Money and Banking Midterm

Forecasting stock prices using trends of past data should not be an effective method for making trading decisions if asset markets are a. Weakly efficient. b. Semi-strongly efficient. c. Strongly efficient. d. All of the above.

d. All of the above.

After three years, a deposit of $1000 that compounds annually at an interest rate of 20% returns a. $1000 b. $1440 c. $1200 d. $1728

d. $1728

The present value of a discount bond with one year to maturity, face value of $1000 and a yield to maturity 5% is a. 1,005.00 b. 1,000.00 c. 1,050.00 d. 952.38

d. 952.38

Firms that pay efficiency wages are attempting to minimize a. Transactions costs. b. Monitoring costs. c. Adverse selection problems. d. Agency problems.

d. Agency problems.

Which are examples of external finance? a. Issuing commercial paper b. Stock sales c. Issuing bonds d. All of the above

d. All of the above

Which of the following are examples of transactions costs faced by lenders? a. Accounting fees b. Legal fees c. Monitoring costs d. All of the above

d. All of the above

When the Treasury Department recapitalized some banks, they were a. engaged in a bailout. b. operating as a lender of last resort. c. decreasing the money supply. d. all of the above.

a. engaged in a bailout.

James decides that going to graduate school would not be a good idea and applies for the Peace Corps. This is a(n) _____ decision. a. ex-ante b. ex-poste c. ceteris paribus d. none of the above

a. ex-ante

Which of the effects of an increase in the money supply would dominate if the central bank lacks credibility? a. expected inflation b. liquidity c. price level d. none of the above

a. expected inflation

Banks are said to ration credit when they refuse to lend above a certain interest rate. The purpose of such a policy is to minimize _____ of lending. a. Adverse selection problems b. Moral hazard problems c. Transactions costs d. All of the above

a. Adverse selection problems

An option that can be exercised on or before its maturity is known as a(n) _____. a. American option b. barrier option c. European option d. Swiss option

a. American option

Which of the following is a technique lenders use to alleviate the adverse selection problem? a. Checking credit ratings (consumer credit score) b. Monitoring borrower activity c. Requiring collateral d. All of the above

a. Checking credit ratings (consumer credit score)

The free-rider problem affects decisions of participants in a. The stock market. b. Product market c. Money market d. None of the above

a. The stock market.

Laws that require companies to fully inform investors about debts and loans on their balance sheets are intended to increase a. Transparency. b. Efficiency. c. Volatility. d. All of the above.

a. Transparency.

Banks are said to ration credit when they refuse to lend above a certain interest rate. The purpose of such a policy is to minimize _____ of lending. a. adverse selection problems b. moral hazard problems c. transactions costs d. all of the above

a. adverse selection problems

Basel II gave more sophisticated guidelines for judging _____ than Basel I. a. asset quality b. capital requirements c. reserve requirements d. interest rates for loans

a. asset quality

Futures contracts avoid the difficulties of forward contracts by: a. efficiently linking buyers and sellers. b. controlling the price of the commodity being traded. c. allowing speculators to make a profit on futures contracts. d. covering any losses incurred by buyers and sellers on the contract.

a. efficiently linking buyers and sellers.

ARMs a. force borrowers to assume some of the interest rate risk from banks. b. have become less prevalent in the U.S. since the Great Depression c. both of the above. d. neither of the above.

a. force borrowers to assume some of the interest rate risk from banks.

Which of the following is a method banks use to deal with interest rate risk? a. gap analysis b. restrictive covenants c. specialization d. compensating balances

a. gap analysis

Bank consolidation is potentially a problem because a. larger banks are harder to regulate. b. banks are less diversified. c. banks are less able to innovate. d. all of the above.

a. larger banks are harder to regulate.

A bank suffers defaults on some loans. Hence, the _____ decreases. a. level of capital b. quantity of excess reserves c. ROA d. all of the above

a. level of capital

The two main categories of profit making assets on a bank's balance sheet are a. loans and securities. b. reserves and loans. c. bonds and deposits d. borrowings and deposits

a. loans and securities.

Which of the following is an example of disintermediation? a. money market mutual funds b. insurance companies c. interest-only mortgages d. all of the above

a. money market mutual funds

Which of the following is NOT a method banks use to deal with adverse selection? a. monitoring b. requiring collateral c. restrictive covenants d. none of them deal with adverse selection

a. monitoring

The free-rider problem affects decisions of participants in a. the stock market. b. internal finance c. both of the above. d. neither of the above.

a. the stock market.

