Financial Markets and Institutions

A point on a mortgage loan refers to one monthly payment of principal and interest.

False

A positive liquidity premium indicates that investors prefer long-term bonds over short-term bonds.

False

A stock is a debt security that promises to make periodic payments for a specific period of time.

False

A stock's market value will be higher the higher the investor's required rate of return is, all else being equal.

False

About half of new equity issues are preferred stock.

False

According to some economists, Congress made a mistake when it passed the FDICIA of not requiring the FDIC to assess risk-based insurance premiums.

False

Agency theory focuses on how government agencies regulate financial intermediaries and markets.

False

All else being equal, the greater the interest rate the greater the duration is.

False

All stocks pay dividends, as that is the only way an investor can profit from holding stock.

False

Although the internet has changed many aspects of our lives, it hasn't proven very useful for collecting and/or analyzing financial and economic data.

False

American businesses get more funds from direct financing than from indirect financing.

False

American investors pay attention to only the Dow Jones Industrial Average.

False

An asset should be priced so that is has a higher expected return when it has a greater risk in isolation.

False

An important lesson from the global financial crisis is that central banks and other regulators should have a laissez-faire attitude and let credit-driven bubbles proceed without any reaction. Intervention is always a mistake.

False

An increase in the expected rate of inflation lowers the expected return for bonds, causing their demand to increase and the demand curve to shift to the right.

False

An increase in the inflation rate will cause the demand curve for bonds to shift to the right.

False

An open market sale leads to an expansion of reserves and deposits in the banking system and hence to a decline in the monetary base and the money supply.

False

An unusual feature of the "Great Recession" in the U.S. from 2007-2009 was that the crisis did not spread to European nations.

False

As of 2015, depository institutions (banks) held the largest share of the mortgage market.

False

Bank failures in the U.S. have spiked only twice: in the 1930s and around 2010.

False

Banks are unusual participants in the money market because they buy, but do not sell, money market instruments.

False

Bonds typically sell in public markets where bid and ask prices are readily available and transparent. By contrast, stocks typically trade over the counter, where transaction details can be hidden from the public.

False

Bonds with a maturity that is longer than the holding period have no interest-rate risk.

False

Bonds with the lowest risk of default are often referred to as junk bonds.

False

Closing for a mortgage loan refers to the moment the loan is paid off.

False

Commercial paper has been used in various forms since the 1930s.

False

Countries with more independent central banks have lower inflation rates, but these have come at the expense of greater output fluctuations.

False

Critics of the current system of Fed independence contend that the president has too much control over monetary policy on a day-to-day basis.

False

Currently, over 80% of the new issues in the international bond market are Eurobonds.

False

Debt deflation refers to the decline in debt values as creditors agree to lower interest rates as an alternative to defaults.

False

Decreased transparency of the monetary policy strategy through communication with the public and the markets about the plans and objectives of monetary policymakers is an element of inflation targeting.

False

Deposits that banks keep in accounts at the Federal Reserve less vault cash is called reserves.

False

Discounting the future is the procedure used to find the future value of a dollar received today.

False

During the Global Financial Crisis of 2007-2009, conventional monetary policy actions proved sufficient to heal the U.S. financial markets and contain the financial crisis.

False

During the early years of a mortgage loan, the lender applies most of the payment to the principal on the loan.

False

Economies of scale means that the percentage return on a financial transaction rises as the size of the transaction rises.

False

Electronic Communications Networks apply technology to make organized exchanges more efficient and speedy.

False

Even if a stock does not pay a dividend, the Gordon growth model is still useful for computing the stock's price.

False

Evidence that a mutual fund has performed extraordinarily well in the past contradicts the efficient market hypothesis.

False

Evidence that stock prices sometimes fall when a firm announces good news contradicts the efficient market hypothesis.

False

Fannie Mae and Freddie Mac together either own or insure the risk on nearly one-fourth of America's residential mortgages.

False

Federal Reserve monetary policy decisions must be approved by the Secretary of the Treasury before they may be implemented.

False

Financial markets are what makes financial institutions work.

