Financial Institutions--> Iwanowycz FINAL (ch.20 missing)

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At any point in time, households and businesses demand a greater quantity of loanable funds at lower rates of interest. A) True B) False

Forecasters should consider future plans for corporate expansion and the future state of the economy when forecasting business demand for loanable funds. A) True B) False

If the real interest rate was stable over time, this would suggest that there is ______ relationship between inflation and nominal interest rate movements. A) a positive B) an inverse C) no D) an uncertain (cannot be determined from information above)

If the yield curve is upward sloping, some investors may attempt to benefit from the higher yields on longer-term securities, even when they have funds for only a short period of time. This strategy is known as riding the yield curve. A) True B) False

Parsons Bank reported $3 million in interest revenues and $1 million in interest expenses. Parsons has $20 million in assets and $8 million in liabilities. Parsons net interest margin is _____ percent. A) 10 B) -10 C) 35 D) 25 E) none of the above

Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri's $800 million in assets are rate-sensitive, while $600 million of its liabilities are rate-sensitive. Petri Bank's gap is $_________. A) -300 million B) 300 million C) -500 million D) 500 million

The measure of interest rate risk that uses the difference between rate-sensitive assets and rate-sensitive liabilities is called A) gap measurement. B) duration measurement. C) duration ratio. D) gap ratio.

____________ is not a method used to assess interest rate risk. A) Efficiency analysis B) Gap analysis C) Duration analysis D) Regression analysis

Bank A has a 10 percent capital ratio and uses a significant proportion of its assets to invest in very highly-rated bonds. Bank B has an 12 percent capital ratio and uses a significant proportion of its assets to invest in highly leveraged transactions. How would Bank A rate versus Bank B using the capital and asset quality criteria? a. Bank A is perceived as safer by both criteria. b. Bank B is perceived as safer by both criteria. c. Bank A is perceived as safer according to capital, but more risky according to asset quality. d. Bank B is perceived as safer according to capital, but more risky according to asset quality.

Bank b is perceived as safer according to capital, but more risky according to asset quality

A _________________ swap involves an exchange of interest rate payments that does not begin until a specified future point in time. A) plain vanilla B) zero-coupon-for-floating C) forward D) seasoned vanilla E) putable

Assume that foreign investors who have invested in U.S. securities decide to increase their holdings of U.S. securities. This should cause the supply of loanable funds in the United States to _____ and should place ______ pressure on U.S. interest rates. A) decrease; upward B) decrease; downward C) increase; downward D) increase; upward

Bank A has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Bank A's net interest margin is A) $1 million. B) -$1 million. C) -5 percent. D) 5 percent.

If a bank expects interest rates to consistently _____________ over time, it will consider allocating most of its funds to rate-_______________ assets. A) decrease; sensitive B) increase; insensitive C) increase; sensitive D) Answers a and b are correct. E) none of the above

If a strong economy allows for a large ________ in households income, the supply curve will shift _________. A) decrease; outward B) increase; inward C) increase; outward D) none of the above

Floating-rate loans completely eliminate interest rate risk. A) True B) False

If interest rates are ______ , ______ projects will have positive NPVs. A) higher; more B) lower; more C) lower; no D) none of the above

In general, the duration of zero-coupon securities with short maturities is _____ than the duration of zero-coupon securities with long maturities. A) higher than B) lower than C) equal to D) A or B, depending on the issuer of the securities

In some time periods there is evidence that corporations initially financed long-term projects with short-term funds. They planned to borrow long-term funds once interest rates were lower. This specifically supports the ______ for explaining the term structure of interest rates. A) liquidity premium theory B) expectations theory C) segmented markets theory D) A and C

Interest income from municipal bonds is exempt from state taxes but is subject to federal taxes. A) True B) False

Other things being equal, an expected decrease in interest rates will increase the demand for long-term funds by borrowers. A) True B) False

The advantage of a rate-capped interest rate swap (relative to a plain vanilla swap) to a party exchanging floating payments for fixed payments is that A) there is a minimum limit set on interest rate payments received. B) there is a maximum limit set on the interest payments it will provide. C) it receives an up-front fee. D) none of the above

The demand for funds resulting from business investment in short-term assets is ______ related to the number of projects implemented, and is therefore ______ related to the interest rate. A) inversely; positively B) positively; inversely C) inversely; inversely D) positively; positively

The level of installment debt as a percentage of disposable income is generally _________ during recessionary periods. A) higher B) lower C) zero D) negative

The most common proxy for the benchmark rate from which a floating-rate payment is determined is the prime rate. A) True B) False

The risk of a loss due to closing out a transaction is referred to as _________________ risk. A) credit B) settlement C) interest rate D) exchange rate E) none of the above

The segmented markets theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it. A) True B) False

When a bank participates in a swap of fixed interest rate payments for floating-rate payments, or a swap of currencies, it A) can match up two parties but can not take a position in the swap. B) can match up two parties or can take a position in the swap. C) cannot match up two parties and cannot take a position in the swap. D) cannot match up two parties but can take a position in the swap.

When cash outflows temporarily exceed cash inflows, banks are most likely to experience A) higher dividend payments. B) illiquidity. C) a negative duration on its assets. D) an excess of capital.

Whether a bank has a temporary or a permanent need for funds, the decision should be to borrow in the federal funds market. A) True B) False

Which of the following statements is incorrect? A) Managers may be tempted to make decisions that are in their own best interests rather than shareholder interests. B) The compensation of bank loan officers may be tied to loan volume, which encourages a loan department to extend loans with a very high concern for risk. C) To prevent agency problems, some banks provide stock as compensation to managers. D) The underlying goal behind the managerial policies of a bank is to maximize the wealth of the bank's shareholders.

Within the category of capital market securities, municipal bonds have the ________ before-tax yield, and their after-tax yield is typically _________ of Treasury bonds from the perspective of investors in high tax brackets. A) highest; below that B) lowest; above that C) highest; above that D) lowest; below that

Yield curves are always upward sloping. A) True B) False

The quantity of loanable funds supplied is normally A) highly interest elastic. B) more interest elastic than the demand for loanable funds. C) less interest elastic than the demand for loanable funds. D) equally interest elastic as the demand for loanable funds. E) A and B

The term structure of interest rates defines the relationship A) between risk and return. B) between risk and maturity. C) between maturity and yield. D) between default risk ratings and maturity.

The typical purchaser of an interest rate cap is a financial institution that is _________ affected by _________ interest rates. A) favorably; rising B) favorably; falling C) adversely; rising D) adversely; falling

_____________ is (are) least likely to be used as a method of reducing interest rate risk. A) Maturity matching B) Using floating-rate loans C) Stock options D) Using interest rate swaps E) Using interest rate caps

The federal funds rate is ____ the yield on a Treasury security with a similar term remaining until maturity. a. substantially above b. substantially below c. close to d. none of the above; the rate is much higher than the Treasury yield in some periods, and much lower than the Treasury yield in other periods

Close to

A bank has a return on assets of 2 percent, $40 million in assets, and $4 million in equity. What is the return on equity? A) 10 percent B) .2 percent C) 2 percent D) 20 percent E) none of the above

A common method for banks to reduce their default risk is to A) specialize in loans to just one or a few particular industries in which they have expertise in assessing creditworthiness. B) specialize in loans of companies whose earnings patterns are quite similar over time. C) A and B D) none of the above

A firm is involved in an agreement in which it makes payments in periods when a market interest rate falls below an interest rate level specified in the agreement. This means that the firm has A) purchased an interest rate cap. B) sold an interest rate cap. C) purchased an interest rate floor. D) sold an interest rate floor.

A theory states that while investors and borrowers may normally concentrate on a particular natural maturity market, conditions may cause them to change maturity markets. This theory is called the A) liquidity premium theory. B) efficient markets theory. C) pure expectations theory. D) preferred habitat theory.

A(n) _____________swap provides the party making the floating-rate payments with a right to terminate the swap. A) callable B) extendable C) plain vanilla D) putable E) none of the above

AIG's financial problems were attributed to: A) its weak returns on its investments in Treasury securities. B) its potential losses from its life insurance policies. C) fraud from avoiding taxes on its gains from credit default swaps. D) its potential losses from credit default swaps.

According to expectations theory, the sudden expectation of lower interest rates in the future will cause a ______ supply of short-term funds provided by investors, and a ______ supply of long-term funds. A) large; large B) large; small C) small; small D) small; large

Assume a financial institution has rate-sensitive liabilities and rate-sensitive assets. If this institution negotiates a rate-capped swap, its ______ payments will be capped, and it will ______ an up-front premium in exchange for the cap. A) outflow; receive B) outflow; pay C) inflow; pay D) inflow; receive

Assume a financial institution that has rate-sensitive liabilities and rate-insensitive assets. If interest rates are expected to decline consistently, this institution would benefit by negotiating a(n) A) forward swap. B) callable swap. C) extendable swap. D) none of the above

Assume that the Treasury experiences a large increase in the budget deficit and issues a large number of T-bills. This action will _________ the supply of T-bills in the market and place __________ pressure on the yield of T-bills. A) decrease; downward B) decrease; upward C) increase; upward D) increase; downward

Bank A has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Bank A's net interest margin is A) $1 million. B) -1 million. C) 5 percent. D) -5 percent.

Banks can reduce their default risk by restructuring their asset portfolio to contain less ______ and more ______. A) Treasury bonds; corporate bonds B) Treasury bonds; municipal bonds C) Treasury bonds; commercial loans D) none of the above

If the federal government reduces its budget deficit, this causes a(n) __________________ in the supply of loanable funds, and a(n) ________________________ in the demand for loanable funds. A) increase; no change B) decrease; no change C) no change; increase D) no change; decrease

Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri's $800 million in assets are rate-sensitive, while $600 million of its liabilities are rate-sensitive. Petri Bank's net interest margin is ________ percent. A) 4.0 B) 3.6 C) 6.7 D) 5.0

The Bank of Moronto has negotiated a plain vanilla swap in which it will exchange fixed payments of 10 percent for floating payments equal to LIBOR plus 0.5 percent at the end of each of the next three years. In the first year, LIBOR is 8 percent; in the second year, 9 percent; in the third year, LIBOR is 7 percent. What is the total net payment the Bank of Moronto makes over the three-year period if the notional principal is $10 million? A) -600,000 B) 600,000 C) 450,000 D) -450,000 E) none of the above

The _________________ theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it. A) pure expectations B) liquidity premium C) segmented markets D) preferred habitat

The yield curve in a foreign country is A) always downward sloping. B) non-existent. C) the same as the United States at any point in time. D) none of the above

Which of the following loan portfolios are best diversified against default risk? A) consumer loans to farmers and commercial loans to farm equipment dealers in a local area B) commercial loans to the same industry C) commercial loans to various retail stores in the same city D) consumer and commercial loans to different industries in different cities

You are considering the purchase of a tax-exempt security that is paying a yield of 10.08 percent. You are in the 28 percent tax bracket. To match this after-tax yield, you would consider taxable securities that pay A) 31.1 percent. B) 19 percent. C) 12.5 percent. D) 14 percent.

Obtaining funds through ____ is not a common source of funds for banks to satisfy a temporary deficiency of funds? a. issuing bonds b. the federal funds market c. repurchase agreements d. borrowing from the Federal Reserve

Issuing Bonds

Which of the following statements is incorrect with respect to the Financial Services Modernization Act of 1999? a. It complemented the Glass-Steagall Act. b. It enabled commercial banks to more easily pursue securities and insurance activities. c. It gave securities firms and insurance companies the right to acquire banks. d. The Act requires that commercial banks must have a strong rating in community lending in order to pursue additional expansion in securities and other nonbank activities. e. All of the above are true.

It completed the Glass-Steagall Act

Which of the following is not an off-balance sheet activity for commercial banks? a. consumer loans b. loan commitments c. standby letters of credit d. swap contracts e. All of the above are off-balance sheet activities.

Loan commitments

The main use of bank funds is for a. loans. b. investment securities. c. fixed assets. d. repurchase agreements.

Loans

When a bank obtains funds through ____, households are not a common provider of the funds. a. NOW accounts b. retail CDs c. passbook savings accounts d. NCDs

NCDs

A ____ is a time deposit offered by some large banks to corporations, with a specific maturity date, minimum deposit of $100,000 or more, and a secondary market. a. retail CD b. negotiable CD c. market CD d. protective CD

Negotiable cd

When banks obtain funds in the federal funds market, the providers of the funds are a. other depository institutions. b. nonfinancial corporations. c. consumers. d. the Federal Reserve.

Other depository institutions

The interest rate banks charge their most creditworthy customers is known as the a. federal funds rate. b. primary credit lending rate. c. prime rate. d. call money rate

Prime rate

As a source of funds, small banks rely more heavily on ____, and larger banks rely more heavily on ____. a. time deposits and foreign deposits; savings deposits and short-term borrowings b. savings deposits and short-term borrowings; foreign deposits and time deposits c. savings and time deposits; foreign deposits and short-term borrowings d. foreign deposits and short-term borrowings; savings and time deposits

Savings and time deposits; foreign deposits and short term borrowings

Subordinated notes and debentures are examples of a. primary capital. b. secondary capital. c. depository sources of funds. d. repurchase agreements.

