FIN 7-11

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A $5 million deposit outflow from a bank has the immediate effect of A) reducing deposits and reserves by $5 million. B) reducing deposits and loans by $5 million. C) reducing deposits and securities by $5 million. D) reducing deposits and capital by $5 million.

A ________ pays out cash flows from subprime mortgage-backed securities in different tranches, with the highest-rated tranch paying out first, while lower ones paid out less if there were losses on the mortgage-backed securities. A) Collateralized debt obligation (CDO) B) Adjustable-rate mortgage C) Negotiable CD D) Discount bond

A bank failure occurs whenever A) a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements. B) a bank suffers a large deposit outflow. C) a bank has to call in a large volume of loans. D) a bank is not allowed to borrow from the Fed.

A bank is insolvent when A) its liabilities exceed its assets. B) its assets exceed its liabilities. C) its capital exceeds its liabilities. D) its assets increase in value.

A common element in all of the banking crisis episodes in different countries is A) the existence of a government safety net. B) deposit insurance. C) increased regulation. D) lack of competition

A conflict of interest arises in investment banking because the banks are attempting to simultaneously serve two client groups A) the security-issuing firms and the security-buying investors. B) the government and the stockholders. C) the government and the security-issuing firms. D) the security-issuing firms and the lawyers.

A conflict of interest can occur for accounting firms when the firms both A) provide auditing services and nonaudit consulting services. B) provide nonaudit services and tax advice. C) enter data and record data. D) monitor data and underwrite securities.

A credit boom can lead to a(n) ________ such as we saw in the tech stock market in the late 1990s. A) asset-price bubble B) liability war C) decline in lending D) decrease in moral hazard

A debt contract is incentive compatible A) if the borrower has the incentive to behave in the way that the lender expects and desires, since doing otherwise jeopardizes the borrowerʹs net worth in the business. B) if the borrowerʹs net worth is sufficiently low so that the lenderʹs risk of moral hazard is significantly reduced. C) if the debt contract is treated like an equity. D) if the lender has the incentive to behave in the way that the borrower expects and desires.

A feature of debt markets in emerging-market countries is that debt contracts are typically ________. A) very short term B) long term C) intermediate term D) perpetual

A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system A) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently. B) allows for a more efficient use of funds. C) increases economic activity. D) reduces uncertainty in the economy and increases market efficiency.

A key finding of the economic analysis of financial structure is that A) the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses. B) while free-rider problems limit the extent to which securities markets finance some business activities, nevertheless the majority of funds going to businesses are channeled through securities markets. C) given the great extent to which securities markets are regulated, free-rider problems are not of significant economic consequence in these markets. D) economists do not have a very good explanation for why securities markets are so heavily regulated.

A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a A) financial crisis. B) fiscal imbalance. C) free-rider problem. D) ʺlemonsʺ problem

A possible sequence for the three stages of a financial crisis in the U.S. might be ________ leads to ________ leads to ________. A) asset price declines; banking crises; unanticipated decline in price level B) unanticipated decline in price level; banking crises; increase in interest rates C) banking crises; increase in interest rates; unanticipated decline in price level D) banking crises; increase in uncertainty; increase in interest rates

A problem with the too-big-to-fail policy is that it ________ the incentives for ________ by big banks. A) increases; moral hazard B) decreases; moral hazard C) decreases; adverse selection D) increases; adverse selection

A serious consequence of a financial crisis is A) a contraction in economic activity. B) an increase in asset prices. C) financial engineering. D) financial globalization.

A sharp decline in the stock market means that the ________ of corporations has fallen making lenders ________ willing to lend. A) net worth; less B) net worth; more C) liability; less D) liability; more

A sharp depreciation of the domestic currency after a currency crisis leads to A) higher inflation. B) lower import prices. C) lower interest rates. D) decrease in the value of foreign currency-denominated liabilities.

A sharp stock market decline increases moral hazard incentives A) since borrowing firms have less to lose if their investments fail. B) because it is immoral to profit from someoneʹs loss. C) since lenders are more willing to make loans. D) reducing uncertainty in the economy and increasing market efficiency.

A substantial decrease in the aggregate price level that reduces firmsʹ net worth may stall a recovery from a recession. This process is called A) debt deflation. B) moral hazard. C) insolvency. D) illiquidity.

A system of deposit insurance A) attracts risk-taking entrepreneurs into the banking industry. B) encourages bank managers to decrease risk. C) increases the incentives of depositors to monitor the riskiness of their bankʹs asset portfolio. D) increases the likelihood of bank runs.

A venture capital firm protects its equity investment from moral hazard through which of the following means? A) It places people on the board of directors to better monitor the borrowing firmʹs activities. B) It writes contracts that prohibit the sale of an equity investment to the venture capital firm. C) It prohibits the borrowing firm from replacing its management. D) It requires a 50% stake in the company.

Acquiring information on a bankʹs activities in order to determine a bankʹs risk is difficult for depositors and is another argument for government ________. A) regulation B) ownership C) recall D) forbearance

Adverse selection is a problem associated with equity and debt contracts arising from A) the lenderʹs relative lack of information about the borrowerʹs potential returns and risks of his investment activities. B) the lenderʹs inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults. C) the borrowerʹs lack of incentive to seek a loan for highly risky investments. D) the lenderʹs inability to restrict the borrower from changing his behavior once given a loan.

Agency problems in the subprime mortgage market included all of the following except A) homeowners could refinance their houses with larger loans when their homes appreciated in value. B) mortgage originators had little incentives to make sure that the mortgage is a good credit risk. C) underwriters of mortgage-backed securities had weak incentives to make sure that the holders of the securities would be paid back. D) the evaluators of securities , the credit rating agencies, were subject to conflicts of interest.

Agreements such as the ________ are attempts to standardize international banking regulations. A) Basel Accord B) UN Bank Accord C) GATT Accord D) WTO Accord

All of the following are credit-rating agency reforms proposed by the SEC in 2008 except A) prohibit credit-rating agencies from structuring the same products that they rate. B) disclose historical ratings performance. C) differentiate the ratings on structured products from those issued on bonds. D) sever links between research and securities underwriting

All of the following are operating expenses for a bank except A) service charges on deposit accounts. B) salaries and employee benefits. C) rent on buildings. D) servicing costs of equipment such as computers.

All of the following would reduce the agency problems of the originate-to-distribute model except A) encouraging more complex mortgage products. B) more stringent licensing requirements. C) clearer disclosure of mortgage terms. D) discouraging borrowers from ʺgetting in over their head.ʺ

Although debt contracts require less monitoring than equity contracts, debt contracts are still subject to ________ since borrowers have an incentive to take on more risk than the lender would like. A) moral hazard B) agency theory C) diversification D) the ʺlemonsʺ problem

Although restrictive covenants can potentially reduce moral hazard, a problem with restrictive covenants is that A) borrowers may find loopholes that make the covenants ineffective. B) they are inexpensive to monitor and enforce. C) too many resources may be devoted to monitoring and enforcing them, as debtholders duplicate othersʹ monitoring and enforcement efforts. D) they reduce the value of the debt contract.

Although the FDIC was created to prevent bank failures, its existence encourages banks to A) take too much risk. B) hold too much capital. C) open too many branches. D) buy too much stock.

Although the subprime mortgage market problem began in the United States, the first indication of the seriousness of the crisis began in A) Europe. B) Australia. C) China. D) South America.

An example of the ________ problem would be if Brian borrowed money from Sean in order to purchase a used car and instead took a trip to Atlantic City using those funds. A) moral hazard B) adverse selection C) costly state verification D) agency

An important factor in producing the subprime mortgage crisis was A) lax consumer protection regulation. B) onerous rules placed on mortgage originators. C) weak incentives for mortgage brokers to use complicated mortgage products. D) strong incentives for the mortgage brokers to verify income information.

An unanticipated decline in the price level increases the burden of debt on borrowing firms but does not raise the real value of borrowing firmsʹ assets. The result is A) that net worth in real terms declines. B) that adverse selection and moral hazard problems are reduced. C) an increase in the real net worth of the borrowing firm. D) an increase in lending.

Analysis of adverse selection indicates that financial intermediaries, especially banks, A) have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than is direct finance. B) despite their success in overcoming free-rider problems, nevertheless play a minor role in moving funds to corporations. C) provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations which rely to a greater extent on the new issues market for funds. D) must buy securities from corporations to diversify the risk that results from holding non-tradable loans.

Another way to state the efficient markets condition is: in an efficient market, A) unexploited profit opportunities will be quickly eliminated. B) unexploited profit opportunities will never exist. C) arbitragers guarantee that unexploited profit opportunities never exist. D) every financial market participant must be well informed about securities.

As in the United States, an important factor in the banking crises in Latin America was the A) financial liberalization that occurred in the 1980s. B) decline in real interest rates that occurred in the 1980s. C) high inflation that occurred in the 1980s. D) sluggish economic growth that occurred in the 1980s

As in the United States, an important factor in the banking crises in Norway, Sweden, and Finland was the A) financial liberalization that occurred in the 1980s. B) decline in real interest rates that occurred in the 1980s. C) high inflation that occurred in the 1980s. D) sluggish economic growth that occurred in the 1980s.

At the time of the South Korean financial crisis, the government allowed many chaebol owned finance companies to convert to merchant banks. Finance companies ________ allowed to borrow abroad and merchant banks ________. A) were not; could borrow abroad B) were not; could not borrow abroad C) were; could borrow abroad D) were; could not borrow abroad

At the time of the South Korean financial crisis, the merchant banks were A) almost virtually unregulated. B) subject to heavy government regulation. C) engaged in long-term lending to the corporate sector. D) restricted to long-term foreign borrowing.

Bank capital has both benefits and costs for the bank owners. Higher bank capital ________ the likelihood of bankruptcy, but higher bank capital ________ the return on equity for a given return on assets. A) reduces; reduces B) increases; increases C) reduces; increases D) increases; reduces

Bank capital is equal to ________ minus ________. A) total assets; total liabilities B) total liabilities; total assets C) total assets; total reserves D) total liabilities; total borrowings

Banks are required to file ________ usually quarterly that list information on the bankʹs assets and liabilities, income and dividends, and so forth. A) call reports B) balance reports C) regulatory sheets D) examiner updates

Banks engage in regulatory arbitrage by A) keeping high-risk assets on their books while removing low-risk assets with the same capital requirement. B) keeping low-risk assets on their books while removing high-risk assets with the same capital requirement. C) hiding risky assets from regulators. D) buying risky assets from arbitragers.

Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans. A) adverse selection B) moral hazard C) moral suasion D) intentional fraud

Banksʹ asset portfolios include state and local government securities because A) their interest payments are tax deductible for federal income taxes. B) banks consider them helpful in attracting accounts of Federal employees. C) the Federal Reserve requires member banks to buy securities from state and local governments located within their respective Federal Reserve districts. D) there is no default-risk with state and local government securities.

Because conflicts of interest increase asymmetric information problems A) the economy will not operate as efficiently. B) loans will not be made. C) banks will not be able to make a profit. D) the financial markets will operate more smoothly.

Before the South Korean financial crisis, sales by the top five chaebols (family-owned conglomerates) were A) nearly 50% of GDP. B) about 10% of GDP. C) almost 90% of GDP. D) nearly 25% of GDP.

Bruce the Bank Manager can reduce interest rate risk by ________ the duration of the bankʹs assets to increase their rate sensitivity or, alternatively, ________ the duration of the bankʹs liabilities. A) shortening; lengthening B) shortening; shortening C) lengthening; lengthening D) lengthening; shortening

China is trying to move its banking system from being strictly ________ owned by having them issue shares overseas. A) state B) domestic investor C) depositor D) domestic corporate

Commercial and farm mortgages, in which property is pledged as collateral, account for A) one-quarter of borrowing by nonfinancial businesses. B) one-half of borrowing by nonfinancial businesses. C) one-twentieth of borrowing by nonfinancial businesses. D) two-thirds of borrowing by nonfinancial businesses.

