FIN 3100 Midterm
Which of the following are capital market instruments?
10-year corporate bonds 30-year mortgages 20-year Treasury bonds 15-year U.S. government agency bonds
from 1992 through 2015, U.S. investors' holdings of foreign financial market debt securities increased by a factor of
10x
the federal reserve system is divided into ___ districts, each of which has one main federal reserve bank and possibly branches in other cities
12
the system that was jointly developed by the Federal Reserve and the private sector to be a nationwide network to electronically process credit and debit transfers of funds is the ___ system
ACH
Financial intermediaries (FIs) can offer savers a safer, more liquid investment than a capital market security, even though the intermediary invests in risky illiquid instruments because
FIs can diversify away some of their risk and closely monitor the riskiness of their assets
the inverse relationship between interest rates and the present value of a security holds for ___ and ___
Fair present value: required rates of return current market prices: expected rates of return
Secondary markets help support primary markets because secondary markets I. offer primary market purchasers liquidity for their holdings. II. update the price or value of the primary market claims. III. reduce the cost of trading the primary market claims.
I. II. and III onlt
the equation for valuing a stock with a dividend growth rate of zero can be written as
P0=DIV/Rs
when the required rate of return is equal to the coupon rate, the bond will sell at
PAR
the 3 largest Federal Reserve Banks, holding over 65 percent of the total assets of the system are
Richmond, New York, San Francisco
the Volcker rule was passed as part of what important act of Congress
The Wall Street Reform and Consumer Protection Act of 2010
TorF: the originate and distribute model contributed to the financial crisis because it allowed FIs to issue risky mortgages knowing they could sell them before they defaulted
True (moral hazard)
The ___ creates federal laws intended to protect consumers in financial transactions, and the ___ implement and enforce those laws
U.S. Congress; Federal Reserve Banks
the most frequently reported and analyzed yield curve is the curve for
U.S. Treasury securities
The Federal Reserve Trading Desk at the New York Fed implements the FOMC policy directive by buying or selling ___ on the over the counter market
U.S. Treasury securtities
___ are regarded as having no default risk
U.S. gov securities
the YTM calculation implicitly assumes that all coupon payments received by the bond holder can be reinvested at the
YTM
as a result of increased globalization, movements in foreign financial markets now have ___ impact on U.S. financial markets
a much greater
the 3 tools that the Federal Reserve Bank can use to implement monetary policy are
adjusting the discount rate, adjusting bank reserve requirements, executing open market operations
when a financial institution accepts short-term deposits from investors and uses those funds to issue long-term loans to borrowers, they are engaging in
asset transformation
changing the level of required reserves does not always result in a predictable change in the level of bank deposits, because
banks do not always convert all of their excess reserves to loans borrowers do not always spend 100 percent of the funds borrowed depositors sometimes hold back cash outside of banks rather than deposit all of their funds
of the 3 monetary policy tools the Federal Reserve has at their disposal, only ___ has the effect of directly changing interest rate in the economy
changing the discount rate
The largest capital market security outstanding in 2016 measured by market value was
corporate stocks
4 of the programs implemented by central banks to alleviate the effects of the Financial Crises were
debt guarantees capital injections into the banking system expansion of retail deposit insurance asset purchases or guarantees
The Securities Exchange Commission (SEC) does not
decide whether a public issue is fairly priced.
