FIN FINAL

Gross Domestic Product

all the above

Which of the following could reduce negative externalities?

all the above

Deposit runs

are dangerous because they tend to impair the liquidity and profitability of a financial institution and, thus, threaten its solvency.

Certificates of deposit (CDs)

are issued by commercial banks.

Holding everything else constant, a bank may improve its liquidity by

increasing its legal reserves.

Tier II capital

is part of a bank's capital requirement and increases a bank's ability to absorb losses before the FDIC has to compensate insured depositors.

The big three credit rating agencies (Moody's, Standard and Poor's and Fitch) are paid by

the companies that ask these firms to rate their securities.

In response to reports that the coronavirus is spreading, exacerbating fears of a global economic slowdown, holding everything constant,

the demand for U.S. Treasury securities increases

When a company's debt is upgraded from "junk" to "investment grade," holding everything else constant,

the demand for the company's debt securities tends to increase.

Which of the following markets provides access to liquidity for lenders?

the secondary market

Which of the following are classified as bank off-balance sheet activities?

Standby letters of credit

Which of the following may be reasonable choices when forecasting future spot interest rates?

forwards rates implied in the spot interest rates that are plotted in the yield curve

A loan commitment

generates fee revenue for the issuing bank.

When the economy goes into a recession,

GDP declines

Kirsten McGowan must decide whether to invest in a 5-year bond issued by New York City yielding 4.2%, or a similar maturity corporate bond issued by Greater Comforts Inc. that offers a yield of 6.8%. Give that Ellen's tax rate is 30%, which investment?

Greater Comforts

Which of the following term structure theories focuses on investors' preference for lending in the short-term funds market?

The Liquidity Preference Theory

The prices and yields of U.S. Treasury bills in the primary market are set by

competitive bidders in single-price auctions.

Suppose inflation rates have increased from 2% to 3% and are expected to go up from there. Market participants are likely to

shift the demand for funds to the right

Holding everything else constant, if the Fe increases its holdings of short-term Treasury Bills,

short-term interest rates fall to relative to longer-term interest rates

when a coupon bond trades at a premium above par

the bond's current yield is less than its coupon rate

Using the Treynor Ratio to measure the performance of a portfolio of stocks implies the assumption that

the portfolio is fully diversified so that firm-specific risk is irrelevant.

Which of the following instruments are considered "least risky"?

Treasury bills

When there is a large decrease in interest rates from 6% to 4%, the duration measure is likely to

understate the bond price increase.

Deposit insurance by the FDIC

was established to reduce the risk of runs on bank deposits.

The yield curve defines the relationship between

yields at a point in time and term to maturity

Holding everything else constant, a bond's discount from par is greater

the higher its yield to maturity and the longer time remaining before maturity

When the value of the dollar on foreign currency markets is expected to decrease against the peso, holding everything else constant,

the stock prices of U.S. companies that export to Mexico are likely to increase.

In the 1970s

market interest rates rose above the rates paid by banks on deposit accounts.

Currently, deposits in banks are insured up to

250,000

Suppose an investor purchased a newly issued 90-day Treasury bills with a $100,000 face value for $99,100. Estimate the yield assuming the investor holds the T-bills to maturity. (Use a 365-day year.)

3.7%

A ______ grants the owner the right to purchase a specified financial instrument for a specified price within a speci¬fied period of time. A) call option B) put option C) sale of a futures contract D) purchase of a futures contract

A

A call option is "in the money" when the A) market price of the underlying security exceeds the exercise price. B) market price of the underlying security equals the exercise price. C) market price of the underlying security is less than the exercise price. D) premium on the option is less than the exercise price.

A

A put option is "out of the money" when the A) market price of the security exceeds the exercise price. B) market price of the security equals the exercise price. C) market price of the security is less than the exercise price. D) premium on the option is less than the exercise price.

A

A savings and loan association has long term fixed rate mortgages supported by short term funds. A put option on Treasury bond futures could be used to (ignore the premium paid for the option when you answer this question) A) maintain its interest rate spread if interest rates rise, and increase its spread if interest rates fall. B) maintain its interest rate spread if interest rates fall, and increase its spread if interest rates rise. C) maintain its interest rate spread whether interest rates rise or fall. D) increase its interest rate spread whether interest rates rise or fall

A

A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29, and rises to $32 before the expiration date. What is the stock price at which the speculator would break even? A) $26 B) $34 C) $28 D) $29 E) $32

A

The ________, the lower the premium on a put option, other things being equal. A) higher the existing price of the security relative to the exercise price B) greater the variability of the security's market value C) longer the maturity of the option D) A and B

A

The sale of a call option on a stock the seller already owns is referred to as A) a covered call. B) a naked call. C) call on futures. D) futures on options.

A

When the market price of the underlying security exceeds the exercise price, the A) call option is in the money. B) put option is in the money. C) call option is at the money. D) call option is out of the money.