Competition between banks A) encourages greater risk taking. B) encourages conservative bank management. C) increases bank profitability. D) eliminates the need for government regulation.

Conditions that likely contributed to a credit crunch in 2008 include: A) capital shortfalls caused in part by falling real estate prices. B) regulated hikes in bank capital requirements. C) falling interest rates that raised interest rate risk, causing banks to choose to hold more capital. D) increases in reserve requirements.

Consumer protection legislation includes legislation to A) reduce discrimination in credit markets. B) require banks to make loans to everyone who applies. C) reduce the amount of interest that bankʹs can charge on loans. D) require banks to make periodic reports to the Better Business Bureau

Credit market problems of adverse selection and moral hazard increased as a result of all of the following except A) increase in housing market prices. B) increased uncertainty from the failures of financial institutions. C) deterioration in financial institutionsʹ balance sheets. D) decline in the stock market of over 40% from its peak.

Credit-rating agencies may face a conflict of interest because they A) both advise clients on how to structure debt issues and determine the creditworthiness of the debt issues. B) underwrite securities and advise clients on how to structure debt issues. C) underwrite securities and determine the creditworthiness of the debt issues. D) both advise clients on how to structure debt issues and write restrictive covenants.

Currently, Fannie Mae and Freddie Mac are A) privately owned government-sponsored enterprises. B) privately owned enterprises with no government sponsorship. C) government agencies. D) government departments.

Debt contracts A) are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals. B) have a higher cost of state verification than equity contracts. C) are used less frequently to raise capital than are equity contracts. D) never result in a loss for the lender.

Debt deflation occurs when A) an economic downturn causes the price level to fall and a deterioration in firmsʹ net worth because of the increased burden of indebtedness. B) rising interest rates worsen adverse selection and moral hazard problems. C) lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral. D) corporations pay back their loans before the scheduled maturity date.

Deposit insurance has not worked well in countries with A) a weak institutional environment. B) strong supervision and regulation. C) a tradition of the rule of law. D) few opportunities for corruption.

Deposit insurance is only one type of government safety net. All of the following are types of government support for troubled financial institutions except A) forgiving tax debt. B) lending from the central bank. C) lending directly from the governmentʹs treasury department. D) nationalizing and guaranteeing that all creditors will be repaid their loans in full

Depositors lack of information about the quality of bank assets can lead to ________. A) bank panics B) bank booms C) sequencing D) asset transformation

Direct finance involves the sale to ________ of marketable securities such as stocks and bonds. A) households B) insurance companies C) pension funds D) financial intermediaries

During the 1960s, 1970s, and early 1980s, traditional bank profitability declined because of A) financial innovation that increased competition from new financial institutions. B) a decrease in interest rates to fight the inflation problem. C) a decrease in deposit insurance. D) increased regulation that prohibited banks from making risky real estate loans.

During times of financial crisis, mark-to-market accounting A) requires that a financial firmsʹ assets be marked down in value which can worsen the lending crisis. B) leads to an increase in the financial firmsʹ balance sheets since they can now get assets at bargain prices. C) leads to an increase in financial firmsʹ lending. D) results in financial firmsʹ assets increasing in value

Economists have focused more attention on the formation of expectations in recent years. This increase in interest can probably best be explained by the recognition that A) expectations influence the behavior of participants in the economy and thus have a major impact on economic activity. B) expectations influence only a few individuals, have little impact on the overall economy, but can have important effects on a few markets. C) expectations influence many individuals, have little impact on the overall economy, but can have distributional effects. D) models that ignore expectations have little predictive power, even in the short run

Equity contracts A) are claims to a share in the profits and assets of a business. B) have the advantage over debt contracts of a lower costly state verification. C) are used much more frequently to raise capital than are debt contracts. D) are not subject to the moral hazard problem.

Equity contracts account for a small fraction of external funds raised by American businesses because A) costly state verification makes the equity contract less desirable than the debt contract. B) of the reduced scope for moral hazard problems under equity contracts, as compared to debt contracts. C) equity contracts do not permit borrowing firms to raise additional funds by issuing debt. D) there is no moral hazard problem when using a debt contract.

Evidence in support of the efficient markets hypothesis includes A) the failure of technical analysis to outperform the market. B) the small-firm effect. C) the January effect. D) excessive volatility.

Examples of off-balance-sheet activities include A) loan sales. B) extending loans to depositors. C) borrowing from other banks. D) selling negotiable CDs.

FDICIA ________ incentives for banks to hold capital and ________ incentives to take on excessive risk. A) increased; decreased B) increased; increased C) decreased; decreased D) decreased; increased

FIRREA increased the core-capital leverage requirement for thrift institutions from 3% to A) 8%. B) 5% C) 10% D) 25%

Factors likely to cause a financial crisis in emerging market countries include A) fiscal imbalances. B) decreases in foreign interest rates. C) a foreign exchange crisis. D) too strong oversight of the financial industry.

Factors that led to worsening conditions in Mexicoʹs 1994-1995 financial markets, but did not lead to worsening financial market conditions in East Asia in 1997-1998 include A) rise in interest rates abroad. B) bankersʹ lack of expertise in screening and monitoring borrowers. C) deterioration of banksʹ balance sheets because of increasing loan losses. D) stock market decline

Factors that led to worsening financial market conditions in East Asia in 1997-1998 include A) weak supervision by bank regulators. B) a rise in interest rates abroad. C) unanticipated increases in the price level. D) increased uncertainty from political shocks.

Financial crises generally develop along two basic paths: A) mismanagement of financial liberalization/globalization and severe fiscal imbalances. B) stock market declines and severe fiscal imbalances. C) mismanagement of financial liberalization/globalization and stock market declines. D) stock market declines and unanticipated declines in the value of the domestic currency.

Financial innovations that emerged after 2000 in the mortgage markets included all of the following except A) adjustable-rate mortgages. B) subprime mortgages. C) Alt-A mortgages. D) mortgage-backed securities.

Financial intermediaries develop ________ in things such as computer technology which allows them to lower transactions costs. A) expertise B) diversification C) regulations D) equity

Financial intermediariesʹ low transaction costs allow them to provide ________ services that make it easier for customers to conduct transactions. A) liquidity B) conduction C) transcendental D) equitable

For restrictive covenants to help reduce the moral hazard problem they must be ________ by the lender. A) monitored and enforced B) written in all capitals C) easily changed D) impossible to remove

Government regulations designed to reduce the moral hazard problem include A) laws that force firms to adhere to standard accounting principles. B) light sentences for those who commit the fraud of hiding and stealing profits. C) state verification subsidies. D) state licensing restrictions.

Higher capital requirements will reduce the problems incurred when troubled ________ which had been off-balance sheet activities come back on the balance sheet. A) structured investment vehicles (SIVs) B) negotiable CDs C) Eurodollars D) Federal funds

Holding all else constant, when a bank receives the funds for a deposited check, A) cash items in the process of collection fall by the amount of the check. B) bank assets increase by the amount of the check. C) bank liabilities decrease by the amount of the check. D) bank reserves increase by the amount of required reserves

If a bank has $10 million of checkable deposits, a required reserve ratio of 10 percent, and it holds $2 million in reserves, then it will not have enough reserves to support a deposit outflow of A) $1.2 million. B) $1.1 million. C) $1 million. D) $900,000.

If a bank has $200,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $50,000. B) $40,000. C) $30,000. D) $25,000.

If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in A) deposits and reserves. B) deposits and loans. C) capital and reserves. D) capital and loans.

If a bankʹs liabilities are more sensitive to interest rate movements than are its assets, then A) an increase in interest rates will reduce bank profits. B) a decrease in interest rates will reduce bank profits. C) interest rates changes will not impact bank profits. D) an increase in interest rates will increase bank profits.

If a forecast is made using all available information, then economists say that the expectation formation is A) rational. B) irrational. C) adaptive. D) reasonable.

If a forecast made using all available information is not perfectly accurate, then it is A) still a rational expectation. B) not a rational expectation. C) an adaptive expectation. D) a second-best expectation.

If a market participant believes that a stock price is irrationally high, they may try to borrow stock from brokers to sell in the market and then make a profit by buying the stock back again after the stock falls in price. This practice is called A) short selling. B) double dealing. C) undermining. D) long marketing.

If debt contracts are denominated in foreign currency, then an unanticipated decline in the value of the domestic currency results in A) a decline in a firmʹs net worth. B) an increase in a firmʹs net worth. C) a decrease in adverse selection and moral hazard. D) an increase in willingness to lend.

If during the past decade the average rate of monetary growth has been 5% and the average inflation rate has been 5%, everything else held constant, when the Federal Reserve announces that the new rate of monetary growth will be 10%, the adaptive expectation forecast of the inflation rate is A) 5%. B) between 5 and 10%. C) 10%. D) more than 10%.

If in an efficient market all prices are correct and reflect market fundamentals, which of the following is a false statement? A) A stock that has done poorly in the past is more likely to do well in the future. B) One investment is as good as any other because the securitiesʹ prices are correct. C) A securityʹs price reflects all available information about the intrinsic value of the security. D) Security prices can be used by managers to assess their cost of capital accurately.

If market participants notice that a variable behaves differently now than in the past, then, according to rational expectations theory, we can expect market participants to A) change the way they form expectations about future values of the variable. B) begin to make systematic mistakes. C) no longer pay close attention to movements in this variable. D) give up trying to forecast this variable.

If the optimal forecast of the return on a security exceeds the equilibrium return, then A) the market is inefficient. B) no unexploited profit opportunities exist. C) the market is in equilibrium. D) the market is myopic.

If uncertainty about banksʹ health causes depositors to begin to withdraw their funds from banks, the country experiences a(n) A) banking crisis. B) financial recovery. C) reduction of the adverse selection and moral hazard problems. D) increase in information available to investors.

In October 2008, the stock market crashed, falling by ________ from its peak value a year earlier. A) over 40% B) over 30% C) over 50% D) over 25%

In emerging market countries, many firms have debt denominated in foreign currency like the dollar or yen. A depreciation of the domestic currency A) results in increases in the firmʹs indebtedness in domestic currency terms, even though the value of their assets remains unchanged. B) results in an increase in the value of the firmʹs assets. C) means that the firm does not owe as much on their foreign debt. D) strengthens their balance sheet in terms of the domestic currency.

In emerging market countries, the deterioration in bankʹs balance sheets has more ________ effects on lending and economic activity than in advanced countries. A) negative B) positive C) affirming D) advancing

In one sense ________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk. A) specialization in lending; diversifying B) specialization in lending; rationing C) credit rationing; diversifying D) screening; rationing

In the Gordon growth model, a decrease in the required rate of return on equity A) increases the current stock price. B) increases the future stock price. C) reduces the future stock price. D) reduces the current stock price

In the generalized dividend model, if the expected sales price is in the distant future A) it does not affect the current stock price. B) it is more important than dividends in determining the current stock price. C) it is equally important with dividends in determining the current stock price. D) it is less important than dividends but still affects the current stock price.

In the one-period valuation model, the current stock price increases if A) the expected sales price increases. B) the expected sales price falls. C) the required return increases. D) dividends are cut.

In the one-period valuation model, the value of a share of stock today depends upon A) the present value of both dividends and the expected sales price. B) only the present value of the future dividends. C) the actual value of the dividends and expected sales price received in one year. D) the future value of dividends and the actual sales price.

Increased uncertainty resulting from the subprime crisis ________ the required return on investment in equity. A) raised B) lowered C) had no impact on D) decreased

Investment banks ________ companies issuing securities and ________ these securities by selling them to the public on behalf of the issuing companies. A) research; underwrite B) research; monitor C) monitor; underwrite D) monitor; manipulate

Investment banks that are part of ________ are regulated and supervised like banks. A) bank holding companies B) insurance companies C) Freddie Mac D) Fannie Mae

Like a CDO, a structured investment vehicle pays off cash flows from pools of assets, however, rather than long-term debt the structured investment vehicle backs A) commercial paper. B) Treasury notes. C) corporate bonds. D) municipal bonds.

Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks. A) reduce; screen B) increase; screen C) reduce; increase D) increase; increase

Looking at the Net Interest Margin indicates that the poor bank performance in the late 1980s A) was not the result of interest-rate movements. B) was not the result of risky loans made in the early 1980s. C) resulted from a narrowing of the gap between interest earned on assets and inters paid on liabilities. D) resulted from a huge decrease in provisions for loan losses.

Loss aversion can explain why very little ________ actually takes place in the securities market. A) short selling B) bargaining C) bartering D) negotiating

Many 19th century U.S. financial crises were started by A) spikes in interest rates. B) financial innovation. C) onerous financial regulations. D) a strong improvement in banksʹ balance sheets.

Modern liability management has resulted in A) increased sales of certificates of deposits to raise funds. B) increase importance of deposits as a source of funds. C) reduced borrowing by banks in the overnight loan market. D) failure by banks to coordinate management of assets and liabilities

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer. A) principal-agent B) adverse selection C) free-rider D) debt deflation

Moral hazard is an important concern of insurance arrangements because the existence of insurance A) provides increased incentives for risk taking. B) is a hindrance to efficient risk taking. C) causes the private cost of the insured activity to increase. D) creates an adverse selection problem but no moral hazard problem.

Mortgage brokers often did not make a strong effort to evaluate whether the borrower could pay off the loan. This created a A) severe adverse selection problem. B) decline in mortgage applications. C) call to deregulate the industry. D) decrease in the demand for houses.

Most U.S. financial crises have started during periods of ________ either after the start of a recession or a stock market crash. A) high uncertainty B) low interest rates C) low asset prices D) high financial regulation

Most of a bankʹs operating income results from A) interest on assets. B) service charges on deposit accounts. C) off-balance-sheet activities. D) fees from standby lines of credit.

Net profit after taxes per dollar of assets is a basic measure of bank profitability called A) return on assets. B) return on capital. C) return on equity. D) return on investment.

New information that might lead to a decrease in an assetʹs price might be A) an expected decrease in the level of future dividends. B) a decrease in the required rate of return. C) an expected increase in the dividend growth rate. D) an expected increase in the future sales price.

One financial intermediary in our financial structure that helps to reduce the moral hazard from arising from the principal-agent problem is the A) venture capital firm. B) money market mutual fund. C) pawn broker. D) savings and loan association.

One of the criticisms of Basel 2 is that it is procyclical. That means that A) banks may be required to hold more capital during times when capital is short. B) banks may become professional at a cyclical response to economic conditions. C) banks may be required to hold less capital during times when capital is short. D) banks will not be required to hold capital during an expansion.

One of the problems experienced by the savings and loan industry during the 1980s was A) managers lack of expertise to manage risk in new lines of business. B) heavy regulations in the new areas open to S&Ls. C) slow growth in lending. D) close monitoring by the FSLIC.

One of the problems in conducting a duration gap analysis is that the duration gap is calculated assuming that interest rates for all maturities are the same. That means that the yield curve is A) flat. B) slightly upward sloping. C) steeply upward sloping. D) downward sloping.

One reason China has been able to grow so rapidly even though its financial development is still in its early stages is A) the high savings rate of around 40%. B) the shift of labor to the agricultural sector. C) the stringent enforcement of financial contracts. D) the ease of obtaining high-quality information about creditors.

One way for banks to reduce the principal-agent problems associated with trading activities is to A) set limits on the total amount of a tradersʹ transactions. B) make sure that the person conducting the trades is also the person responsible for recording the transactions. C) encourage traders to take on more risk if the potential rewards are higher. D) reduce the regulations on the traders so that they have more flexibility in conducting trades.

Overseeing who operates banks and how they are operated is called ________. A) prudential supervision B) hazard insurance C) regulatory interference D) loan loss reserves

Property promised to the lender as compensation if the borrower defaults is called ________. A) collateral B) deductibles C) restrictive covenants D) contingencies

Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment is called A) collateral. B) points. C) interest. D) good faith money.

Regulations designed to provide information to the marketplace so that investors can make informed decisions are called A) disclosure requirements. B) efficient market requirements. C) asset restrictions. D) capital requirements.

Regulations that reduced competition between banks included A) branching restrictions. B) bank reserve requirements. C) the dual system of granting bank charters. D) interest-rate ceilings.

Regulators attempt to reduce the riskiness of banksʹ asset portfolios by A) limiting the amount of loans in particular categories or to individual borrowers. B) encouraging banks to hold risky assets such as common stocks. C) establishing a minimum interest rate floor that banks can earn on certain assets. D) requiring collateral for all loans.

Regulatory forbearance A) meant delaying the closing of ʺzombie S&Lsʺ as their losses mounted during the 1980s. B) had the advantage of benefiting healthy S&Ls at the expense of ʺzombie S&Lsʺ, as insolvent institutions lost deposits to health institutions. C) had the advantage of permitting many insolvent S&Ls the opportunity to return to profitability, saving the FSLIC billions of dollars. D) increased adverse selection dramatically.

Rules used to predict movements in stock prices based on past patterns are, according to the efficient markets hypothesis, A) a waste of time. B) profitably employed by all financial analysts. C) the most efficient rules to employ. D) consistent with the random walk hypothesis

Savings and loan regulators allowed S&Ls to include in their capital calculations a high value for intangible capital called A) goodwill. B) salvation. C) kindness. D) retribution.

Secondary reserves are so called because A) they can be converted into cash with low transactions costs. B) they are not easily converted into cash, and are, therefore, of secondary importance to banking firms. C) 50% of these assets count toward meeting required reserves. D) they rank second to bank vault cash in importance of bank holdings

Severe fiscal imbalances can directly trigger a currency crisis since A) investors fear that the government may not be able to pay back the debt and so begin to sell domestic currency. B) the government may stop printing money. C) the government may have to cut back on spending. D) the currency must surely increase in value.

Since they require less monitoring of firms, ________ contracts are used more frequently than ________ contracts to raise capital. A) debt; equity B) equity; debt C) debt; loan D) equity; stock

That only large, well-established corporations have access to securities markets A) explains why indirect finance is such an important source of external funds for businesses. B) can be explained by the problem of moral hazard. C) can be explained by government regulations that prohibit small firms from acquiring funds in securities markets. D) explains why newer and smaller corporations rely so heavily on the new issues market for funds

That several hundred S&Ls were not even examined once in the period January 1984 through June 1986 can be explained by A) Congressʹs unwillingness to allocate the necessary funds to thrift regulators. B) regulatorsʹ reluctance to find the specific problem thrifts that they knew existed. C) slower growth in lending meant that less regulation was needed. D) Congressʹs unwillingness to listen to campaign contributors.

The Argentine banking crisis of 2001 resulted from Argentinaʹs banks being required to A) purchase large amounts of government debt. B) pay back the value of failed loans. C) make risky real estate loans. D) make loans to only state-owned businesses.

The Basel Accord, an international agreement, requires banks to hold capital based on A) risk-weighted assets. B) the total value of assets. C) liabilities. D) deposits.

The Basel Committee ruled that regulators in other countries can ________ the operations of a foreign bank if they believe that it lacks effective oversight. A) restrict B) encourage C) renegotiate D) enhance

The Economic Recovery Act of 2008 had several provisions to promote recovery from the subprime financial crisis. These provisions included all of the following except A) guaranteed all the deposits of the commercial banks. B) purchase of subprime mortgage assets from troubled financial institutions by the Treasury. C) temporarily raised the limit of the federal deposit insurance from $100,000 to $250,000. D) guarantee of par value for money market mutual fund shares for one year by the Treasury.

The Federal Deposit Insurance Corporation Improvement Act of 1991 A) increased the FDICʹs ability to borrow from the Treasury to deal with failed banks. B) increased the FDICʹs ability to use the too-big-to-fail doctrine. C) eliminated governmentally-administered deposit insurance. D) eliminated restrictions on nationwide banking.

The Global Legal Settlement of 2002 required investment banks to separate ________ and ________. A) research; securities underwriting B) deposits; securities underwriting C) research; legal analysis D) deposits; legal analysis

The Japanese banking system went through a cycle of ________ in the 1990s similar to the one that occurred in the U.S. in the 1980s. A) regulatory forbearance B) policy antagonism C) regulatory ignorance D) policy renewal

The Resolution Trust Corporation was created by the FIRREA in order to A) manage and resolve insolvent S&Ls. B) build up trust in government regulation. C) regulate the S&L industry. D) purchase large amounts of government debt.

The S&L Crisis can be analyzed as a principal-agent problem. The agents in this case, the ________, did not have the same incentive to minimize cost to the economy as the principals, the ________. A) politicians/regulators; taxpayers B) taxpayers; politician/regulators C) taxpayers; bank managers D) bank managers; politicians/regulators

The ________ problem helps to explain why the private production and sale of information cannot eliminate ________. A) free-rider; adverse selection B) free-rider; moral hazard C) principal-agent; adverse selection D) principal-agent; moral hazard

The ability to use the too-big-to-fail policy was curtailed by the passage of the FDICIA. To use this action today, the FDIC must get approval of a two-thirds majority of both the Board of Governors of the Federal Reserve and the directors of the FDIC and also the approval of the ________. A) Secretary of the Treasury B) Senate Finance Committee Chairperson C) President of the United States D) Governor of the state in which the failed bank is located

The advantage of a ʺbuy-and-hold strategyʺ is that A) net profits will tend to be higher because there will be fewer brokerage commissions. B) losses will eventually be eliminated. C) the longer a stock is held, the higher will be its price. D) profits are guaranteed.

The bailout of the savings and loan industry was much delayed and, therefore, much more costly to taxpayers because A) of regulatorsʹ initial attempts to downplay the seriousness of problems within the thrift industry. B) politicians listened to the taxpayers rather than the S&L lobbyists. C) Congress did not wait long enough for many of the problems in the thrift industry to correct themselves. D) regulators could not be fired, therefore, they didnʹt care if they did a good job or not.

The chaebols encouraged the Korean government to open up Korean financial markets to foreign capital. The Korean government responded by A) allowing unlimited short-term foreign borrowing but maintained quantity restrictions on long-term foreign borrowing by financial institutions. B) allowing unlimited short-term and long-term foreign borrowing by financial institutions. C) maintaining quantity restrictions on short-term foreign borrowing but allowing unlimited long-term foreign borrowing by financial institutions. D) not allowing any foreign borrowing by financial institutions.

The chartering process is similar to ________ potential borrowers and the restriction of risk assets by regulators is similar to ________ in private financial markets. A) screening; restrictive covenants B) screening; branching restrictions C) identifying; branching restrictions D) identifying; credit rationing

The collapse of the Bank of Credit and Commerce International, BCCI, showed the difficulty of international banking regulation. BCCI operated in more than ________ countries and was supervised by the small country of ________. A) 70, Luxembourg B) 100, Monaco C) 70, Monaco D) 100, Luxembourg

The directive of prompt corrective action means that A) the FDIC will intervene earlier and more vigorously when a bank gets into trouble. B) the banks must take actions quickly to resolve reserve disputes. C) bank failures cannot occur. D) there must be an immediate response to an increase in interest rates.

The economic hardship resulting from a financial crises is severe, however, there are also social consequences such as A) increased crime. B) difficulty getting a loan. C) currency devaluations. D) loss of output.

The economy recovers quickly from most recessions, but the increase in adverse selection and moral hazard problems in the credit markets caused by ________ led to the severe economic contraction known as The Great Depression. A) debt deflation B) illiquidity C) an improvement in banksʹ balance sheets D) increases in bond prices

The efficient markets hypothesis suggests that investors A) should purchase no-load mutual funds which have low management fees. B) can use the advice of technical analysts to outperform the market. C) let too many unexploited profit opportunities go by if they adopt a ʺbuy and holdʺ strategy. D) act on all ʺhot tipsʺ they hear.