Secondary capital

____ loans are primarily used to finance the purchase of fixed assets. a. Term b. Working capital c. Informal line of credit d. Revolving credit

Term

A firm plans to issue 30-day commercial paper for $9,900,000. Par value is $10,000,000. What is the firm's cost of borrowing? a. 12.12 percent b. 11.11 percent c. 13.00 percent d. 14.08 percent e. 15.25 percent

a. 12.12 percent

When an investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700, the Treasury bill discount is ____ percent. a. 5.93 b. 6.12 c. 6.20 d .6.02 e. none of the above

a. 5.93

Which of the following is an action that the Fed uses to increase or decrease the money supply? a. buying or selling Treasury securities in the secondary market b. adjusting the tax rate imposed on income earned on Treasury securities c. adjusting the coupon rate on Treasury bonds d. selling Treasury securities in the primary market

a. Buying or selling Treasury securities in the secondary market

In aggregate, ____ are the most dominant depository institution, with more total assets than other depository institutions. a. commercial banks b. savings banks c. credit unions d. S&Ls

a. Commercial banks

____ are classified as a depository institution. a. Credit unions b. Pension funds c. Finance companies d. Securities firms

a. Credit unions

Which of the following are not considered depository financial institutions? a. finance companies b. commercial banks c. savings institutions d. credit unions e. All of the above are depository financial institutions

a. Finance companies

A ____ mortgage allows the borrower to initially make small payments on the mortgage. The payments then increase over the first 5 to 10 years and then level off. a. graduated payment mortgage b. growing-equity mortgage c. second mortgage d. shared-appreciation mortgage

a. Graduated payment mortgage

The yield on commercial paper is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period. a. greater than; recessionary b. greater than; boom economy c. less than; boom economy d. less than; recessionary

a. Greater than; recessionary

____ serves as the most direct indicator of economic growth in the United States. a. Gross domestic product (GDP) b. National income c. The unemployment rate d. The industrial production index

a. Gross domestic product (GDP)

Historical evidence has shown that, when the Fed significantly increases money supply, U.S. inflation tends to ____ shortly thereafter which in turn places ____ pressure on U.S. interest rates. a. increase; upward b. increase; downward c. decrease; downward d. decrease; upward

a. Increase; upward

As the supply of funds in the banking system ____, the federal funds rate ____. a. increases; declines b. increases; increases c. declines, declines d. none of the above

a. Increases; declines

The ____ indicators tend to occur before a business cycle. a. leading b. lagging c. coincident d. none of the above

a. Leading

Financial markets facilitating the flow of short-term funds with maturities of less than one year are known as a. secondary markets. b. capital markets. c. primary markets. d. money markets. e. none of the above

a. Secondary markets.

If the federal government is willing to pay whatever is necessary to borrow loanable funds, but the private sector is not, this reflects a. the crowding-out effect. b. dynamic open market operations. c. defensive open market operations. d. monetizing the debt.

a. The crowding-out effect.

A high budget deficit tends to place ____ pressure on interest rates; the Fed's tightening of the money supply tends to place ____ pressure on interest rates. a. upward; upward b. upward; downward c. downward; downward d. downward; upward

a. Upward; upward

Bank regulations typically: a. involve a tradeoff between the safety of the banking system and the efficiency of bank operations. b. impose restrictions on the types of assets in which banks can invest. c. set requirements for the minimum amount of capital that banks must hold. d. all of the above

all of the above

Commercial banks ____ restricted to a maximum percentage of their capital to loan to a single customer, and ____ allowed to use borrowed or deposited funds to purchase common stock. a. are; are b. are; are not c. are not; are d. are not; are not

are; are not

Assume that the reserve requirements ratio is 15%. An initial injection of $150 million could result in a maximum change in the money supply of a. $150 million. b. $1 billion. c. $1 million. d. $22.5 million.

b. $1 billion

If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield? a. about 13.4 percent b. about 12.5 percent c. about 11.3 percent d. about 11.6 percent e. about 10.7 percent

b. About 12.5 percent

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. a. below b. above c. equal to d. all of the above are very common

b. Above

In general, there is: a. a positive relationship between unemployment and inflation. b. an inverse relationship between unemployment and inflation. c. an inverse relationship between GNP and inflation. d. a positive relationship between GNP and unemployment.

b. An inverse relationship between unemployment and inflation.

When the Fed uses open market operations by selling some of its Treasury securities to investors in the U.S., there will be a. an outward shift in the supply schedule of loanable funds. b. an inward shift in the supply schedule of loanable funds. c. no shift in the supply schedule of loanable funds. d. an outward shift in the demand schedule for loanable funds.

b. An inward shift in the supply schedule of loanable funds.

____________ applies psychology to financial decisions and offers an explanation for why markets are not always efficient. a. Psychological marketing b. Behavioral finance c. Inefficient markets theory d. Financial psychology

b. Behavioral finance

When a securities firm acts as a(n) ____, it maintains a position in securities. a. adviser b. dealer c. broker d. none of the above

b. Dealer

The creditors in the federal funds market are a. households. b. depository institutions. c. firms. d. government agencies.

b. Depository institutions.

The ____ is directly responsible for conducting monetary policy. a. Federal Advisory Council b. FOMC c. Senate d. President of the United States

b. FOMC

The ____ is directly responsible for controlling money supply growth. a. Federal Advisory Council b. FOMC c. Board of Governors d. President of the United States

b. FOMC

Which of the following will typically require homeowners to ultimately request a new mortgage? a. graduated-payment mortgage (GPM) b. growing-equity mortgage c. balloon-payment mortgage d. shared-appreciation mortgage

c. Balloon-payment mortgage

The ____ consists of seven members, each of whom is appointed by the President of the United States. a. Federal Open Market Committee (FOMC) b. Federal Advisory Council c. Board of Governors d. none of the above

c. Board of Governors

The ____ consists of seven members, each of whom is appointed by the president of the United States. a. Federal Open Market Committee (FOMC) b. Federal Advisory Council c. Board of Governors d. none of the above

c. Board of Governors

A ____ is not a money market security. a. Treasury bill b. negotiable certificate of deposit c. bond d. banker's acceptance e. All of the above are money market securities.

c. Bond

Which of the following is sometimes issued in the primary market by nonfinancial firms to borrow funds? a. NCDs b. retail CDs c. commercial paper d. federal funds

c. Commercial paper

____ is a short-term debt instrument issued only be well-known, creditworthy firms and is normally issued to provide liquidity or finance a firm's investment in inventory and accounts receivable. a. A banker's acceptance b. A repurchase agreement c. Commercial paper d. A Treasury bill

c. Commercial paper

Which of the following is not a money market security? a. Treasury bill b. negotiable certificate of deposit c. common stock d. federal funds

c. Common stock

As a result of the Financial Reform Act of 2010, the ____ was assigned the role of regulating financial products and services. a. Federal Advisory Committee b. Federal Open Market Committee c. Consumer Financial Protection Bureau d. Board of Governors

c. Consumer Financial Protection Bureau

A __________ is a privately negotiated contract that protects investors against the risk of default on particular debt securities such as mortgage-backed securities. a. default insurance contract b. default risk swap c. credit default swap d. collateralized debt obligation

c. Credit default swap

The Fed's monetary policy is commonly intended to alter the supply of funds in the banking system in order to achieve a specific targeted: a. discount rate. b. required reserve requirement. c. federal funds rate. d. prime rate.

c. Federal funds rate.

If markets are ____, investors could use available information ignored by the market to earn abnormally high returns. a. perfect b. active c. inefficient d. in equilibrium

c. Inefficient

A ____ economic indicator tends to rise or fall a few months after business-cycle expansions and contractions. a. leading b. coincident c. lagging d. none of the above

c. Lagging

____ risk is the risk that a borrower may prepay the mortgage in response to a decline in interest rates. a. Interest rate b. Credit c. Prepayment d. Reinvestment rate

c. Prepayment

The largest deficit unit is (are) a. households and businesses. b. foreign financial institutions. c. the U.S. Treasury. d. foreign nonfinancial sectors.

c. The U.S. Treasury.

Which of the following securities is most likely to be used in a repo transaction? a. commercial paper b. certificate of deposit c. Treasury bill d. common stock e. All of the above are equally likely to be used in a repo transaction.

c. Treasury bill

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. a. stable; decreasing b. increasing; stable c. increasing; decreasing d. decreasing; increasing

c. increasing; decreasing

If the Fed uses a passive monetary policy during weak economic conditions, a. it increases money supply substantially. b. it reduces money supply substantially. c. it allows the economy to fix itself. d. it focuses on monetizing the debt.

c. it allows the economy to fix itself.

When the Fed purchases _______, it is attempting to directly stimulate the housing market. a. commercial paper b. short-term Treasury securities c. mortgage-backed securities d. consumer loans

c. mortgage-backed securities

Equity securities a. have a maturity. b. pay interest on a periodic basis. c. represent ownership in the issuer. d. repay the principal amount at maturity.

c. represent ownership in the issuer.

Securities with maturities of one year or less are classified as a. capital market instruments. b. money market instruments. c. preferred stock. d. none of the above

b. Money market instruments.

____ securities have a maturity of one year or less; ____ securities are generally more liquid. a. Money market; capital market b. Money market; money market c. Capital market; money market d. Capital market; capital market

b. Money market; money market

A(n) _________ problem occurs when a person or institution does not have to bear the full consequence of its behavior and therefore assumes more risk than it otherwise would. a. asymmetric information b. moral hazard c. risk adjustment d. specific hazard

b. Moral hazard

All ____ are required to be members of the Federal Reserve System. a. state banks b. national banks c. savings and loan associations d. finance companies e. A and B

b. National banks

According to your text, which of the following is not considered a money market security? a. Treasury bills b. Treasury notes c. retail CD d. banker's acceptance e. commercial paper

b. Treasury notes

Financial institutions such as commercial banks, bond mutual funds, insurance companies, and pension funds maintain large portfolios of bonds, so their portfolio is ____ affected when the Fed ____ interest rates. a. unfavorably; decreases b. unfavorably; increases c. favorably; increases d. Answer A and C are correct.

b. Unfavorably; increases

In an amortization schedule of monthly mortgage payments a. the amount of interest in each payment is equal to the principal paid. b. interest payments exceed principal payments early on. c. principal payments exceed interest payments early on. d. B and C both occur with about equal frequency

b. interest payments exceed principal payments early on.

Which of the following is a capital market instrument? a. a six-month CD b. a three-month Treasury bill c. a ten-year bond d. an agreement for a bank to loan funds directly to a company for nine months

c. A ten-year bond

Credit guarantees for commercial paper: a. ensures that the issuer of commercial paper will use the funds obtained to provide credit. b. are issued by the Federal Reserve Bank of New York. c. are only as good as the credit of the guarantor. d. A and C

c. Are only as good as the credit of the guarantor.

Treasury bills are sold through ____ when initially issued. a. insurance companies b. commercial paper dealers c. auction d. finance companies

c. Auction

The Garn-St. Germain Act of 1982 a. permitted depository institutions to offer money market deposit accounts. b. prevented depository institutions from acquiring problem institutions across geographical boundaries. c. required the Fed to explicitly charge depository institutions for its services. d. allowed the Fed to provide check clearing to depository institutions at no charge.

permitted depository instututions to offer money market deposit accounts

The Financial Reform Act was intended to: a. prevent another credit crisis. b. reduce capital ratios. c. impose interest rate ceilings on deposits. d. prevent banks from offering securities services.

prevent another financial crisis

For any given bank, federal funds ____ represent a(n) ____. a. purchased; asset b. sold; liability c. purchased; liability d. A and B

purchased; liability

The opening of a commercial bank in the United States a. does not require a charter. b. always requires a charter from a state government. c. always requires a charter from the federal government. d. requires a charter from a state or the federal government. e. requires a charter from both the state and federal government.

requires a charter from a state or the federal government.

The uniform global capital requirements mandated a minimum level of Tier 1 capital, which primarily consists of funds obtained from a. issuing commercial paper and bonds. b. retaining earnings and issuing commercial paper. c. retaining earnings and issuing common stock. d. issuing bonds and common stock.

retained earnings and issuing common stock

he Basel framework recommends capital requirements in proportion to: a. mortgages b. commercial paper c. liabilities d. risk-weighted assets

risk-weighted assets

n "off-balance-sheet commitment" that provides the bank's guarantee on the financial obligations of a borrower to a specific party is a a. standby letter of credit. b. federal funds agreement. c. repurchase agreement. d. discount window agreement.

standby letter of credit

____ loans are extended primarily to finance the purchase of fixed assets such as machinery. a. Term b. Working capital c. Federal fund d. Direct lease

term

The interest rate charged on loans between depository institutions is commonly referred to as the a. federal funds rate. b. discount rate. c. primary credit lending rate. d. none of the above

federal funds rate

The Basel Accord a. forces banks with greater risk to maintain more deposits. b. forces banks with greater risk to maintain more capital. c. forces banks with greater risk to maintain less capital. d. none of the above

forces banks with greater risk to maintain more capital

Which of the following statements is incorrect? a. The validity of a bank's estimated VAR is assessed with backtests in which the actual daily trading gains or losses are compared to the estimated VAR over a particular period. b. Some banks supplement the VAR estimate with stress tests. c. In general, the VAR model does not lend itself to determine capital requirements. d. All of the statements above are correct.

in general, the VAR model does not lend itself to determine capital requirements

The Depository Institutions Deregulation and Monetary Control Act of 1980 allowed banks to set their own a. reserve requirements. b. capital ratios. c. interest rates on savings deposits. d. corporate loan interest rates.

interest rates on savings deposits

Bank capital represents funds obtained through ____ and through ____. a. issuing stock; offering long-term CDs b. issuing repurchase agreements; issuing bonds c. issuing stock; retaining earnings d. offering long-term CDs; issuing bonds

issuing stock, retained earnings

____ is not a rating criterion used by the FDIC. a. Capital adequacy b. Off-balance sheet financing c. Asset quality d. Management e. Liquidity

off balance sheet financing

____ is not a rating criterion used by the Federal Deposit Insurance Corporation (FDIC). a. Capital adequacy b. Off-balance sheet financing c. Asset quality d. Management e. Liquidity

off balance sheet financing

During the credit crisis, all of the following occurred except: a. some securities firms were allowed to become bank holding companies. b. the Federal Reserve rescued American International Group, an insurance company. c. the Treasury injected funds into financial institutions. d. the Supreme Court ruled that the Federal Reserve had exceeded its authority by assisting Bear Stearns because Bear was a securities firm and not a commercial bank.

the supreme court ruled that the federal reserve had exceeded its authority by assisting bear stearns because Bear was a securities firm and not a commercial bank

The graphic comparison of maturities and annualized yields is known as the interest rate curve. A) True B) False

____ credit extended by the Fed to financial institutions may be used for any purpose and is available only to depository institutions that satisfy specific criteria reflecting financial soundness. a. Primary b. Secondary c. Tertiary d. None of the above

a. Primary

____ credit may be used for any purpose and is available only to depository institutions that meet specific requirements for financial soundness. a. Primary b. Secondary c. Tertiary d. None of the above

a. Primary

he ____ is not an indicator of economic growth. a. producer price index b. gross domestic product c. national income d. unemployment rate e. All of the above are indicators of economic growth.

a. Producer price index

Mortgage-backed securities are assigned ratings by: a. rating agencies. b. the Treasury. c. the Fed. d. the mortgage originator.

a. Rating agencies.

The ____ lag represents the time from when an economic problem exists until it is recognized. a. recognition b. adjustment c. implementation d. none of the above

a. Recognition

The time lag between when an economic problem arises and when it is reported in economic statistics is the a. recognition lag. b. implementation lag. c. impact lag. d. open-market lag.

a. Recognition lag.

