FIN315 Final Exam

The Fed needs the approval of the presidential administration to make decisions. True False

False

________ bonds are the most liquid of all long-term bonds. A) Callable B) Municipal C) Corporate Aaa D) U.S. Treasury

D) U.S. Treasury

Factors that can cause the supply curve for bonds to shift to the right include A) an expansion in overall economic activity. B) a decrease in expected inflation. C) a decrease in government deficits. D) all of the above. E) only A and B of the above.

A) an expansion in overall economic activity.

The Bank of England, as well as the ECB, put price stability first among all goals. This is known as a A) hierarchical mandate. B) dual mandate. C) singular mandate. D) ubiquitous mandate.

A) hierarchical mandate.

If expected inflation increases for the coming year, we expect the price of gold to ________ due to a rightward shift the in ________ curve. A) increase; demand B) increase; supply C) decrease; demand D) decrease; supply

A) increase; demand

Which of the following statements about venture capital (VC) funding is NOT correct? A. VC firms plan to exit a start-up soon after investing, within three years usually. B. When VC firms exit a deal via Merger & Acquisition (M&A), on average it occurs sooner than the deals that they exit vis IPO. C. VC firms some time use convertible bonds to provide financing. D. VC investing is risky. E. VC's may focus on a specific industry to facilitate monitoring their investments and to enhance returns by providing expertise

A. VC firms plan to exit a start-up soon after investing, within three years usually.

Suppose legislation requiring the Fed to keep the inflation rate between 1.5% and 2.5% per year is passed by Congress. This law restricts the Fed's A. goal independence. B. instrument independence. C. both A and B of the above. D. neither A nor B of the above.

A. goal independence.

Which of the following factors might help explain why the amount of negative yielding bond debt in Europe and Asia has reached $18 Trillion. a. Foreign governments, especially in France and Germany, have successfully engaged in a restructuring and stimulating their economies through lower taxes and less regulation, thereby causing surges in GDP growth and inflation. b. The US dollar is appreciating relative to the yen and the euro, thereby driving down interest rates. c. Some central banks and commercial banks are charging, instead of paying, interest on excess reserves and large deposits. d. Corporations and investors incurs costs to store large amounts of cash and, therefore, they are willing to tolerage negative yields (i.e. as a convenience fee) up to a point. e. Quantitative easing by the European Central Bank has pushed bond supply and demand equilibrium into a regime of negative yields.

All of the following: c. Some central banks and commercial banks are charging, instead of paying, interest on excess reserves and large deposits. d. Corporations and investors incurs costs to store large amounts of cash and, therefore, they are willing to tolerage negative yields (i.e. as a convenience fee) up to a point. e. Quantitative easing by the European Central Bank has pushed bond supply and demand equilibrium into a regime of negative yields.

Which likely has a longer duration — a 30-year 5% coupon bond or a 30-year 5% mortgage? A) The 30-year mortgage B) The 30-year bond C) Both have the same duration D) It is not possible to determine without more information

B) The 30-year bond

When the least desirable credit risks are the ones most likely to seek loans, lenders are subject to the A) moral hazard problem. B) adverse selection problem. C) shirking problem. D) free-rider problem. E) principal-agent problem

B) adverse selection problem.

Discount loans to banks experiencing severe liquidity problems are called A) primary credit. B) secondary credit. C) seasonal credit. D) lender-of-last-resort credit.

B) secondary credit.

The bond markets are important because A) they are easily the most widely followed financial markets in the United States. B) they are the markets where interest rates are determined. C) they are the markets where foreign exchange rates are determined. D) all of the above.

B) they are the markets where interest rates are determined.

