ECON FINAL

Financial markets do not function as well as they could due to: a. the fact that banking is highly monopolized b. the cost of obtaining information can be high c. regulation by governments d. fluctuations in the inflation rate

B

Dodd-Frank 4 goals:

1. make financial system rebust 2. limit systemic risk 3. end "too-big-to-fail" 4. reduce the moral hazard

A bank supervisor examines the banks portfolio of loans to see if the loans are being repaid in a timely manner. In terms of the acronym CAMELS, this would be part of rating the banks: a. asset quality b. losses c. management d. earnings

A

A credit card that charges a monthly interest rate of 3.2% has an effective annual interest rate of: a. 45.9% b. 38.4% c. 34.99% d. 40.99%

A

All of the following US banks experienced bank runs during the financial crisis except for: a. Northern Rock b. Wachovia c. Washington Mututal d. Indy MAc

A

All of the possible policies below are Macro-prudent, except for: a. visit the bank and examine its operation on site b. raising capital requirements for banks during a boom c. requiring banks to issue contingents convertible bonds d. implement the systemic capital surcharge on extremely large banks

A

If the federal government were to let a large break on the purchase of new equipment for businesses expire (the tax break is no longer offered), all other factors constant, we would expect to see: a. the bond supply curve shift right b. the bond supply curve shift left c. the bond demand curve shift left d. the bond demand curve shift right

B

If the ratio of a bank's assets to its capital remains constant, but the bank's return on equity decreases: a. the banks return on assets must have increased b. the banks return on assets must have decreased c. the banks assets and capital must have increased by the same percent d. the bank must be more profitable

B

In order to benefit from diversification, the returns on assets in a portfolio must: a. have the same idiosyncratic risks b. not be perfectly positively correlated c. be perfectly positively correlated d. be perfectly negatively correlated

B

Moral hazard problems arise because: a. lenders cannot distinguish good from bad risks b. borrowers have incentives to act in ways that do not reflect the lenders interest c. firms hire incompetent employees d. lenders charge interest rates that are too low

B

One lesson learned from the bank panics of the early 1930s is: a. the lender of last resort function almost guarantees that bank panics are a thing of the past b. the mere existence of a lender of last resort will not keep the financial system from collapsing c. only the US treasury can be a true lender of last resort d. the financial system will collapse without a lender of last resort

B

An increase in expected inflation for any given nominal interest rate will cause: a. bond prices to decrease and interest rates to increase b. bond prices to increase and interest rates to decrease c. the bond demand curve to shift to the left d. the bond supply curve to shift to the left

A

Capital is the cushion banks have against: a. sudden drops in the value of their assets b. an unexpected decrease in liabilities c. liquidity risk d. moral hazard

A

One way for a bank to deal with credit risk it to: a. charge all borrowers from the same industry an average rate for that industry b. add a mark-up for a specific borrower based on the borrower's credit history to the cost of funds c. avoid making loans to borrowers from a broad spectrum and to specialize geographically and in specific industries d. limit the number of loans made in any year

B

Considering the methods available to the FDIC for dealing with a failed bank, the depositors of the failed bank should: a. prefer the purchase and assumption method since the deposits over $100,000 will also be protected b. prefer the payoff method because they will have access to their funds earlier c. be indifferent between the two since it really does not matter to them which method is used d. prefer the payoff method since a lot less paperwork is involved for the depositor

A

Economies of scale associated with financial intermediaries means: a. the cost per transactions falls as a larger volume of similar transactions are handled b. the cost per transaction decreases regardless of the size of the transaction c. the total cost of handling transactions falls as more transactions are handled d. the cost per transaction increases as more transactions are handled

A

Financial instruments used primarily as stores of value would not include: a. a car insurance policy b. a us treasury bond c. shares of general motors stock d. a home mortgage

A

Financial instruments used primarily to transfer risk would include all of the following, except: a. a bank loan b. an insurance contract c. options d. a future contract

A

Governments supervise banks mainly to do each of the following except: a. eliminate all risk faced by investors b. reduce the potential cost to taxpayers of bank failures c. be sure the banks are following the regulations set out by bankings laws d. reduce the moral hazard risk

A

If a bank increases its assets by adding $1 to capital for every $1 added to assets: a. leverage decreases b. leverage stays constant c. leverage increases d. cannot be determined

A

If the government did not offer the too-big-to-fail safety net: a. large banks would be more disciplined by the potential loss of large corporate accounts b. them oral hazard problem of insuring large banks would increase c. the moral hazard problem of insuring large banks would not be affected d. the FDIC deposit insurance limits would have to be raised

A

The acronym CAMELS, which is the criteria used by supervisors to evaluate the health of banks, includes the following, except: a. losses b. management c. asset quality d. earnings