False

General obligation bonds have specific assets pledged as security or specific sources of revenue allocated for their repayment.

False

Given a bank's return on assets, the higher the bank capital, the higher the return for the owners of the bank.

False

Having performed well in the past indicates that an investment adviser or a mutual fund will perform well in the future.

False

Holding everything else constant, an increase in wealth lowers the quantity demanded of an asset.

False

Holding everything else constant, as the dollar strengthens foreigners will buy more U.S. exports.

False

If the security markets are truly efficient, there is no need to pay for help selecting securities.

False

In 2015, mortgage loans to farms represented the largest proportion of mortgage lending in the U.S.

False

In a bear market stock prices are rising, on average.

False

In a recession, when income and wealth are falling, the demand for bonds falls, and the demand curve shifts to the right.

False

In an efficient market, abnormal returns are not possible, even using inside information.

False

In general, money market instruments are low-risk, high-yield securities.

False

In recent years, financial markets have become more risky. However, only a limited number of tools (such as derivatives) are available to assist in managing this risk.

False

In recent years, financial markets have become more stable and less risky.

False

In the ECB, the Governing Council has the right to vote, and this right is taken very seriously, with all important matters decided by a majority vote.

False

In the U.S. stock market, arbitrageurs are typically able to eliminate (profit from) unexploited profit opportunities by engaging in pure arbitrage.

False

In the liquidity preference framework, an increase in the money supply engineered by the Federal Reserve will shift the supply curve for money to the left.

False

In the long run, the price stability goal is inconsistent with other goals, such as economics growth, stability of financial markets, etc.

False

Increased liquidity of alternative assets increases the demand for bonds and shifts the demand curve to the left.

False

Inflation targeting makes the central bank less accountable.

False

Interest-rate risk is the uncertainty that an investor faces because the interest rate at which a bond's future coupon payments can be invested is unknown.

False

Issuing marketable securities is the primary way businesses finance their operations.

False

It is impossible for default-free bonds to default, so their risk has no impact on bond markets.

False

It is probably a good use of an investor's time to watch as many shows featuring technical analysts as possible.

False

Loan loss reserves are an asset on a bank's balance sheet.

False

Many common stocks are traded at organized exchanges, although a majority of the largest corporations have their shares traded over the counter.

False

Monetary policy affects interest rates but has little effect on inflation or business cycles.

False

Monetary policy is set by the Board of Governors.

False

Money markets are referred to as retail markets because small individual investors are the primary buyers of money market securities.

False

More stock trading in the U.S. occurs in over-the-counter markets rather than on organized exchanges.

False

Mortgage interest rates loosely track interest rates on three-month Treasury bills.

False

Mortgage-backed securities have declined in popularity in recent years as institutional investors have sought higher returns in other markets.

False

Most corporate bonds have a face value of $1,000, are sold at a discount, and can only be redeemed at the maturity date.

False

Most of the time, the interest rate on Treasury notes is below that on money market securities because of their low default risk.

False

Nearly half the funds for mortgage lending comes from mortgage pools and trusts.

False

One important advantage to a borrower who qualifies for an FHA or VA loan is the very low interest rate on the mortgage.

False

Open market operations were the primary monetary policy tool used by the Fed to set interest rates during the Global Financial Crisis of 2007-2009.

False

Open market purchases by the Fed cause the federal funds rate to rise.

False

Quantitative easing and credit easing are essentially the same thing.

False

Rapid money supply growth and uncontrollable inflation were among the factors which motivated the creation of the Federal Reserve System.

False

Registered bonds have now been largely replaced by bearer bonds, which do not have coupons.

False

Required reserves are insurance against the costs associated with deposit outflows. The higher the costs associated with deposit outflows, the more required reserves banks will want to hold.

False

Risk occurs when the issuer of the bond is unable or unwilling to make interest payments when promised or pay off the face value when the bond matures.

False

Since a bank's assets exceed its equity capital, the return on assets always exceeds the return on equity.

False

Since market participants set security prices, the price of a stock is generally the highest price the asset could fetch.

False

The "too-big-to-fail" policy reduces the adverse selection problem in bank regulation.