Both Facebook (FB) and Apple (APPL) were recently trading at over $180 per share. Netflix (NFLX) was trading at over $300 per share and GOOGL is over $1,000 per share. An individual investor who wants to invest $50 per month in these so-called FANG stocks chooses to put their savings into a mutual fund whose stated objective is to invest in FANG stocks. Which function of mutual funds is she relying upon? A. Liquidity intermediation B. Denomination intermediation C. Managerial expertise D. SIPC savings insurance

B. Denomination intermediation

Fraudulent practices and other abuses of private pension funds led Congress to enact the A. Federal Deposit Insurance Corporation Act B. Employee Retirement Income Security Act C. Federal Reserve Act D. Social Security Act E. Dodd-Frank Act

B. Employee Retirement Income Security Act

According to Benn Steil's "Misreading the Fed on a Rate Increase," during the years following the 2008-2009 financial crises the usual FOMC tools for maintaining the federal funds rate at its target were potentially insufficient due to the very low (near zero) short-term rates and a large supply of excess reserves in the banking system. Which of the following statements about Fed's tools to limit rate fluctuations in the federal funds market is TRUE. A. The only tool available is the discount rate, which sets a floor on the federal funds rate because banks will lend through the discount window if the federal fund rate drops too low. B. The Fed can pay interest on excess reserves to set a floor on the federal funds rate and they can also set the discount rate that Federal Reserve Banks will establish to establish a ceiling on the federal funds rate. C. The Fed can use the Depression Era Regulation N to make it illegal for banks to lend or borrow from each other at any rate other than the federal funds rate, plus or minus 50 basis points. D. The Fed's hands are tied because banks can always opt to borrow and lend at LIBOR if they do not like the federal funds rate.

B. The Fed can pay interest on excess reserves to set a floor on the federal funds rate and they can also set the discount rate that Federal Reserve Banks will establish to establish a ceiling on the federal funds rate.

Which aspect of Dodd-Frank regulation potentially allows the federal government to regulate large insurers such as AIG or MetLife? A. repeal of the McCarran-Ferguson Act of 1945 B. establishment of the FSOC (Financial Stability Oversight Council) C. establishment of the CFPB (Consumer Financial Protection Bureau) D. the Volcker rule E. Section 13(3) of the Federal Reserve Act

B. establishment of the FSOC (Financial Stability Oversight Council)

The case for Federal Reserve independence does not include the idea that A. politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level. B. policy is always performed better by an elite group such as the Fed. C. a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced. D. political pressure would impart an inflationary bias to monetary policy.

B. policy is always performed better by an elite group such as the Fed.

Insurance is subject to several basic principles, including all of the following except that A. the insured must provide full and accurate information to the insurance company. B. the insured should profit as a result of insurance coverage when covered-risk losses are incurred. C. the loss must be reasonably quantifiable. D. there must be a relationship between the insured and the beneficiary

B. the insured should profit as a result of insurance coverage when covered-risk losses are incurred.

Between 1950 and 2016, Treasury Bill and Federal Fund rates peaked near A) 1961. B) 1972. C) 1981. D) 1995.

C) 1981.

Suppose that you purchase a 182-day Treasury bill for $9,850 that is worth $10,000 when it matures. The approximate discount yield (i.e. the approximate annualized yield of the instrument) is A) 1.5%. B) 2%. C) 3%. D) 6%

C) 3%.

Which type of open market operation is intended to change the level of reserves? A) Defensive open market operations B) Reserve requirements C) Dynamic open market operations D) Market equilibrium

C) Dynamic open market operations

Which of the following is NOT a regulatory restriction placed on US banks from the 1930's until the deregulation of commercial banking in the 1980s and 1990s? A) limits on location and number of bank branches B) separation of investment and commercial banking activities C) ban on giving gifts, such as toasters, in order to attract new customers D) limits on interest rates paid to depositors

C) ban on giving gifts, such as toasters, in order to attract new customers

When markets develop increased inflation expectations, shifts in both the supply and the demand for bonds (or, equivalently, the supply and the demand for flows of loanable funds) will force interest rates to _________. This is known as the ___________. A) fall; Volcker Rule B) fall; Fisher Effect C) rise; Fisher Effect D) rise; Punch Bowl Dilemma E) rise; Volcker Rule

C) rise; Fisher Effect

Which type of open market operation is intended to change the level of reserves? A. Defensive open market operations B. Reserve requirements C. Dynamic open market operations D. Market equilibrium