A

The reasons for the government to get involved in the financial system include each of the following, except: a. to protect the bank's monopoly position b. to protect investors c. to ensure the stability of the financial system d. to protect bank customers from monopolistic exploitation

A

The risk premium that investors associate with a bond increases with all of the following except: a. an improved bond rating b. inflation risk increases c. maturity d. interest-rate risk

A

What is the role of Credit Default Swap in fueling the housing bubble? a. to enhance the credit rating of mortgage backed securities in order to attract global investors b. to swap the debt of financial institutions among one anther so that they can make more loans to home buyers c. to protect companies from defaulting on their loans by creating an insurance asset pool from the premium received d. to provide insurance to bond investors in order to protect downside interest rate risk

A

Which of the following is not a feature of common stock? a. stockholders receive regular fixed payments on their shares b. stockholders are residual claimants c. stockholders have voting rights d. stockholders have limited liability

A

Which of the following statements is most correct? a. financial regulators work to prevent monopolies but also work to prevent strong competition in banking b. financial regulators do everything possible to encourage competition in banking c. financial regulators prefer banks to have monopoly power in their geographic markets d. financial regulators discourage competition in banking

A

Which of the following would lead to a decrease in bond demand? a. an increase in expected inflation b. an increase in wealth c. a decrease in risk d. a decrease in liquidity

A

Why even when there was an inverted yield curve from later 2006 to early 2007, the US housing market bubble was still growing: a. short-term liquidity provided by Yen carry trade b. the Fed required all banks to keep making home mortgage loans c. investors are seeking safer returns from the stock market d. the US trade deficit led to investors stay away from US treasury securities

A

The First Bank of Podunk has recently suffered some extraordinary losses on its loan portfolio due to the closing of the largest employer in town. As a result, the bank's management decides to raise the interest rate to new loan applicants. This move is likely to: a. increase the profitability of the bank b. cause even greater losses c. significantly increase both loan applicants and profits d. treat the problem of adverse selection that contributed to the losses the bank is experiencing

B

The collapses of Bear Stearns and Lehman Brothers due to their difficulties in the repo market and commercial paper market showed the importance of: a. supervision of the commercial banks b. funding liquidity c. micro-prudential regulation d. market liquidity

B

The existence of a lender of last resort creates moral hazard for bank managers because: a. they are less likely to apply for a direct loan from the central bank b. they have an incentive to take too much risk in their operations c. officials are likely to undervalue the bank's portfolio of assets d. banks seek loans from the central bank only after exploring other options

B

The governments role of lender if last resort is directed to: a. developing countries that are trying to build their financial systems b. banks that experience sudden deposit outflows c. depositors; this is role the government plays when they insure depositors balances in banks that fail d. large manufacturing firms that employ thousands of people

B

The interest rates charged on most credit cards is: a. lower than they should be given the problem of adverse selection b. High due to the problem of adverse selection c. high due to diseconomies of scale that exist in this market d. high because Visa and MasterCard have a virtual monopoly on this business

B

Which of the following is a bank liability? a. mortgage loans b. demand deposits c. reserves d. us treasury securities

B

The value of fiat money: a. means that it is more desirable than currency b. comes from its intrinsic value c. comes from government decree d. is worth more as a commodity than its value as money

C

Which of the following is not a bank asset? a. Securities b. Reserves c. Non-transaction deposits d. mortgage loans

C

Which of the following statements is most correct? a. the higher the deposit insurance limit the lower the risk of moral hazard b. deposit insurance limits do not impact moral hazard, they impact adverse selection c. the higher the deposit insurance limit the greater the risk of moral hazard d. increasing the deposit insurance limits above $100,000 would increase coverage for over 50 percent of all depositors

C

Which of the following tradeoffs impact the likelihood of a banks failure? a. the more competitive the banking environment, the more liquid the bank will be b. the greater the regulation from government the more likely the bank will fail c. the more profitable the bank, the less liquid the bank will be and the more likely it will fail d. the larger the bank in asset size the more likely it will fail

C

The Standard & Poor's 500 Index differs from the Dow Jones Industrial Index because: a. It takes into account the stock prices of 500 of the largest firms, which is less than the DIJA b. It is a price-weighted index, where the DIJA is a value-weighted index c. Larger firms are less important in the S&P 500 than in the DIJA d. It takes into account the prices of more stocks and it uses a different weighting scheme

D

The measure of risk that focuses on the worst possible outcome is called: a. ERR b. SD of return c. Risk-free rate of return d. value at risk

D

The most a risk-averse individual would pay to participate in a flip of a fair coin with a payoff of $300 if the correct outcome is called is: a. $300 b. an amount not to exceed $300 c. $150 d. an amount less than $150