A

A speculator buys a call option for $3, with an exercise price of $50. The stock is currently priced at $49, and rises to $55 on the expiration date. What is the stock price at which the speculator would break even? A) $50 B) $58 C) $52 D) $53 E) $49

B

A speculator purchased a call option with an exercise price of $31 for a premium of $4. The option was exercised a few days later when the stock price was $34. What was the return to the speculator? A) 25 percent B) 25 percent C) 3.2 percent D) 2.9 percent

B

Corporations involved in international business trans¬actions can ______ to hedge future ______. A) sell currency call options; payables B) purchase currency put options; receivables C) purchase currency call options, receivables D) purchase currency put options, payables E) A and B

B

Sellers (writers) of call options can offset their position at any point in time by A) selling a put option on the same stock. B) buying identical call options. C) selling additional call options on the same stock. D) A and B E) all of the above

B

The _______________ is the most important exchange for trading options. A) New York Stock Exchange (NYSE) B) Chicago Board of Options Exchange (CBOE) C) Chicago Mercantile Exchange (CME) D) Philadelphia Stock Exchange

B

European-style stock options A) are long-term options (at least one year until expiration at the time they are created). B) can be exercised after the expiration date. C) can be exercised any time until the expiration date. D) none of the above

D

When the exercise price exceeds the market price of the underlying security, the A) call option is in the money. B) put option is in the money. C) call option is at the money. D) put option is out of the money.

B

A speculator buys a call option for $3, with an exercise price of $50. The stock is currently priced at $49, and rises to $55 on the expiration date. The speculator will exercise the option on the expiration date (if it is feasible to do so). What is the speculator's profit per unit? A) $1 B) $5 C) $2 D) $1 E) $2

C

Put options are typically used to hedge A) when portfolio managers are mainly concerned with a permanent decline in a stock's value. B) when portfolio managers are mainly concerned with a permanent increase in a stock's value. C) when portfolio managers are mainly concerned with a temporary decline in a stock's value. D) when portfolio managers are mainly concerned with a temporary increase in a stock's value.

C

The ________, the higher the call option premium, other things being equal. A) lower the existing price of the security relative to the exercise price B) lower the variability of the security's market price C) longer the maturity of the option D) A and B

C

The greater the volatility of the underlying stock, the ___________ the call option premium and the _________ the put option premium. A) higher; lower B) lower; higher C) higher; higher D) lower; lower

C

The longer the time to maturity, the ___________ the call option premium and the _________ the put option premium. A) higher; lower B) lower; higher C) higher; higher D) lower; lower

C

___________ execute transactions desired by investors and trade stock options for their own account. A) Floor brokers B) Specialists C) Market-makers D) none of the above

C

If the Federal Reserve were to raise interest rates, holding everything else constant, which of the following would be a likely consequence?

Companies' cost of financing would decline.

A ______ requires a premium above and beyond the price to be paid for the financial instrument. A) futures contract B) call option C) put option D) B and C

D

A speculator buys a call option for $3, with an exercise price of $50. The stock is currently priced at $49, and rises to $55 on the expiration date. What is the stock price at which the speculator would break even? A) $50 B) $58 C) $52 D) $53 E) $49

D

Assume a pension fund purchased stock at $53. Call options at a $50 exercise price presently have a $4 premium per share. The pension fund sells a call option on the stock it owns. If the call option is exercised when the price of the stock is $56, what is the gain or loss per share to the pension fund (including its gain from holding the stock as well)? A) $4 gain B) $6 loss C) $2 loss D) $1 gain E) $0

D

Assume an insurance company purchases a call option on an S&P 500 Index futures contract for a premium of 14, with an exercise price of 1800. The value of an S&P 500 futures contract is 250 times the index. If the index on the futures contract increases to 1830, what is the gain on the sale of the futures contract? A) $15,000 B) $7,500 C) $3,300 D) $4,000 E) $1,500

D

Covered call writing ______ the upside potential return and ______ the risk of an investment in stock. A) increases; increases B) increases; decreases C) limits; increases D) limits; decreases

D

Speculators purchase currency ______ on currencies they expect to ______ against the dollar. A) call options; weaken B) put options; strengthen C) futures; weaken D) put options; weaken

D

A speculator purchases a put option on Treasury bond futures with a September delivery date with a strike price of 85 00. The option has a premium of 2 00. Assume that the price of the futures contract decreases to 82 00 on the expiration date and the option is exercised at that point (if it is feasible). What is the net gain? A) $1,968.75 B) $3,750.00 C) $3,000.00 D) $2,000.00 E) $1,000.00

E

If a corporation hedges payables with currency call options, it will ______ if the value of the foreign currency is ______ than the exer¬cise price when the payables are due. A) exercise the option; greater B) exercise the option; less C) let the option expire; greater D) let the option expire; less E) A and D

E

Speculators may be willing to write ______ options on foreign currencies they expect to ______ against the dollar. A) put; strengthen B) put; weaken C) call; strengthen D) call; weaken E) A and D

E

Which of the following financial institutions do not issue deposits?