C. Dynamic open market operations

A recent Wall Street Journal piece states "Retirement plans across the country still project their investments will increase at a median annual rate of 7.25%, according to Wilshire Consulting, an adviser to pension funds. Yearly returns on public pension plans have returned a median 6.79% over the past decade and 6.49% over the past 20 years, according to Wilshire Trust Universe Comparison Service, a database." In the context of our discussion about retirement and pensions plans, which of the following statements is implied and most likely to be TRUE. A. Because pension plans will earn more, 7.25% rather than 6.79% in the future, they are more likely to be fully funded, thereby reducing the risk to our financial system. B. Some pension plans will be underfunded because their investment rate assumption is optimistic, thereby posing the risk that the Financial Stability Oversight Council will be forced to designate some large public pension plans as SIFIs (Systemically Important Financial Institutions) and thereafter subject them to liquidation by the FDIC through Dodd-Frank's Orderly Liquidation Authority. C. Some pension plans are likely to be underfunded, which may cause the Pension Benefit Guaranty Corporation's (PBGC) burden to grow even further, thereby placing a strain on the financial system. D. Pension plans are being overfunded because the investment rate assumptions were too pessimistic in the past. E. Many pension plans are likely to be seriously underfunded in the coming decades, thereby creating exigent circumstances that may cause the Federal Reserve to intervene under the authority of Section 13 (3) of the Federal Reserve Act.

C. Some pension plans are likely to be underfunded, which may cause the Pension Benefit Guaranty Corporation's (PBGC) burden to grow even further, thereby placing a strain on the financial system.

From and investment banker's perspective the best outcome occurs when a new issue is A. undersubscribed. B. syndicated. C. fully subscribed. D. oversubscribed.

C. fully subscribed.

The efficient market hypothesis suggests that allocating your funds in the financial markets on the advice of a financial analyst A. will certainly mean higher returns than if you had made selections by throwing darts at the financial page. B. will always mean lower returns than if you had made selections by throwing darts at the financial page. C. is not likely to prove superior to a strategy of making selections by throwing darts at the financial page. D. is good for the economy.

C. is not likely to prove superior to a strategy of making selections by throwing darts at the financial page.

Which of the following statements about mutual funds is TRUE? A. open-end mutual funds shares do not trade at the Net Asset Value (NAV) of the fund, and can trade at either a premium or discount to the NAV. B. open-end mutual funds may close to new investors at times and when they do, they become closed-end funds, the shares of which will not necessarily be redeemed at the NAV. C. the NAV of open-end mutual funds is determined once per day, and is the price, not considering fees and sales charges, that sellers and buyers of shares will get when their transactions are made. D. following the mutual fund abuses discovered by the SEC in the early 2000s, and because sales loads encourage market timing, regulations were passed to permanently ban up-front sales loads. E. only A and B of the above are true.

C. the NAV of open-end mutual funds is determined once per day, and is the price, not considering fees and sales charges, that sellers and buyers of shares will get when their transactions are made.

Which of the following statements are true? A) Because coupon payments on municipal bonds are exempt from federal income tax, the expected after-tax return on them will be higher for individuals in higher income tax brackets. B) An increase in tax rates will increase the demand for municipal bonds, lowering their interest rates. C) Interest rates on municipal bonds will be lower than on comparable bonds without the tax exemption. D) All of the above are true statements. E) Only A and B are true statements.

D) All of the above are true statements.

Each Fed bank president attends FOMC meetings; although only ________ Fed bank presidents vote on policy, all ________ provide input. A) three; ten B) five; ten C) three; twelve D) five; twelve

D) five; twelve

A bank manager is trying to shorten the duration of the bank's assets to reduce interest rate risk and duration gap. Which of the following actions could be taken to effectively meet the manager's goal? A. Purchase assets of shorter maturity and sell assets of longer maturity. B. Enter into interest rate swaps (sell fixed, buy float). C. Sell bond futures D. All of the above. E. None of the above

D. All of the above.

Which of the following is NOT a true statement about Bagehot's Dictum A. Bagehot's Dictum is the basis for section 13(3) of the Federal Reserve Act, which allows the Fed to lend not only to banks, but also to any institution or corporation during times of financial stress. B. It is credited to Walter Bagehot, who is an 19th century English intellectual. C. It states that the lender of last resort should lend freely, but only when the loans are secured by sufficient collateral. D. It proposes that loans be made to struggling institutions at below-market interest rates so that these financial institutions can recover more easily with a reduced cost of debt.