The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insurance A) are likely to take on greater risks than they otherwise would. B) are likely to be too conservative, reducing the probability of turning a profit. C) are likely to regard deposits as an unattractive source of funds due to depositorsʹ demands for safety. D) are placed at a competitive disadvantage in acquiring funds.

The fact that the credit-rating agencies both advised clients on how to structure the financial instruments that paid out cash flows from subprime mortgages and also rated these financial instruments contributed to the A) subprime financial crisis that began in 2007. B) Enron collapse. C) demise of Arthur Andersen. D) technology bust.

The federal agencies that examine banks include A) the Federal Reserve System. B) the Internal Revenue Service. C) the SEC. D) the U.S. Treasury.

The government bailout of troubled financial institutions occurred in the U.S. and many other countries. Which country saw their banking system collapse requiring the government to take over its three largest banks? A) Iceland B) England C) Germany D) Belgium

The government safety net creates ________ problem because risk -loving entrepreneurs might find banking an attractive industry. A) an adverse selection B) a moral hazard C) a lemons D) a revenue

The growth of the subprime mortgage market led to A) increased demand for houses and helped fuel the boom in housing prices. B) a decline in the housing industry because of higher default risk. C) a decrease in home ownership as investors chose other assets over housing. D) decreased demand for houses as the less credit-worthy borrowers could not obtain residential mortgages.

The inaccurate ratings provided by credit-rating agencies A) meant that investors did not have the information they needed to make informed choices about their investments. B) were irrelevant since no one pays any attention to them anyway. C) meant that investors actually took on less risk. D) will not be a problem when determining capital requirements under Basel 2..

The key factor leading to the financial crises in Mexico and the East Asian countries was A) a deterioration in banksʹ balance sheets because of increasing loan losses. B) severe fiscal imbalances. C) a sharp increase in the stock market. D) a sharp decline in interest rates.

The largest bank failure in U.S. history was ________ which went into receivership by the FDIC on September 25, 2008. A) Washington Mutual B) Bank of America C) J.P. Morgan D) Wells Fargo

The largest percentage of banksʹ holdings of securities consist of A) Treasury and government agency securities. B) tax-exempt municipal securities. C) state and local government securities. D) corporate securities

The major criticism of the view that expectations are formed adaptively is that A) this view ignores that people use more information than just past data to form their expectations. B) it is easier to model adaptive expectations than it is to model rational expectations. C) adaptive expectations models have no predictive power. D) people are irrational and therefore never learn from past mistakes.

The mismanagement of financial liberalization in emerging market countries can be understood as a severe ________. A) principal/agent problem B) asymmetric information problem. C) lemons problem. D) free-rider problem.

The name economists give the process by which stockholders gather information by frequent monitoring of the firmʹs activities is A) costly state verification. B) the free-rider problem. C) costly avoidance. D) debt intermediation

The originate-to-distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk. A) principal-agent B) debt deflation C) democratization of credit D) collateralized debt

The policy of ________ exacerbated ________ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency. A) regulatory forbearance; moral hazard B) regulatory forbearance; adverse hazard C) regulatory agnosticism; moral hazard D) regulatory agnosticism; adverse hazard

The presence of economies of scope may benefit financial institutions but may create potential costs from ________. A) conflicts of interest B) multiple profitable enterprises C) economies of scale D) unsecured debt

The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________. A) adverse selection; moral hazard B) moral hazard; adverse selection C) costly state verification; free-riding D) free-riding; costly state verification

The problem of adverse selection helps to explain A) why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets. B) why collateral is an important feature of consumer, but not business, debt contracts. C) why direct finance is more important than indirect finance as a source of business finance. D) why lenders refuse loans to individuals with high net worth.

The subprime financial crisis lead to a decline in stock prices because A) of a lowered expected dividend growth rate. B) of a lowered required return on investment in equity. C) higher expected future stock prices. D) higher current dividends.

The subprime financial crisis showed the need for increased financial regulation, however, too much or poorly designed regulation could A) choke off financial innovation. B) increase the efficiency of the financial system. C) increase economic growth. D) increase international financial integration.

The two key factors that trigger speculative attacks on emerging market currencies are A) deterioration in bank balance sheets and severe fiscal imbalances. B) deterioration in bank balance sheets and low interest rates abroad. C) low interest rates abroad and severe fiscal imbalances. D) low interest rates abroad and rising asset prices.

To prevent bank runs and the consequent bank failures, the United States established the ________ in 1934 to provide deposit insurance. A) FDIC B) SEC C) Federal Reserve D) ATM

To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective, banks must also A) monitor and enforce them. B) be willing to rewrite the contract if the borrower cannot comply with the restrictions. C) trust the borrower to do the right thing. D) be prepared to extend the deadline when the borrower needs more time to comply.

Traders working for banks are subject to the A) principal-agent problem. B) free-rider problem. C) double-jeopardy problem. D) exchange-risk problem.

Using the Gordon growth model, a stockʹs price will increase if A) the dividend growth rate increases. B) the growth rate of dividends falls. C) the required rate of return on equity rises. D) the expected sales price rises.

When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to make any loans but to hold excess reserves instead, then, in the bankʹs final balance sheet, A) the assets at the bank increase by $1 million. B) the liabilities of the bank decrease by $1 million. C) reserves increase by $200,000. D) liabilities increase by $200,000

When Happy Feet Corporation announces that their fourth quarter earnings are up 10%, their stock price falls. This is consistent with the efficient markets hypothesis A) if earnings were not as high as expected. B) if earnings were not as low as expected. C) if a merger is anticipated. D) the company just invented a new bunion product

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then A) the liabilities of the First National Bank decrease by $10. B) the reserves of the First National Bank increase by $10. C) the liabilities of Citibank decrease by $10. D) the assets of Citibank decrease by $10.

When a bank suspects that a $1 million loan might prove to be bad debt that will have to be written off in the future the bank A) can set aside $1 million of its earnings in its loan loss reserves account. B) reduces its reported earnings by $1, even though it has not yet actually lost the $1 million. C) reduces its assets immediately by $1 million, even though it has not yet lost the $1 million. D) reduces its reserves by $1 million, so that they can use those funds later.

When a new depositor opens a checking account at the First National Bank, the bankʹs assets ________ and its liabilities ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

When banks calculate the losses the institution would incur if an unusual combination of bad events happened, the bank is using the ________ approach. A) stress-test B) value-at-risk C) trading-loss D) maximum value

When comparing the banking crisis in the United States to the crises in Latin America, cost to the taxpayers of the government bailouts was A) higher in Latin American than in the United States. B) higher in the United States than in Latin America. C) about the same in both Latin America and the United States. D) positive in Latin America but negative in the United States.

When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a A) credit boom. B) credit bust. C) deleveraging. D) market race.

When financial intermediaries deleverage, firms cannot fund investment opportunities resulting in A) a contraction of economic activity. B) an economic boom. C) an increased opportunity for growth. D) a call for government regulation.

When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were ʺunderwater.ʺ This meant that A) the value of the house fell below the amount of the mortgage. B) the basement flooded since they could not afford to fix the leaky plumbing. C) the roof leaked during a rainstorm. D) the amount that they owed on their mortgage was less than the value of their house

When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of A) moral hazard. B) split incentives. C) ex ante shirking. D) pre-contractual opportunism.

When regulators chose to allow insolvent S&Ls to continue to operate rather than to close them, they were pursuing a policy of ________. A) regulatory forbearance B) regulatory kindness C) ostrich reasoning D) ignorance reasoning

When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending in a process called A) deleveraging. B) releveraging. C) capitulation. D) deflation.

Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history? A) Lehman Brothers B) Merrill Lynch C) Bear Stearns D) Goldman Sachs

Which of the following accurately summarize the empirical evidence about technical analysis? A) Technical analysts fare no better than other financial analysison average they do not outperform the market. B) Technical analysts tend to outperform other financial analysis, but on average they nevertheless under-perform the market. C) Technical analysts fare no better than other financial analysis, and like other financial analysts they outperform the market. D) Technical analysts fare no better than other financial analysis, and like other financial analysts they under-perform the market.

Which of the following are bank assets? A) the building owned by the bank B) a discount loan C) a negotiable CD D) a customerʹs checking account

Which of the following are primary concerns of the bank manager? A) Maintaining sufficient reserves to minimize the cost to the bank of deposit outflows B) Extending loans to borrowers who will pay low interest rates, but who are poor credit risks C) Acquiring funds at a relatively high cost, so that profitable lending opportunities can be realized D) Maintaining high levels of capital and thus maximizing the returns to the owners.

Which of the following are reported as liabilities on a bankʹs balance sheet? A) Discount loans B) Reserves C) U.S. Treasury securities D) Loans

Which of the following has not resulted from more active liability management on the part of banks? A) Increased bank holdings of cash items B) Aggressive targeting of goals for asset growth by banks C) Increased use of negotiable CDs to raise funds D) An increased proportion of bank assets held in loans

Which of the following is not one of the eight basic puzzles about financial structure? A) Stocks are the most important source of finance for American businesses. B) Issuing marketable securities is not the primary way businesses finance their operations. C) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. D) Banks are the most important source of external funds to finance businesses.

Which of the following statements are true? A) Checkable deposits are payable on demand. B) Checkable deposits do not include NOW accounts. C) Checkable deposits are the primary source of bank funds. D) Demand deposits are checkable deposits that pay interest.

Which of the following statements most accurately describes the task of bank asset management? A) Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity. B) Banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations. C) Banks seek to prevent bank failure at all cost; since a failed bank earns no profit, liquidity needs supersede the desire for profits. D) Banks seek to acquire funds in the least costly way.

While Sarbanes-Oxley is designed to reduce the problems caused by conflicts of interest critics say that it might diminish economies of scope and A) reduce information in financial markets. B) encourage IPOs in the U.S. C) encourage smaller firms to list on the U.S. financial markets. D) increase U.S. capital markets relative to those abroad.

Who has regulatory responsibility when a bank operates branches in many countries? A) It is not always clear. B) The WTO. C) The U.S. Federal Reserve System. D) The first country to submit an application.

With ________, firms value assets on their balance sheet at what they would sell for in the market. A) mark-to-market accounting B) book-value accounting C) historical-cost accounting D) off-balance sheet accounting

With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is A) $90. B) $100. C) $10. D) $110.

With regard to external sources of financing for nonfinancial businesses in the United States, which of the following are accurate statements? A) Marketable securities account for a larger share of external business financing in the United States than in Germany and Japan. B) Since 1970, most of the newly issued corporate bonds and commercial paper have been sold directly to American households. C) Direct finance accounts for more than 50 percent of the external financing of American businesses. D) Smaller businesses almost always raise funds by issuing marketable securities.

You have observed that the forecasts of an investment advisor consistently outperform the other reported forecasts. The efficient markets hypothesis says that future forecasts by this advisor A) may or may not be better than the other forecasts. Past performance is no guarantee of the future. B) will always be the best of the group. C) will definitely be worse in the future. What goes up must come down. D) will be worse in the near future, but improve over time.

________ and ________ may provide an explanation for stock market bubbles. A) Overconfidence; social contagion B) Underconfidence; social contagion C) Overconfidence; social isolationism D) Underconfidence; social isolationism

________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices. A) Behavioral finance B) Strategical finance C) Methodical finance D) Procedural finance

________ occurs when market participants observe returns on a security that are larger than what is justified by the characteristics of that security and take action to quickly eliminate the unexploited profit opportunity. A) Arbitrage B) Mediation C) Asset capitalization D) Market intercession

A bank will want to hold more excess reserves (everything else equal) when A) it expects to have deposit inflows in the near future. B) brokerage commissions on selling bonds increase. C) the cost of selling loans falls. D) the discount rate decreases.