The Fed's purchases of long-term Treasury securities in recent years were intended to: a. reduce long-term interest rates. b. reduce interest rates on credit cards and consumer loans. c. increase the federal funds rate. d. restore confidence in the market for these securities.

a. Reduce long-term interest rates.

____ are not considered capital market securities. a. Repurchase agreements b. Municipal bonds c. Corporate bonds d. Equity securities e. Mortgages

a. Repurchase agreements

Which of the following is not a specific criterion the FDIC uses to monitor banks? a. capital adequacy b. dollar value of fixed assets c. asset quality d. earnings e. sensitivity to financial market conditions

dollar value of fixed assets

The potential risk that financial problems can spread through financial institutions and the financial system is referred to as: a. systemic b. systematic c. unsystematic d. market

systemic

According to the Fisher effect, expectations of higher inflation cause savers to require a ___________ on savings. A) higher nominal interest rate B) higher real interest rate C) lower nominal interest rate D) lower real interest rate

According to the Fisher effect, if the real interest rate is zero, the nominal interest rate must be equal to the expected inflation rate. A) True B) False

According to the loanable funds theory, market interest rates are determined by the factors that control the supply of and demand for loanable funds. A) True B) False

According to the text, any political aspects that prevent a counterparty on a swap from meeting its payment obligations represent A) sovereign risk. B) basis risk. C) credit risk. D) none of the above

All other characteristics being equal, securities with ____________ liquidity would have to offer a ______________ yield to be preferred. A) lower; higher B) higher; higher C) lower; lower D) none of the above

An advantage of a ______ over other interest rate swaps is that the fixed-rate payer has the flexibility to avoid exchanging future interest payments. A) callable swap B) putable swap C) zero-coupon for floating swap D) forward swap

An arrangement which enables firms to exchange currencies at periodic intervals is called a A) currency swap. B) interest rate swap. C) swap exchange. D) eurobond swap.

An interest rate collar involves the purchase of an interest rate cap and the simultaneously sale of an interest rate floor. A) True B) False

As the secondary market for loans has become active, banks are more able to satisfy their liquidity needs with a _________ proportion of loans while achieving ________ profitability. A) higher; higher B) lower; lower C) higher; lower D) lower; higher

Assume a bank accepts deposits on Australian dollars (A$) and makes some fixed-rate loans in British pounds. Which of the following would reduce the bank's profit margin? A) the A$ appreciates against the pound B) the A$ is stable against the pound C) the A$ depreciates against the pound D) the British interest rates increase E) C and D

The _____________________ suggests that the market interest rate is determined by factors that control the supply of and demand for loanable funds. A) Fisher effect B) loanable funds theory C) real interest rate D) none of the above

The business demand for funds resulting from short-term investments is inversely related to the number of projects implemented and inversely related to the interest rate. A) True B) False

The duration of zero-coupon bonds will be _____ the duration of coupon bonds with the same maturity. A) lower than B) higher than C) the same as D) A or B, depending on the size of the coupon payment

The federal government demand for funds is said to be interest inelastic, or ___________ to interest rates. A) sensitive B) insensitive C) relatively sensitive as compared to other sectors D) none of the above

The most likely users of plain vanilla swaps would be A) commercial banks that focus on short-term consumer loans. B) savings institutions. C) manufacturing companies. D) municipal governments.

The option on a callable swap would most likely be exercised if interest rates A) rise. B) fall. C) remain constant. D) remain somewhat stable.

The preference for more liquid short-term securities places downward pressure on the slope of the yield curve. A) True B) False

The primary purpose of interest rate swaps is to reduce exchange rate risk. A) True B) False

The relationship between interest rates and expected inflation is often referred to as the loanable funds theory. A) True B) False

The required return to implement a given business project will be ______ if interest rates are lower. This implies that businesses will demand a ______ quantity of loanable funds when interest rates are lower. A) greater; lower B) lower; greater C) lower; lower D) greater; greater

The yield offered on a debt security is ____________ related to the prevailing risk-free rate and ___________ related to the security's risk premium. A) negatively; negatively B) positively; positively C) negatively; positively D) positively; negatively

There is risk that a firm involved in an interest rate swap may not meet its payment obligations; this risk is called systemic risk. A) True B) False

Treasury securities are exempt from federal and state income taxes. A) True B) False

_____________ is (are) least likely to be used as a method of reducing interest rate risk. A) Maturity matching B) Floating-rate loans C) Stock options D) Interest rate swaps E) Interest rate caps

The interest rate charged on loans from the Federal Reserve to banks is commonly referred to as the a. federal funds rate. b. primary credit lending rate. c. repo rate. d. none of the above

Primary credit lending rate

The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate one-year ahead is _________ percent. A) 2.8 B) 115 C) 103 D) 15.1

The expected impact of an increased expansion by businesses is an ___________ shift in the demand schedule and ______________ in the supply schedule. A) inward; an inward shift B) inward; an outward shift C) outward; an inward shift D) outward; no obvious change

When Japanese interest rates rise, and if exchange rate expectations remain unchanged, the most likely effect is that the supply of loanable funds provided by Japanese investors to the United States will _________________, and the U.S. interest rates will ____________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

Which of the following is not a reason for financial institutions to engage in interest rate swaps? A) to reduce interest rate risk B) to act as an intermediary C) to act as a dealer in swaps D) all of the above are reasons for financial institutions to engage in swaps

Which of the following is not a typical provision of an interest rate swap? A) the notional principal value to which the interest rates are applied to determine the interest payments involved B) the fixed interest rate C) the floating interest rate D) the underwriter of the bond E) All of the above are provisions of an interest rate swap.

Which of the following statements is incorrect? A) Interest rate swaps are sometimes used by financial institutions and other firms for speculative purposes. B) A primary reason for the popularity of interest rate swaps is the existence of market imperfections. C) Swaps are necessary for some financial institutions to obtain the maturities or rate sensitivities on funds that they desire. D) Most financial institutions that anticipate that interest rate will move in an unfavorable direction to not hedge their positions.

Which of the following statements is incorrect? A) The Fed's monetary policy is intended to control the economic conditions in the U.S. B) The Fed's monetary policy affects the supply of loanable funds, which affects interest rates. C) By influencing interest rates, the Fed is able to influence the amount of money that corporations and households are willing to borrow and spend. D) All of the statements above are true.

A downward-sloping yield curve indicates that Treasury securities with ______________ maturities offer ______________ annualized yields. A) longer; lower B) longer; higher C) shorter; lower D) shorter; higher E) Answers a and d are correct.

According to the pure expectations theory of the term structure of interest rates, the ______ the difference between the implied one-year forward rate and today's one-year interest rate, the ______ is the expected change in the one-year interest rate. A) greater; less B) less; greater C) greater; greater D) less; less E) C and D

An upward-sloping yield curve indicates that Treasury securities with ______________ maturities offer ______________ annualized yields. A) longer; lower B) longer; higher C) shorter; lower D) shorter; higher E) B and C

Assume that today, the annualized two-year interest rate is 12 percent, and the one-year interest rate is 9 percent. A three-year security has an annualized interest rate of 14 percent. What is the one-year forward rate two years from now? A) 12.67 percent B) 113 percent C) 195 percent D) 15.67 percent E) none of the above

Banks can resolve cash deficiencies by A) creating additional liabilities. B) selling assets. C) buying back common stock. D) increasing dividend payouts. E) A or B

During a period of _______________ interest rates, a bank's net interest margin will likely ___________ if its liabilities are more rate sensitive than its assets. A) decreasing; decrease B) increasing; increase C) decreasing; increase D) increasing; decrease E) answers c and d are correct

If a bank attempts to reduce exposure to interest rate risk by replacing long-term marketable securities with more floating-rate commercial loans, it is likely that the bank's A) default risk would decrease. B) default risk would increase. C) liquidity risk would increase. D) liquidity risk would decrease. E) B and C

If issuers of securities (borrowers) and investors suddenly expect interest rates to decrease, their actions to benefit from their expectations should cause A) long-term yields to rise. B) short-term yields to decrease. C) prices of long-term securities to decrease. D) A and B E) none of the above

Which of the following is a measure for banks to assess their exposure to interest rate risk? A) capital ratio B) leverage measure C) duration measurement D) gap ratio E) C and D

Which of the following is not a characteristic affecting the yields on debt securities? A) default risk B) liquidity C) tax status D) term to maturity E) All of the above affect yields on debt securities.

Households with ____ are served by ____. a. deficient funds; depository institutions and finance companies b. deficient funds; finance companies only c. savings; finance companies only d. savings; pension funds and finance companies

a. Deficient funds; depository institutions and finance companies

If security prices fully reflect all available information, the markets for these securities are a. efficient. b. primary. c. overvalued. d. undervalued.

a. Efficient.

The rate at which depository institutions effectively lend or borrow funds from each other is the ____. a. federal funds rate b. discount rate c. prime rate d. repo rate

a. Federal funds rate

____ obtain funds by issuing securities, then lend the funds to individuals and small businesses. a. Finance companies b. Securities firms c. Mutual funds d. Insurance companies

a. Finance companies

The yield on NCDs is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period. a. greater than; recessionary b. greater than; boom economy c. less than; boom economy d. less than; recessionary

a. Greater than; recessionary

The interest rate on a second mortgage is ____ on a first mortgage created at the same time, because the second mortgage is ____ the existing first mortgage in priority claim against the property in the event of default. a. higher than; behind b. equal to that; equal to c. lower than; ahead of d. higher than; ahead of e. lower than; behind

a. Higher than; behind

Equity securities have a ____ expected return than most long-term debt securities, and they exhibit a ____ degree of risk. a. higher; higher b. lower; lower c. lower; higher d. higher; lower

a. Higher; higher

The main provider(s) of funds to the U.S. Treasury is (are) a. households and businesses. b. foreign financial institutions. c. the Federal Reserve System. d. foreign nonfinancial sectors.

a. Households and businesses.

To decrease money supply, the Fed could ____ the reserve requirement ratio. a. increase b. stabilize c. reduce d. eliminate

a. Increase

When the Fed purchases securities, the total funds of commercial banks ____ by the market value of securities purchased by the Fed. This activity initiated by the FOMC's policy directive is referred to as a(n) ____ of money supply growth. a. increase; loosening b. decrease; tightening c. decrease; loosening d. increase; tightening e. none of the above

a. Increase; loosening

If the Fed desires to ____ the money supply using open market operations, it would instruct the trading desk to ____ government securities. a. increase; purchase b. increase; sell c. decrease; purchase d. Answers B and C are correct.

a. Increase; purchase

Total funds of commercial banks will initially ____ by the dollar amount of securities ____ by the Fed. a. increase; purchased b. increase; sold c. decrease; purchased d. A and B

a. Increase; purchased

The effective yield of a foreign money market security is ____ when the foreign currency strengthens against the dollar. a. increased b. reduced c. always negative d. unaffected

a. Increased

Federally insured mortgages guarantee a. loan repayment to the lending financial institution. b. that the interest rate will not increase during the life of the mortgage. c. the lending financial institution a selling price for the mortgage in the secondary market. d. all of the above

a. Loan repayment to the lending financial institution.

The Federal Reserve would be most inclined to use a stimulative monetary policy to cure a recession if oil prices are a. low and steady. b. low, but rising. c. very high, but declining slightly. d. very high and rising.

a. Low and steady.

If investors speculate in the underlying asset rather than derivative contracts on the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk. a. lower; lower b. lower; higher c. higher; lower d. higher; higher

a. Lower; lower

The form of money consisting of currency held by the public and checkable deposits at depository institutions is called a. M1. b. M2. c. M3. d. MMDA.

a. M1

Those financial markets that facilitate the flow of short-term funds are known as a. money markets. b. capital markets. c. primary markets. d. secondary markets.

a. Money markets.

The main reason that depository institutions experienced financial problems during the credit crisis was their investment in: a. mortgages. b. money market securities. c. stock. d. Treasury bonds.

a. Mortgages

There is a ____ relationship between the risk of a security and the expected return from investing in the security. a. positive b. negative c. indeterminable d. none of the above

a. Positive

A(n) ____ account provides checking services as well as interest. a. demand deposit b. negotiable order of withdrawal (NOW) c. passbook savings d. time deposit

Negotiable order of withdrawal (NOW)

A ____ is a type of loan commitment. a. standby letter of credit (SLC) b. note issuance facility (NIF) c. forward contract d. swap contract e. none of the above

Note issuance facility (NIF)

Money market deposit accounts differ from conventional time deposits in that they a. specify a maturity. b. offer limited check writing privileges. c. are less liquid. d. none of the above

Offer limited check writing privileges

An aggregate purchase by investors of low-yield instruments in favor of high-yield instruments places ____ pressure on the yields of low-yield securities and ____ on the yields of high-yield securities. a. upward; upward b. downward; downward c. upward; downward d. downward; upward

d. Downward; upward

The main source of funds for ____ is proceeds from selling securities to households and businesses, while their main use of funds is providing loans to households and businesses. a. savings institutions b. commercial banks c. mutual funds d. finance companies e. pension funds

d. Finance companies

____ mortgages enabled more people with relatively lower income, or high existing debt, or a small down payment to purchase homes. a. Prime b. Balloon c. Amortized d. Subprime

d. Subprime

Repurchase agreements are purchased by the Fed to a. temporarily decrease the aggregate level of bank funds. b. permanently increase the aggregate level of bank funds. c. permanently decrease the aggregate level of bank funds. d. temporarily increase the aggregate level of bank funds.

d. Temporarily increase the aggregate level of bank funds.

____ is (are) not a component of the Fed as it exists today. a. The Federal Advisory Council b. The Board of Governors c. National banks d. The U.S. Department of Commerce e. All of the above are components of the Fed.

d. The U.S. Department of Commerce

The voting members of the Federal Open Market Committee consist of the Board of Governors plus the a. President of the United States. b. Presidents of the 12 Fed district banks. c. Presidents of 5 Fed district banks. d. Federal Advisory Council.

c. Presidents of 5 Fed district banks

The ____ rate is the interest rate charged on Fed district bank loans to depository institutions. a. federal funds b. prime c. primary credit lending d. real

c. Primary credit lending

____ are backed by conventional mortgages. a. Ginnie Mae mortgage-backed securities b. Federal Reserve mortgage-backed securities c. Private-label pass-through securities d. Shared appreciation pass-through securities

c. Private-label pass-through securities

____ open market operations offset the impact of other conditions that affect the level of funds. a. Active b. Passive c. Dynamic d. Defensive

d. Defensive

The key reason for regulatory examinations (such as CAMELS ratings) is to a. rate past performance. b. detect problems of a bank in time to correct them. c. check for embezzlement. d. monitor reserve requirements.

detect problems of a bank in time to correct them

A bank can usually simultaneously maximize its return on assets and minimize credit risk. A) True B) False

A bank's net interest margin is commonly defined as A) interest revenues minus interest expenses. B) (interest revenues minus interest expenses)/total assets. C) (interest revenues minus interest expenses)/total liabilities. D) (interest revenues minus interest expenses)/capital.