D. It proposes that loans be made to struggling institutions at below-market interest rates so that these financial institutions can recover more easily with a reduced cost of debt.

Which of the following is not a regulator of part of the U.S. financial system? A. US Department of Labor B. Securities and Exchange Commission C. Federal Deposit Insurance Corporation D. Mutual Fund Integrity Institute E. Federal Reserve System

D. Mutual Fund Integrity Institute

Which of the following is NOT an implication of the strong form of the efficient market hypothesis? A. One investment is as good as any other because security mispricing based on any information cannot be exploited for economic benefit. B. Security prices will reflect all relevant information about a securities price: past, present, and future. C. A security's price already reflects all publicly available information about the intrinsic value of the security. D. Persons with inside (i.e. not known to the public) information, using long and/or short positions, are able to exploit such information to profit from market prices that do not yet reflect the inside information.

D. Persons with inside (i.e. not known to the public) information, using long and/or short positions, are able to exploit such information to profit from market prices that do not yet reflect the inside information.

Consider Figure 1 above. The reinforcing shifts in both bond supply and demand, such that each tend to drive rates in the same direction, is usually associated with A. The Phillips Curve B. The Laffer Effect C. The Greenspan Grapple D. The Fisher Effect

D. The Fisher Effect

Which is NOT an activity of investment banks? A. Underwriting new issues of corporate stocks and bonds B. Acting as deal makers in mergers C. Acting as intermediaries in the buying and selling of businesses or parts of businesses D. Underwriting new issues of federal government bonds

D. Underwriting new issues of federal government bonds

Mutual funds may charge a 12b-1 fee, which is A. a contingent deferred sales charge. B. a redemption fee. C. a fee used to compensate the mutual fund's managers for their skill. D. a fee used to pay marketing expenses and sales commissions.

D. a fee used to pay marketing expenses and sales commissions.

Banks subject to reserve requirements set by the Federal Reserve System include A) only state-chartered banks. B) only nationally chartered banks. C) only banks with less than $100 million in assets. D) only banks with less than $500 million in assets. E) all banks whether or not they are members of the Federal Reserve System

E) all banks whether or not they are members of the Federal Reserve System

The chairman of the Board of Governors of the Federal Reserve System exercises a high degree of control over the board A) through his ability to set the agenda of the Board and the FOMC. B) through his role as spokesperson for the Fed with the President and before Congress. C) because he or she can veto decisions made by a majority of the other Board members. D) because of all of the above. E) because of only A and B of the above.

E) because of only A and B of the above.

Which of the following is NOT a method that a bank can use to handle meeting its reserve requirement during periods of deposit net outflows? A. Enter into repurchase agreements with other banks or the Fed's repo facility. B. Borrow from other banks in the federal funds market. C. Sell securities. D. Hold excess reserves. E. Call in loans.

E. Call in loans.

Mortgage-backed securities A. are securities collateralized by a pool of mortgages. B. may be collateralized by either insured or uninsured mortgages. C. may be in the form of CDOs, but never in the form of CMOs. D. are all of the above E. are only A and B of the above.

E. are only A and B of the above.

Hedge funds are generally A. low risk because they are market-neutral. B. low risk if they buy Treasury bonds. C. low risk because they hedge their investments. D. high risk because they are market-neutral. E. high risk, even though they may be market-neutral.

E. high risk, even though they may be market-neutral.

Buyers of private placement issues are most likely to be A. insurance companies. B. pension funds. C. investment banks. D. all of the above. E. only A and B of the above

E. only A and B of the above

Financial markets improve economic welfare because A. they allow funds to move from those without productive investment opportunities to those who have such opportunities. B. they allow consumers to time their purchases better. C. they weed out inefficient firms. D. they do all of the above. E. they do A and B of the above.