A bank with insufficient reserves can increase its reserves by A) lending federal funds. B) calling in loans. C) buying short-term Treasury securities. D) buying municipal bonds

A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called A) moral hazard. B) asymmetric information. C) noncollateralized risk. D) adverse selection.

A lesson of the Enron collapse is that government regulation A) always fails. B) can reduce but not eliminate asymmetric information. C) increases the problem of asymmetric information. D) should be reduced.

A problem for equity contracts is a particular type of ________ called the ________ problem. A) adverse selection; principal-agent B) moral hazard; principal-agent C) adverse selection; free-rider D) moral hazard; free-rider

A stockholderʹs ownership of a companyʹs stock gives her the right to A) vote and be the primary claimant of all cash flows. B) vote and be the residual claimant of all cash flows. C) manage and assume responsibility for all liabilities. D) vote and assume responsibility for all liabilities.

A stockʹs price will fall if there is A) a decrease in perceived risk. B) an increase in the required rate of return. C) an increase in the future sales price. D) current dividends are high.

A well-capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities. A) more; more B) more; less C) less; more D) less; less

All else the same, if a bankʹs liabilities are more sensitive to interest rate fluctuations than are its assets, then ________ in interest rates will ________ bank profits. A) an increase; increase B) an increase; reduce C) a decline; reduce D) a decline; not affect

An expectation may fail to be rational if A) relevant information was not available at the time the forecast is made. B) relevant information is available but ignored at the time the forecast is made. C) information changes after the forecast is made. D) information was available to insiders only

As information technology improves, the lending role of financial institutions such as banks should ________. A) increase somewhat B) decrease C) stay the same D) increase significantly

Asset transformation can be described as A) borrowing long and lending short. B) borrowing short and lending long. C) borrowing and lending only for the short term. D) borrowing and lending for the long term.

Bank capital is listed on the ________ side of the bankʹs balance sheet because it represents a ________ of funds. A) liability; use B) liability; source C) asset; use D) asset; source

Bank loans from the Federal Reserve are called ________ and represent a ________ of funds. A) discount loans; use B) discount loans; source C) fed funds; use D) fed funds; source

Bankersʹ concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings from other banks to deal with deposit outflows is an example of A) liability management. B) liquidity management. C) managing interest rate risk. D) managing credit risk.

Banks acquire the funds that they use to purchase income-earning assets from such sources as A) cash items in the process of collection B) savings accounts. C) reserves. D) deposits at other banks.

Banks develop statistical models to calculate their maximum loss over a given time period. This approach is known as the A) stress-testing approach. B) value-at-risk approach. C) trading-loss approach. D) doomsday approach.

Banks hold excess and secondary reserves to A) reduce the interest-rate risk problem. B) provide for deposit outflows. C) satisfy margin requirements. D) achieve higher earnings than they can with loans

Banks that actively manage liabilities will most likely meet a reserve shortfall by A) calling in loans. B) borrowing federal funds. C) selling municipal bonds. D) seeking new deposits.

Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for ________. A) liabilities B) liquidity C) loans D) leverage

Because information is scarce A) helps explain why equity contracts are used so much more frequently to raise capital than are debt contracts. B) monitoring managers gives rise to costly state verification. C) government regulations, such as standard accounting principles, have no impact on problems such as moral hazard. D) developing nations do not rely heavily on banks for business financing.

Because of an expected rise in interest rates in the future, a banker will likely A) make long-term rather than short-term loans. B) buy short-term rather than long-term bonds. C) buy long-term rather than short-term bonds. D) make either short or long-term loans; expectations of future interest rates are irrelevant.

Collateralized debt is also know as A) unsecured debt. B) secured debt. C) unrestricted debt. D) promissory debt.

Credit card debt is A) secured debt. B) unsecured debt. C) restricted debt. D) unrestricted debt.

Credit risk management tools include A) deductibles. B) collateral. C) interest rate swaps. D) duration analysis

Depositors have a strong incentive to show up first to withdraw their funds during a bank crisis because banks operate on a A) last-in, first-out constraint. B) sequential service constraint. C) double-coincidence of wants constraint. D) everyone-shares-equally constraint.

Duration analysis involves comparing the average duration of the bankʹs ________ to the average duration of its ________. A) securities portfolio; non-deposit liabilities B) assets; liabilities C) loan portfolio; deposit liabilities D) assets; deposit liabilities

Federal deposit insurance covers deposits up to $100,000, but as part of a doctrine called ʺtoo-big-to-failʺ the FDIC sometimes ends up covering all deposits to avoid disrupting the financial system. When the FDIC does this, it uses the A) ʺpayoffʺ method. B) ʺpurchase and assumptionʺ method. C) ʺinequityʺ method. D) ʺBaselʺ method.

For a given return on assets, the lower is bank capital, A) the lower is the return for the owners of the bank. B) the higher is the return for the owners of the bank. C) the lower is the credit risk for the owners of the bank. D) the lower the possibility of bank failure.

If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $30,000. B) $25,000. C) $20,000. D) $10,000.

If a bank has ________ rate-sensitive assets than liabilities, a ________ in interest rates will reduce bank profits, while a ________ in interest rates will raise bank profits. A) more; rise; decline B) more; decline; rise C) fewer; decline; decline D) fewer; rise; rise

If a bank has ________ rate-sensitive assets than liabilities, then ________ in interest rates will increase bank profits. A) more; a decline B) more; an increase C) fewer; an increase D) fewer; a surge

If additional information is not used when forming an optimal forecast because it is not available at that time, then expectations are A) obviously formed irrationally. B) still considered to be formed rationally. C) formed adaptively. D) formed equivalently

If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of A) moral hazard. B) adverse selection. C) free-riding. D) costly state verification.

If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of A) adverse credit risk. B) adverse selection. C) moral hazard. D) lemon lenders

If you default on your auto loan, your car will be repossessed because it has been pledged as ________ for the loan. A) interest B) collateral C) dividend D) commodity

In addition to having a direct effect on increasing adverse selection problems, increases in interest rates also promote financial crises by ________ firmsʹ and householdsʹ interest payments, thereby ________ their cash flow. A) increasing; increasing B) increasing; decreasing C) decreasing; decreasing D) decreasing; increasing

In emerging economies, government fiscal imbalances may cause fears of A) debt deflation. B) default on government debt. C) stock price declines. D) lower interest rates.

In general, banks make profits by selling ________ liabilities and buying ________ assets. A) long-term; shorter-term B) short-term; longer-term C) illiquid; liquid D) risky; risk-free

In order to reduce the ________ problem in loan markets, bankers collect information from prospective borrowers to screen out the bad credit risks from the good ones. A) moral hazard B) adverse selection C) moral suasion D) adverse lending

In the early stages of the 1980s banking crisis, financial institutions were especially harmed by A) declining interest rates from late 1979 until 1981. B) the severe recession in 1981-82. C) the disinflation from mid 1980 to early 1983. D) the increase in energy prices in the early 80s

In the generalized dividend model, a future sales price far in the future does not affect the current stock price because A) the present value cannot be computed. B) the present value is almost zero. C) the sales price does not affect the current price. D) the stock may never be sold.

In the generalized dividend model, the current stock price is the sum of A) the actual value of the future dividend stream. B) the present value of the future dividend stream. C) the present value of the future dividend stream plus the actual future sales price. D) the present value of the future sales price.

Information plays an important role in asset pricing because it allows the buyer to more accurately judge ________. A) liquidity B) risk C) capital D) policy

Mean reversion refers to the fact that A) small firms have higher than average returns. B) stocks that have had low returns in the past are more likely to do well in the future. C) stock returns are high during the month of January. D) stock prices fluctuate more than is justified by fundamentals.

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called A) basic duration analysis. B) basic gap analysis. C) interest-exposure analysis. D) gap-exposure analysis

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals times the change in the interest rate is called A) basic gap analysis. B) the maturity bucket approach to gap analysis. C) the segmented maturity approach to gap analysis. D) the segmented maturity approach to interest-exposure analysis

Moral hazard and adverse selection problems increased in prominence in the 1980s A) as deregulation required savings and loans and mutual savings banks to be more cautious. B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking. C) following a decrease in federal deposit insurance from $100,000 to $40,000. D) as interest rates were sharply decreased to bring down inflation.

Moral hazard problems increased in prominence in the 1980s A) as deregulation required savings and loans and mutual savings banks to be more cautious. B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking. C) following a decrease in federal deposit insurance from $100,000 to $40,000. D) as interest rates were sharply decreased to bring down inflation.

Net worth can perform a similar role to ________. A) diversification B) collateral C) intermediation D) economies of scale

Of the following methods that banks might use to reduce moral hazard problems, the one not legally permitted in the United States is the A) requirement that firms keep compensating balances at the banks from which they obtain their loans. B) requirement that firms place on their board of directors an officer from the bank. C) inclusion of restrictive covenants in loan contracts. D) requirement that individuals provide detailed credit histories to bank loan officers

Of the following sources of external finance for American nonfinancial businesses, the least important is A) loans from banks. B) stocks. C) bonds and commercial paper. D) loans from other financial intermediaries.

Of the sources of external funds for nonfinancial businesses in the United States, stocks account for approximately ________ of the total. A) 2% B) 11% C) 20% D) 40%

One way of describing the solution that high net worth provides to the moral hazard problem is to say that it A) collateralizes the debt contract. B) makes the debt contract incentive compatible. C) state verifies the debt contract. D) removes all of the risk in the debt contract.

People have a strong incentive to form rational expectations because A) they are guaranteed of success in the stock market. B) it is costly not to do so. C) it is costly to do so. D) everyone wants to be rational.

Periodic payments of net earnings to shareholders are known as A) capital gains. B) dividends. C) profits. D) interest.

Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities are called A) proscription bonds. B) restrictive covenants. C) due-on-sale clauses. D) liens.

Psychologists have found that people tend to be ________ in their own judgments. A) underconfident B) overconfident C) indecisive D) insecure

Regular bank examinations and restrictions on asset holdings help to indirectly reduce the ________ problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from entering the banking industry. A) moral hazard B) adverse selection C) ex post shirking D) post-contractual opportunism

Risk that is related to the uncertainty about interest rate movements is called A) default risk. B) interest-rate risk. C) the problem of moral hazard. D) security risk.

Solutions to the moral hazard problem include A) low net worth. B) monitoring and enforcement of restrictive covenants. C) greater reliance on equity contracts and less on debt contracts. D) greater reliance on debt contracts than financial intermediaries.

Sometimes one observes that the price of a companyʹs stock falls after the announcement of favorable earnings. This phenomenon is A) clearly inconsistent with the efficient markets hypothesis. B) consistent with the efficient markets hypothesis if the earnings were not as high as anticipated. C) consistent with the efficient markets hypothesis if the earnings were not as low as anticipated. D) consistent with the efficient markets hypothesis if the favorable earnings were expected.

That most used cars are sold by intermediaries (i.e., used car dealers) provides evidence that these intermediaries A) have been afforded special government treatment, since used car dealers do not provide information that is valued by consumers of used cars. B) are able to prevent potential competitors from free-riding off the information that they provide. C) have failed to solve adverse selection problems in this market because ʺlemonsʺ continue to be traded. D) have solved the moral hazard problem by providing valuable information to their customers.

The Basel Accord requires banks to hold as capital an amount that is at least ________ of their risk-weighted assets. A) 10% B) 8% C) 5% D) 3%

The Federal Home Loan Bank Board and the FSLIC, both of which failed in their regulatory tasks, were abolished by the A) Competitive Equality Banking Act of 1987. B) Financial Institutions Reform, Recovery and Enforcement Act of 1989. C) Office of Thrift Supervision. D) Office of the Comptroller of the Currency.

