hypothesis if the earnings were not as high as anticipated. C) consistent with the efficient markets hypothesis if the earnings were not as low as anticipated. D) consistent with the efficient markets hypothesis if the favorable earnings were expected.
B) consistent with the efficient markets hypothesis if the earnings were not as high as anticipated.
Periodic payments of net earnings to shareholders are known as A) capital gains. B) dividends. C) profits. D) interest.
B) dividends.
The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market, A) it will tend to go unnoticed for some time. B) it will be quickly eliminated. C) financial analysts are your best source of this information. D) prices will reflect the unexploited profit opportunity.
B) it will be quickly eliminated.
The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market, A) it will tend to go unnoticed for some time. B) it will be quickly eliminated. C) financial analysts are your best source of this information. D) prices will reflect the unexploited profit opportunity.
B) it will be quickly eliminated.
When you deposit a $50 bill in the Security Pacific National Bank, A) its liabilities decrease by $50. B) its assets increase by $50. C) its reserves decrease by $50. D) its cash items in the process of collection increase by $50.
B) its assets increase by $50.
If, for a $1000 premium, you buy a $100,000 put option on bond futures with a strike price of 110 points, and at the expiration date the price is 114 points, your ________ is ________. A) profit; $1000 B) loss; $1000 C) profit; $3000 D) loss; $3000
B) loss; $1000
If, for a $1000 premium, you buy a $100,000 put option on bond futures with a strike price of 110, and at the expiration date the price is 114, your ________ is ________. A) profit; $1000 B) loss; $1000 C) profit; $3000 D) loss; $3000
B) loss; $1000
If you purchase a $100,000 interest-rate futures contract for 110, and the price of the Treasury securities on the expiration date is 106, your ________ is ________. A) profit; $4000. B) loss; $4000. C) profit; $6000. D) loss; $6000.
B) loss; $4000.
The problem faced by the lender that the borrower may take on additional risk after receiving the loan is called A) adverse selection. B) moral hazard. C) transactions costs. D) diversification.
B) moral hazard.
Using the Gordon growth model, the global financial crisis lead to a decline in stock prices because A) of a higher expected dividend growth rate. B) of a higher required return on investment in equity. C) higher expected future stock prices. D) higher current dividends.
B) of a higher required return on investment in equity.
Of the following sources of external finance for American nonfinancial businesses, the least important is A) loans from banks. B) stocks. C) bonds and commercial paper. D) loans from nonbank financial intermediaries.
B) stocks.
Hedging risk for a long position is accomplished by A) taking another long position. B) taking another short position. C) taking additional long and short positions in equal amounts. D) taking another neutral position.
B) taking another short position.
Assume you are holding Treasury securities and have sold futures to hedge against interest-rate risk. If interest rates rise A) the increase in the value of the securities equals the decrease in the value of the futures contracts. B) the decrease in the value of the securities equals the increase in the value of the futures contracts. C) both the securities and the futures contracts decrease in value. D) both the securities and the futures contracts increase in value.
B) the decrease in the value of the securities equals the increase in the value of the futures contracts.
Assume you are holding Treasury securities and have sold futures to hedge against interest-rate risk. If interest rates rise A) the increase in the value of the securities equals the decrease in the value of the futures contracts. B) the decrease in the value of the securities equals the increase in the value of the futures contracts. C) both the securities and the futures contracts decrease in value. D) both the securities and the futures contracts increase in value.
B) the decrease in the value of the securities equals the increase in the value of the futures contracts.
In the generalized dividend model, the current stock price is the sum of A) the actual value of the future dividend stream. B) the present value of the future dividend stream. C) market bubbles. D) the present value of the future sales price.
B) the present value of the future dividend stream.
In the generalized dividend model, the current stock price is the sum of A) the actual value of the future dividend stream. B) the present value of the future dividend stream. C) the present value of the future dividend stream plus the actual future sales price. D) the present value of the future sales price.
B) the present value of the future dividend stream.