A firm in the 35 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7 percent. To match this yield, taxable securities must offer a before-tax yield of A) 7.0 percent. B) 10.8 percent. C) 20.0 percent. D) none of the above

A firm is involved in an agreement in which it makes payments in periods when a market interest rate rises above an interest rate level specified in the agreement. This means that the firm has A) purchased an interest rate cap. B) sold an interest rate cap. C) purchased an interest rate floor. D) sold an interest rate floor.

A forward swap allows an institution to lock in the terms of the arrangement today, and the swap period begins immediately. A) True B) False

A positive gap (or gap ratio of more than 1.00) suggests that rate-sensitive liabilities exceed rate-sensitive assets. A) True B) False

A putable swap gives the party making the fixed-rate payments the right to terminate the swap. A) True B) False

Which of the following is not an off-balance sheet activity? a. highly leveraged transactions (HLTs) b. standby letters of credit c. forward contracts d. swap contracts

highly leveraged transactions (HLTs)

____ do not specify a maturity and provide limited check-writing ability (they allow only a limited number of transactions per month). a. Money market deposit accounts (MMDAs) b. Negotiable CDs (NCDs) c. Retail CDs d. Callable CDs e. Negotiable order of withdrawal (NOW) accounts

MMDAs

Transaction deposits do not include a. demand deposits. b. NCDs. c. NOW accounts. d. all of the above are transactions deposits

NCDs

Some types of debt securities always offer a higher yield than others. A) True B) False

Deposit insurance has a limit of: a. $10,000. b. $25,000. c. $100,000. d. $250,000.

250,000

A __________ swap involves the exchange of fixed-rate payments for floating-rate payments that are capped. A) rate-capped B) zero-coupon-for-floating C) callable D) putable

A bank that holds a greater percentage of traditional demand deposits and loans will likely incur ______ non-interest expenses and have a ______ net interest margin than other banks of the same size (assuming that its loan losses are no higher than those at other banks). A) greater; higher B) greater; lower C) less; higher D) less; lower

A bank's net interest margin will likely decline if it has a large amount of A) rate-sensitive assets and no rate-sensitive liabilities. B) rate-sensitive liabilities and no rate-sensitive assets. C) loans to technology firms. D) real estate loans.

A firm is involved in an agreement in which it receives payments in periods when a market interest rate rises above an interest rate level specified in the agreement. This means that the firm has A) purchased an interest rate cap. B) sold an interest rate cap. C) purchased an interest rate floor. D) sold an interest rate floor.

A plain vanilla swap enables firms to exchange ______ for ______. A) fixed rate payments; variable interest rate payments B) a high interest rate foreign currency; a low interest rate foreign currency C) a low interest rate foreign currency; a high interest rate foreign currency D) bonds; stocks that pay dividends

A plain vanilla swap is especially beneficial when interest rates are expected to A) rise consistently. B) decline consistently. C) be stable. D) rise and then decline.

A rate-capped swap may limit the fixed-rate payer's ability to effectively hedge against interest rate risk. A) True B) False

A(n) ______ swap involves an exchange of interest payments over a swap period that does not begin until a specified future point in time. A) forward B) extendable C) callable D) putable

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place ______________ pressure on the demand for shortterm funds by borrowers and the yield curve will be ____________ sloping. A) upward; downward B) downward; upward C) upward; upward D) downward; downward

According to segmented markets theory, if investors have mostly short-term funds available and borrowers want long-term funds, there would be _________ pressure on the supply of short-term funds provided by investors and _________ pressure on the yield of long-term securities. A) upward; upward B) downward; downward C) upward; downward D) downward; upward

Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate according to the pure expectations theory? A) 15.08 percent B) 3.00 percent C) 12.00 percent D) 12.62 percent E) 11.41 percent

Assume that a yield curve is influenced by interest rate expectations and a liquidity premium. Assume the yield curve is initially flat. If liquidity suddenly was no longer important, the yield curve would now have a ______ (assuming no other changes). A) slight downward slope B) slight upward slope C) steep upward slope D) steep downward slope

Assume that foreign investors who have invested in U.S. securities decide to decrease their holdings of U.S. securities and to instead increase their holdings of securities in their own countries. This should cause the supply of loanable funds in the United States to ______ and should place ______ pressure on U.S. interest rates. A) decrease; upward B) decrease; downward C) increase; downward D) increase; upward

Assume that the Treasury bond yield today is 2% higher than it was one year ago. Also assume that the credit (default) risk premium of an A-rated bond declined by 0.4% for one year ago. A newly issued A-rated bond will likely offer a yield today that is _______ the yield that was offered on an Arated bond issued one year ago. A) greater than B) equal to C) less than D) A or B are both common

Banks can increase their potential interest revenues by restructuring their asset portfolio to contain less ______ and more ______. A) Treasury bonds; commercial loans B) Treasury bonds; excess reserves C) consumer loans; Treasury bills D) none of the above

Buyers of credit default swaps are most likely going to receive a payment from the seller of credit default swaps when the economy: A) is very weak. B) is stable. C) experiences high growth. D) experiences low inflation.

Canada and the U.S. are major trading partners. If Canada experiences a major increase in economic growth, it could place ____ pressure on Canadian interest rates and _____ pressure on U.S. interest rates. A) upward; upward B) upward; downward C) downward; downward D) downward; upward

Credit ratings are most commonly used to indicate which financial institutions have available funds that they can lend to borrowers. A) True B) False

Due to expectations of lower inflation in the future, we would typically expect the supply of loanable funds to ________________ and the demand for loanable funds to ______________. A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease

Durango Bank has $2 million in rate-sensitive liabilities and $3 million in rate sensitive assets. Durango's gap ratio is ____________. A) 1.5 B) 0.67 C) $1 million E) none of the above

Each bank may have its own classification system of interest rate sensitivity, because there is no perfect measurement of the gap. A) True B) False

Financial institutions such as U.S. savings institutions and commercial banks traditionally had fewer interest rate-sensitive ___________ than ____________ and therefore were adversely affected by ____________ interest rates. A) assets; liabilities; increasing B) liabilities; assets; decreasing C) liabilities; assets; increasing D) none of the above

Financial institutions with _________ interest rate-sensitive liabilities than assets are ___________ affected by rising interest rates. A) more; adversely B) fewer; adversely C) more; favorably D) none of the above

Floating-rate loans cannot completely eliminate interest rate risk; if the cost of funds is changing more frequently than the rate on assets, the bank's net interest margin is still affected by interest rate fluctuations. A) True B) False

Holding other factors such as risk constant, the relationship between the maturity and annualized yield of securities is called the A) term structure of interest rates. B) default structure of interest rates. C) liquidity structure of interest rates. D) tax structure of interest rates. E) none of the above

If a bank sells CD futures, it ______ of rising interest rates and ______ of declining interest rates on its interest expenses. A) reduces the potential adverse effect; reduces the potential favorable effect B) increases the potential adverse effect; increases the potential favorable effect C) decreases the potential adverse effect; increases the potential favorable effect D) increases the potential adverse effect; decreases the potential favorable effect

If a firm negotiates a plain vanilla swap, it will provide ______ payments in exchange for ______ payments. A) fixed-rate; floating-rate B) floating-rate; fixed rate C) stock dividend; fixed-rate D) stock dividend; floating rate

If a large bank that has taken numerous swap positions and guaranteed many other swap positions fails, there could be several defaults on swap payments. A) True B) False

If a security can easily be converted to cash without a loss in value, it A) is liquid. B) has a high after-tax yield. C) has high default risk. D) is illiquid.

If a yield curve is upward sloping, the investment strategy of buying long-term securities, then selling them after a short period (say, one year) is called A) riding the yield curve. B) liquidating the yield curve. C) segmenting the yield curve. D) a forward roll. E) none of the above

If economic expansion is expected to increase, then demand for loanable funds should ______ and interest rates should ______. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

If foreign interest rates fall, foreign firms and governments would likely reduce their demand for U.S. funds. A) True B) False

If inflation turns out to be lower than expected A) savers benefit. B) borrowers benefit while savers are not affected. C) savers and borrowers are equally affected. D) savers are adversely affected but borrower benefit.

If liquidity influences the yield curve, but is not considered when deriving the forward interest rate, the forward interest rate ______ the market's expectation of the future interest rate. A) overestimates B) accurately estimates C) underestimates D) is an unbiased forecast of (it has an equal chance of overestimating or underestimating)

If the Treasury uses a relatively large proportion of ______ debt to finance the deficit, this may place upward pressure on ______ interest rates, and corporations may reduce their investment in fixed assets. A) long-term; long-term B) long-term; short-term C) short-term; long-term D) B and C

If the currency mix of a bank's assets is similar to that of its liabilities and the overall rate sensitivity of its assets and liabilities is similar, interest rate risk is completely nonexistent. A) True B) False

In an interest rate swap, a bank whose liabilities are ____________ rate sensitive than its assets can swap payments with a ____________ interest rate in exchange for payments with a ______________ interest rate. A) more; fixed; variable B) more; variable; fixed C) less; fixed; variable D) less; fixed; fixed E) none of the above

In general, suppliers of loanable funds are willing to supply more funds if the interest rate is higher. A) True B) False

Interest rate floors are commonly used to hedge against lower interest rates. A) True B) False

Most loan sales enable the bank originating the loan to continue servicing the loan. A) True B) False

Other things being equal assets with ____________ maturities and _______ frequent coupon payments have shorter durations. A) shorter; more B) shorter; less C) longer; more D) longer; less

Other things being equal, foreign governments and corporations would demand ________ U.S. funds if their local interest rates were lower than U.S. rates. Therefore, for a given set of foreign interest rates, foreign demand for U.S. funds is _______ related to U.S. interest rates. A) less; inversely B) more; positively C) less; positively D) more; inversely

Securities that offer ________ liquidity will offer a _________ yield to be preferred. A) lower; higher B) lower; lower C) higher; higher D) B and C

Sovereign risk differs from credit risk because it is dependent on the financial status of the government rather than the counterparty itself. A) True B) False

The Fisher effect states that the A) nominal interest rate equals the expected inflation rate plus the real rate of interest. B) nominal interest rate equals the real rate of interest minus the expected inflation rate. C) real rate of interest equals the nominal interest rate plus the expected inflation rate. D) expected inflation rate equals the nominal interest rate plus the real rate of interest.

The ____________ sector is the largest supplier of loanable funds. A) household B) government C) business D) none of the above

The dollar amount to be received (or paid) by the seller of the interest rate cap based on the forecast of LIBOR assumed above over the three-year period is $__________. A) -500,000 B) 500,000 C) -1,500,000 D) 1,500,000 E) none of the above

The equilibrium interest rate A) equates the aggregate demand for funds with the aggregate supply of loanable funds. B) equates the elasticity of the aggregate demand and supply for loanable funds. C) decreases as the aggregate supply of loanable funds decreases. D) increases as the aggregate demand for loanable funds decreases.

The equilibrium interest rate should A) fall when the aggregate supply funds exceed aggregate demand for funds. B) rise when the aggregate supply of funds exceeds aggregate demand for funds. C) fall when the aggregate demand for funds exceeds aggregate supply of funds. D) rise when aggregate demand for funds equals aggregate supply of funds. E) B and C

The forward rate is commonly used to represent the market's forecast of the future interest rate. A) True B) False

The greater the ______, the greater the amount of assets per dollar worth of equity. A) leverage measure B) ratio of equity to debt C) capital ratio D) proportion of loans to securities in the asset portfolio

The higher a bond rating, the lower the perceived default risk. A) True B) False

The option on a putable swap would most likely be exercised if interest rates A) rise. B) fall. C) remain constant. D) remain somewhat stable.

The risk of a loss due to closing out a transaction is referred to as _________________ risk. A) settlement B) credit C) interest rate D) exchange rate E) none of the above

The supply of loanable funds in the U.S. is partly determined by the monetary policy implemented by the Federal Reserve System. A) True B) False

The term structure of interest rates defines the relationship between maturity and annualized yield, holding other factors such as risk constant. A) True B) False

The total payments received (or paid) by Lizard, including the initial fee, are $______________. A) 500,000 B) -500,000 C) -1,500,000 D) 1,500,000 E) none of the above

To forecast interest rates using the Fisher effect, the real interest rate for an upcoming period can be forecasted by subtracting the expected inflation rate over that period from the nominal interest rate quoted for that period. A) True B) False

What is the basis of the relationship between the Fisher effect and the loanable funds theory? A) the saver's desire to maintain the existing real rate of interest B) the borrower's desire to achieve a positive real rate of interest C) the saver's desire to achieve a negative real rate of interest D) B and C

Which of the following is a valid representation of the Fisher effect? A) i = E(INF) + IR B) IR= E(INF) + i C) E(INF) = i + IR D) none of the above

The term ____ involves decisions such as how much funding to obtain, and how to invest the proceeds to expand operations. a. corporate finance b. investment management c. financial markets and institutions d. none of the above

A. Corporate finance

Which type of savings account transfers funds to a checking account when checks are written? a. ATS b. passbook savings c. CDs d. MMDAs

ATS

Money market deposit accounts (MMDAs) a. require a maturity of 6 months or longer. b. allow a limited number of checks to be written against the account. c. pay a higher interest rate than CDs. d. none of the above

Allow a limited number of checks to be written against the account.