D

The procedure that estimates the interest-rate sensitivity of a bank's assets and liabilities is called: a. managing credit risk b. estimating operating risk differential c. trading risk minimization d. gap analysis

D

The scandals involving Enron, World Com, Global Crossing and other large firms: a. Have resulted in a cry for less government regulation of public corporations b. is what should have been expected on the part of investors, that is why there is a risk premium c. demonstrate that the government should be responsible for collecting and distributing financial information on firms d. are examples of asymmetric information and have led, at least temporarily, to a less well functioning stock market

D

Usually an investment will be profitable if: a. the cost of borrowing is equal to the internal rate of return b. the internal rate of return is less than the cost of borrowing c. it is financed with retained earnings d. the cost of borrowing is less than the internal rate of return

D

Which of the following is necessarily true of coupon bonds? a. The price exceeds the face value b. The coupon rate exceeds the interest rate c. The price is equal to the coupon payments d. The price is the sum of the present value of coupon payments and the face value

D

Which of the following is true of interest-rate risk? a. it refers to the probability that a borrower will default on debt obligations b. it is the risk that the face value of a bond will change before maturity c. it is the risk that the coupon rate for a bond will change, affecting current bondholders coupon payments d. individuals owning long-term bonds are exposed to greater interest-rate risk

D

Which of the following statements is most correct for US commercial banks? a. net interest margin is much larger than return on equity b. net interest margin is about equal to return on equity c. net interest margin averages about two times the return on equity d. net interest margin is closely related to the return on assets

D

Which of the following statements is most correct? a. stockholders have limited liability and have no control over corporate leadership b. stockholders can dislodge the managers of the corporation but not the board of directors c. stockholders have unlimited liability and can dislodge members of board of directors d. stockholders can dislodge members of the board and have limited liability

D

Which of the following statements pertaining to the yield curve is not true? a. the yield curve can be flat or downward sloping depending on market conditions b. yield curves usually slope upwards c. the yield curve shows the relationship among bonds with the same risk characteristics but different maturities d. the yield curve shows the difference in default risk between securities

D

the license authorizing the operation of a bank

bank charter

old method of exchange

barter system

the government guarantee that depositors will receive the full value of their accounts should a bank fail

deposit insurance

reducing overall risk by investing in two assets with opposing payoffs

hedging

A bank that makes most of its long-term loans at adjustable interest rates is: a. reducing both interest rate and credit risk b. increasing credit risk and reducing interest rate risk c. reducing credit risk and increasing interest rate risk d. increasing both credit risk and interest rate

B

A bank that meet deposit withdrawal by borrowing additional funds will alter: a. the asset and liabilities side of the balance sheet b. the liabilities side of the balance sheet c. the asset side of the balance sheet d. the amount of bank capital

B

A long-standing goal of financial regulators has been to: a. encourage banks to grow as large as possible b. prevent banks from growing too big and powerful c. minimize the competition that banks face d. discourage small rural banks

B

An economic rationale for government protection of small investors is that: a. banks are often run by unethical managers who will often exploit small investors b. many small investors cannot adequately judge the soundness of their bank c. there is inadequate competition to ensure a bank is operating efficiently d. large investors can better afford losses

B

Banking regulations prevent banks from: a. holding more than 10% of their assets in common stock of companies b. owning common stocks of corporations c. owning corporate jets d. building big office buildings

B

Banks are required to disclose certain information. This disclosure is done for all of the following reasons except: a. to allow financial market participants to penalize banks that carry additional risk b. create uniform prices for standard bank services c. to allow customers to more easily compare prices for services offered by banks d. to enable regulators to more easily assess the financial condition of banks

B

A bank's assets tend to be long-term while its liabilities are short-term. Therefore, when interest rates rise, the value of the bank's assets: a. increases by more than the value of its liabilities b. increases and the value of its liabilities decreases c. will decrease by more than the value of its liabilities d. decreases and the value of its liabilities increases

C

A borrower is offered a choice between a fixed rate mortgage and a variable rate mortgage. The variable rate mortgage may be more attractive to the lender if the lender expects: a. the home price to decrease b. inflation to decrease c. inflation to increase d. the home price to increase

C

A lender who wants to avoid the problem of adverse selection could: a. charge a very high interest rate and assume all loan applicants are high risk b. charge the same average interest rate to all borrowers c. charge a low interest rate and make the applicant prove they warrant the low rate by providing information d. only lend by issuing credit cards

C

As an economy produces more different types of goods: a. the number of relative prices decreases b. money becomes less useful as a standard of value c. it is more difficult to quote prices if the economy does not use money d. money becomes less useful as a unit of account

C

Commercial banks increased their involvement in mortgages over the years due to: a. the demands of regulators b. the reduced risk of borrowers defaulting on mortgage loans c. the ability to securitize mortgages which made them more liquid d. the increase in commercial loans demanded due to the development of the commercial paper market