The Sarbanes-Oxley Act of 2002 increased supervisory oversight by A) giving the FDIC the authority to review independent audits. B) increasing the SECʹs budget to supervise securities markets. C) creating a new Department of Conflict Resolution. D) reducing the penalties for obstruction of an official investigation.

The ________ that required separation of commercial and investment banking was repealed in 1999. A) the Federal Reserve Act. B) the Glass-Steagall Act. C) the Bank Holding Company Act. D) the Monetary Control Act.

The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem. A) adverse selection; adverse selection B) adverse selection; moral hazard C) moral hazard; adverse selection D) moral hazard; moral hazard

The efficient markets hypothesis indicates that investors A) can use the advice of technical analysts to outperform the market. B) do better on average if they adopt a ʺbuy and holdʺ strategy. C) let too many unexploited profit opportunities go by if they adopt a ʺbuy and holdʺ strategy. D) do better if they purchase loaded mutual funds.

The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market, A) it will tend to go unnoticed for some time. B) it will be quickly eliminated. C) financial analysts are your best source of this information. D) prices will reflect the unexploited profit opportunity.

The elimination of unexploited profit opportunities requires that ________ market participants be well informed. A) all B) a few C) zero D) many

The fraction of checkable deposits that banks are required by regulation to hold are A) excess reserves. B) required reserves. C) vault cash. D) total reserves

The free-rider problem occurs because A) people who pay for information use it freely. B) people who do not pay for information use it. C) information can never be sold at any price. D) it is never profitable to produce information

The number and availability of discount brokers has grown rapidly since the mid -1970s. The efficient markets hypothesis predicts that people who use discount brokers A) will likely earn lower returns than those who use full-service brokers. B) will likely earn about the same as those who use full-service brokers, but will net more after brokerage commissions. C) are going against evidence suggesting that full-service brokers can help outperform the market. D) are likely to outperform the market by a wide margin.

The practice of ________ is allocating initially underpriced initial public offerings to executives in companies the investment bank hopes to do underwriting business with in the future. A) discounting B) spinning C) peppering D) wiring

The predominant form of household debt is A) consumer installment debt. B) collateralized debt. C) unsecured debt. D) unrestricted debt.

The primary difference between the ʺpayoffʺ and the ʺpurchase and assumptionʺ methods of handling failed banks is A) that the FDIC guarantees all deposits when it uses the ʺpayoffʺ method. B) that the FDIC guarantees all deposits when it uses the ʺpurchase and assumptionʺ method. C) that the FDIC is more likely to use the ʺpayoffʺ method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. D) that the FDIC is more likely to use the purchase and assumption method for small institutions because it will be easier to find a purchaser for them compared to large institutions.

The principal-agent problem that exists for bank trading activities can be reduced through A) creation of internal controls that combine trading activities with bookkeeping. B) creation of internal controls that separate trading activities from bookkeeping. C) elimination of regulation of banking. D) elimination of internal controls.

The quantity interest income minus interest expenses divided by assets is a measure of bank performance known as A) operating income. B) net interest margin. C) return on assets. D) return on equity.

The reduction in transactions costs per dollar of investment as the size of transactions increases is A) discounting. B) economies of scale. C) economies of trade. D) diversification.

The theory of rational expectations, when applied to financial markets, is known as A) monetarism. B) the efficient markets hypothesis. C) the theory of strict liability. D) the theory of impossibility.

Through correspondent banking, large banks provide services to small banks, including A) loan guarantees. B) foreign exchange transactions. C) issuing stock. D) debt reduction.

Unanticipated moral hazard contingencies can be reduced by A) screening. B) long-term customer relationships. C) specialization in lending. D) credit rationing.

Using the Gordon growth formula, if D1 is $1.00, ke is 10% or 0.10, and g is 5% or 0.05, then the current stock price is A) $10. B) $20. C) $30. D) $40

When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but makes loans instead, then, in the bankʹs final balance sheet, A) the assets at the bank increase by $800,000. B) the liabilities of the bank increase by $1,000,000. C) the liabilities of the bank increase by $800,000. D) reserves increase by $160,000.

When bad drivers line up to purchase collision insurance, automobile insurers are subject to the A) moral hazard problem. B) adverse selection problem. C) assigned risk problem. D) ill queue problem.

When you deposit a $50 bill in the Security Pacific National Bank, A) its liabilities decrease by $50. B) its assets increase by $50. C) its reserves decrease by $50. D) its cash items in the process of collection increase by $50.

Which of the following are reported as assets on a bankʹs balance sheet? A) Borrowings B) Reserves C) Savings deposits D) Bank capital

Which of the following are reported as liabilities on a bankʹs balance sheet? A) Reserves B) Checkable deposits C) Loans D) Deposits with other banks

Which of the following bank assets is the most liquid? A) Consumer loans B) Reserves C) Cash items in process of collection D) U.S. government securities

Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are true? A) Stocks are a far more important source of finance than are bonds. B) Stocks and bonds, combined, supply less than one-half of the external funds. C) Financial intermediaries are the least important source of external funds for businesses. D) Since 1970, more than half of the new issues of stock have been sold to American households.

Which of the following statements is false? A) Checkable deposits are usually the lowest cost source of bank funds. B) Checkable deposits are the primary source of bank funds. C) Checkable deposits are payable on demand. D) Checkable deposits include NOW accounts.

_______ means people are more unhappy when they suffer losses than they are happy when they achieve gains. A) Loss fundamentals B) Loss aversion C) Loss leader D) Loss cycle

A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be prevented, will require borrowers to A) place a bank officer on their board of directors. B) place a corporate officer on the bankʹs board of directors. C) keep compensating balances in a checking account at the bank. D) purchase the bankʹs CDs.

A bankʹs commitment to provide a firm with loans up to pre-specified limit at an interest rate that is tied to a market interest rate is called A) an adjustable gap loan. B) an adjustable portfolio loan. C) loan commitment. D) pre-credit loan line.

A change in perceived risk of a stock changes A) the expected dividend growth rate. B) the expected sales price. C) the required rate of return. D) the current dividend.

A clause in a debt contract requiring that the borrower purchase insurance against loss of the asset financed with the loan is called a A) collateral-insurance clause. B) prescription covenant. C) restrictive covenant. D) proscription covenant.

A clause in a mortgage loan contract requiring the borrower to purchase homeownerʹs insurance is an example of a A) proscriptive covenant. B) prescriptive covenant. C) restrictive covenant. D) constraint-imposed covenant

According to the efficient markets hypothesis, purchasing the reports of financial analysts A) is likely to increase oneʹs returns by an average of 10%. B) is likely to increase oneʹs returns by about 3 to 5%. C) is not likely to be an effective strategy for increasing financial returns. D) is likely to increase oneʹs returns by an average of about 2 to 3%.

According to the efficient markets hypothesis, the current price of a financial security A) is the discounted net present value of future interest payments. B) is determined by the highest successful bidder. C) fully reflects all available relevant information. D) is a result of none of the above.

An analysis of the political economy of the savings and loan crisis helps one to understand A) why politicians aided the efforts of thrift regulators, raising regulatory appropriations and encouraging closing of insolvent thrifts. B) why thrift regulators were so quick to inform Congress of the problems that existed in the thrift industry. C) why thrift regulators willingly acceded to pressures placed upon them by members of Congress. D) why politicians listened so closely to the taxpayers they represented.

Argentinaʹs financial crisis was due to A) poor supervision of the banking system. B) a lending boom prior to the crisis. C) fiscal imbalances. D) lack of expertise in screening and monitoring borrowers at banking institutions.

As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________. A) decrease; increase B) increase; decrease C) increase; increase D) decrease; not be affected

Assume a bank has $200 million of assets with a duration of 2.5, and $190 million of liabilities with a duration of 1.05. The duration gap for this bank is A) 0.5 year. B) 1 year. C) 1.5 years. D) 2 years.

Bank reserves include A) deposits at the Fed and short-term treasury securities. B) vault cash and short-term Treasury securities. C) vault cash and deposits at the Fed. D) deposits at other banks and deposits at the Fed.

Banks earn profits by selling ________ with attractive combinations of liquidity, risk, and return, and using the proceeds to buy ________ with a different set of characteristics. A) loans; deposits B) securities; deposits C) liabilities; assets D) assets; liabilities

Banks that suffered significant losses in the 1980s made the mistake of A) holding too many liquid assets. B) minimizing default risk. C) failing to diversify their loan portfolio. D) holding only safe securities.

Bankʹs make their profits primarily by issuing ________. A) equity B) negotiable CDs C) loans D) NOW accounts

Because ________ are less liquid for the depositor than ________, they earn higher interest rates. A) money market deposit accounts; time deposits B) checkable deposits; passbook savings C) passbook savings; checkable deposits D) passbook savings; time deposits

Because of the adverse selection problem, A) good credit risks are more likely to seek loans causing lenders to make a disproportionate amount of loans to good credit risks. B) lenders may refuse loans to individuals with high net worth, because of their greater proclivity to ʺskip town.ʺ C) lenders are reluctant to make loans that are not secured by collateral. D) lenders will write debt contracts that restrict certain activities of borrowers.

Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves. A) low; short-term B) low; long-term C) high; short-term D) high; long-term

During the boom years of the 1920s, bank failures were quite A) uncommon, averaging less than 30 per year. B) uncommon, averaging less than 100 per year. C) common, averaging about 600 per year. D) common, averaging about 1000 per year.

Factors that lead to worsening conditions in financial markets include: A) declining interest rates. B) unanticipated increases in the price level. C) the deterioration in banksʹ balance sheets. D) increases in bond prices.

Factors that led to worsening conditions in Mexicoʹs 1994-1995 financial markets include A) failure of the Mexican oil monopoly. B) the ratification of the North American Free Trade Agreement. C) increased uncertainty from political shocks. D) decline in interest rates.

Financial markets quickly eliminate unexploited profit opportunities through changes in A) dividend payments. B) tax laws. C) asset prices. D) monetary policy

For banks, A) return on assets exceeds return on equity. B) return on assets equals return on equity. C) return on equity exceeds return on assets. D) return on equity is another name for net interest margin

For small investors, the best way to pursue a ʺbuy and holdʺ strategy is to A) buy and sell individual stocks frequently. B) buy no-load mutual funds with high management fees. C) buy no-load mutual funds with low management fees. D) buy load mutual funds.

Government regulations require publicly traded firms to provide information, reducing A) transactions costs. B) the need for diversification. C) the adverse selection problem. D) economies of scale.

High net worth helps to diminish the problem of moral hazard problem by A) requiring the state to verify the debt contract. B) collateralizing the debt contract. C) making the debt contract incentive compatible. D) giving the debt contract characteristics of equity contracts.

Holding large amounts of bank capital helps prevent bank failures because A) it means that the bank has a higher income. B) it makes loans easier to sell. C) it can be used to absorb the losses resulting from bad loans. D) it makes it easier to call in loans.

If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to A) buy back bank stock. B) pay higher dividends. C) shrink the size of the bank. D) sell securities the bank owns and put the funds into the reserve account.

If a mutual fund outperforms the market in one period, evidence suggests that this fund is A) highly likely to consistently outperform the market in subsequent periods due to its superior investment strategy. B) likely to under-perform the market in subsequent periods to average its overall returns. C) not likely to consistently outperform the market in subsequent periods. D) not likely to outperform the market in any subsequent period.

If expectations are formed adaptively, then people A) use more information than just past data on a single variable to form their expectations of that variable. B) often change their expectations quickly when faced with new information. C) use only the information from past data on a single variable to form their expectations of that variable. D) never change their expectations once they have been made

If expectations of the future inflation rate are formed solely on the basis of a weighted average of past inflation rates, then economics would say that expectation formation is A) irrational. B) rational. C) adaptive. D) reasonable

If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can A) reduce deposits by $3 million. B) increase loans by $3 million. C) sell $3 million of securities. D) repay its discount loans from the Fed.

