Fin 330 final

If the interest rates on all bonds rise from 5 percent to 6 percent over the course of the year, which bond would you prefer to have been holding?

a bond with one year to maturity

The key factor causing life insurance companies to move into the management of pension funds was. (from last session)

a change in federal legislation in 1974 to encourage pension funds to turn fund management over to life insurance companies.

Which of the following would be considered an asset on a bank's balance sheet?

a consumer loan

U.S. Treasury bonds

a credit union

One of the most important functions of the US Federal Reserve is to serve as

a lender of last resort

A bank's commitment to provide a borrower with loans up to pre-specified limit at an interest rate tied to the market is called:

a loan committment

Mandy goes to the grocery store to buy groceries, and at the checkout counter she pays cash. This is an example of money being used as

a medium of exchange

A major challenge for banks with lots of mortgage loans is a lack of liquidity. The solution to this problem has been the emergence of

a secondary mortgage market.

Which of the following is an example of an intermediate-term debt?

a sixty-month car loan

A plot of the interest rates on default-free government bonds with different terms to maturity is called

a yield curve

At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically __________ the initial interest rate offered on a new adjustable-rate mortgage.

above

The loan application process that banks require potential borrowers to go through is an attempt to deal with

adverse selection

In many cases, life insurance companies will require applicants to take a physical. This is done to avoid the problem of:

adverse selection.

Private-label issuers of bundled mortgages gained market share prior to the crisis. Much of the content was substandard due to

all of these potential answers contributed

Reinsurance

allocates portion of risk to another company in exchange for a portion of the premium.

A bank's loan loss reserves are:

an amount the bank sets aside to cover potential losses from defaulted loans.

A liquid asset is

an asset that can easily and quickly be sold to raise cash.

All else the same, if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then ___________ in interest rates will ____________ bank profits.

an increase; reduce

When a corporation wishes to sell new securities, it usually employs

an investment bank.

Secondary financial markets:

are financial markets where existing securities are bought and sold.

Exchange-traded funds (ETFs):

are traded on an exchange, and their share price changes throughout the day.

Financial markets quickly eliminate unexploited profit opportunities through changes in

asset prices

Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.

assets, liabilities

Ridley goes for a job interview at Exeter Corporation. When she sits down with the human resources director, we might say that a situation of __________________ exists.

asymmetric information

When securities firms facilitate an IPO, they attempt to price the stock

at a level that will enable the securities firms to place the entire issue. at a level that will enable institutional investors who invest in the IPO to earn reasonable returns.high enough to satisfy the issuing firm.

Since Social Security benefits are paid from current contributions, the system is a

"pay-as-you-go" system.

The return on a 5 % coupon bond that initially sells for $1,000 and sells for $950 next year is

0%

How many bond insurers did i indicate last week survived the financial crisis?

1

Rank the components of aggregate demand by their sensitivity to changes in the real interest rate. Start with the most sensitive to the least sensitive.

1. investment 2. consumption and net exports 3. government purchases

Five Core values

1.Time has value .2.Risk requires compensation. 3.Information is the basis for decisions. 4.Markets determine prices and allocate resources. 5.Stability improves welfare.

How many regional Federal Reserve Banks are there?

12

300 basis points is

3%

Approximately _______ of American households own mutual funds.

45%

The number of banks in the U.S. today is approximately:

5,000

The three largest Federal Reserve banks (New York, Chicago, and San Francisco) combined hold more than ________ percent of the assets of the Federal Reserve System.

50

Which of the following types of equity funds is considered the most speculative?

Aggressive growth funds

_______________________________ are subject to reserve requirements.

All depository institutions

Which of the following is a problem of moral hazard?

An individual who purchases auto insurance begins to leave his or her keys in the car while running into a store.

All are true about hedge funds except:

Aways employ diversification techniques called "hedging."

A bank has decided to retain more of their earnings, moving their retention ratio from 40% to 70%. What way of meeting their capital needs is the bank taking?

Changing their dividend policy

What distinguishes commodity money from fiat money?