E. they do A and B of the above.

From 2008 through 2015 (post global financial crisis period) and since March 2020 (post Covid19 outbreak period), the Fed increased the federal funds rate in an effort to stimulate the economy. True False

False

If, in the future, Jerome Powell wants to reduce inflation, he would likely increase money supply growth (i.e. reduce the Federal Funds Rate target) and bring out the punch bowl. True False

False

T-bills must offer a premium above negotiable certificates of deposit (NCDs) to compensate for less liquidity and safety. True False

False

Money market security values are less sensitive to interest rate movements than bonds. True False

True

T-bills do not offer coupon payments but are sold at a discount from par value. True False

True

When there is a conflict between the Fed's mandates (for example, both inflation and unemployment are relatively high). there is likely to be greater disagreement among FOMC members about what to do with the punch bowl. True False

True

Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The (Macauley) duration of this bond is: a. 1.90 years. b. 2.00 years. c. 1.53 years. d. 1.00 year. e. 1.81 years.

a. 1.90 years.

Which of the following arguments argues in favor of limiting the independence of the Federal Reserve and legislation like "Audit the Fed?" a. Because the Fed's decision-makers are not elected, the institution is undemocratic and potentially unresponsive to the wishes of the people b. If the Fed's decision-makers were readily subject to political pressures while fulfilling their duties, or to maintain the positions, then the Fed's monetary policy moves could exaggerate business cycles, and thereby inflationary and recessionary periods, at the expense of long-term economic health. c. Because the Fed can engage in ordinary monetary policy moves without Congressional authorization or appropriation, rate changescan be uncompleted quickly and, thereby, to maximum effect. d. The 4 -year term of the Chair of the Board of Governors is staggered in-between presidential election cycles, which thereby avoids pressures to ease monetary policy excessively, risking inflation and long-term economic damage, during the quarter leading up to the November election.

a. Because the Fed's decision-makers are not elected, the institution is undemocratic and potentially unresponsive to the wishes of the people

Which of the following statements about central banks use of monetary policy during asset bubbles would NOT be consistent with the views of Alan Greenspan during his time as chair of the Federal Reserve Board of Governors? a. The Fed should pursue monetary policies, and also encourage Congress to pursue new regulations, that will gently deflate the asset bubble and return the asset's exuberant price levels to their rational and intrinsic levels. b. Interest rates are a blunt instrument and risk unnecessarily and broadly negative consequences if used in attempt to deflate an asset bubble. c. One can never be certain that a large and sustained rise in asset prices is actually a bubble and deploying monetary policy to deflate prices unnecessarily risks economic harm. d. For the case where an asset market corrects quickly (i.e when an asset bubble bursts) the central bank can pursue policies of easing rates and liquidity provision to mitigate the damage to the broader economy while markets recover.

a. The Fed should pursue monetary policies, and also encourage Congress to pursue new regulations, that will gently deflate the asset bubble and return the asset's exuberant price levels to their rational and intrinsic levels.

What concept explains the connection between the Fisher effect and loanable funds framework predictions of interest rate movements due to changes in inflation expectations? a. savers' desire to maintain the existing real rate of interest b. savers' desire to achieve a negative real rate of interest c. borrowers' desire to achieve a positive real rate of interest AND savers' desire to achieve a negative real rate of interest d. borrowers' desire to achieve a positive real rate of interest

a. savers' desire to maintain the existing real rate of interest

____ bonds are the most liquid and thereby have the most active secondary market.​ a. ​Treasury b. Convertible c. ​Junk d. Municipal​ e. ​Zero-coupon corporate

a. ​Treasury

Which of the following is likely to cause a decrease in the equilibrium U.S. interest rate, other things being equal?​ a. ​pessimistic economic projections that cause businesses to reduce expansion plans b. ​a decrease in saving by foreign savers c. ​a decrease in saving by U.S. households d. ​an increase in inflation

a. ​pessimistic economic projections that cause businesses to reduce expansion plans