The __________ of CD futures ________ the potential adverse effect of rising interest rates on a bank's interest expenses. A) sale; increases B) sale; reduces C) purchase; reduces D) both A and C are correct

A __________ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing a ___________ shift in the demand schedule. A) higher; inward B) higher; outward C) lower; outward D) none of the above

A __________ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing an ___________ shift in the demand schedule. A) higher; inward B) higher; outward C) lower; outward D) none of the above

A(n) ______ allows the party making fixed payments to extend the swap period. A) forward B) extendable C) callable D) putable

According to the Fisher effect, when the inflation rate is lower than anticipated, the real interest rate is relatively low. A) True B) False

According to the segmented markets theory, if most investors suddenly preferred to invest in short-term securities and most borrowers suddenly preferred to issue long-term securities there would be A) upward pressure on the price of long-term securities. B) upward pressure on the price of short-term securities. C) downward pressure on the yield of long-term securities. D) A and C

According to the segmented markets theory, the term structure of interest rates is determined solely by expectations of future interest rates. A) True B) False

An equity swap involves the exchange of dividend payments for payments linked to the degree of change in a stock index. A) True B) False

An equity swap involves the exchange of interest payments for payments linked to the degree of change in a bond index. A) True B) False

An interest rate cap offers payments in periods when a specified interest rate index exceeds a specified floor interest rate. A) True B) False

An investor's tax rate is 30 percent. What must the before-tax yield on a security be to have an after-tax yield of 11 percent? A) 7.7 percent B) 15.71 percent C) 130 percent D) 11.00 percent E) none of the above

Assume a U.S. savings institution funds its fixed-rate mortgages by attracting short-term deposits. If it engages in an interest rate swap, but the index on the swap does not move in perfect tandem with its cost of deposits, this reflects A) sovereign risk. B) basis risk. C) credit risk. D) none of the above

Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large number of T-bills. This action will _________________ the supply of T-bills in the market and places __________________ pressure on the yield of T-bills. A) decrease; downward B) decrease; upward C) increase; upward D) increase; downward

Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-year security is 7 percent. If the liquidity premium on a two-year security is 0.4 percent, then the one-year forward rate is A) 8.0 percent. B) 7.6 percent. C) 3.0 percent. D) 7.0 percent.

Assume the yield curve is flat. If investors flood the short-term market and avoid the long-term market, they may cause the yield curve to A) remain flat. B) become upward sloping. C) become downward sloping. D) none of the above

At any given point in time, households would demand a _______ quantity of loanable funds at________ rates of interest. A) greater; higher B) greater; lower C) smaller; lower D) none of the above

Banks are more liquid as a result of securitization because it allows them to request repayment of the loan principal from the borrower upon demand. A) True B) False

Banks can reduce their required capital levels by A) increasing their loans. B) reducing their loans. C) increasing their dividends. D) obtaining more deposits.

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

During a period of rising interest rates, a bank's net interest margin will likely ______ if its liabilities are ______ its assets. A) increase; more rate-sensitive than B) decrease; more rate-sensitive than C) increase; equally rate-sensitive as D) decrease; equally rate-sensitive as

For a commercial bank, when the average duration of assets exceeds the average duration of liabilities, the duration gap is A) zero. B) positive. C) negative. D) B or C

For a given set of foreign interest rates, the quantity of U.S. loanable funds demanded by foreign governments or firms will be _________________ U.S. interest rates. A) positively related to B) inversely related to C) unrelated to D) none of the above

For most banks, the average duration of liabilities exceeds the average duration of assets, so the duration gap is positive. A) True B) False

Hewitt Inc. has entered into an equity swap arrangement that allows it to swap a fixed interest rate of 8 percent in exchange for the rate of appreciation on the Dow Jones Industrial Average each year over a three-year period. The notional principal is $1 million. If the Dow depreciates by 1 percent, Hewitt will A) have to make a payment of $70,000. B) have to make a payment of $90,000. C) receive a payment of $70,000. D) receive a payment of $90,000. E) none of the above

If a U.S. institution in a forward swap would like to lock in the fixed rate that it will pay when the swap period begins, it is probably concerned that interest rates will ___________; the counterparty is likely adversely affected by ____________ interest rates. A) increase; increasing B) increase; declining C) decrease; declining D) decrease; increasing E) none of the above

If a bank desired to maximize its net interest margin, it would best achieve its goal by attempting to obtain most of its funds through ______ and use most of its funds for ______ (assuming that all loans will be repaid). A) traditional demand deposits; commercial loans B) traditional demand deposits; consumer loans C) NOW accounts; consumer loans D) NOW accounts; commercial loans

If a bank expected interest rates to consistently ___________ over time, it will consider allocating most funds to rate-__________ assets. A) decrease; sensitive B) decrease; insensitive C) increase; insensitive D) none of the above

If a bank has a ______________ duration gap, its average asset duration is probably ________________ than its liability duration. A) negative; smaller B) positive; larger C) negative; larger D) none of the above

If a bank obtains a relatively large portion of its funds from conventional demand deposits, interest expenses should be relatively ________, while its noninterest expenses should be relatively ______. A) high; low B) low; high C) high; high D) low; low E) none of the above

If the liquidity premium theory completely describes the term structure of interest rates, then, on the average, the yield curve should be A) flat. B) downward sloping. C) upward sloping. D) none of the above.

If all other characteristics are similar, ______ would have to offer ______. A) taxable securities; a higher after-tax yield than tax-exempt securities B) taxable securities; a higher before-tax yield than tax-exempt securities C) tax-exempt securities; a higher after-tax yield than taxable securities D) tax-exempt securities; a higher before-tax yield than taxable securities

If inflation and nominal interest rates move more closely together over time than they did in earlier periods, this would ________ the volatility of the real interest rate movements over time. A) increase B) decrease C) have an effect, which cannot be determined with above information, on D) have no effect on

If interest rates ____________, banks with ____________ duration gaps will be ________________ affected. A) rise; positive; positively B) rise; positive; adversely C) decrease; positive; adversely D) decrease; negative; positively E) none of the above

If interest rates are expected to decrease, the yield on new short-term securities may be expected to _______________, and the yield curve should be ______________ sloping. A) increase; upward B) increase; downward C) decrease; upward D) decrease; downward

If investors shift funds from stocks into bank deposits, this ______ the supply of loanable funds, and places ______ pressure on interest rates. A) increases; upward B) increases; downward C) decreases; downward D) decreases; upward

If liquidity influences the yield curve, the forward rate underestimates the market's expectation of the future interest rate. A) True B) False

If research showed that anticipation about future interest rates was the only important factor for all investors in choosing short-term or long-term securities, this would support the argument made by the A) liquidity premium theory. B) expectations theory. C) segmented markets theory. D) A and B

If the aggregate demand for loanable funds increases without a corresponding ___________ in aggregate supply, there will be a ___________ of loanable funds. A) increase; surplus B) increase; shortage C) decrease; surplus D) decrease; shortage

If the aggregate demand for loanable funds increases without a corresponding increase in aggregate supply, there will be a surplus of loanable funds. A) True B) False

If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting ______ in interest rates. A) no changes B) a slight decrease C) a slight increase D) a large increase

If the real interest rate is expected by a particular person to become negative, then the purchasing power of his or her savings would be ________________, as the inflation rate is expected to be __________________ the existing nominal interest rate. A) decreasing; less than B) decreasing; greater than C) increasing; greater than D) increasing; less than

In a period when interest rates are expected to rise, __________ institutions will want a fixed-forfloating swap, and the fixed rate specified on interest rate swaps will be __________ under these conditions. A) many; lower B) many; higher C) few; lower D) few; higher

In a(n) ___________ swap, the fixed-rate payer makes a single payment at the maturity date of the swap agreement, while the floating-rate payer makes periodic payments throughout the swap period. A) rate-capped B) zero-coupon-for-floating C) extendable D) callable

In general, securities with ____________ characteristics will offer _________ yields. A) favorable; higher B) favorable; lower C) unfavorable; lower D) none of the above

Interest rate swaps are rarely used by companies that issue bonds. A) True B) False

International diversification of loans can best reduce the bank's overall default risk if A) the countries where loans are given are clustered together in a single continent. B) the countries where loans are given have economic cycles that do not move together over time. C) A and B D) none of the above

Investors will always prefer the purchase of risk-free Treasury securities, since other securities have a higher level of risk. A) True B) False

Other things being equal, a _________ quantity of U.S. funds would be demanded by foreign governments and corporations if their domestic interest rates were _______ relative to U.S. rates. A) smaller; high B) larger; high C) larger; low D) none of the above

Other things being equal, a smaller quantity of U.S. funds would be demanded by foreign governments and corporations if their domestic interest rates were high relative to U.S. rates. A) True B) False

Other things equal, assets with shorter maturities have ______ durations. Assets that generate more frequent coupon payments have ______ durations. A) shorter; longer B) shorter; shorter C) longer; shorter D) longer; longer

Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri's $800 million in assets are rate-sensitive, while $600 million of its liabilities are rate-sensitive. Petri Bank's gap ratio is _________ percent. A) 37.5 B) 50.0 C) 100.0 D) 40.0

Ringo Bank has a profit after taxes of $1.5 million, total assets of $50 million, and shareholder's equity of $30 million. Ringo's return on equity (ROE) is _________ percent. A) 1.8 B) 5.0 C) 3.0 D) 1.5 E) none of the above

Since the aggregate demand for loanable funds is the sum of the quantities demanded by the separate sectors, and since most of these sectors are likely to demand a larger quantity of funds at lower interest rates (other things being equal), the aggregate demand for loanable funds is positively related to interest rates at any point in time. A) True B) False

The Sarbanes-Oxley Act has had little impact on the monitoring conducted by the board members of commercial banks. A) True B) False

Vaughn Corporation is considering the issue of commercial paper and would like to know the yield it should offer on its commercial paper. The corporation believes that a 0.2 percent default risk premium, a 0.1 percent liquidity premium, and a 0.3 percent tax adjustment are necessary to sell its commercial paper to investors. Furthermore, annualized T-bill rates are 7 percent. Based on this information, Vaughn should offer __________ percent on its commercial paper. A) 8.0 B) 7.6 C) 7.5 D) 7.9 E) none of the above

When expectations theory is combined with the liquidity theory, the yield on a security will always be equal to the yield from consecutive investments in shorter-term securities over the same investment horizon. A) True B) False

Which of the following financial institutions would be most willing to swap variable-rate payments for fixed-rate payments in order to reduce exposure to interest rate risk? A) one whose assets and liabilities are equally interest-rate sensitive B) one whose assets are more interest-rate sensitive than its liabilities C) one whose liabilities are more interest-rate sensitive than its assets D) one whose gap ratio is equal to 1.0

Which of the following is not a likely method used by a bank to reduce interest rate risk? A) maturity matching B) using fixed-rate loans C) using interest rate futures contracts D) using interest rate caps

________ risk in a swap is typically not overwhelming because the affected party can simply discontinue its payments to the other party. A) Basis B) Credit C) Sovereign D) none of the above

________ risk prevents the interest rate swap from completely eliminating a financial institution's exposure to interest rate risk. A) Credit B) Basis C) Sovereign D) none of the above

____________ is not a method used to assess interest rate risk. A) Gap analysis B) Ratio analysis C) Duration analysis D) Regression analysis E) All of the above are methods to assess interest rate risk.

The ____ is the fund used to cover insured depositors. a. Bank Insurance Fund b. Federal Deposit Insurance Corporation (FDIC) c. money market mutual fund d. growth fund e. none of the above

Bank insurance fund

Commercial banks are not allowed to invest in a. Treasury securities. b. Freddie Mac securities. c. Fannie Mae securities. d. Banks can invest in all securities mentioned above.

Banks can invest in all securities mentioned above

When banks need funding for just a few days, they would most likely a. issue bonds and then call them. b. issue stock and then repurchase it. c. borrow in the federal funds market. d. issue NCDs.

Borrow in the federal funds market

Which of the following will probably not result in an increase in the business demand for loanable funds? A) an increase in positive net present value (NPV) projects B) a reduction in interest rates on business loans C) a recession D) none of the above

A common maturity of a credit default swap contract is: A) one month B) three months C) five years D) 25 years

A firm is involved in an agreement in which it receives payments in periods when a market interest rate falls below an interest rate level specified in the agreement. This means that the firm has A) purchased an interest rate cap. B) sold an interest rate cap. C) purchased an interest rate floor. D) sold an interest rate floor.

A gap ratio of less than one suggests that A) rate-sensitive assets exceed rate-sensitive liabilities. B) an increase in interest rates would increase the bank's net interest margin. C) rate-sensitive liabilities exceed rate-sensitive assets. D) a decrease in interest rates would decrease the bank's net interest margin. E) B and D

A typical bank will attempt to earn a A) maximum return and maintain credit risk at a high level. B) maximum return and maintain credit risk at a low level. C) reasonable return and maintain credit risk at a tolerable level. D) very safe return and maintain credit risk at a high level.

A(n) ______ swap allows the party making fixed-rate payments to terminate the swap prior to maturity. A) forward B) extendable C) callable D) putable

According to pure expectations theory, if interest rates are expected to decrease, there will be __________ pressure on the demand for short-term funds by borrowers and __________ pressure on the demand for long-term funds issued by borrowers. A) upward; upward B) downward; downward C) upward; downward D) downward; upward

According to the liquidity premium theory, the expected yield on a two-year security will ______ the expected yield from consecutive investments in one-year securities. A) equal B) be less than C) be greater than D) B and C are possible, depending on the size of the liquidity premium

An equity swap involves the exchange of A) preferred stock for common stock. B) interest payments for an equity position in the counterparty's firm. C) interest payments for payments linked to the degree of change in a stock index. D) interest payments for newly issued stock by financial institutions.

As a result of more favorable economic conditions, there is a(n) __________ demand for loanable funds, causing an _________ shift in the demand curve. A) decreased; inward B) decreased; outward C) increased; outward D) increased; inward

Assume an investor's tax rate is 25 percent. The before-tax yield on a security is 12 percent. What is the after-tax yield? A) 16.00 percent B) 9.25 percent C) 9.00 percent D) 3.00 percent E) none of the above

Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to A) become inverted. B) become flat. C) become upward sloping. D) be unaffected.