Commodity money will have value whether its used as payment or not where fiat money only has value when being used as the currency.

Which of the following could cause a stock market bubble?

Investor euphoria

A bank's reserves include:

The bank's deposits at the Federal Reserve

What matters most during a bank run is:

The liquidity of the bank

The most liquid securities traded in the capital market are

U.S. Treasury bonds

Which specific asset on the bank's balance sheet is often referred to a secondary reserve?

U.S. government and agency bonds.

Credit unions began in response to which of the following?

Working class and small merchants had to go to loan sharks for needed funds.

In order for a municipality or corporation to be able to pay off its bond before the maturity date, the bond must have a(n)

call provision.

Banks are required to file ________ usually quarterly that list information on the bank's assets and liabilities, income and dividends, and so forth

call reports

A bank's net worth is synonymous with its:

capital

Subprime loans

carry higher levels of perceived risk

Ricky purchased shares in a mutual fund through an initial public offering, and now no shares are issued and shares cannot be redeemed. He invested in a _________________ fund.

close-ended

A short-term debt instrument issued by well-known corporations is called

commercial paper

In the United States, monetary policy is formed by:

committee

Which of the following long-term bonds has the highest interest rate?

corporate Baa bonds

Sue uses a credit card to purchase a new pair of jeans. Sue is:

creating a liability that she will ultimately have to pay with money.

The type of credit insurance that landed AIG into trouble in 2008 is called

credit default swaps.

Both ________ and ________ are monetary liabilities of the Fed.

currency in circulation; reserves

An increase in the time to the promised future payment _____________ the present value of the payment.

decreases

An increase in the interest rate

decreases the quantity of money demanded

The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is

default risk

In a ________ plan, the employee makes the investment decisions for funding the pension.

defined contribution

Most pension plans today are

defined contribution.

Keynes would say:

demand creates supply

Which of the following qualifies as a liability to a bank?

demand deposits

A bank's net interest margin is calculated by taking net interest income and:

dividing it by the banks assets

A bank's return on equity (ROE) is calculated by:

dividing the bank's net profit after taxes by the bank's capital.

Roles served by financial markets include the following, except:

eliminate risk.

The Panic of 1907 was triggered by

excessive speculation in the stock market, excessively loose lending by banks and trusts, and a lack of effective oversight of financial markets.

The price of one country's currency in terms of another country's currency is called the

exchange rate

The ______________ is the final amount that will be paid to the holder of a coupon bond.

face value

A limitation of a bond compared to a loan is that it decreases the pool of money available to the issuer.

false

Banks tend to focus their loans in one industry so that they can specialize on that industry and reduce the credit risk of their loan portfolio.

false

Corporate bonds are not as liquid as government bonds because the corporate bond rating must be calculated each time they are traded.

false

Fed funds are overnight funds that banks borrow from a Federal Reserve Bank.

false

General obligation bonds generally do not have to be approved by taxpayers.

false

One thing that is true about economic policy in the U.S. is fiscal and monetary policy never conflict.

false

The Standard & Poor's 500 Index actually includes more than 500 of the largest corporations in the U.S.

false

A big advantage to the borrower of a 15-yr mortgage loan compared to a 30-yr mortgage loan is that

far less interest will be paid over the life of the loan.

Farm Credit System members can include:

farm equipment manufacturers and dealers. farmers and ranchers agricultural investors - landlords and absentee owners.

U.S. currency is

fiat money

GDP, the most direct indicator of economic growth is driven by agriculture, manufacturing and services. The service sector is the largest driver of the three and its largest

financial

The transition from LIBOR to SOFR hit a snag when

financial institutions pushed back.

A defined-benefit pension plan

fixes benefits in advance.

Bernanke's lecture took place at

following the financial crisis

Which of the following is a major component of the Federal Reserve System?

fomc, board of governors, member banks

The Federal Reserve was created largely in response to the

frequency of bank panics.

The Dow Jones Industrial Average:

gives greater weight to shares with higher prices.