During a housing bubble, people continue to buy houses because a. they expect house price to continue to rise. b. they are able to get loans at high interest rates. c. the government guarantees house value won't fall. d. all of the above.

a. they expect house price to continue to rise.

Subprime mortgages refer to home loans a. to high risk borrowers. b. for real estate with rising prices. c. at below market interest rates. d. all of the above.

a. to high risk borrowers.

If the annual earnings for a company are $30, the expected future price of its stock is $100, and the required rate of return is 30%, then the current price of the stock should be a. $97.00 b. $100.00 c. $130.00 d. $169.00

b. $100.00

Refer to Table 1: What is the maximum amount of write-downs (defaults) the bank could sustain without becoming insolvent (bankrupt)? a. $0 b. $260 c. $600 d. $1,060

b. $260

If the annual earnings for a company are $10, the expected future price of its stock is $110, and the current price is $100, then the required rate of return on the stock is a. 10%. b. 20%. c. 30%. d. none of the above.

b. 20%.

A one-year discount bond with face value $1000 and price $800 has a yield of a. 20% b. 25% c. 80% d. none of the above

b. 25%

Which of the following does NOT involve a financial intermediary? a. Saving for retirement b. Buying a treasury bond from the government c. Buying stock online d. They all involve an intermediary.

b. Buying a treasury bond from the government

Deductibles on car insurance are solutions to the _____ problem for insurers. a. Adverse selection b. Moral hazard c. Free-rider d. All of the above

b. Moral hazard

Spinning, in relation to IPOs, is a practice that achieves which of the following a. Overprices stocks at IPO's b. Under prices stocks at IPO's c. Prices stocks perfectly at IPO's d. Under prices bonds

b. Under prices stocks at IPO's

Which of the following is an example of a source of internal finance? a. Corporate bonds b. Withheld earnings c. Commercial loans d. None of the above

b. Withheld earnings

At the beginning of March 2012, Brian told Chris that he is thinking of buying some shares of Ford motors from him at the end of the month at $12/share. Chris agreed to this proposal and wrote a contract to sell shares to Brian at a price of $12/share. The current market price is $10/share. At the end of the month, the share price was $11/share, so Brian chose not to buy the shares from Chris. This is an example of: a. a forward contract. b. an option. c. a future contract. d. a swap.

b. an option.

Which government action involves putting taxpayer money at risk? a. lowering interest rates b. bailout c. lender of last resort d. none of the above

b. bailout

If the value of a bank's liabilities exceeds the value of its assets, the bank is: a. undervalued. b. bankrupt. c. viable. d. marginal.

b. bankrupt.

The erosion of Glass-Steagall allowed financial institutions to take advantage of a. economies of scale. b. economies of scope. c. interstate banking. d. online banking

b. economies of scope.

Which of the following contributed to falling profits for banks in the 1970s and early 1980s? a. regulatory forbearance b. high inflation c. low capital levels d. all of the above

b. high inflation

Which of the following were factors exacerbating the Great Depression? a. deposit insurance b. higher interest rates c. falling productivity d. all of the above

b. higher interest rates

According to the Herfindahl index, the U.S banking industry is _____ concentrated than that of most developed economies. a. more b. less c. equally d. The Herfindal index is not a measure of concentration.

b. less

A decrease in the money supply leads to a long-run increase in the equilibrium interest rate if the _______ effect dominates other effects. a. expected inflation b. liquidity c. price level d. none of the above

b. liquidity

A farmer and a sugar factory enter into a futures contract requiring the delivery of 4,000 tons of sugarcane to the buyer in June at a price of $30 per ton. Suppose the futures contracts for sugarcane increases to $35 per bushel the day after the farmer and the sugar factory enter into their futures contract. If the contract was settled under these conditions, the farmer will have: a. lost $5. b. lost $20,000. c. gained $5. d. gained $20,000.

b. lost $20,000.

Regulators do not consider a financial institution to be a bank if it does not a. hold bonds. b. make loans. c. borrow from the federal reserve d. none of the above

b. make loans.

When the Fed bought commercial paper (short term loans to established firms) they were a. engaged in a bailout. b. operating as a lender of last resort. c. decreasing the money supply. d. all of the above.

b. operating as a lender of last resort.

The FDICIA helps solve the moral hazard problem between a. two different banks engaging in loans. b. regulators and banks. c. politicians and regulators. d. the public and politicians.

b. regulators and banks.