Banks can increase their liquidity position by restructuring their asset portfolio to contain less ______ and more ______. A) excess reserves; Treasury bills B) Treasury bonds; corporate bonds C) loans; Treasury bills D) none of the above

Because riskier assets offer ____________ returns, a bank's strategy to increase its return will typically entail a(n) ______________ in the overall credit risk of its asset portfolio. A) lower; increase B) lower; decrease C) higher; increase D) higher; decrease E) none of the above

Businesses demand loanable funds to A) finance installment debt. B) subsidize other companies. C) invest in fixed and short-term assets. D) none of the above

Due to expectations of higher inflation in the future, we would typically expect the supply of loanable funds to ___________________ and the demand for loanable funds to ____________. A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease

For most banks, the average duration of assets _________ the average duration of liabilities, so the duration gap is __________. A) exceeds; zero B) exceeds; negative C) exceeds; positive D) is less than; negative

If a bank has assets and liabilities in dollars and euros, its exposure to interest rate risk can best be minimized if the A) currency mix of assets is similar to that of liabilities. B) overall rate-sensitivity of assets and liabilities are similar. C) rate sensitivity of assets and liabilities is matched for each currency. D) A and B

If economic expansion is expected to decrease, the demand for loanable funds should ______ and interest rates should ______. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

If inflation is expected to decrease, then A) savers will provide less funds at the existing equilibrium interest rate. B) the equilibrium interest rate will increase. C) the equilibrium interest rate will decrease. D) borrowers will demand more funds at the existing equilibrium interest rate.

If shorter term securities have higher annualized yields than longer term securities, the yield curve A) is horizontal. B) is upward sloping. C) is downward sloping. D) cannot be determined unless we know additional information (such as the level of market interest rates).

If the federal government needs to borrow additional funds, this borrowing reflects a(n) _________ in the supply of loanable funds, and a(n) _________ in the demand for loanable funds. A) increase; no change B) decrease; no change C) no change; increase D) no change; decrease

Swap transactions are only used to A) hedge against upward interest rate movements. B) hedge against downward interest rate movements. C) speculate. D) none of the above

In a regression of a bank's stock return on an interest rate proxy and market returns, a ____________ coefficient for the interest rate variable suggests that bank performance is _____________ affected by ___________ interest rates. A) positive; adversely; rising B) positive; favorably; declining C) negative; adversely; rising D) negative; favorably; rising E) none of the above

In a swap arrangement, the most common index used for floating-rate payments would be the A) coupon rate on existing bonds. B) stock dividend rate based on a U.S. stock index. C) London Interbank Offer Rate (LIBOR). D) Treasury bond yield.

Other things equal, the yield required on A-rated bonds should be ______ the yield required on Brated bonds whose other characteristics are exactly the same. A) greater than B) equal to C) less than D) All of the above are possible, depending on the size of the bond offering.

ROE is defined as A) Net profit after taxes x (Assets/Equity) B) (Net profit after taxes/Assets)x Equity C) (Net profit after taxes/Assets)x (Assets/Equity) D) Net profit after taxes x (Equity/Assets)

Research on bank mergers has generally found that the acquiring bank's stock price __________ at the time of the acquisition. A) rises moderately B) rises substantially C) declines or remains unchanged D) all of the above occur with equal frequency

Savings institutions participate in the swap market primarily to A) serve as an intermediary by matching up two parties in a swap. B) serve as a dealer by taking the counterparty position in a swap. C) reduce interest rate risk. D) none of the above

The advantage of a rate-capped interest rate swap to a party exchanging fixed payments for floating payments (relative to a plain vanilla swap) is that A) there is a minimum limit set on interest rate payments received. B) there is a maximum limit set on the interest payments it will provide. C) it receives an up-front fee. D) none of the above

The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate two years ahead is _________ percent. A) 1.8 B) 9.0 C) 15.0 D) none of the above

The degree to which the Treasury's debt management policy could affect the term structure of interest rates is greatest if A) most debt is financed by foreign investors. B) the Treasury's debt level is small. C) maturity markets are segmented. D) A and B

The federal government demand for loanable funds is __________. If the budget deficit was expected to increase, the federal government demand for loanable funds would ________. A) interest elastic; decrease B) interest elastic; increase C) interest inelastic; increase D) interest inelastic; decrease

The performance of a bank that continually concentrates in short-term deposits in euros and adjustable-rate dollar loans with equal rate-sensitivity is A) unaffected if European interest rates increase and U.S. rates decrease. B) unaffected if U.S. interest rates increase and European interest rates decrease. C) adversely affected if European interest rates increase and U.S. rates decrease. D) adversely affected if U.S. interest rates increase and European rates decrease. E) A and B

The real interest rate can be forecasted by subtracting the ____________ from the ___________ for that period. A) nominal interest rate; expected inflation rate B) prime rate; nominal interest rate C) expected inflation rate; nominal interest rate D) prime rate; expected inflation rate

The theory for the term structure of interest rates that says the shape of the yield curve is determined solely by expectations of future interest rates is called the A) segmented markets theory. B) liquidity premium theory. C) pure expectations theory. D) theory of rational expectations.

The theory of the term structure of interest rates, which states that investors and borrowers choose securities with maturities that satisfy their forecasted cash needs, is the A) pure expectations theory. B) liquidity premium theory. C) segmented markets theory. D) liquidity habitat theory.

The yield curve for corporate bonds. A) would typically lie below the Treasury yield curve. B) is identical to the Treasury yield curve. C) typically has the same slope as the Treasury yield curve. D) is irrelevant to investors.

Which of the following is least likely to affect household demand for loanable funds? A) a decrease in tax rates B) an increase in interest rates C) a reduction in positive net present value (NPV) projects available D) All of the above are equally likely to affect household demand for loanable funds.

Which of the following is likely to cause a decrease in the equilibrium U.S. interest rate, other things being equal? A) a decrease in savings by foreign savers B) an increase in inflation C) pessimistic economic projections that cause businesses to reduce expansion plans D) a decrease in savings by U.S. households

Which of the following is not true regarding foreign interest rates? A) The large flow of funds between countries causes interest rates in any given country to become more susceptible to interest rate movements in other countries. B) The expectations of a strong dollar should cause a flow of funds to the U.S. C) An increase in a foreign country's interest rates will encourage investors in that country to invest their funds in other countries. D) All of the above are true regarding foreign interest rates.

Which of the following statements is not true with respect to debt securities? A) Some types of debt securities always offer a higher yield than others. B) Debt securities offer different yields because they exhibit different characteristics that influence the offered yield. C) In general, securities with favorable characteristics will offer higher yields to entice investors. D) All of the above are true with respect to debt securities.

Which of the following statements is incorrect? a. Banks have expanded their business across services over time. b. Acquisitions have been a convenient method for banks to grow quickly and capitalize on economies of scale. c. The banking industry has become less concentrated in recent years. d. All of the statements above are correct.

C: The banking industry has become less concentrated in recent years.

A ______ swap allows the party making floating-rate payments to terminate the swap prior to maturity. A) zero coupon-for-floating B) forward C) callable D) putable

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place ______________ pressure on the demand for longterm funds issued by borrowers and the yield curve will be ____________ sloping. A) upward; downward B) downward; upward C) upward; upward D) downward; downward

An interest rate collar represents the __________ of an interest rate cap and a simultaneous __________ of an interest rate floor. A) sale; sale B) sale; purchase C) purchase; purchase D) purchase; sale

An interest rate swap agreement indicates the ______ value, which represents the principal amount to which interest rates are applied to determine the interest payments involved. A) vanilla B) LIBOR C) programmed D) notional

Banks generally ________ loans and ___________ their purchases of low-risk securities when the economy is weak. A) increase; increase B) reduce; reduce C) increase; reduce D) reduce; increase

Banks would reduce their liquidity position by restructuring their asset portfolio to contain less ______ and more ______. A) Treasury securities; excess reserves B) loans; Treasury securities C) corporate bonds; Treasury securities D) none of the above

Default risk is likely to be highest for A) short-term Treasury securities. B) AAA corporate securities. C) long-term Treasury securities. D) BBB corporate securities.

Durango Bank has $2 million in rate-sensitive liabilities and $3 million in rate sensitive assets. Durango's gap is ___________, and Durango is probably more concerned about a(n) ____________ in interest rates. A) -$1 million; increase B) -$1 million; decrease C) $1 million; increase D) $1 million; decrease E) none of the above

Financial institutions primarily use interest rate swaps in a way that will ______ exposure to interest rate risk and ______ potential returns. A) increase; increase B) increase; reduce C) reduce; increase D) reduce; reduce

Firms A and B have entered into an interest rate swap. On the first payment date, Firm A owes Firm B 12 percent of $10 million, and Firm B owes Firm A 14 percent of $10 million. Most likely, this transaction will be settled in what manner? A) Firm A will send Firm B $120,000 and Firm B will send Firm A $140,000 B) Firm B will send Firm A $120,000 and Firm A will send Firm B $140,000 C) Firm A will send Firm B $20,000 D) Firm B will send Firm A $20,000 E) none of the above

If Bank A has a negative gap and Bank B has a positive gap. Which of the following is true? A) Bank A is more favorably affected by rising interest rates. B) Bank B is more favorably affected by falling interest rates. C) Bank A is adversely affected by falling interest rates. D) none of the above

If a bank that relies heavily on short-term deposits expects interest rates to consistently decrease over time, it would allocate most of its loans with ______ rates if it desires to maximize its expected returns. It could reduce its exposure to interest rate risk by setting ______ rates on its loans. A) fixed; fixed B) variable; fixed C) variable; variable D) fixed; variable

If economic conditions become less favorable A) expected cash flows on various projects will increase. B) more proposed projects will have expected returns greater than the hurdle rate. C) there would be additional acceptable business projects. D) there would be a decreased demand by business for loanable funds.

If research showed that all investors attempt to purchase securities that perfectly match their time in which they will have available funds, this would specifically support the argument made by the A) liquidity premium theory. B) real interest rate theory. C) expectations theory. D) segmented markets theory.

If the Treasury uses a relatively large proportion of ___________ debt to finance a budget deficit, this would place ___________ pressure on long-term yields. A) short-term; downward B) long-term; downward C) short-term; upward D) long-term; upward

If the economy weakens, there is _________ pressure on interest rates. If the Federal Reserve increases the money supply there is ______ pressure on interest rates (assume that inflationary expectations are not affected). A) upward; upward B) upward; downward C) downward; upward D) downward; downward

If the real interest rate was negative for a period of time, then A) inflation is expected to exceed the nominal interest rate in the future. B) inflation is expected to be less than the nominal interest rate in the future. C) actual inflation was less than the nominal interest rate. D) actual inflation was greater than the nominal interest rate.

In a __________, a buyer makes periodic payments to a seller in exchange for protection against the possible default of debt securities specified in the contract. A) default option contract B) default futures contract C) bankruptcy contract D) credit default swap

Interest rate______________ are interest rate derivative instruments that are normally classified separately from interest rate swaps. A) caps B) floors C) collars D) all of the above

Some financial institutions such as commercial banks are required by law to invest only in A) junk bonds. B) corporate stock. C) Treasury securities. D) investment-grade bonds.

Which banking act allowed for the creation of NOW accounts? a. McFadden Act b. Glass-Steagall Act c. DIDMCA d. Garn-St. Germain Act

DIDMCA

Which banking act removed deposit rate ceilings? a. McFadden Act b. Glass-Steagall Act c. DIDMCA d. Garn-St. Germain A

DIDMCA

____ are offered to bank customers who desire to write checks against their account. a. Time deposit accounts b. CDs c. Demand deposit accounts d. Money market deposit accounts

Demand deposit accounts

All other things equal, when banks issue new stock, they a. increase reported earnings per share. b. decrease their ability to absorb operating losses. c. dilute the ownership of the bank. d. A and B

Dilute the ownership of the bank

A ____ loan may be especially appropriate when the bank wishes to avoid adding more debt to its balance sheet. a. term b. bullet c. direct lease d. revolving credit

Direct lease

The argument that interstate banking would allow banks to grow and more fully achieve a reduction in operating costs per unit of output as output increases is based on a. economies of scale. b. financial leverage. c. diseconomies of scale. d. capital adequacy theory.

Economies of scale

All Fed member banks must hold a. private insurance on deposits. b. FDIC insurance on deposits. c. both FDIC and private insurance on deposits. d. none of the above

FDIC insurance on deposits

Banks sometimes need funds and sometimes have excess funds available. Which of the following is commonly a source of bank funds and a use of bank funds? a. MMDAs b. federal funds c. the discount window d. retail CDs

Federal Funds

Which of the following statements is incorrect with respect to the federal funds market? a. It allows depository institutions to accommodate the short-term liquidity needs of other financial institutions. b. Federal funds purchased represent an asset to the borrowing bank and a liability to the lending bank that sells them. c. The federal funds market is typically most active on Wednesday, because that is the final day of each particular settlement period for which each bank must maintain a specified volume of reserves required by the Fed. d. All of the above are true with respect to the federal funds market.

Federal funds purchased represent an asset to the borrowing bank and a liability to the lending bank that sells them.

Before establishing foreign branches, a U.S. bank must obtain the approval of the: a. U.S. Treasury. b. U.S. Commerce Department. c. Federal Deposit Insurance Corporation. d. Federal Reserve.

Federal reserve

Which banking act permanently increased FDIC insurance up to $250,000? a. DIDMCA b. Sarbanes-Oxley Act c. Financial Reform Act d. Garn-St. Germain Act

Financial reform act

Which banking act allowed banks to cross state lines in order to acquire a failing institution? a. McFadden Act b. Glass-Steagall Act c. DIDMCA d. Garn-St. Germain Act

Garn-St. Germain act

The federal funds rate is typically ____ the primary credit lending rate. a. greater than b. less than c. equal to d. none of the above

Greater than

Cash held ____ represents the major portion of a bank's required reserves. a. at other commercial banks b. in a bank's vault c. on deposit at the federal funds window d. on deposit with the Board of Governors

In a banks vault

Which of the following is most appropriate for a business that may experience a sudden need for funds but does not know precisely when? a. working capital loan b. direct lease loan c. term loan d. informal line of credit

Informal line of credit

Which banking act allowed interstate banking? a. Reigle-Neal Interstate Banking and Branching Efficiency Act b. Glass-Steagall Act c. DIDMCA d. Sarbanes-Oxley Act

Reigle-Neal interstate banking and branching efficiency act

When a bank in need of funds for a few days sells some of its government securities to a corporation with a temporary excess of funds, then buys them back shortly thereafter, this is a a. federal funds loan. b. discount window loan. c. repurchase agreement. d. commercial paper transaction.