False

The Dodd-Frank legislation of 2010 finally resolved the status of GSEs such as Freddie Mac.

False

The Dow Jones Industrial Average is the broadest and best indicator of the stock market's day-to-day performance.

False

The Fed has goal independence but not instrument independence.

False

The Federal Reserve banks act as liaisons between the business community and the Federal Reserve System.

False

The Fisher Effect predicts that an increase in expected inflation will lower the interest rate on bonds.

False

The Internet stock market bubble of the late 1990s led to one of the worst financial crises in U.S. history. Banks lost billions of dollars as Internet companies went bankrupt.

False

The New York Stock Exchange is an example of a primary market.

False

The Sarbanes-Oxley Act of 2002 provides for oversight of accounting firms but makes no provisions for increasing the flow of information to financial markets.

False

The Sarbanes-Oxley Act of 2002 was passed in response to scandals in the investment banking industry.

False

The Securities and Exchange Commission Division of Fraud Investigation was credited with uncovering the Enron and Madoff scandals.

False

The Treasury accepts noncompetitive bids in ascending order of yield until the accepted bids reach the offering amount.

False

The U.S. Treasury Department is the single most influential participant in the U.S. money market.

False

The Washington, D.C. Fed bank, with over 30 percent of the system's assets, is the most important Federal Reserve Bank.

False

The capital market is a financial market in which only short-term debt instruments (generally those with an original maturity of less than one year) are traded.

False

The concept of present value tells you that a dollar in the future is not as valuable to you as a dollar today because you can earn interest on this dollar. Therefore, nominal interest rates can never be negative.

False

The coupon rate is the rate of interest that the investors require, which can be different from the periodic interest payment made by the bond issuer, often called the coupon payment.

False

The current yield is the best measure of an investor's return from holding a bond.

False

The current yield on a bond is a good approximation of the bond's yield to maturity when the bond matures in five years or less and its price differs from its par value by a large amount.

False

The difference between the ex ante interest rate and the ex post interest rate is known as the Fisher effect.

False

The efficient market hypothesis views expectations as superior to optimal forecasts using all available information.

False

The evidence suggests technical analysts are not superior stock pickers.

False

The expectations theory is able to explain why yield curves are usually upward-sloping.

False

The failure of Ohio Life Insurance and Trust in 1857 did not signal the start of a recession due to prompt actions by the Fed.

False

The government agency that insures each depositor at a commercial bank, savings and loan association, or mutual savings bank up to a loss of $100,000 per account ($250,000 for individual retirement accounts) is the Securities and Exchange Commission (SEC).

False

The government organization responsible for the conduct of monetary policy in the United States is the U.S. Treasury.

False

The marginal contribution of an asset to the risk of a portfolio depends on the risk of the asset in isolation.

False

The market for U.S. Treasury bills is a shallow market because so few individual investors buy T-bills.

False

The market segmentation theory is able to explain why interest rates on bonds of different maturities move together over time.

False

The primary issuers of capital market securities are local governments and corporations.

False

The principal-agent problem is an example of the adverse selection problem that can result from asymmetric information.

False

The problem of adverse selection helps to explain why direct finance is more important than indirect finance as a source of business finance.

False

The process of financial intermediation is also known as direct finance.

False

The real interest rate is actually the ex ante real interest rate because it is adjusted for actual changes in the price level.

False

The risk premium on corporate bonds becomes smaller as the liquidity of the bonds falls.

False

The secondary market is where new issues of stocks and bonds are introduced.

False

The spread between the interest rates on bonds with default risk and default-free bonds is called the risk premium.

False

The term structure of interest rates describes how interest rates move over time.

False

The value-at-risk method for estimating a bank's risk exposure measures the losses a bank could incur under a worst-case scenario.

False

To be classified as a well-capitalized bank, a bank's leverage ratio must exceed 8 percent.

False

Unfortunately, due to current SEC regulations, U.S. investors cannot buy foreign stocks on U.S. stock exchanges.

False

Unless a bond defaults, an investor cannot lose money investing in bonds.