Life Insurance companies

Holding everything else constant, under which of the following conditions are Treasury yields most likely to decrease?

The U.S. economy appears to be slowing along with other economies in Europe and Asia

Holding everything else constant, which of the following would likely cause stock prices to increase?

The announcement that an effective vaccine against the coronavirus is ready for distribution.

When a bank raises the interest rate it pays on its deposits in an attempt to reverse large unexpected deposit withdrawals, holding everything else constant, which of the following is most likely:

The bank's interest expense will increase.

Which of the following measures a bond's price sensitivity to changes in interest rates?

The bond's duration.

When interest rates in Europe are lower than interest rates in the U.S., holding everything else constant,

U.S. companies their demand for funds in the Europe

Suppose you purchased a coupon bond with a duration of 6.7 years and 8 years to maturity at par. Shortly after you purchased the bond, interest rates on similar bonds decreased from 7% to 5% and stayed at that lower level. If you decide to sell your bond 2 years after you purchased it, which of the following is most likely?

Your actual annual return on the bond for the two years you held it will exceed the yield-to-maturity the bond promised at the time of purchase.

The financial return to investors in money market securities comes in the form of

a capital gain.

Treasury Inflation-Protected Securities (TIPS) are more attractive than nominal Treasury securities with similar maturities when

actual inflation turns out to be greater than the inflation the market had expected.

Holding everything else constant, the demand for funds from the business sector tens to increase when,

all of the above.

Which of the following may contribute to cost-push inflation?

bad weather and the spread of a virus killing animals have led to higher prices for food; war in the middle east is raising prices for crude oil on world markets

When interest rates rise

bond investors reinvestment income increases and bond prices tend to decline

If the Pure Expectations Theory holds and interest rates are expected fall,

borrowers choose short maturities now

When real interest in the U.S. are higher than real interest rates in other countries, holding everything constant, foreign investors tend to

buy U.S. securities this increasing the prices of these securities; increase their supply of funds in U.S. financial markets thus putting downward pressure on U.S. interest rates

Changes in the yield differentials between TIPS and nominal Treasury securities of the same maturity may be used as the market measure of

changes in inflation expectations.

For financing, small and mid-sized businesses depend most heavily on

commercial banks.

Holding everything else constant, a bond's duration

decreases as the bond approaches its maturity date.

Holding everything else constant, households' demand for funds tends to shift to the right when

economic growth is expected to increase

The charging of flat (uniform) deposit insurance premiums during the 1980s

encouraged risk-taking at banks and thrifts because depository institutions were not charged for the risk they imposed on the FDIC.

The federal government budget deficit is defined as

federal tax revenues minus federal government expenditures over a given period of time

The U.S. treasury,

finances the U.S. federal debt by issuing Treasury Securities

Holding everything else constant, rising demand-pull inflation tends to

increase business profits and production

Suppose the nominal interest rate on one-year Treasury security is 2% with an expected inflation rate of 1.5%. If actual inflation turns out to be 2.5%,

lenders will have earned a real interest rate that is lower than expected

When the default risk premium that is part of the corporate interest rate increases significantly, which of the following is likely to increase at the same time?

liquidity risk premium

Including a conversion feature in a bond contract would

make the bond more attractive to investors (bondholders)

a zero coupon bond

may trade above par only when its interest rate is negative

Currently in the U.S.

none of the above(look at yellow sheet)

Stripped Treasury securities (STRIPS)

offer only a one-time cash flow at maturity.

Strict protective covenants in a bond issue

protect the bondholders and lower a firm's cost of borrowing.

If the treasury increases its issuance of long-term securities and decreases its issuance of short securities,

short-term interest rates would fall while long-term interest rates would rise, the yield curve would rotate upward causing the slope to become steep and upward sloping

To help the stock market efficiently allocate resources to their most productive uses,

stock prices should reflect all available public information.

Municipal general obligation bonds are

supported by the municipal government's ability to tax.

Holding everything else constant, the demand for funds from the federal government tends to increase when,

tax revenues are falling; the unemployment rate goes up

Milani inc. is planning to issue a 10-year corporate bond and must estimate the interest rate investors are likely to require. The firm estimates that it is likely to pay 3 % above the appropriate Treasury rate. The appropriate treasury rate is

the 10-year Treasury bond rate

The required return on a stock may be determined by

the Capital Asset Pricing Model (CAPM).

Holding everything constant, the U.S. Treasury's demand for funds is more likely to crowd out the demand for funds by businesses and households when

the Treasury's demand for funds keeps rising as interest rates are going up

An analyst considers a bond undervalued when

the bond's yield to maturity exceeds the analyst's required return

When foreign central banks buy U.S. Treasury securities, holding everything else constant,

the supply of funds to the U.S. Treasury shifts to the right

When demand for funds shifts to the right, Holding everything else constant,

the supply of securities shifts to the right