Using the Gordon growth formula, if D1 is $2.00, ke is 12% or 0.12, and g is 10% or 0.10, then the current stock price is A) $20. B) $50. C) $100. D) $150.
C) $100.
Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10%, the current price of the stock would be A) $110.11. B) $121.12. C) $100.10. D) $120.11
C) $100.10.
An option that can only be exercised at maturity is called A) a swap. B) a stock option. C) an European option. D) an American option.
C) an European option.
If you buy a call option on Treasury futures at 115, and at expiration the market price is 110, the ________ will ________ exercised. A) call; be. B) put; be. C) call; not be. D) put; not be.
C) call; not be.
According to the efficient markets hypothesis, purchasing the reports of financial analysts A) is likely to increase one's returns by an average of 10%. B) is likely to increase one's returns by about 3 to 5%. C) is not likely to be an effective strategy for increasing financial returns. D) is likely to increase one's returns by an average of about 2 to 3%.
C) is not likely to be an effective strategy for increasing financial returns.
Holding large amounts of bank capital helps prevent bank failures because A) it means that the bank has a higher income. B) it makes loans easier to sell. C) it can be used to absorb the losses resulting from bad loans. D) it makes it easier to call in loans.
C) it can be used to absorb the losses resulting from bad loans.
If, for a $1000 premium, you buy a $100,000 call option on bond futures with a strike price of 110 points, and at the expiration date the price is 114 points, your ________ is ________. A) profit; $4000 B) loss; $4000 C) profit; $3000 D) loss; $3000
C) profit; $3000
If, for a $1000 premium, you buy a $100,000 call option on bond futures with a strike price of 110, and at the expiration date the price is 114, your ________ is ________. A) profit; $4000. B) loss; $4000. C) profit; $3000. D) loss; $3000.
C) profit; $3000.
If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can A) reduce deposits by $3 million. B) increase loans by $3 million. C) sell $3 million of securities. D) repay its discount loans from the Fed.
C) sell $3 million of securities.
If expectations are formed adaptively, then people A) use more information than just past data on a single variable to form their expectations of that variable. B) often change their expectations quickly when faced with new information. C) use only the information from past data on a single variable to form their expectations of that variable. D) never change their expectations once they have been made.
C) use only the information from past data on a single variable to form their expectations of that variable.
Using the Gordon growth formula, if D1 is $3.00, ke is 12% or 0.12, and g is 10% or 0.10, then the current stock price is A) $20. B) $50. C) $100. D) $150.
D) $150.
An option that can be exercised at any time up to maturity is called A) a swap. B) a stock option. C) an European option. D) an American option.
D) an American option.
The advantage of forward contracts over future contracts is that they A) are standardized. B) have lower default risk. C) are more liquid. D) are more flexible.
D) are more flexible.
If one party pays a fixed fee on a regular basis in return for a contingent payment that is triggered by a downgrading of a firm's credit rating, that is called a A) credit option. B) credit swap. C) credit-linked note. D) credit default swap.
D) credit default swap.
Which of the following types of information most likely allows the exploitation of a profit opportunity? A) financial analysts' published recommendations. B) technical analysis. C) hot tips from a stockbroker. D) insider information.
D) insider information.
American businesses get their external funds primarily from A) bank loans. B) bonds and commercial paper issues. C) stock issues. D) loans from nonbank financial intermediaries.
D) loans from nonbank financial intermediaries.
Which of the following would not be a way to increase the return on equity? A) buy back bank stock. B) pay higher dividends. C) acquire new funds by selling negotiable CDs and increase assets with them. D) sell more bank stock.
D) sell more bank stock.
Which of the following would not be a way to increase the return on equity? A) Buy back bank stock. B) Pay higher dividends. C) Acquire new funds by selling negotiable CDs and increase assets with them. D) Sell more bank stock.
D) sell more bank stock.
An essential characteristic of credit unions is that A) they are typically large. B) branching across state lines is prohibited. C) their lending is primarily for mortgage loans. D) they are organized for individuals with a common bond.
D) they are organized for individuals with a common bond.