the duration of a zero coupon bond is
equal to its maturity
if an investor buys a share of stock today at the current market price, receives al expected dividends over the life of the investment, and sells the stock at the end of the investment period, they will earn
expected rate of return
major suppliers of securities for capital markets (i.e. users of funds are)
governments corporations
when a U.S. corporation or investor receives foreign currency cash flows, the U.S. dollar value of those cash flows will ___ if the foreign currency ___ against the U.S. dollar
increase; appreciates decrease; depreciates
The Federal Reserve System is a
independent central bank
the first-time issue of stock by a corporation going public is called a
initial public offering (IPO)
most primary market transactions in the U.S> are arranged through ___ who help reduce the cost and risk of the seller creating a a market for its securities on its own
investment banks
Following the Brexit vote in June 2016, the British Pound dropped in value to its lowest point since 1985 due to
investors selling off pound-denominated assets and investing in funds in safe assets like gold and U.S. govmt bonds
the supervisory and regulatory activities of each federal reserve bank in its district includes the authority to do which of the following
issue warnings, approve expanded activities, performs examinations and inspections
2 important characteristics of money markets are
low interest rate risk maturity of one year or less
The decline of the share of assets held by commercial banks between 1948 and 2016 is due to
low interest rates strict capital regulations regulations imposed during the financial crisis
US Treasury securities are an important component of the Fed's balance sheet because the Fed buys and sells them as part of their
open market operations
the ___ is the return that compensates the investor for the risk undertaken by holding a share of a stock
required rate of return
in the equation for valuing a zero dividend growth stock, if we use the ___ we will solve for the ___ of the stock
required rate of return; fair present value expected rate of return; current market price
the loanable funds theory views the level of interest rates as being determined by
supply and demand for funds
which of the following is not specified in the derivative security contract
the final purpose for which the asset exchanged will be used
the primary responsibilities of the federal reserve board are
the supervision and regulation of banks the formulation and conduct of monetary policy
two of the important payment services provided by the financial institutions of the economy are ___ and ___
wire transfers check clearing
What factors are encouraging financial institutions to offer overlapping financial services such as banking, investment banking, brokerage, etc.? I. Regulatory changes allowing institutions to offer more services II. Technological improvements reducing the cost of providing financial services III. Increasing competition from full-service global financial institutions IV. Reduction in the need to manage risk at financial institutions
I. II. and III. only
the passage of the Securities act of 1933 designated that ___ would be the regulator of financial markets and exchanges in the U.S.
Securities and Exchange Commission (SEC)
the total return on a bond instrument incorporates both the ___ and ___
coupon payments; repayment of principal
for a bond instrument, the periodic cash flow that the bond issuer contractually promises to pay the bond holder is called the
coupon rate
the diff between the nominal rate quoted on a security and the rate quoted on a treasury security with similar characteristics is called the
credit risk premium default risk premium
the 2 largest liabilities on the Federal Reserve balance sheet are ____ and ___
currency in circulation; resreves
the Federal Reserve Banks distribute new ___ to meet the public's need for ___
currency; cash
the ___ of the stock is calculated by discounting the expected dividends and future sale price of the stock at the expected rate of return
current market price
when investors determine that a security is overvalued, a ___ in demand causes security price to ___ and equilibrium is reestablished
decrease; decrease
as the interest rates increase, the price of a bond ___ at a ___ rate
decrease; decreasing
a consequence of the unbiased expectations theory is that if investors believe that short-term interest rates will __ in the future, the yield curve will be
decreases; negatively increase; positively
when the federal reserve sells U.S. Treasury securities from the over the counter market, it ___ the supply of excess reserves and places ___ pressure on the federal funds rate
decreases; upward
financial institutions frequently pool small deposits from indiv. savers and invest the funds in large denomination securities. This is called...
denomination intermediation
on the fed balance sheet, reserves consist of ___ and ___
depository institution reserves; vault cash
FIs are able to guarantee the liquidity and safety of investors' funds despite investing in risky assets by
diversifying their investments across many uncorrelated assets
financial institutions average cost of monitoring is lower than the individual investor's due to
economies of scale
economically speaking, the duration is the ___ of a security's value to small interest rate changes
elasticity
the reserves which depository institutions hold at the fed over and above required reserves are calles
excess reserves
for a given set of project cash flows and investment time period, the required rate of return is related to the ___ and the expected rate of return is related to the ___ of the security
fair present value; current market price
TorF: the original issuers of financial instruments obtain additional funds when those instruments are resold on the secondary market
false
during the past 30 years, some of the trends that have reshaped the financial industry are
financial innovation increased use of technology removal of regulatory barriers
traditional depository institutions find it difficult to compete with other financial institutions due to
higher costs due to regulation
the ___ the interest rate "r", the ___ the future value of the annuity
higher; higher lower; lower