False

Unlike regulations in other countries, there are very few federal regulations governing who is allowed to set up a financial intermediary.

False

Unlike the United States, Canada, and Australia, the European Central Bank does not have a facility where banks are paid interest on reserves.

False

When a bank receives additional deposits, it loses an equal amount of reserves.

False

When interest rates decrease, the demand curve for bonds shifts to the left.

False

When the federal government's budget deficit decreases, the demand curve for bonds shifts to the right.

False

When the payoff method is used to resolve a failed bank, both large and small depositors are protected from suffering losses.

False

When the real interest rate is high, there are greater incentives to borrow and fewer incentives to lend.

False

When yield curves are downward-sloping, long-term interest rates are above short-term interest rates.

False

With the Obama tax increase that repealed the Bush tax cuts for high-income tax payers in 2013, the after-tax expected return on tax-free municipal bonds relative to Treasury bonds decreases.

False

A financial crisis occurs when information flows in financial markets experience a particularly large disruption.

True

A financial guarantee ensures that the lender (bond purchaser) will be paid both principal and interest in the event the issuer defaults.

True

A financial intermediary borrows funds from people who have saved.

True

A financial intermediary's risk-sharing activities are also referred to as asset transformation.

True

A loan commitment is an agreement to provide a loan up to a certain dollar amount if a customer requests the loan during a specific time period.

True

A mildly upward-sloping yield curve suggests that the market is predicting constant short-term interest rates.

True

A mutual fund is not a depository institution.

True

A problem that initially hindered the marketability of mortgages in a secondary market was that they were not standardized.

True

A sinking fund is a requirement in the bond indenture that the firm pay off a portion of the bond issue each year.

True

A stock's market value will be higher the higher its expected dividend stream is, all else being equal.

True

According to the expectations theory, the interest rate on a long-term bond is the average of the short-term interest rates expected over the life of the long-term bond.

True

Adjustable-rate mortgages generally have lower initial interest rates than fixed-rate mortgages.

True

Adverse selection is an asymmetric information problem that occurs before the transaction, while moral hazard arises after the transaction occurs.

True

Adverse selection refers to those with high credit risks, being most aggressive in their search for funds.

True

All else being equal, the higher the coupon rate on the bond, the shorter the bond's duration.

True

All nationally chartered banks are required to be members of the Fed.

True

American businesses use stock to finance about 11 percent of their external financing.

True

An advantage of a graduated-payment mortgage is that borrowers will qualify for a larger loan than if they requested a conventional mortgage.

True

An example of direct financing is if you were to lend money to your neighbor.

True

An important feature of the loanable funds analysis is that supply and demand are always in terms of stocks of assets, not in terms of flows.

True

An important outcome of a financial intermediary's low transaction costs is the ability to provide its customers with liquidity services.

True

An increase in an asset's expected return relative to that of an alternative asset, holding everything else unchanged, raises the quantity demanded of the asset.

True

An increase in income tax rates will cause the interest rates on tax-exempt municipal bonds to fall relative to the interest rate on taxable corporate securities.

True

An increase in the federal government budget deficit will raise the interest rate on bonds.

True

An increase in the marginal tax rate would likely increase the demand for municipal bonds, and decrease the demand for U.S. government bonds.

True

An increase in the riskiness of alternative assets causes the demand for bonds to rise and the demand curve to shift to the right.

True

An indexed bond is a bonds whose interest and/or principal payments are adjusted for changes in the price level.

True

An objective of the Federal Reserve in its conduct of monetary policy is high employment.

True

Announcing the FOMC's policy decision immediately after the FOMC meeting is an example of how Fed policymaking has become more transparent.

True

Another way to state the efficient market condition is this: in an efficient market, all unexploited profit opportunities will be eliminated.

True

Asset pricing bubbles, where the prices of assets rise well above their fundamental values, casts serious doubt on the stronger view that financial markets are efficient.

True

Bank failures have been a feature of all U.S. financial crises from 1800 to 1944.

True

Because asymmetric information problems in the banking industry are a fact of life throughout the world, bank regulation in other countries is similar to that in the United States.

True

Because of the adverse selection problem, lenders may refuse loans to individuals with low net worth.