Which of the following shifts the demand for bonds to the right? a. an increase in inflation expectations b. relative risk decreases c. a decrease in wealth d. an increase in the expected interest rate

b. relative risk decreases

When a bank requires that a borrower deposit some of a loan, the bank is a. requiring collateral. b. requiring compensating balances. c. credit rationing. d. none of the above.

b. requiring compensating balances.

Which of the following balance sheet entries is not sensitive to changes in market interest rates? a. bonds b. reserves c. mortgages d. borrowings

b. reserves

Which of the following is NOT a method banks use to deal with moral hazard? a. monitoring b. screening c. restrictive covenants d. They all deal with moral hazard.

b. screening

The creation of the SEC was intended to increase _____ in financial markets. a. profits b. transparency c. credit risk d. liquidity

b. transparency

Refer to Table 1: If the reserve requirement is 10%, the bank has _____ in excess reserves. a. $0 b. $5 c. $10 d. $50

c. $10

The earnings for a company are $10 and they are expected to grow at 3% annually. According to the Gordon Growth Model, if the required rate of return is 4%, then the price of the company's stock should be a. $10.10. b. $257.50. c. $1030.00. d. $4,050.00

c. $1030.00.

Your rich uncle Albert gives you a savings bond that pays $500 four years from now. If the relevant interest rate for you is 2%, what is the present value of the bond? a. $541.21 b. $510.00 c. $461.92 d. $490.19

c. $461.92

Refer to Table 1: If $100 in transaction deposits were withdrawn, what is the minimum amount the bank would have to borrow to meet the reserve requirement, a. $30 b. $50 c. $80 d. $100

c. $80

Ignoring borrowing costs, an investor who borrower half the funds to invest in an asset that rises from $200 to $300 makes an effective rate of return of a. 30%. b. 50%. c. 100%. d. 300%.

c. 100%.

If an asset market is not weakly efficient, then it cannot be a. Semi-strongly efficient. b. Strongly efficient. c. Both of the above. d. Neither of the above.

c. Both of the above.

Which of the following could be examples of inefficiencies in financial markets data? a. Random walk b. High volatility c. Bubbles d. All of the above

c. Bubbles

The relationship between real and nominal rates is called the a. inflation relation b. Friedman equation c. Fisher equation d. none of the above

c. Fisher equation

Which of the following is a technique lenders use to alleviate moral hazard problems? a. Specialized lending b. Diversified lending c. Requiring collateral d. All of the above

c. Requiring collateral

Which of the following is considered to be a derivative? a. Bonds b. Mutual funds c. Swaps d. Equities

c. Swaps

Which of the following is a measure of bank consolidation? a. Regulation Q b. The Gini coefficient c. The Herfindahl index d. The Greenspan index

c. The Herfindahl index

Which of the following is NOT a major problem with forward contracts? a. It is often costly/difficult to find a willing counter party. b. The market for forward contracts is illiquid as they are not easily sold to other parties. c. The market is highly regulated. d. One party usually has an incentive to break the agreement.

c. The market is highly regulated.

The biggest reason for the consolidation of the banking industry in the 1980s was a. mergers. b. bailouts. c. bankruptcy. d. all of the above.

c. bankruptcy.

Bank consolidation is desirable because a. small banks with little capital are eliminated. b. banks are more diversified. c. both of the above. d. neither of the above.

c. both of the above.

Which of the following reduces the incentive for consumers to monitor the liquidity of banks? a. online banking b. SWAPs c. brokered deposits d. all of the above

c. brokered deposits

The most beneficial government reaction to the Great Depression was a. lowering interest rates. b. raising tariffs. c. creating the FDIC. d. raising the reserve requirement

c. creating the FDIC.

When a bank refuses to lend at high interest rates, it is a. requiring collateral. b. requiring compensating balances. c. credit rationing. d. none of the above.

c. credit rationing.

If the Federal Reserve wants to increase the equilibrium interest rate, it will _________ the __________ money. a. increase, demand for b. decrease, demand for c. decrease, supply of d. increase, supply of

c. decrease, supply of

Ratings from Moody's and S&P measure a. interest rate risk b. liquidity risk c. default risk d. all of the above

c. default risk

The yield curve indicates a possible future recession if it is a. flat b. upward sloping c. downward sloping d. none of the above

c. downward sloping

Which of the following is NOT a method banks use to control credit risk? a. specialization b. credit rationing c. gap analysis d. collateral requirements

c. gap analysis

The opportunity cost of money is a. real GDP b. interest rate c. growth rate of prices d. none of the above

c. interest rate

In order to prevent traders from reneging on futures contracts, exchanges require traders to maintain _____. a. micro accounts b. savings accounts c. margin accounts d. credit accounts

c. margin accounts

Costly state verification means the same as a. specialized lending. b. agency fees. c. monitoring. d. all of the above.

c. monitoring.