Repurchase agreement

When a bank obtains funds through a ____, the provider of the funds receives collateral. a. retail CD b. NOW account c. repurchase agreement d. money market deposit account

Repurchase agreement

The Federal Reserve provides loans to banks in order to a. resolve permanent shortages of funds experienced by banks. b. resolve temporary shortages of funds experienced by banks. c. finance the shortages of funds of finance companies. d. none of the above

Resolve temporary shortages of funds experienced by banks

Which of the following accounts does not allow checks (at least a limited amount) to be written? a. NOW accounts b. money market deposit accounts (MMDAs) c. retail CDs d. all of the above allow checks to be written

Retail CDs

____ are the largest bank source of funds as a percentage of total liabilities. a. Small-denomination time deposits b. Money market deposit accounts (MMDAs) c. Transaction deposits d. Borrowed funds e. Savings deposits (including MMDAs)

Savings deposits (including MMDAs)

The primary credit lending rate is determined by a. the Federal Reserve. b. Congress. c. the Treasury. d. the President of the United States.

The federal reserve

Which of the following is true? a. The primary credit lending rate is set by the president of the United States. b. The federal funds rate is set by the president of the United States. c. The primary credit lending rate is set by commercial banks. d. The primary credit lending rate is now set at a level above the federal funds rate. e. A and B

The primary credit lending rate is now set at a level above the federal funds rate

Which of the following is a money market security? a. Treasury note b. municipal bond c. mortgage d. commercial paper

d. Commercial paper

Bank loans designed to support a firm's ongoing business operations are called a. term loans. b. working capital loans. c. direct lease loans. d. revolving credit loans.

Working capital loans

Freeman Corp., a large corporation, plans to issue 45-day commercial paper with a par value of $3,000,000. Freeman expects to sell the commercial paper for $2,947,000. Freeman's annualized cost of borrowing is estimated to be ____ percent. a. 14.39 b. 14.13 c. 14.59 d. 14.33 e. none of the above

a. 14.39

Caps on mortgage rate fluctuations with adjustable-rate mortgages (ARMs) are typically a. 2 percent per year and 5 percent for the mortgage lifetime. b. 5 percent per year and 15 percent for the mortgage lifetime. c. 0 percent per year and 10 percent for the mortgage lifetime. d. 3 percent per year and 8 percent for the mortgage lifetime.

a. 2 percent per year and 5 percent for the mortgage lifetime.

An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of $10,000,000 at the end of a 90-day period. The repo rate is ____ percent. a. 3.10 b. 0.77 c. 1.00 d. none of the above

a. 3.10

financial institution has a higher degree of interest rate risk on a ____ than a ____. a. 30-year fixed-rate mortgage; 15-year fixed-rate mortgage b. 30-year variable-rate mortgage; 30-year fixed-rate mortgage c. 15-year fixed-rate mortgage; 30-year fixed-rate mortgage d. 15-year variable-rate mortgage; 15-year fixed-rate mortgage

a. 30-year fixed-rate mortgage; 15-year fixed-rate mortgage

You purchase a six-month (182-day) T-bill with a $10,000 par value for $9,700. The Treasury bill discount is ____ percent. a. 5.93 b 6.12 c. 6.20 d. 6.02 e. none of the above

a. 5.93

When the Fed uses open market operations by purchasing Treasury securities from various financial institutions in the U.S., there will be a. an outward shift in the supply schedule of loanable funds. b. an inward shift in the supply schedule of loanable funds. c. no shift in the supply schedule of loanable funds. d. an inward shift in the demand schedule for loanable funds.

a. An outward shift in the supply schedule of loanable funds.

Which of the following instruments has a highly active secondary market? a. banker's acceptances b. commercial paper c. federal funds d. repurchase agreements

a. Banker's acceptances

The ____ is made up of seven individual members, and each member is appointed by the president of the U.S. a. Board of Governors b. Federal Reserve district bank c. Federal Open Market Committee (FOMC) d. Securities and Exchange Commission

a. Board of Governors

Which of the following is not a major investor in stocks? a. commercial banks b. insurance companies c. mutual funds d. pension funds

a. Commercial banks

Large corporations typically make ____ bids for T-bills so they can purchase larger amounts. a. competitive b. noncompetitive c. very small d. none of the above

a. Competitive

Which of the following distinguishes credit unions from commercial banks and savings institutions? a. Credit unions are non-profit b. Credit unions accept deposits but do not make loans c. Credit unions make loans but do not accept deposits d. Savings institutions restrict their business to members who share a common bond

a. Credit unions are non-profit

The Securities Act of 1933 a. required complete disclosure of relevant financial information for publicly offered securities in the primary market. b. declared trading strategies to manipulate the prices of public secondary securities illegal. c. declared misleading financial statements for public primary securities illegal. d. required complete disclosure of relevant financial information for securities traded in the secondary market. e. all of the above

a. Required complete disclosure of relevant financial information for publicly offered securities in the primary market.

With regard to monetary policy, which of the following is under direct control of the Federal Reserve's Board of Governors? a. revise reserve requirements for depository institutions b. authorize changes in the amount of borrowing by the Treasury c. monitor the stock market for insider trading d. monitor the derivatives market for illegal trading strategies

a. Revise reserve requirements for depository institutions

The Board of Governors is composed of a. seven members appointed by the President of the United States. b. the 12 presidents of Fed district banks. c. the Federal Open Market Committee, plus the Federal Advisory Council. d. the Federal Open Market Committee, plus the President of the United States.

a. Seven members appointed by the President of the United States

The federal funds market allows depository institutions to borrow a. short-term funds from each other. b. short-term funds from the Treasury. c. long-term funds from each other. d. long-term funds from the Federal Reserve. e. B and D

a. Short-term funds from each other.

The risk that financial problems could spread among financial institutions and across financial markets, causing a collapse of the financial system, is known as: a. systemic risk. b. leverage risk. c. financial meltdown risk. d. credit risk.

a. Systemic risk

LIBOR is: a. the interest rate charged on international interbank loans. b. the average rate charged on commercial loans in Europe. c. the rate charged by the Federal Reserve for loans to banks. d. the rate charged by the European Central Bank for loans to banks.

a. The interest rate charged on international interbank loans.

Which of the following is true of money market instruments? a. Their yields are highly correlated over time. b. They typically sell for par value when they are initially issued (especially T-bills and commercial paper). c. Treasury bills have the highest yield. d. They all make periodic coupon (interest) payments. e. A and B

a. Their yields are highly correlated over time.

____ are sold at an auction at a discount from par value. a. Treasury bills b. Repurchase agreements c. Banker's acceptances d. Commercial paper

a. Treasury bills

A five-year security was purchased two years ago by an investor who plans to resell it. The security will be sold by the investor in the so-called a. secondary market. b. primary market. c. deficit market. d. surplus market.

a. secondary market.

Which of the following is not a corrective action taken by regulators when a bank is identified as a problem bank? a. Regulators may examine such banks frequently and thoroughly. b. Regulators may request that a bank boost its capital level or delay its plans to expand. c. Regulators can require that additional financial information be periodically updated to allow continued monitoring. d. Regulators have the authority to take legal action against a problem bank if the bank does not comply with their suggested remedies. e. All of the above are possible corrective actions taken by bank regulators.

all of the above

Which of the following is not a main deregulatory provision of Depository Institutions Deregulation and Monetary Control Act of 1980? a. phase-out of deposit rate ceilings b. allowance of checkable deposits for all depository institutions c. new lending flexibility of depository institutions d. allowance of interstate banking for depository institutions in most states

allowance of interstate banking for depository institutions in most states

The Financial Services Modernization Act of 1999 a. gave banks and other financial service firms less freedom to merge. b. allowed financial institutions to offer a diversified set of financial services without being subjected to stringent constraints. c. offers very few benefits to a financial institution's clients. d. increased the reliance of financial institutions on the demand for the single service they offer.

allowed financial institutions to offer a diversified set of financial services without being subject to stringent constraints

The Glass-Steagall Act of 1933 prevented a. any firm that accepts deposits from underwriting stocks and bonds of corporations. b. any firm that accepts deposits from underwriting general obligation bonds of states and municipalities. c. any firm that accepts deposits from holding any corporate bonds in its asset portfolio. d. state-chartered banks from offering commercial loans.

any firm that accepts deposits from underwriting stocks and bonds of corporations

The minimum denomination of commercial paper is a. $25,000. b. $100,000. c. $150,000. d. $200,000.

b. $100,000.

Commercial paper has a maximum maturity of ____ days. a. 45 b. 270 c. 360 d. none of the above

b. 270

An investor purchased an NCD a year ago in the secondary market for $980,000. He redeems it today and receives $1,000,000. He also receives interest of $30,000. The investor's annualized yield on this investment is a. 2.0 percent. b. 5.10 percent. c. 5.00 percent. d. 2.04 percent.

b. 5.10 percent

An investor buys a T-bill with 180 days to maturity and $250,000 par value for $242,000. He plans to sell it after 60 days, and forecasts a selling price of $247,000 at that time. What is the annualized yield based on this expectation? a. about 10.1 percent b. about 12.6 percent c. about 11.4 percent d. about 13.5 percent e. about 14.3 percent

b. About 12.6 percent

T-bills and commercial paper are sold a. with a stated coupon rate. b. at a discount from par value. c. at a premium about par value. d. A and C e. none of the above

b. At a discount from par value.

A mortgage that requires interest payments for a three- to five-year period, then full payment of principal, is a(n) a. chattel mortgage. b. balloon payment mortgage. c. variable-rate mortgage. d. open-ended mortgage bond.

b. Balloon payment mortgage.

The adjustable-rate mortgage creates uncertainty for the ____ profit margin, but reduces the uncertainty for the ____. a. originator's; borrower b. borrower's; originator c. government's; originator d. none of the above

b. Borrower's; originator

The interest rate that the Fed targets for its monetary policy is the: a. commercial paper rate. b. federal funds rate. c. Treasury bond coupon rate. d. 1-year certificate of deposit rate.

b. Federal funds rate.

Systemic risk exists because: a. there is no government regulation of financial markets. b. financial institutions invest in similar securities and therefore are similarly exposed to large declines in prices of those securities. c. financial institutions borrow using long-term debt securities but lend their funds for short-term periods. d. financial institutions invest heavily in Treasury securities and therefore are exposed to the possibility that the government will default on its debts.

b. Financial institutions invest in similar securities and therefore are similarly exposed to large declines in prices of those securities.

A criticism of the Fed's actions during the credit crisis is that it: a. did not attempt to increase the liquidity of the debt markets. b. focused too much on financial institutions. c. allowed Bear Stearns to fail and file for bankruptcy. d. periodically raised the primary credit rate.

b. Focused too much on financial institutions.

____ was created in 1968 as a corporation that is wholly owned by the federal government. It guarantees payment on mortgages that meet specific criteria. a. Freddie Mac b. Ginnie Mae c. Fannie Mae d. None of the above

b. Ginnie Mae

A ____ mortgage allows borrowers to initially make small payments on the mortgage, which are then increased on a graduated basis over the first five to ten years; payments then level off from there on. a. balloon-payment b. graduated-payment c. shared-appreciation d. growing-equity e. none of the above

b. Graduated-payment

For any given interest rate, the shorter the life of the mortgage, the ____ the monthly payment and the ____ the total payments over the life of the mortgage. a. greater; greater b. greater; lower c. lower; greater d. lower; lower

b. Greater; lower

A mortgage with low initial payments that increase over time without ever leveling off is a a. graduated payment mortgage. b. growing-equity mortgage. c. second mortgage. d. shared-appreciation mortgage.

b. Growing-equity mortgage.

Treasury bills a. have a maturity of up to five years. b. have an active secondary market. c. are commonly sold at par value. d. commonly offer coupon payments.

b. Have an active secondary market.

Which of the following is probably not a goal the Fed is trying to achieve consistently? a. low inflation b. high interest rates c. steady GNP growth d. low unemployment

b. High interest rates

According to the theory of rational expectations, ____ inflationary expectations encourage businesses and households to ____ their demand for loanable funds in order to borrow and make planned expenditures increase. a. higher; reduce b. higher; increase c. lower; reduce d. lower; increase

b. Higher; increase

The time between when an economic problem is realized and when the Fed tries to correct it with its policies is the a. recognition lag. b. implementation lag. c. impact lag. d. open-market lag.

b. Implementation lag.

Assume that the reserve requirement ratio is 12 percent and that the Fed uses open market operations by buying $200 million worth of Treasury securities. Assuming that banks use all funds except required reserves to make loans and that the public does not store any cash, the money supply should ____ by about ____. a. increase; $200 million b. increase; $1.67 billion c. decrease; $200 million d. decrease; $1.67 billion

b. Increase; $1.67 billion

When the Fed purchases Treasury securities, the account balances of the investors who sell their securities to the Fed _________, and there are _________ in the account balances of other financial institutions. a. increase; offsetting decreases b. increase; no offsetting decreases c. decrease; offsetting increases d. decrease; no offsetting increases

b. Increase; no offsetting decreases

Which of the following statements is incorrect with respect to the federal funds rate? a. It is the rate charged by financial institutions on loans they extend to each other. b. It is not influenced by the supply and demand for funds in the federal funds market. c. The federal funds rate is closely monitored by all types of firms. d. Many market participants view changes in the federal funds rate to be an indicator of potential changes in other money market rates. e. The Federal Reserve adjusts the amount of funds in depository institutions in order to influence the federal funds rate.

b. It is not influenced by the supply and demand for funds in the federal funds market.

Which of the following is not true with respect to the Federal Reserve Act of 1913? a. It established reserve requirements for member commercial banks. b. It specified fourteen districts across the United States as well as a city in each district where a Federal Reserve district bank was to be established. c. Each district focused on its particular district, without much concern for other districts. d. All of the above are true.

b. It specified fourteen districts across the United States as well as a city in each district where a Federal Reserve district bank was to be established.

The ____ indicators tend to occur after a business cycle. a. leading b. lagging c. coincident d. none of the above

b. Lagging

The credit crisis is mostly attributed to the use of: a. strict criteria applied by mortgage originators. b. liberal criteria applied by mortgage originators. c. very tough credit ratings applied to mortgages. d. fixed-rate mortgages with long terms to maturity.

b. Liberal criteria applied by mortgage originators.

A ____-money policy can reduce unemployment, and a ____-money policy can reduce inflation. a. tight; loose b. loose; tight c. tight; tight d. loose; loose

b. Loose; tight

From the perspective of the lending financial institution, interest rate risk is a. lower on a 30-year fixed-rate mortgage than on a 15-year fixed-rate mortgage. b. lower on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage. c. higher on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage. d. higher on a 15-year adjustable-rate mortgage than on a 30-year adjustable-rate mortgage.

b. Lower on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.