True

Because their interest and principal payments are adjusted for changes in the price level, the interest rate on TIPS provides a direct measure of a real interest rate.

True

Capital market securities are less liquid and have longer maturities than money market securities.

True

Changes in interest rates make investments in long-term bonds risky.

True

China is in an early state of development, with a per capita income that is still less than $10,000, one-fifth of the per capita income in the United States.

True

Collateralized debt is also called secured debt.

True

Commercial paper securities are unsecured promissory notes, issued by corporations, that mature in no more than 270 days.

True

Common stock is the riskiest corporate security, followed by preferred stock and then bonds.

True

Corporations that issue new securities to raise capital now conduct more of this business in financial markets in Europe and Asia than in the U.S.

True

Debentures are long-term unsecured bonds that are backed only by the general creditworthiness of the issuer.

True

Different interest rates have a tendency to move in unison.

True

Discount points (or simply points) are interest payments made at the beginning of a loan.

True

Diversification is almost always beneficial to the risk-averse investor, since it reduces risk unless returns on securities move perfectly together.

True

Down payments are designed to reduce the likelihood of default on mortgage loans.

True

Due to criticisms of rating agencies following the default of many subprime products, the SEC prohibited credit rating agencies from structuring the same products that they rate.

True

During a bank panic, many banks fail in a very short time period.

True

During the budget negotiations in Congress in 1995-1996, and then again in 2011-2013, the Republicans threatened to let Treasury bonds default, and this had an impact on the bond market.

True

Dynamic open market operations are intended to change the level of reserves and the monetary base, and defensive open market operations are intended to offset movements in other factors that affect reserves and the monetary base.

True

Each member of the seven-member Board is appointed by the president and confirmed by the Senate to serve 14-year terms.

True

Equity contracts are subject to a particular type of moral hazard called the principal-agent problem.

True

Equity represents an ownership interest in a firm and entitles the holder to the residual cash flows.

True

Every financial market allows loans to be made.

True

Factors that can lead to worsening conditions in financial markets include increasing interest rates and asset price booms.

True

Financial innovation has provided more options to both investors and borrowers.

True

Financial institutions are among the largest employers in the country and frequently pay very high salaries.

True

Firms and individuals use the money markets primarily to warehouse funds for short periods of time until a more important need or a more productive use for the funds arises.

True

Following the subprime collapse, the spread (difference) between the interest rates on Baa bonds and Treasury bonds widened.

True

From 2001 to 2008, the dollar depreciated substantially.

True

From 2007 to 2009, the U.S. economy was hit by the worst financial crisis since the Great Depression.

True

Given the return on assets, the lower the bank capital, the higher the return for the owners of the bank.

True

Governments never issue stock because they cannot sell ownership claims.

True

Higher expected interest rates in the future lower the expected return for long-term bonds, decrease the demand, and shift the demand curve to the left.

True

Higher government deficits increase the supply of bonds and shift the supply curve to the right.

True

Holding everything else constant, as the dollar weakens vacations abroad become less attractive.

True

Housing prices boomed from 2002 to 2006, fueling the market for subprime mortgages and forming an asset-price bubble. Housing prices began declining in 2006, falling by more than 30%, which led to defaults by subprime mortgage holders.

True

If a bank has ample excess reserves, a deposit outflow does not necessitate changes other parts of its balance sheet.

True

If the markets are efficient, the optimal investment strategy will be to buy and hold so as to minimize transaction costs.

True

In 2015, the price of the average house was about $232,500.

True

In Europe, Greece was the first nation to face a debt crisis.

True

In a bull market stock prices are rising, on average.

True

In a business cycle expansion with growing wealth, the demand for bonds rises and the demand curve for bonds shifts to the right.

True

In a business cycle expansion, the supply of bonds increases, and the supply curve shifts to the right.

True

In a leveraged buy-out, a firm greatly increases its debt level by issuing junk bonds to finance the purchase of another firm's stock.

True

In addressing the goal of price stability, central bankers must deal with the time-inconsistency problem, in which monetary policy conducted on a discretionary, day-by-day basis leads to poor long-run outcomes.