Well-functioning financial markets promote

growth

According to the theory of efficient markets, investors may be expected to earn above-average returns if they:

have access to illegal, private information.

Consumption can be sensitive to changes in the real interest rate because:

higher interest rates can increase the cost of durable goods like automobiles.

A bank that does not want to hold a lot of excess reserves (account balances with the Federal Reserve) but wants to manage liquidity risk is likely to:

hold a lot in highly liquid securities.

The Federal Deposit Insurance Corporation (FDIC) was created:

in 1933 as a part of the Glass-Steagall Act.

The Fed started picking up more mortgage-backed securities in its inventory during TAP. What was the intended goal?

increase price of securities (lower yield) and therefore support lower mortgage rates.

A decrease in aggregate demand would be caused by a(n) ________________ in __________________.

increase; imports

An increase in government spending ______________ aggregate ______________.

increases; demand

An institution that originates and holds a fixed-rate mortgage is adversely affected by ____________interest rates; the borrower who was provided the mortgage is adversely affected by __________ interest rates.

increasing; decreasing

Most of a bank's operating income results from

interest on assets

The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the

interest rate

The CAMELS "S" for sensitivity measures the impact of _______________________on earnings and capital

interest rate changes

The coupon rate of a bond refers to the

interest rate to be paid to the holder of the bond.

Stocks appear to present risk, yet many people have substantial parts of their wealth invested in them. This behavior could be explained by:

investing in stocks over the long run is not as risky as short-term holdings of stocks.

Municipal bonds are usually purchased by:

investors who are in high marginal tax brackets.

The Nasdaq Composite Index:

is. made of mainly newer, smaller firms

A major automobile manufacturer typically has slow sales during the winter months, creating a cash flow problem for meeting payroll. In a situation like this, the automobile manufacturer may

issue commercial paper.

Bank capital represents funds obtained through __________ and through _____________.

issuing stock; retaining earnings

People and businesses have a strong incentive to form rational expectations because

it is costly not to do so.

Federal Reserve notes are considered to be

liabilities of the Federal Reserve

Life insurance companies and fire and casualty insurance companies are both examples of contractual savings institutions. Because fire and casualty insurance companies have a greater possibility of loss of funds if disasters occur, they tend to hold more ________ assets than life insurance companies.

liquid

I argued that the primary mission of Fannie and Freddie in the market is to provide

liquidity

An inverted yield occurs when

long-term interest rates are lower than short-term interest rates.

An important function of secondary markets is to

make it easier to sell financial instruments to raise funds.

Bonds are issued by

many kinds of borrowers.

discount policy

monetary base

omo

monetary base

reserve requirement

money multiplier

Many health insurers require a deductible where the policyholder pays the first part of any loss. The use of a deductible most directly treats the problem of:

moral hazard.

Price paid by banks in the financial crisis:

more liquidity required more oversight more capital required

The Fed's open market operations normally involve only the purchase of government securities, particularly those that are short-term. However, during the crisis, the Fed started new programs to purchase

mortgage-backed securities and long-term Treasuries.

A bundle of home mortgages sold to an investor is known as a

mortgage-backed security

_________ are financial intermediaries that acquire funds by selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds.

mutual funds

Commercial banks face competition from a variety of institutions including

mutual funds, investment banks, and insurance companies.

A primary lesson learned from the Panic of 1907 was the

need in the United States for a central bank.

For most banks, its calculated burden is

negative

The use of a credit card to purchase goods or services on the Internet affects

neither M1 or M2

Investment banks sell _______________ securities to the public, and brokerage firms sell ________________ securities to the public.

new; existing

If a bank increases its provisions for loan losses, its interest income is _______________, and its noninterest income is ________________.

not affected, not affected

If someone wants to start a bank today, they would have to:

obtain a charter either from the federal or state government.

A primary financial market is:

one in which newly issued securities are sold.

The marketable securities that banks hold on their balance sheet include:

only bonds.