In May 1991, the FDIC announced that it would sell the governmentʹs final 26% stake in Continental Illinois, ending government ownership of the bank that it had rescued in 1984. The FDIC took control of the bank, rather than liquidate it, because it believed that Continental Illinois A) was a good investment opportunity for the government. B) could be the Chicago branch of a new governmentally-owned interstate banking system. C) was too big to fail. D) would become the center of the new midwest region central bank system.

In a rational bubble, investors can have ________ expectations that a bubble is occurring but continue to hold the asset anyway. A) irrational B) adaptive C) rational D) myopic

In general, banks would prefer to acquire funds quickly by ________ rather than ________. A) reducing loans; selling securities B) reducing loans; borrowing from the Fed C) borrowing from the Fed; reducing loans D) ʺcalling inʺ loans; selling securities

In recent years the interest paid on checkable and time deposits has accounted for around ________ of total bank operating expenses, while the costs involved in servicing accounts have been approximately ________ of operating expenses. A) 45 percent; 55 percent B) 55 percent; 4 percent C) 25 percent; 50 percent D) 50 percent; 30 percent

In the Gordon Growth Model, the growth rate is assumed to be ________ the required return on equity. A) greater than B) equal to C) less than D) proportional to

In the United States, the government agency requiring that firms that sell securities in public markets adhere to standard accounting principles and disclose information about their sales, assets, and earnings is the A) Federal Communications Commission. B) Federal Trade Commission. C) Securities and Exchange Commission. D) Federal Reserve System.

In the absence of regulation, banks would probably hold A) too much capital, reducing the efficiency of the payments system. B) too much capital, reducing the profitability of banks. C) too little capital. D) too much capital, making it more difficult to obtain loans.

Large-denomination CDs are ________, so that like a bond they can be resold in a ________ market before they mature. A) nonnegotiable; secondary B) nonnegotiable; primary C) negotiable; secondary D) negotiable; primary

Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called A) return on assets. B) return on capital. C) return on equity. D) return on investment.

Of the sources of external funds for nonfinancial businesses in the United States, corporate bonds and commercial paper account for approximately ________ of the total. A) 5% B) 10% C) 32% D) 50%

Of the sources of external funds for nonfinancial businesses in the United States, loans from banks and other financial intermediaries account for approximately ________ of the total. A) 6% B) 40% C) 56% D) 60%

Off-balance sheet activities involving guarantees of securities and back-up credit lines A) have no impact on the risk a bank faces. B) greatly reduce the risk a bank faces. C) increase the risk a bank faces. D) slightly reduce the risk a bank faces.

Off-balance-sheet activities A) generate fee income with no increase in risk. B) increase bank risk but do not increase income. C) generate fee income but increase a bankʹs risk. D) generate fee income and reduce risk.

One of the assumptions of the Gordon Growth Model is that dividends will continue growing at ________ rate. A) an increasing B) a fast C) a constant D) an escalating

One purpose of regulation of financial markets is to A) limit the profits of financial institutions. B) increase competition among financial institutions. C) promote the provision of information to shareholders, depositors and the public. D) guarantee that the maximum rates of interest are paid on deposits.

One reason financial systems in developing and transition countries are underdeveloped is A) they have weak links to their governments. B) they make loans only to nonprofit entities. C) the legal system may be poor making it difficult to enforce restrictive covenants. D) the accounting standards are too stringent for the banks to meet.

Professional athletes often have contract clauses prohibiting risky activities such as skiing and motorcycle riding. These clauses are A) limited-liability clauses. B) risk insurance. C) restrictive covenants. D) illegal.

Secondary reserves include A) deposits at Federal Reserve Banks. B) deposits at other large banks. C) short-term Treasury securities. D) state and local government securities.

Taxpayers were served poorly by thrift regulators in the 1980s. This poor performance cannot be explained by A) regulatorsʹ desire to escape blame for poor performance, leading to a perverse strategy of ʺbureaucratic gambling.ʺ B) regulatorsʹ incentives to accede to pressures imposed by politicians, who sought to keep regulators from imposing tough regulations on institutions that were major campaign contributors. C) Congressʹs dogged determination to protect taxpayers from the unsound banking practices of managers at many of the nations savings and loans. D) politicians strong incentives to act in their own interests rather than the interests of the taxpayers.

Tests used to rate the performance of rules developed in technical analysis conclude that technical analysis A) outperforms the overall market. B) far outperforms the overall market, suggesting that stockbrokers provide valuable services. C) does not outperform the overall market. D) does not outperform the overall market, suggesting that stockbrokers do not provide services of any value

The January effect refers to the fact that A) most stock market crashes have occurred in January. B) stock prices tend to fall in January. C) stock prices have historically experienced abnormal price increases in January. D) the football team winning the Super Bowl accurately predicts the behavior of the stock market for the next year.

The amount of assets per dollar of equity capital is called the A) asset ratio. B) equity ratio. C) equity multiplier. D) asset multiplier

The concept of adverse selection helps to explain A) why collateral is not a common feature of many debt contracts. B) why large, well-established corporations find it so difficult to borrow funds in securities markets. C) why financial markets are among the most heavily regulated sectors of the economy. D) why stocks are the most important source of external financing for businesses.

The concept of adverse selection helps to explain all of the following except A) why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets. B) why indirect finance is more important than direct finance as a source of business finance. C) why direct finance is more important than indirect finance as a source of business finance. D) why the financial system is so heavily regulated.

The current structure of financial markets can be best understood as the result of attempts by financial market participants to A) adapt to continually changing government regulations. B) deal with the great number of small firms in the United States. C) reduce transaction costs. D) cartelize the provision of financial services.

The current supervisory practice toward risk management A) focuses on the quality of a bankʹs balance sheet. B) determines whether capital requirements have been met. C) evaluates the soundness of a bankʹs risk-management process. D) focuses on eliminating all risk.

The efficient markets hypothesis predicts that stock prices follow a ʺrandom walk.ʺ The implication of this hypothesis for investing in stocks is A) a ʺchurning strategyʺ of buying and selling often to catch market swings. B) turning over your stock portfolio each month, selecting stocks by throwing darts at the stock page. C) a ʺbuy and hold strategyʺ of holding stocks to avoid brokerage commissions. D) following the advice of technical analysts.

The fact that banks operate on a ʺsequential service constraintʺ means that A) all depositors share equally in the bankʹs funds during a crisis. B) depositors arriving last are just as likely to receive their funds as those arriving first. C) depositors arriving first have the best chance of withdrawing their funds. D) banks randomly select the depositors who will receive all of their funds.

The leverage ratio is the ratio of a bankʹs A) assets divided by its liabilities. B) income divided by its assets. C) capital divided by its total assets. D) capital divided by its total liabilities.

The major provisions of the Competitive Equality Banking Act of 1987 include A) expanding the responsibilities of the FDIC, which is now the sole administrator of the federal deposit insurance system. B) the establishment of the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in conservatorship or receivership. C) directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance. D) prompt corrective action when a bank gets in trouble.

The most important category of assets on a bankʹs balance sheet is A) discount loans. B) securities. C) loans. D) cash items in the process of collection.

The practice of keeping high-risk assets on a bankʹs books while removing low-risk assets with the same capital requirement is know as A) competition in laxity. B) depositor supervision. C) regulatory arbitrage. D) a dual banking system.

The presence of ________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets. A) noncollateralized risk B) free-riding C) asymmetric information D) costly state verification

The principal-agent problem A) occurs when managers have more incentive to maximize profits than the stockholders-owners do. B) in financial markets helps to explain why equity is a relatively important source of finance for American business. C) would not arise if the owners of the firm had complete information about the activities of the managers. D) explains why direct finance is more important than indirect finance as a source of business finance.

The recent Enron and Tyco scandals are an example of A) the free-rider problem. B) the adverse selection problem. C) the principal-agent problem. D) the ʺlemons problem.ʺ

The share of checkable deposits in total bank liabilities has A) expanded moderately over time. B) expanded dramatically over time. C) shrunk over time. D) remained virtually unchanged since 1960.

The small-firm effect refers to the A) negative returns earned by small firms. B) returns equal to large firms earned by small firms. C) abnormally high returns earned by small firms. D) low returns after adjusting for risk earned by small firms.

The too-big-to-fail policy A) reduces moral hazard problems. B) puts large banks at a competitive disadvantage in attracting large deposits. C) treats large depositors of small banks inequitably when compared to depositors of large banks. D) allows small banks to take on more risk than large banks.

To be considered well capitalized, a bankʹs leverage ratio must exceed ________. A) 10% B) 8% C) 5% D) 3%

Using the Gordon growth formula, if D1 is $2.00, ke is 12% or 0.12, and g is 10% or 0.10, then the current stock price is A) $20. B) $50. C) $100. D) $150

Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10%, the current price of the stock would be A) $110.11. B) $121.12. C) $100.10. D) $100.11

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then A) the liabilities of the First National Bank increase by $10. B) the reserves of the First National Bank increase by $ 10. C) the liabilities of Citibank increase by $10. D) the assets of Citibank fall by $10

When a corporation announces a major decline in earnings, the stock price may initially decline significantly and then rise back to normal levels over the next few weeks. This impact is called ________. A) the January effect B) mean reversion C) market overreaction D) the small-firm effect

When a lender refuses to make a loan, although borrowers are willing to pay the stated interest rate or even a higher rate, the bank is said to engage in A) coercive bargaining. B) strategic holding out. C) credit rationing. D) collusive behavior

When banks involved in trading activities attempt to outguess markets, they are A) forecasting. B) diversifying. C) speculating. D) engaging in riskless arbitrage.

When you deposit $50 in currency at Old National Bank, A) its assets increase by less than $50 because of reserve requirements. B) its reserves increase by less than $50 because of reserve requirements. C) its liabilities increase by $50. D) its liabilities decrease by $50.

When you deposit $50 in your account at First National Bank and a $100 check you have written on this account is cashed at Chemical Bank, then A) the assets of First National rise by $50. B) the assets of Chemical Bank rise by $50. C) the reserves at First National fall by $50. D) the liabilities at Chemical Bank rise by $50.

Which of the following are transaction deposits? A) Savings accounts B) Small-denomination time deposits C) Negotiable order of withdraw accounts D) Certificates of deposit

Which of the following is not a benefit to an individual purchasing a mutual fund? A) reduced risk B) lower transactions costs C) free-riding D) diversification

Which of the following is not a nontransaction deposit? A) Savings accounts B) Small-denomination time deposits C) Negotiable order of withdrawal accounts D) Certificate of deposit

Which of the following is not a source of borrowings for a bank? A) Federal funds B) Eurodollars C) Transaction deposits D) Discount loans

Which of the following statements are true? A) A bankʹs assets are its sources of funds. B) A bankʹs liabilities are its uses of funds. C) A bankʹs balance sheet shows that total assets equal total liabilities plus equity capital. D) A bankʹs balance sheet indicates whether or not the bank is profitable.

Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are true? A) Issuing marketable securities is the primary way that they finance their activities. B) Bonds are the least important source of external funds to finance their activities. C) Stocks are a relatively unimportant source of finance for their activities. D) Selling bonds directly to the American household is a major source of funding for American businesses.

________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow. A) Selling securities B) Selling loans C) Calling in loans D) Selling negotiable CDs

ʺBureaucratic gamblingʺ refers to A) the strategy of thrift managers that they would not be audited by thrift regulators in the 1980s due to the relatively weak bureaucratic power of thrift regulators. B) the risk that thrift regulators took in publicizing the plight of the S&L industry in the early 1980s. C) the strategy adopted by thrift regulators of lowering capital requirements and pursuing regulatory forbearance in the 1980s in the hope that conditions in the S&L industry would improve. D) the risk that regulators took in going to Congress to ask for additional funds.

A ________ is a provision that restricts or specifies certain activities that a borrower can engage in. A) residual claimant B) risk hedge C) restrictive barrier D) restrictive covenant

A bank failure is less likely to occur when A) a bank holds less U.S. government securities. B) a bank suffers large deposit outflows. C) a bank holds fewer excess reserves. D) a bank has more bank capital.