Marilyn purchases a three-month (91-day) T-bill with a $10,000 par value for $9,900. The Treasury bill discount rate is ____ percent. a. 7.91 b. 3.96 c. 3.56 d. 2.00 e. None of these are correct.

b. 3.96

Suppose that on Monday the yield curve is flat. Then, on Wednesday, the Fed chair gives a press conference that causes investors (bondholders) to flood the short-term market and avoid the long-term market. This may cause the yield curve to a. become downward sloping. b. become upward sloping. c. remain flat. d. None of these are correct.

b. become upward sloping.

If a commercial bank has more deposits than it needs to make loans, invest in securities or keep as reserves, then it can lend its excess funds to another depository institution through the a. federal exchange market. b. federal funds market. c. options market. d. Federal Reserve's trading desk.

b. federal funds market.

​In a collateralized mortgage obligation (CMO), mortgages are segmented into ____ based on ______ risk. a. ​caps; borrower FICO scores b. ​tranches; prepayment risk c. ​strips; income-to-debt ratios d. ​balloon payments; price risk

b. ​tranches; prepayment risk

The price that competitive and noncompetitive bidders will pay at a Treasury bill auction is the a. equally weighted average price paid by all competitive bidders whose bids were accepted. b. highest price entered by a competitive bidder. c. lowest accepted bid price entered by a competitive bidder. d. highest price entered by a noncompetitive bidder. e. None of these are correct.

c. lowest accepted bid price entered by a competitive bidder.

As a result of the Financial Reform Act of 2010, the ____ was established to regulate financial products and services.​ a. ​Federal Advisory Committee b. ​Federal Open Market Committee c. ​Consumer Financial Protection Bureau d. ​Board of Governors

c. ​Consumer Financial Protection Bureau

​Financial market participants who provide funds are called a. ​deficit units. b. ​primary units. c. ​surplus units. d. ​secondary units.

c. ​surplus units.

Which of the following is not, and has never been, a regulation imposed on US banks. a. Banks are restricted in the number and location of their retail bank branches. b. Banks are subject to an upper limit on interest rates that they may pay to depositors. c. Banks can not engage in both investment banking and commercial banking activities. d. Banks can not accept additional deposits in accounts that, in total value, exceed the FDIC insurance limits.

d. Banks can not accept additional deposits in accounts that, in total value, exceed the FDIC insurance limits.

Which of the following can be described as involving direct finance? a. An insurance company buys shares of common stock in the over-the-counter markets. b. A pension fund manager buys commercial paper in the secondary market. c. A corporation's stock is traded in an over-the-counter market. d. The seller of a home lends money to the buyer in the form of a 10-year fixed rate mortgage. e. People buy shares in a mutual fund.

d. The seller of a home lends money to the buyer in the form of a 10-year fixed rate mortgage.

A corporation acquires new funds only when its securities are sold in the a. secondary market by a stock exchange broker. b. secondary market by an investment bank. c. secondary market by a commercial bank. d. primary market by an investment bank.

d. primary market by an investment bank.

​When the Fed uses dynamic open market operations (OMOs) to sell some of its Treasury securities, there will be a. ​no shift in the supply schedule of loanable funds. b. ​an outward (rightward) shift in the supply schedule of loanable funds. c. ​an outward (rightward) shift in the demand schedule for loanable funds. d. ​an inward (leftward) shift in the supply schedule of loanable funds.

d. ​an inward (leftward) shift in the supply schedule of loanable funds.

​The difference between the 30-year mortgage rate and the 30-year Treasury bond rate is primarily attributable to a. ​insurance risk. b. ​reinvestment rate risk. c. ​interest rate risk. d. ​credit risk.

d. ​credit risk.

​An investor buys commercial paper with a 60-day maturity for $985,000. Par value is $1,000,000, and the investor holds it to maturity. What is the annualized yield? a. ​8.90 percent b. ​8.62 percent c. ​8.78 percent d. ​9.00 percent e. ​9.14 percent

e. ​9.14 percent