The quantity of securities held by the Federal Reserve is controlled through:

open market operations

Credit unions pay ________________. (mark all that apply)

payroll tax property tax

Which of the following financial intermediaries commonly invests in stocks and bonds?

pension funds, insurance companies, mutual funds

The most important advantage of discount policy is that the Fed can use it to

perform its role as lender of last resort.

A potential problem of a more politically controlled central bank is that

politicians may want to pursue monetary policies that are good in the short run but bad in the long run.

Tasks that investment bankers perform when acting as underwriters to sell securities to the public include:

pricing the security. arranging for the security to be rated. preparing the filings required by the Securities and Exchange Commission.

The tool that has helped millions of borrowers who have insufficient funds for a 20% down payment mortgage.

private mortgage insurance

In a ______________ of stock, all of the shares issued may be held by a small number of institutional investors.

private placement

Bank regulators set minimum capital standards to

protect creditors/depositors from decreases in asset values.

In its role as the bankers' bank, a central bank performs each of the following, except:

providing deposit insurance.

When the current yield and the coupon rate are equal, the bond is:

purchased at a price that equals the face value.

The term "quantitative easing" refers to the Fed's

purchases of various types of debt securities, including risky debt securities.

You are having a conversation with your friend Yvonne about the upward-sloping yield curve that currently exists in the bond market. She explains this to you by saying that the upward slope to the yield curve is because the market expects future interest rates to be higher than current interest rates. Her observation means that she is a proponent of the __________ theory of interest rates.

pure expectations

The sum of the current yield and the rate of capital gain is called the

rate of return

The Farm Credit System pays no income tax on interest received from ___________loans.

real estate

What did I say contributed to the larger than expected time that Fannie and Freddie were/are wards of the U.S. Government?

rebound in housing

Acquiring information on a bank's activities in order to determine a bank's risk is difficult for depositors and is another argument for government

regulation

The risk structure of interest rates refers to the:

relationship among the interest rates of bonds from different issuers with the same maturities.

Money market securities generally have

relatively high liquidity, low expected return, and a low degree of credit risk

Reserves are equal to the sum of

required reserves and excess reserves.

Everything else held constant, a decline in interest rates will cause spending on housing to:

rise

Everything else held constant, an increase in the liquidity of bonds results in a __________________ in demand for bonds and the demand curve shifts to the __________________.

rise, right

When the asset items on a bank's balance sheet and each off-balance-sheet commitment it has made are multiplied by the appropriate risk-weighting factor, they are often called

risk-weighted assets

A financial market in which previously issued securities can be resold is called a ________ market.

secondary

Both ________ and ________ are Federal Reserve assets.

securities; loans to financial institutions

Dunder Corporation issues convertible bonds. Convertible bonds allow Dunder bondholders to convert their bonds into _______________ at some point in the future.

shares of common stock

Taxes play an important role in bond returns because:

some bond interest is exempt from some government taxation, so after tax returns across bonds can vary considerably.

To put things into pandemic perspective, I said the Fed lends and Congress __________.

spends

In order for insurance companies to generate predictable payouts, they need to:

spread the risk across many policies.

On payday at your nanny job, you get paid in cash, so each month you put $20 into a shoebox in your closet so that you can buy some Apple Airpods at the end of the year. In this situation, money is serving as a

store of value

Financial market participants who provide funds are called

surplus units

The risk that financial problems could spread among financial institutions and across financial markets, causing a collapse of the financial system, is known as:

systemic risk

Finance companies perform all of the following functions, except:

take deposits.

Which of the books used at the FOMC meetings is/are treated as secret documents and not released to the public until after a number of years have passed?

tealbook

Long-term debt has a maturity that is

ten years or longer

The additional incentive that the purchaser of a Treasury security requires to buy a long-term security rather than a short-term security is called the

term premium

Which bank regulator has the sole regulatory authority over bank holding companies?

the Federal Reserve System

If the Federal Reserve is to be independent, then the quantity of securities it purchases

the Federal Reserve itself.