True

In over-the-counter markets, dealers increase the liquidity of thinly traded securities.

True

In the U.S., financial intermediaries are restricted in what they are allowed to do and what assets they can hold.

True

In the absence of a government safety net, financial institutions have little incentive to take on too much risk.

True

In the liquidity preference framework, a higher level of income causes the demand for money to increase and the demand curve to shift to the right.

True

In the short run, price stability often conflicts with the goals of high employment and interest-rate stability.

True

In the years just prior to the global financial crisis, mortgage loans were issued to borrowers with no income or employment.

True

Increasing duration implies that interest-rate risk has increased.

True

Interest rates are determined in the bond markets.

True

Interest rates are procyclical in that they tend to rise during business cycle expansions and fall during recessions.

True

Interest rates can be accurately described as the rental price of money.

True

Interest rates on banker's acceptances are low because the risk of default is very low.

True

Investors make their choices of which assets to hold by comparing the expected return, liquidity, and risk of alternative assets.

True

Limitations of the Basel Accord became apparent because the regulatory measure of bank risk as stipulated by the risk weights differed substantially from the actual risk the bank faced.

True

Liquidity services are services that make it easier for customers to conduct financial transactions.

True

Loss aversion means the unhappiness a person feels when he or she suffers a monetary loss exceeds the happiness the same person experiences from receiving a monetary gain of the same amount.

True

Many common stocks are traded over the counter, although a majority of the largest corporations have their shares traded at organized stock exchanges.

True

Many institutions that make mortgage loans do not want to hold large portfolios of long-term securities, because it would subject them to unacceptably high interest-rate risk.

True

Many money market investors are looking for liquidity intervention - an intermediary to provide liquidity where it did not previously exist.

True

Money is anything accepted by anyone as payment for services or goods.

True

Money market securities are short-term instruments with an original maturity of less than one year.

True

Money market securities include Treasury bills, commercial paper, federal funds, repurchase agreements, negotiable certificates of deposit, banker's acceptances, and Eurodollars.

True

Money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds.

True

Mortgage reserve accounts, or escrow accounts, are established for most mortgage loans to permit the lender to make tax and insurance payments for the borrower.

True

Mortgage-backed securities are marketable securities collateralized by a pool of mortgages.

True

Most legal work in the U.S. involves the writing and enforcement of contracts, not ambulance chasing, criminal law, and frivolous lawsuits.

True

Most municipal bonds are revenue bonds rather than general obligation bonds.

True

Most people's involvement with the financial system is through financial intermediaries rather than financial markets.

True

Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation.

True

Net worth is the difference between a firm's assets and its liabilities.

True

Nonfinancial businesses in Germany and Japan are more likely to use bank loans over all other sources of external financing.

True

Nontransaction deposits are the primary source of bank funds.

True

Not all commercial banks deal in the secondary money market for their customers.

True

Off-balance-sheet activities consist of trading financial instruments and generating income from fees and loan sales, all of which affect bank profits but are not visible on bank balance sheets.

True

On the NYSE, in about 90% of trades, the specialist matches buyers with sellers. In the other 10%, the specialists may intervene by taking ownership of the stock themselves or by selling stock from inventory.

True

Once a bank has been chartered, it is required to file periodic call reports that reveal the bank's assets and liabilities, income, ownership, and other details.

True

One reason the mortgage market is well suited to providing online service is because it is information-based and no products have to be shipped or inventoried.

True

One reason why indirect financing is used is to minimize adverse selection problems.

True

One way of describing the solution that high net worth provides to the moral hazard problem is to say that it makes debt contracts incentive compatible.

True

Open market purchases by the Fed increase the supply of nonborrowed reserves.

True

Owners cannot write checks on nontransaction deposits, but the interest rate paid on these deposits are usually higher than those on checkable deposits.

True

Partly due to transaction costs, only around 50% of American households own any securities.

True

Price stability is defined by central bankers as low and stable inflation.

True

Prices for long-term bonds are more volatile than for shorter-term bonds.