C

Consider the price paid for debt issued by the State of California. Which of the following would lead to a decrease in the value of State of California bonds? a. The State of CA bonds are in small dollar amounts b. The State of CA bonds have longer maturity c. The State of CA experiences a fiscal crisis that makes it less likely it will be able to honor its interest payments d. The State of CA pays back its previous bonds ahead of schedule

C

Everything else equal, if the ratio of bank assets to bank capital decreases, the bank's return on equity should: a. cannot be determined b. increase c. decrease. d. remain constant

C

In 2003, ratings agencies downgraded bonds issued by the State of CA several times. How will this affect the market for these bonds? a. the yield on these bonds and on T-bonds will both decrease b. yields on these bonds will decrease and the yield on T-bonds will increase c. yields on these bonds will increase d. the yield on these bonds will not change, nor will the yield on T-bonds

C

Often Eurodollar deposits earn higher returns than U.S. bank deposits for all of the following reasons except: a. eurodollar deposits are not subject to US reserve requirements b. the bank does not have to pay deposit insurance premiums on these deposits c. regulatory compliance may be more costly for a foreign bank than a US bank d. taxes on the profits at foreign banks may be lower than those for us banks, allowing for higher returns

C

One result of the Reigel-Neal Interstate Banking and Branching Efficiency Act was that: a. banking system efficiency decreased b. banks became less geographically diversified c. banking system efficiency increased d. banks became less geographically diversified and banking system efficiency decreased

C

Suppose that the return on assets other than bonds falls. In the bond market this will result in: a. a movement down the bond demand curve b. a shift to the left of the bond demand curve c. an increase in the price of bonds d. a shift to the left of the bond supply curve

C

The Dow Jones Industrial Average: a. is a value-weighted index b. reflects that a 10% increase in a share of stock selling for $30 will have the same effect on the index as a 10% increase in the price of a stock selling for $60 c. gives greater weight to shares with higher prices d. gives equal weight to a change in the price of the stock of any company in the index

C

A bank that does not want to hold a lot of excess reserves but wants to manage liquidity risk is likely to: a. limit withdrawals by customers b. make sure that most of its assets are in small business loans c. have a high ratio of loans to securities d. hold a lot in highly liquid securities

D

A bank that specializes in granting loans to firms in a specific line of business: a. may decrease its operating cost and decrease its credit risk b. may increase both operating and credit risk c. may increase its operating cost and decrease its credit risk d. may decrease its operating costs and increase its credit risk

D

A borrower is offered a choice between a fixed rate mortgage and a variable rate mortgage. The fixed rate mortgage may be more attractive if the borrower expects: a. the home price to increase b. inflation to decrease c. the home price to decrease d. inflation to increase

D

During the financial crisis of 2007-2009 in the United States it was revealed that the function of a lender of last report had not kept pace with the evolving financial system because: a. banks had become sufficiently diversified so as to be able to provide for their own liquidity b. financial intermediaries had grown sufficiently large so as not to need a lender of last resort c. banks were sufficiently linked to one another that the need for a lender of last resort had diminished d. shadow banks lacked access to the financial capital available through the lender of last resort

D

Economists study the link between money and inflation because: a. as prices increase money becomes more valuable b. the Fed needs to increase the money supply as prices increase c. Economists believe that inflation in the 3-6% range is healthy for an economy d. research suggests that controlling money growth helps us to control moderate inflation

D

One reason a bank's officer may be reluctant to write off a past due loan is that it will: a. increase the banks liabilities b. mean the bank will have to answer to an additional regulator c. increase the banks liabilities and assets, requiring more capital to be held d. decrease the banks assets and capital

D

created the Federal Deposit Insurance Corp. and severely limited the activities of commercial banks

Glass-Steagall Act of 1933

Repealed the Glass-Steagall Act and eliminated the restrictions on banks activities

Gramm-Leach-Billey Act

interest rate at which banks lend each other eurodollars, and serves as the benchmark for more than $300 trillion if interest-rate derivatives, making is the lending global interest-rate indicator

LIBOR

required that nationally chartered banks meet the branching restrictions of the states in which they were located

McFadden Act of 1927

this legislation reversed the restrictions put in place earlier by the McFadden Act and allowed banks to diversify geographically

Riegle-Neal Act

the risk that traders who work for a bank will create losses on the banks own account

trading or market risk

a type of firm that engages in a wide range of financial activities

universal bank

aimed at limiting systemic risks in the financial system

macro-prudential policy

aims to make intermediaries bear the costs that their behavior imposes on others

macro-prudential policy

a situation where more than one regulatory agency works to safeguard the soundness of a bank

regulatory competition

combination of term life insurance and a savings account

whole life insurance