The Reserve Banks of the Federal Reserve System are owned by:

the commercial banks in their districts.

The currency component includes paper money and coins held in

the hands of the nonbank public

A major advantage that municipal bonds have over corporate bonds for investors is that

the income earned on municipal bonds is not subject to federal income tax.

The demand for U.S. government bonds is high relative to other bond issues because:

the market for U.S. government bonds is more liquid than most other bond markets.

Banks do not hold a lot of their assets in the form of cash mainly because of:

the opportunity cost of holding cash; cash does not earn interest.

If financial markets are efficient, this implies that all securities should earn the same return.

False

It is illegal for an employer to underfund a pension.

False

The Fed agreed to purchase municipal bonds as long as they were not used to refinance to a lower rate as a pandemic response

False

The assumed rate of return has been trending up for public pension plans (largely invested in equities).

False

The financial crisis of 2007-2009 was largely limited to the United States.

False

Identify the true statement

Fannie and Freddie are the two largest guarantors of residential mortgage loans

Which of the following is most likely to be able to meet its future obligations?

Fully funded pension

Bernanke's lecture was to a students attending which University?

George Washington University

The source of the most comprehensive detailed information on the mortgage market is

HMDA data.

Which of the following statements uses the economists' definition of money?

I hope that I have enough money to buy my lunch today.

The yields on money market instruments are relatively low compared with the yields of other debt instruments.

true

Which of the Federal Reserve's measures of the monetary aggregates—M1 or M2—is the larger measure?

M2

Assume that you are interested in earning some return on the idle balances you usually keep in your checking account and decide to buy some money market mutual funds shares by writing a check. What is the effect of your action (with everything else the same) on M2?

M2 will remain constant

Which of the following statements is most correct?

Money is wealth but not all wealth is money

The three main bond-rating agencies are:

Moody's, S&P, and Fitch.

City National Bank of New Jersey was closed 11/01/19. What did the winning bidder have to pay for the bank? (look CLOSELY at the bid summary or Article VII of the Purchase and Assumption Agreement.

Nothing. The FDIC had to pay the bank to buy it

You examine the balance sheet of an insurance company and note that its assets are made up mainly of U.S. Treasury bills and commercial paper. You determine that this company is more likely to be what type of insurance company?

Property & Casualty

Who created the first finance companies?

Retailers

The __________________ can liquidate failing brokerage firms.

Securities Investor Protection Corporation

The ___________________ regulates the issuance of securities.

Securities and Exchange Commission

Which of the following is NOT a major component of the Federal Reserve System?

Securities and Exchange Commission

________ is creating a marketable capital market instrument by bundling a portfolio of mortgage loans.

Securitization

_____________________ is a process of bundling together smaller loans (like mortgages) into standard debt securities.

Securitization

Which body is pushing back against OCC efforts to invite Fintechs into the "sandbox" and potentially offer them a charter?

State regulators

When market rates are high, there is an increased proportion of cash-out refinances.

true

A category of assets for banks is cash items in the process of collection. This is:

uncollected funds the bank is due to receive from the clearing of checks.

When Welch Ave lists cans of Busch Light on special for $2.00, the bar is using money as a

unit of account

Diedre works for a pension fund and is thinking of buying some bonds that have a nominal interest rate of 6%. She believes that the inflation rate over the life of the bond will be 2%. The ex-post real interest rate on this bond is

unknown

The face value of a bond is the

value of the bond at maturity, or the amount due at repayment

Banks must weigh the risk versus the return in deciding

what to hold in their portfolio of assets.

The segmented markets theory can explain

why yield curves usually tend to slope upward.

Government response to the 2007-2009 crisis included all of the following except:

Stimulus spending by state and local governments

Investment decisions for funding a defined benefit plan is largely made by

Employer

Which of the following account for the largest portion of the U.S. mutual fund industry?

Equity funds

Although the subprime mortgage market problem began in the United States, the first indication of the seriousness of the crisis began in

Europe

Among the issues addressed by Dodd-Frank legislation was privately-owned, government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac.