the fischer effect predicts that the ___ expected inflation, the ___ will be nominal interest rates
higher; higher lower; lower
when economic conditions in a country ___, the supply of loanable funds will tend to ___ in that country
improve; increase decline; decrease
when the federal reserve want to decrease the supply of bank deposits in the system and hence the money supply, they ___ the level of required reserves
increase
which of the following are among the responsibilities of the federal reserve banks
issues and redeem U.S. savings bonds, issue U.S. treasury securities, deliver government securities to investors
the financial sector of the U.S. business is the ___ provider of loanable funds and the ___ user of loanable funds
largest; largest
short-term securities have a more active secondary market and hence are more ____ than long-term securities
liquid
Secondary Markets offer buyers of securities the ability to convert them to cash quickly at fair market value, a characteristic known as
liquidity
the risk that a financial institution may have inadequate cash to meet requests for demand deposit withdrawal is called
liquidity risk
in the "originate and hold" model, financial institutions are exposed to risks, including which of the following
liquidity risk interest rate risk credit risk
a security whose returns are tax-free can pay __ interest than a taxable security and still be attractive to investors
lower
when the fed ___ the discount rate, they are sending a signal to the market that they would like to see ___ interest rates and ___ borrowing
lowers; lower; more raises; higher; less
a single payment received at the beginning or end of an investment period is called a
lump sum payment
the theory that argues that investors have specific maturity preferences and must be paid a premium to hold securities of a different maturity is the
market segmentation theory
both the unbiased expectations theory and the liquidity premium theory ignore investor preferences regarding the ___ of the securities they hold
maturity
two important characteristics of capital market securities are
maturity greater than one year wider price fluctuations than MM securities
financial institutions frequently transform short-maturity liabilities provided by investors into a portfolio of long-maturity assets. This is known as
maturity intermediation
_________ and __________ allow a financial intermediary to offer safe liquid liabilities such as deposits while investing the depositors' money in riskier illiquid assets.
monitoring and diversification
in a world w/o financial institutions where suppliers provided funds directly to users, suppliers of funds would face 3 types of risks/costs
monitoring cost price risk liquidity cost
In January 2003, the Federal Reserve change its discount window policy to make discount window loans
more expensive but easier to obtain
the farther the bond is from maturity, the ___ the price of the bond is to interest rate changes
more sensitive
when non-price restrictions on borrowing are reduced, borrowers will demand___ funds and interest rates will ___
more; increase
the repeated issuing of new loans and creation of new deposits triggered by a change in the reserve requirement results in a total change in bank deposits that is many times different than the original change in reserves. This is called
multiplier effect
for large interest rate increases, duration ___ the fall in bond price
over predicts
financial institutions reduce individual investor's monitoring costs by
pooling their funds and hiring employees to monitor the fund of users
a highly liquid asset has which of the following characteristics
predictable price low transaction cost can be sold quickly
long maturity securities have more ___ than short maturity securities
price risk
duration relates the percentage change in bond ___ to ___ changes in interest rates
price; small
IBM creates and sells additional stock to the investment banker Morgan Stanley. Morgan Stanley then resells the issue to the U.S. public through its mutual funds. This transaction is an example of a(n)
primary market transaction
the financial crisis of 2008 was triggered by
problems in subprime mortgage markets
insolvency risk at a financial intermediary (FI) is the risk
risk that an FI may not have enough capital to offset a sudden decline in the value of its assets.
the term "thrifts" refers to which of the following types of depository institution
savings associations savings banks credit unions
The federal reserve bank has primary responsibility for the supervision and regulation of
state-chartered member banks foreign bank operations in the US edge act and agreement corporation bank holding companies banks chartered by the OCC
when local govmt temporarily invest tax revenues in financial markets until the funds are needed, they become a ___ of loanable funds
supplier
the equillibrium interest rate for a security is the interest rate where the ___ and ___ intersect
supply and demand curve
the 2 approaches available to the Federal Reserve for implementing monetary policy are
target the quantity of reserves in the market based on the FOMC's objectives for growth i the monetary base set a target for the federal funds rate and adjust the level of excess reserves to meet that target
Liquidity risk at a financial intermediary (FI) is the risk
that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices
investors demand more funds at lower interest rates because
the cost of borrowing funds is lower
in addition to the falling boundaries between traditional sectors of the financial industry, another factor which has recently contributed to change in the industry is
the globalization of financial services
investors are willing to supply more funds at higher interest rates because
their reward is higher
businesses demand funds for which of the following reasons
to invest in long-terms assets like plant and equipment to satisfy short-term working capital needs for inventory
TorF: the default risk premium represents the additional return that investors must ear to forego risk-free securities and invest in risky securities
true
when the Federal Reserve want to stimulate the economy, it can
use open market operations to buy treasury bills, lower reserve requirements, lower the discount rate
primary financial markets bring together ___ and ___
users of funds provider of funds