The payoff for issuing an option is known as a(n) _____. a. put b. call c. premium d. valuation

c. premium

If the _____ for a stock fall(s), the current price of the stock rises. a. earnings b. expected price c. required rate of return d. none of the above

c. required rate of return

Which of the following do NOT generate fees for banks? a. credit cards b. securitized loans c. reserves d. They all generate fees.

c. reserves

A bank increases its level of required reserves by a. selling securities. b. increasing borrowings. c. taking checkable deposits. d. none of the above.

c. taking checkable deposits.

Household wealth affects the equilibrium yield on bonds due to its impact on? a. the supply of bonds b. the supply and demand for bonds c. the demand for bonds d. inflation has no effect on bond yields

c. the demand for bonds

An analyst says that inside information would not have helped investors forecast the collapse of the stock market in 2008. This is true if markets satisfy a. Allocational efficiency. b. Weak efficiency. c. Semi-strong efficiency. d. Strong efficiency.

d. Strong efficiency.

Which of the following does NOT determine the premium paid by the option holder to the option issuer? a. Interest rates b. The expiration date c. The strike price d. The volume of the asset traded

d. The volume of the asset traded

Which of the following changes or innovations do NOT depend on computer technology? a. SWAPs b. ATMs c. SWEEP accounts d. They all depend on computer technology.

d. They all depend on computer technology.

Technology has helped to make possible which of the following innovations? a. ATMs b. credit cards c. mortgage backed securities d. all of the above

d. all of the above

Which of the following contributed to the S&L crisis in the 1980s? a. rising real interest rates around 1980 b. S&L involvement in commercial real estate c. regulatory forbearance d. all of the above

d. all of the above

Which of the following factors could explain difference in yields on bonds with the same time to maturity? a. tax considerations b. liquidity c. default risk d. all of the above

d. all of the above

A bank can increase its level of reserves by a. selling securities. b. increasing borrowings. c. calling loans. d. all of the above.

d. all of the above.

A stock market bubble can start due to a. low interest rates. b. high expected dividends. c. high levels of lending. d. all of the above.

d. all of the above.

Asset managers try to maximize profitability and minimize a. defaults. b. write-downs. c. credit risk. d. all of the above.

d. all of the above.

Bailouts are intended to a. increase the capital in financial institutions. b. restore confidence in financial markets. c. prevent insolvencies. d. all of the above.

d. all of the above.

Lenders of last resort intend to a. add liquidity to financial markets. b. restore confidence in financial markets. c. lower interest rates. d. all of the above.

d. all of the above.

To help minimize the financial crisis of 2007-2009, the government has a. lent money to replace private sector funds. b. bailed out failing financial institutions. c. lowered interest rates. d. all of the above.

d. all of the above.

The price of a bond is inversely related to a. the time to maturity b. the yield to maturity c. neither of the above d. both of the above

d. both of the above

The chance that a bond issuer won't make promised payments is called a. representation risk b. interest rate risk c. credit risk d. default risk

d. default risk

A decrease in the government deficit causes the _____ bonds to shift and for equilibrium interest rates to _____ a. supply of, fall b. supply of, rise c. demand for, fall d. demand for, rise

d. demand for, rise

All of the following EXCEPT one would have a strong propensity to initiate a financial crisis. Which is the exception? a. increases in uncertainty b. increases in interest rates c. balance sheet deterioration d. exchange rate appreciation

d. exchange rate appreciation

If the gap on a bank's balance sheet is -$10,000 and interest rates rise by 4%, then bank profits a. rise by $40,000. b. rise by $400. c. fall by $40,000. d. fall by $400.

d. fall by $400.

Which of the following shifts the supply bonds to the right (in the short run)? a. inflation expectations fall b. government budget surplus c. general business conditions fall d. none of the above

d. none of the above

The yield on a one-year bond is currently 3% and the expected yield for the next three years is also 3%. If the term premium is 0.5(n-1) where n is the year to maturity, then the yield curve is a. flat b. downward sloping c. cannot be determined d. upward sloping

d. upward sloping