False

By requiring full disclosure of information, securities laws prevent investors from making poor investment decisions.

False

What is likely impact on aggregate expenditures from an increase in the real interest rate?

It should decrease

The money aggregate M2 includes:

M1

Which of the Federal Reserve's measures of the monetary aggregates—M1 or M2—is composed of the most liquid assets?

M1

Assume that you are interested in earning some return on the idle balances you usually keep in your checking account and decide to buy some money market mutual funds shares by writing a check. What is the effect of your action (with everything else the same) on M1?

M1 will decrease

Which of the following would not be included in aggregate expenditures?

The value of 100 shares of Microsoft stock you purchased

Bernanke indicated the U.S. Government made a profit on its QE asset purchases.

True

Bonds act as a hedge against deflation because they gain value when rates fall.

True

Cryptocurrency has a more decentralized structure than what governs fiat money.

True

Fannie and Freddie support affordable rental housing by facilitating multi-family residential loans.

True

Index funds are popular among investors because of low fees and ease of diversification, which are possible because the fund manager purchases the stocks that make up the index and does not actively buy and sell shares to outperform the index.

True

LIBOR reflects credit risk. SOFR does not.

True

Most of the community banks were hurt more by commercial real estate loan losses than residential real estate loan losses in the aftermath of the financial crisis.

True

The risk of bank losses due to the impact of a natural disaster are known as operational risks.

True

You purchase a good by writing a check for $1,000. The check itself is never money; rather it is the balances on deposit that represent money.

True

Insurance companies look more like a [ bank / finance company ] in terms of asset transformation?

bank

Who shared the credit risk with the Fed on its Main Street Lending Program?

banks

The Fed usually keeps the discount rate above the target fed funds rate and prefers that _________________ so that __________________

banks borrow reserves from each other; banks can monitor each other for credit risk

Unit banks are:

banks with no branches.

____________ risk is associated with the transition from LIBOR to SOFR.

basis, legal, valuation

What does Fannie and Freddie do with most of these loans purchased from banks?

bundles, sells, guarantees

The ability of deposit insurance to prevent a run on a bank is mitigated by the fact that there is a large proportion of deposits in banks that exceed the insurance coverage limit and are therefore uninsured.

true

The fee paid to the insurer to compensate for bearing specific risk is known as

the policy premium.

In a defined-contribution plan:

the retirement benefits will vary with both the amount contributed and the performance of the fund.

The practice of factoring involves

the selling of accounts receivable at a discount in return for cash.

In the early stages of the pandemic crisis

the social distancing lockdown had an immediate impact because household outlays represent about 2/3 of the U.S. economy.

Aggregate demand curves slope down for each of the following reasons EXCEPT:

the wealth effect

Central banks often find:

there are tradeoffs that make pursuing all of their goals simultaneously impossible.

Bonds issued by the U.S. Treasury are referred to as benchmark bonds because:

they are highly liquid and virtually free of default risk.

Life insurance companies are regulated by state governments because

they have never experienced widespread failures.

Bank holding companies developed:

to get around the limitations on bank branching and restrictions in place for non- banking lines of business.

The liquid bank accounts most often used by accountholders to transfer funds to other parties are known as

transaction deposit accounts.

The Europe central bank model is not likely to be modified because it was created by ________________.

treaty

A bond is unlike a loan in that it better spreads out the credit risk.

true

A dual banking system is one in which charters can be granted by national or state/provincial authorities.

true

Bank capital and risk are intimately related to each other.

true

Banks perform a very important function in society called asset transformation.

true

Enhancing a municipal issue with insurance can increase the credit rating of the bonds.

true

The Fed does not completely control the level of bank deposits and loans because banks can hold excess reserves and the public can change its currency holdings.

true

The Glass-Steagall Act of 1933 required commercial banks to sell off their investment banking operations.

true

The process of underwriting a stock or bond issue requires that the investment bank purchase the entire issue at a predetermined price and then resell it in the market.

true