True

Prior to the global financial crisis, inaccurate ratings provided by credit rating agencies helped promote risk taking throughout the financial system.

True

Private mortgage insurance is a policy that guarantees to make up any discrepancy between the value of the property and the loan amount, should a default occur.

True

Probably the most important feature of FDICIA is its prompt corrective action provisions which require the FDIC to intervene earlier and more vigorously when a bank gets into trouble.

True

Rescuing Indonesia from a banking crisis tops the list in term of costs relative to GDP at 57%.

True

Risk, liquidity, and income tax rules all play a role in determining the risk structure of interest rates.

True

Since their introduction in 1961, negotiable CDs have become an important source of bank funds.

True

State-owned banks in developing countries have little incentive to allocate their capital to the most productive uses.

True

Subprime loans are those made to borrowers who do not qualify for loans at the usual market rate of interest because of a poor credit rating or because the loan is larger than justified by their income.

True

Technical analysis is a popular technique used to predict stock prices by studying past stock price data and searching for patterns such as trends and regular cycles.

True

Technical analysts look at historical prices for information to project future prices.

True

The Board of Governors sets reserve requirements.

True

The Commodity Futures Modernization Act (2000) removed derivative securities, such as credit default swaps, from regulatory oversight.

True

The Enron financial scandal increased uncertainty about the quality of accounting information and as a result, increased required return on investment in stocks.

True

The European Central Bank does imposes reserve requirement on its member banks.

True

The European Central Bank uses main refinancing operations as the predominant form of open market operations, which are similar to the Fed's repo transactions

True

The European Central Bank uses the marginal lending facility where banks can borrow overnight loans from the national central banks at the marginal lending rate.

True

The FOMC does not actually carry out securities purchases or sales.

True

The FOMC is an element of the Federal Reserve System.

True

The FOMC issues directives to the trading desk at the New York Fed.

True

The Fed can influence the federal funds rate by adjusting the level of reserves in the banking system.

True

The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate.

True

The Global Legal Settlement of 2002 arose out of a lawsuit brought by New York Attorney General Eliot Spitzer against the ten largest investment banks.

True

The Gordon growth model assumes that a stock's dividend grows at a constant rate forever.

True

The Maastricht Treaty, which established the Eurosystem and the ECB, made the ECB the most independent central bank in the world.

True

The Sarbanes-Oxley Act of 2002 and the Global Legal Settlement of 2002 both have the potential to reduce economies of scope.

True

The Sarbanes-Oxley Act of 2002 established a Public Company Accounting Oversight Board (PCAOB), overseen by the SEC, to supervise accounting firms and ensure that audits are independent and controlled for quality.

True

The Securities and Exchange Commission requires firms to submit various documents to increase the flow of information to investors but does not verify the accuracy of that information.

True

The T-bill is not an investment to be used for anything but temporary storage of excess funds because it barely keeps up with inflation.

True

The U.S. Treasury Department is the single largest borrower in the U.S. money market.

True

The concept of adverse selection helps explain why collateral is an important feature of many debt contracts.

True

The concept of adverse selection helps to explain why indirect finance is more important than direct finance as a source of business finance.

True

The current yield goes up as the price of a bond falls.

True

The current yield is the yearly coupon payment divided by the current market price.

True

The duration of a portfolio of securities is the weighted average of the durations of the individual securities, with the weights reflecting the proportion of the portfolio invested in each.

True

The efficient market hypothesis does not have to imply that financial markets are efficient.

True

The efficient market hypothesis states that prices of securities in financial markets fully reflect all available information.

True

The failure of one bank can hasten the failure of others in what is referred to as a contagion effect.

True

The financial system is one of the most heavily regulated sectors of the economy.

True

The interest rates on bonds of different maturities tend to move together over time.

True

The main purpose of federal funds is to provide banks with an immediate infusion of reserves should they be short.

True

The monetary operations of the Eurosystem are conducted by the National Central Banks in each country, so monetary operations are not centralized as they are in the Federal Reserve System.

True

The more liquid an asset is relative to alternative assets, holding everything else unchanged, the more desirable it is, and the greater the quantity demanded.