A bank panic can lead to a severe contraction in economic activity due to A) a decline in international trade. B) the losses of bank shareholders. C) the losses of bank depositors. D) a decline in lending for productive investment.

A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________, everything else held constant. A) reduces; future sales price; expected rate of return B) reduces; current dividend; expected rate of return C) increases; required rate of return; future sales price D) increases; required rate of return; dividend growth rate

A phenomenon closely related to market overreaction is A) the random walk. B) the small-firm effect. C) the January effect. D) excessive volatility.

A reason why rogue traders have bankrupt their banks is due to A) the separation of trading activities from the bookkeepers. B) stringent supervision of trading activities by bank management. C) accounting errors. D) a failure to maintain proper internal controls.

A situation when an asset price differs from its fundamental value is A) a random walk. B) an inflation. C) a deflation. D) a bubble.

According to rational expectations theory, forecast errors of expectations A) are more likely to be negative than positive. B) are more likely to be positive than negative. C) tend to be persistently high or low. D) are unpredictable.

According to rational expectations, A) expectations of inflation are viewed as being an average of past inflation rates. B) expectations of inflation are viewed as being an average of expected future inflation rates. C) expectations formation indicates that changes in expectations occur slowly over time as past data change. D) expectations will not differ from optimal forecasts using all available information.

All of the following are examples of off-balance sheet activities that generate fee income for banks except A) foreign exchange trades. B) guaranteeing debt securities. C) back-up lines of credit. D) selling negotiable CDs

American businesses get their external funds primarily from A) bank loans. B) bonds and commercial paper issues. C) stock issues. D) loans from nonbank financial intermediaries.

As a source of funds for nonfinancial businesses, stocks are relatively more important in A) the United States. B) Germany. C) Japan. D) Canada

Assume a bank has $200 million of assets with a duration of 2.5, and $190 million of liabilities with a duration of 1.05. If interest rates increase from 5 percent to 6 percent, the net worth of the bank falls by A) $1 million. B) $2.4 million. C) $3.6 million. D) $4.8 million.

Because ________ are less liquid for the depositor than ________, they earn higher interest rates. A) passbook savings; time deposits B) money market deposit accounts; time deposits C) money market deposit accounts; passbook savings D) time deposits; passbook savings

Because banks engage in regulatory arbitrage, the Basel Accord on risk-based capital requirements may result in A) reduced risk taking by banks. B) reduced supervision of banks by regulators. C) increased fraudulent behavior by banks. D) increased risk taking by banks.

Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the A) adverse selection problem. B) lemon problem. C) adverse credit risk problem. D) moral hazard problem.

Because checking accounts are ________ liquid for the depositor than passbook savings, they earn ________ interest rates. A) less; higher B) less; lower C) more; higher D) more; lower

Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is the A) too-big-to-fail effect. B) moral hazard problem. C) adverse selection problem. D) contagion effect.

Because of the ʺlemons problemʺ the price a buyer of a used car pays is A) equal to the price of a lemon. B) less than the price of a lemon. C) equal to the price of a peach. D) between the price of a lemon and a peach.

Evidence against market efficiency includes A) failure of technical analysis to outperform the market. B) the random walk behavior of stock prices. C) the inability of mutual fund managers to consistently beat the market. D) the January effect.

Excessive volatility refers to the fact that A) stock returns display mean reversion. B) stock prices can be slow to react to new information. C) stock price tend to rise in the month of January. D) stock prices fluctuate more than is justified by dividend fluctuations.

From the standpoint of ________, specialization in lending is surprising but makes perfect sense when one considers the ________ problem. A) moral hazard; diversification B) diversification; moral hazard C) adverse selection; diversification D) diversification; adverse selection

If a banker expects interest rates to fall in the future, her best strategy for the present is A) to increase the duration of the bankʹs liabilities. B) to buy short-term bonds. C) to sell long-term certificates of deposit. D) to increase the duration of the bankʹs assets.

If interest rates increase from 9 percent to 10 percent, a bank with a duration gap of 2 years would experience a decrease in its net worth of A) 0.9 percent of its assets. B) 0.9 percent of its liabilities. C) 1.8 percent of its liabilities. D) 1.8 percent of its assets.

If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses. A) payoff; large B) payoff; no C) purchase and assumption; large D) purchase and assumption; no

If the First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to A) increase by $15 million. B) increase by $1.5 million. C) decline by $15 million. D) decline by $1.5 million.

In a bank panic, the source of contagion is the A) free-rider problem. B) too-big-to-fail problem. C) transactions cost problem. D) asymmetric information problem

In asset markets, an assetʹs price is A) set equal to the highest price a seller will accept. B) set equal to the highest price a buyer is willing to pay. C) set equal to the lowest price a seller is willing to accept. D) set by the buyer willing to pay the highest price.

In rational expectations theory, the term ʺoptimal forecastʺ is essentially synonymous with A) correct forecast. B) the correct guess. C) the actual outcome. D) the best guess

In the one-period valuation model, an increase in the required return on investments in equity A) increases the expected sales price of a stock. B) increases the current price of a stock. C) reduces the expected sales price of a stock. D) reduces the current price of a stock.

In the ten year period 1981-1990, 1202 commercial banks were closed, with a peak of 206 failures in 1989. This rate of failures was approximately ________ times greater than that in the period from 1934 to 1980. A) two B) three C) five D) ten

Managers (________) may act in their own interest rather than in the interest of the stockholder-owners (________) because the managers have less incentive to maximize profits than the stockholder-owners do. A) principals; agents B) principals; principals C) agents; agents D) agents; principals

Nonfinancial businesses in Germany, Japan, and Canada raise most of their funds A) by issuing stock. B) by issuing bonds. C) from nonbank loans. D) from bank loans.

Of the following, which would be the first choice for a bank facing a reserve deficiency? A) Call in loans B) Borrow from the Fed C) Sell securities D) Borrow from other banks

Rational expectations forecast errors will on average be ________ and therefore ________ be predicted ahead of time. A) positive; can B) positive; cannot C) negative; can D) zero; cannot

Reasons regulators chose to follow regulatory forbearance rather than to close the insolvent S&Ls include all of the following except A) they had insufficient funds to close all of the insolvent S&Ls. B) they were friends with the S&L owners. C) they hoped the problem would go away. D) they did not have the authority to close the insolvent S&Ls

Regulation of the financial system A) occurs only in the United States. B) protects the jobs of employees of financial institutions. C) protects the wealth of owners of financial institutions. D) ensures the stability of the financial system.

Since depositors, like any lender, only receive fixed payments while the bank keeps any surplus profits, they face the ________ problem that banks may take on too ________ risk. A) adverse selection; little B) adverse selection; much C) moral hazard; little D) moral hazard; much

Stockholders are residual claimants, meaning that they A) have the first priority claim on all of a companyʹs assets. B) are liable for all of a companyʹs debts. C) will never share in a companyʹs profits. D) receive the remaining cash flow after all other claims are paid.

Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period usually A) beat the market in the next time period. B) beat the market in the next two subsequent time periods. C) beat the market in the next three subsequent time periods. D) do not beat the market in the next time period.

The Depository Institutions Deregulation and Monetary Control Act of 1980 A) restricted thrift institutions to making loans for home mortgages. B) restricted the use of ATS accounts. C) imposed restrictive interest-rate ceilings on large agricultural loans. D) increased deposit insurance from $40,000 to $100,000

The Depository Institutions Deregulation and Monetary Control Act of 1980 A) separated investment banks and commercial banks. B) restricted the use of ATS accounts. C) imposed restrictive usury ceilings on large agricultural loans. D) increased deposit insurance from $40,000 to $100,000.

The analysis of how asymmetric information problems affect economic behavior is called ________ theory. A) uneven B) parallel C) principal D) agency

The contagion effect refers to the fact that A) deposit insurance has eliminated the problem of bank failures. B) bank runs involve only sound banks. C) bank runs involve only insolvent banks. D) the failure of one bank can hasten the failure of other banks.

The difference of rate-sensitive liabilities and rate-sensitive assets is known as the A) duration. B) interest-sensitivity index. C) rate-risk index. D) gap.

The evidence from banking crises in other countries indicates that A) deposit insurance is to blame in each country. B) a government safety net for depositors need not increase moral hazard. C) regulatory forbearance never leads to problems. D) deregulation combined with poor regulatory supervision raises moral hazard incentives.

The goals of bank asset management include A) maximizing risk. B) minimizing liquidity. C) lending at high interest rates regardless of risk. D) purchasing securities with high returns and low risk.

The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely. A) small; fewer B) small; greater C) big; fewer D) big; greater

The value of any investment is found by computing the A) present value of all future sales. B) present value of all future liabilities. C) future value of all future expenses. D) present value of all future cash flows.

The view that expectations change relatively slowly over time in response to new information is known in economics as A) rational expectations. B) irrational expectations. C) slow-response expectations. D) adaptive expectations.

The ʺlemons problemʺ exists because of A) transactions costs. B) economies of scale. C) rational expectations. D) asymmetric information.

To say that stock prices follow a ʺrandom walkʺ is to argue that stock prices A) rise, then fall, then rise again. B) rise, then fall in a predictable fashion. C) tend to follow trends. D) cannot be predicted based on past trends

Under the Basel Accord, assets and off-balance sheet activities were sorted according to ________ categories with each category assigned a different weight to reflect the amount of ________. A) 2; adverse selection B) 2; credit risk C) 4; adverse selection D) 4; credit risk

Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales price of $100, and a required rate of return of 5%, the current price of the stock would be A) $110.00. B) $101.00. C) $100.00. D) $96.19.

When Jane Brown writes a $100 check to her nephew (who lives in another state), Ms. Brownʹs bank ________ assets of $100 and ________ liabilities of $100. A) gains; gains B) gains; loses C) loses; gains D) loses; loses

When banks offer borrowers smaller loans than they have requested, banks are said to A) shave credit. B) rediscount the loan. C) raze credit. D) ration credit.

Which of the following are not reported as assets on a bankʹs balance sheet? A) Cash items in the process of collection B) Deposits with other banks C) U.S. Treasury securities D) Checkable deposits

Which of the following is not a reason financial regulation and supervision is difficult in real life? A) Financial institutions have strong incentives to avoid existing regulations. B) Unintended consequences may happen if details in the regulations are not precise. C) Regulated firms lobby politicians to lean on regulators to ease the rules. D) Financial institutions are not required to follow the rules.

Which of the following is not an example of a backup line of credit? A) loan commitments B) overdraft privileges C) standby letters of credit D) mortgages

Which of the following is not one of the eight basic puzzles about financial structure? A) Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. B) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. C) Collateral is a prevalent feature of debt contracts for both households and business. D) There is very little regulation of the financial system.

Which of the following statements is false? A) A bankʹs assets are its uses of funds. B) A bank issues liabilities to acquire funds. C) The bankʹs assets provide the bank with income. D) Bank capital is recorded as an asset on the bank balance sheet.

Which of the following types of information most likely allows the exploitation of a profit opportunity? A) Financial analystsʹ published recommendations B) Technical analysis C) Hot tips from a stockbroker D) Insider information

Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure? A) Excess reserves B) Secondary reserves C) Bank capital D) Mortgages

Which of the following would not be a way to increase the return on equity? A) Buy back bank stock B) Pay higher dividends C) Acquire new funds by selling negotiable CDs and increase assets with them D) Sell more bank stock

You read a story in the newspaper announcing the proposed merger of Dell Computer and Gateway. The merger is expected to greatly increase Gatewayʹs profitability. If you decide to invest in Gateway stock, you can expect to earn A) above average returns since you will share in the higher profits. B) above average returns since your stock price will definitely appreciate as higher profits are earned. C) below average returns since computer makers have low profit rates. D) a normal return since stock prices adjust to reflect expected changes in profitability almost immediately

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