True

The natural rate of unemployment is not lowered by high inflation, so higher inflation cannot produce lower unemployment or more employment in the long run.

True

The price of gold should be positively related to the expected inflation rate.

True

The process by which banks make profits by selling liabilities with one set of characteristics and using the proceeds to buy assets with a different set of characteristics is referred to as asset transformation.

True

The real interest rate is equal to the nominal rate minus inflation.

True

The risk of a well diversified portfolio depends only on the systematic risk of the assets in the portfolio.

True

The risk structure of interest rates describes the relationship between the interest rates of different bonds with the same maturities.

True

The share of bank operating income earned from off-balance-sheet activities has increased over the past two decades.

True

The size of the asset-backed commercial paper market nearly doubled between 2004 and 2007 to about $1 trillion.

True

The strongest argument for an independent Fed rests on the view that subjecting it to more political pressures would impart an inflationary bias to monetary policy.

True

The term money market is actually a misnomer, because liquid securities are traded in these markets rather than money.

True

The unusual structure of the Federal Reserve System is best explained by Americans' fear of centralized power.

True

Through economies of scale, financial intermediaries can lower the cost of information production for each service by applying one information resource to many different services.

True

To keep enough cash on hand to meet depositors' demand for withdrawals, banks must engage in liquidity management.

True

To sell an old bond when rates have risen, the holder will have to discount the bond until the yield to the buyer is the same as the market rate.

True

To understand banking regulation in the United States, it is helpful to understand the concepts of asymmetric information, adverse selection, and moral hazard.

True

When a bank receives additional deposits, it gains an equal amount of reserves; when it loses deposits, it loses an equal amount of reserves.

True

When a bond defaults, the issuer of the bond is unable or unwilling to make interest payments when promised or to pay off the face value when the bond matures.

True

When an economy grows out of a recession, normally the demand for bonds increases and the supply of bonds increases.

True

When income and wealth are rising, the demand for bonds rises and the demand curve shifts to the right.

True

When the real interest rate is low, there are greater incentives to borrow and fewer incentives to lend.

True

When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called frictional unemployment.

True

A person who is risk averse prefers to hold assets that are more, not less, risky.

False

"Short selling" refers to the practice of buying a stock and holding it for only a short time before selling it.

False

A FICO score below 660 is considered good while a score above 720 is likely to cause problems in obtaining a loan.

False

A basic measure of bank profitability is the equity multiplier.

False

A bond denominated in euros and issued in a country that uses the euro as its currency is an example of a Eurobond.

False

A bonds with a 5% coupon as has a yield to maturity of 5%.

False

A fall in expected inflation causes the supply of bonds to increase and the supply curve to shift to the right.

False

A long-term bond's price is less affected by interest rate movements than a short-term bond's price.

False

A lower than average PE may mean that the market expects earnings to rise in the future.

False

A movement along the demand (or supply) curve occurs when the quantity demanded (or supplied) changes at each given price (or interest rate) of the bond in response to a change in some other factor besides the bond's price or interest rate.

False

A pension fund is not a contractual savings institution.

False

"Thrift institutions" include savings and loan associations, mutual savings banks, and credit unions.

True

"Truth in lending" was mandated under the Consumer Protection Act of 1969 and requires all lenders to reveal the annual percentage rate, or APR, on loans.

True

A bank maintains bank capital to lessen the chance that it will become insolvent.

True

A banker's acceptance is an order to pay a specified amount of money to the bearer on a given date. Banker's acceptances have been used since the twelfth century.

True

A better capitalized bank has more to lose when it fails and is less likely to take less risk.

True

A bond with default risk will always have a positive risk premium, and an increase in its default risk will raise its risk premium.

True

A bond's current market value is equal to the present value of the coupon payments plus the present value of the face amount.

True

A credit spread is the difference between the interest rate on loans to businesses and the interest rate on completely safe assets that are sure to be paid back.

True

A critical function of financial markets is an efficient allocation of capital.

True

A discount loan by the Fed leads to an expansion of reserves, which can be lent out, thereby leading to an expansion of liquidity in the banking system.

True