____ includes only currency held by the public and checking deposits as well as savings accounts and small time deposits, money market deposit accounts, and some other items. a. M1 b. M2 c. M3 d. None of the above

b. M2

At a given point in time, the actual price paid for a three-month Treasury bill is a. usually equal to the par value. b. more than the price paid for a six-month Treasury bill. c. equal to the price paid for a six-month Treasury bill. d. none of the above

b. More than the price paid for a six-month Treasury bill

During the early years of a mortgage, a. most of the monthly payment reflects principal reduction. b. most of the monthly payment reflects interest. c. about half of the monthly payment reflects interest. d. Cannot answer without more information.

b. Most of the monthly payment reflects interest.

____ maintain a larger amount of assets in aggregate than the other types of nondepository institutions . a. Finance companies b. Mutual funds c. Life insurance companies d. Securities firms

b. Mutual funds

When particular securities are perceived to be ____ by the market, their prices decrease when they are sold by investors. a. undervalued b. overvalued c. fairly priced d. efficient e. none of the above

b. Overvalued

Since 2003, the Fed's rate on short-term loans to depository institutions is referred to as the a. discount rate. b. primary credit lending rate. c. Federal funds rate. d. prime rate

b. Primary credit lending rate.

Funds are provided to the initial issuer of securities in the a. secondary market. b. primary market. c. deficit market. d. surplus market.

b. Primary market.

When open market operations are used to ____ bank funds, the yield on debt instruments ____. a. reduce; decreases b. reduce; increases c. increase; increases d. none of the above

b. Reduce; increases

The effective yield of a foreign money market security is ____ when the foreign currency weakens against the dollar. a. increased b. reduced c. always negative d. unaffected

b. Reduced

The ____ market accommodates originators of mortgages that desire to sell their mortgages prior to maturity. a. primary b. secondary c. money d. none of the above

b. Secondary

In the "operation twist" strategy used in 2011 and 2012, the Fed sold _______ Treasury securities and used the proceeds to purchase ________ Treasury securities. a. long-term; short-term b. short-term; long-term c. short-term; long-term d. long-term; short-term

b. Short-term; long-term

At any given time, the yield on commercial paper is ____ the yield on a T-bill with the same maturity. a. slightly less than b. slightly higher than c. equal to d. A and B both occur with about equal frequency

b. Slightly higher than

The money market interest rate paid by corporations that borrow short-term funds in a particular country is typically: a. equal to the rate paid by that country's government. b. slightly higher than the rate paid by that country's government. c. mostly influenced by the demand for and supply of long-term funds in that country. d. set by the country's central bank.

b. Slightly higher than the rate paid by that country's government.

A loose money policy tends to ____ economic growth and ____ the inflation rate. a. stimulate; place downward pressure on b. stimulate; place upward pressure on c. dampen; place upward pressure on d. dampen; place downward pressure on

b. Stimulate; place upward pressure on

Financial market participants who provide funds are called a. deficit units. b. surplus units. c. primary units. d. secondary units.

b. Surplus Units

Those participants who receive more money than they spend are referred to as a. deficit units. b. surplus units. c. borrowing units. d. government units.

b. Surplus units.

The rate on Eurodollar floating rate CDs is based on a. a weighted average of European prime rates. b. the London Interbank Offer Rate. c. the U.S. prime rate. d. a weighted average of European discount rates.

b. The London Interbank Offer Rate.

Ignoring transaction costs, the cost of borrowing with commercial paper is equal to: a. the yield on T-bills of the same maturity. b. the yield earned by investors holding the paper until maturity. c. the federal funds rate. d. the par value of the paper.

b. The yield earned by investors holding the paper until maturity.

The advisory committee offering views on issues related to credit unions is the a. Consumer Advisory Council. b. Thrift Institutions Advisory Council. c. Federal Advisory Council. d. none of the above

b. Thrift Institutions Advisory Council.

Which of the following is not a typical money market security? a. Treasury bills b. Treasury bonds c. Commercial paper d. Negotiable certificates of deposit

b. Treasury bonds

A weak dollar would stimulate ____, discourage ____, and ____ the U.S. economy. a. U.S. exports; U.S. imports; weaken b. U.S. exports; U.S. imports; stimulate c. U.S. imports; U.S. exports; stimulate d. none of the above

b. U.S. exports; U.S. imports; stimulate

Which of the following is not an indicator of inflation? a. housing price indexes b. wage rates c. oil prices d. consumer confidence surveys

d. Consumer confidence surveys

In a standby letter of credit, a bank agrees to: a. charge a fixed interest rate for a line of credit for a specified period. b. back a customer's obligation to a third party. c. provide a customer with funds up to a specified maximum amount over a specified period. d. service credit card loans originated by another bank.

back a customers obligation to a third party

Which of the following is not true regarding the Financial Services Modernization Act of 1999? a. It provided more momentum for the consolidation of financial services. b. Financial institutions were finally able to offer a diversified set of financial services without being subjected to stringent constraints on the form or amount of financial services that they could offer. c. Banks and other financial service firms were given more freedom to merge, but were forced to divest some of the financial services that they acquired. d. Financial institutions no longer had to search for loopholes or monitor their business to ensure that the degree of financial services offered remained within the regulatory constraints that were previously imposed. e. all of the above are true

banks and other financial service firms were given more freedom to merge, but were forced to divest some of the financial services they required.

The fee banks pay to the FDIC for deposit insurance is now a. a fixed dollar amount for all banks. b. a fixed percentage of the bank's deposit level for all banks. c. a fixed percentage of the bank's loan volume for all banks. d. based on the risk of the bank.

based on the risk of the bank

Use an amortization schedule. A 15-year $100,000 mortgage has a fixed mortgage rate of 9 percent. In the first month, the total mortgage payment is $____, and $____ of this amount represents payment of interest. a. 1,014; 264 b. 1,241; 750 c. 1,014; 750 d. none of the above

c. 1,014; 750

s invested in a one-year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by Robbins? a. 25.00 percent b. 35.41 percent c. 14.59 percent d. none of the above

c. 14.59 percent

Buser Corp. purchases certain securities for $4,921,349, with an agreement to sell them back at a price of $4,950,000 at the end of a 30-day period. The repo rate is ____ percent. a. 7.08 b. 6.95 c. 6.99 d. 7.04 e. none of the above

c. 6.99

If a firm has a credit risk premium of 3 percent and the Treasury security rate is 4 percent, the firm will be able to borrow at ________. If the Fed implements a monetary policy that raises the Treasury security rate to 6 percent, the cost of borrowing for the firm will be ________. a. 7 percent; 10 percent b. 4 percent; 6 percent c. 7 percent; 9 percent d. 1 percent; 3 percent

c. 7 percent; 9 percent

Assume investors require a 5 percent annualized return on a six-month T-bill with a par value of $10,000. The price investors would be willing to pay is $____. a. 10,000 b. 9,524 c. 9,756 d. none of the above

c. 9,756

A repurchase agreement calls for an investor to buy securities for $4,925,000 and sell them back in 60 days for $5,000,000. What is the yield? a. 9.43 percent b. 9.28 percent c. 9.14 percent d. 9.00 percent

c. 9.14 percent

Commercial paper is subject to: a. interest rate risk. b. default risk. c. A and B. d. none of the above.

c. A and B.

When a bank guarantees a future payment to a firm, the financial instrument used is called a. a repurchase agreement. b. a negotiable CD. c. a banker's acceptance. d. commercial paper.

c. A banker's acceptance.

Which of the following transactions would not be considered a secondary market transaction? a. An individual investor purchases some existing shares of stock in IBM through his broker. b. An institutional investor sells some Disney stock through its broker. c. A firm that was privately held engages in an offering of stock to the public. d. All of the above are secondary market transactions.

c. A firm that was privately held engages in an offering of stock to the public

The Monetary Control Act of 1980 subjected a. only member banks to the reserve requirements set by the Fed. b. only S&Ls to the reserve requirements set by the Fed. c. all depository institutions to the reserve requirements set by the Fed. d. only national banks to reserve requirements set by the Fed.

c. All depository institutions to the reserve requirements set by the Fed

Global crowding out is described in the text to mean the impact of a. excessive U.S. population growth on interest rates. b. excessive global population growth on interest rates. c. an excessive budget deficit in one country on interest rates of another country. d. an excessive budget deficit in one country on exchange rates.

c. An excessive budget deficit in one country on interest rates of another country.

Rates for adjustable-rate mortgages are commonly tied to the a. average prime rate over the previous year. b. Fed's discount rate over the previous year. c. average Treasury bill rate over the previous year. d. average Treasury bond rate over the previous year.

c. Average Treasury bill rate over the previous year.

Which of the following is not a common type of mortgage-backed security according to your text? a. participation certificates (PCs) b. collateralized mortgage obligations (CMOs) c. balloon-payment mortgage certificates d. private-label pass-through securities e. all of the above are common types of mortgage pass-through securities

c. Balloon-payment mortgage certificates

The LIBOR scandal in 2012 involved: a. banks reporting inflated earnings from their loans. b. hackers breaking into the loan documentation files. c. banks falsely reporting the interest rates they offered in the interbank market. d. collusion among the banks when setting the commercial paper.

c. Banks falsely reporting the interest rates they offered in the interbank market.

The ____ is directly responsible for setting reserve requirements. a. Federal Advisory Council b. FOMC c. Board of Governors d. President of the United States

c. Board of Governors

____ are long-term debt obligations issued by corporations and government agencies to support their operations. a. Common stock b. Derivative securities c. Bonds d. None of the above

c. Bonds

The difference between the 30-year mortgages rate and the 30-year Treasury bond rate is primarily attributable to a. interest rate risk. b. reinvestment rate risk. c. credit risk. d. insurance risk.

c. Credit risk.

A credit crunch occurs when: a. interest rates decline. b. interest rates rise. c. creditors restrict the amount of loans they are willing to provide. d. the economy is strong.

c. Creditors restrict the amount of loans they are willing to provide.

Common stock is an example of a(n) a. debt security. b. money market security. c. equity security. d. A and B

c. Equity security.

When a securities firm acts as a broker, it a. guarantees the issuer a specific price for newly issued securities. b. makes a market in specific securities by adjusting its own inventory. c. executes transactions between two parties. d. purchases securities for its own account.

c. Executes transactions between two parties.

The advisory committee making recommendations to the Fed about economic and banking related issues is the a. Consumer Advisory Council. b. Thrift Institutions Advisory Council. c. Federal Advisory Council. d. none of the above

c. Federal Advisory Council

Which money market transaction is most likely to represent a loan from one commercial bank to another? a. banker's acceptance b. negotiable CD c. federal funds d. commercial paper

c. Federal funds

Which of the following statements is incorrect? a. Financial markets attract funds from investors and channel the funds to corporations. b. Money markets enable corporations to borrow funds on a short-term basis so that they can support their existing operations. c. Financial institutions serve solely as intermediaries with the financial markets and never serve as investors. d. Investors seek to invest their funds in the stock of firms that are presently undervalued and have much potential to improve.

c. Financial institutions serve solely as intermediaries with the financial markets and never serve as investors.

Debt securities issued by a small firm may be ________, meaning that _______ investors want to invest in those securities. a. liquid; many b. liquid; not many c. illiquid; not many d. illiquid; many

c. Illiquid; not many

The time between when the Fed adjusts the money supply and when interest rates change reflects the a. recognition lag. b. implementation lag. c. impact lag. d. open-market lag.

c. Impact lag.

The so-called "flight to quality" causes the risk differential between risky and risk-free securities to be a. eliminated. b. reduced. c. increased. d. unchanged (there is no effect).

c. Increased.

During a weak economy, the credit risk to a financial institution from investing in mortgage-backed securities representing subprime mortgages is ____ than that of mortgage-backed securities representing prime mortgages. a. equal to b. slightly less than c. more than d. substantially less than

c. More than

A common use of funds for ____ is investment in stocks and businesses, while their main use of funds is providing loans to households and businesses. a. savings institutions b. commercial banks c. mutual funds d. finance companies

c. Mutual funds

The purchase of government securities by someone other than the Fed results in a. an overall increase in funds among commercial banks. b. an overall decrease in funds among commercial banks. c. offsetting changes in funds at commercial banks. d. an increase in securities maintained by the Fed.

c. Offsetting changes in funds at commercial banks.

Mortgage companies specialize in a. purchasing mortgages originated by other financial institutions. b. investing and maintaining mortgages that they create. c. originating mortgages and selling those mortgages. d. borrowing money through the creation of mortgages that is used to invest in real estate.

c. Originating mortgages and selling those mortgages.

If financial markets were ____, all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors. a. efficient b. inefficient c. perfect d. imperfect

c. Perfect

Commercial paper is a. always directly placed with investors. b. always placed with the help of commercial paper dealers. c. placed either directly or with the help of commercial paper dealers. d. always placed by bank holding companies.

c. Placed either directly or with the help of commercial paper dealers.

Which of the following is not an example of the government's recent increased role in financial markets? a. the Federal Reserve's purchase of debt securities during the credit crisis b. regulations changing the way that the credit risk of bonds is assessed c. regulations setting maximum rates for Treasury securities d. increased monitoring of stock trading and prosecution of those who trade on inside information

c. Regulations setting maximum rates for Treasury securities

____ concentrate on mortgage loans. a. Finance companies b. Commercial banks c. Savings institutions d. Credit unions

c. Savings institutions

The Securities Exchange Commission (SEC) was established by the a. Federal Reserve Act. b. McFadden Act. c. Securities Exchange Act of 1934. d. Glass-Steagall Act. e. none of the above

c. Securities Exchange Act of 1934.

Which of the following is not a major component of the Federal Reserve System? a. member banks b. Federal Open Market Committee c. Securities and Exchange Commission d. Board of Governors

c. Securities and Exchange Commission

The typical role of a securities firm in a public offering of securities is to a. purchase the entire issue for its own investment. b. place the entire issue with a single large investor. c. spread the issue across several investors until the entire issue is sold. d. provide all large investors with loans so that they can invest in the offering.

c. Spread the issue across several investors until the entire issue is sold.

Which of the following is not a disadvantage of inflation targeting? a. If the U.S. inflation rate deviates substantially from the Fed's target inflation rate, the Fed could lose credibility. b. The Fed's complete focus on inflation could result in a much higher unemployment level. c. The Fed's complete focus on inflation could result in much higher interest rates, which would discourage economic growth. d. All of the above are disadvantages of inflation targeting.

c. The Fed's complete focus on inflation could result in much higher interest rates, which would discourage economic growth.

Which of the following is not a guarantor of federally insured mortgages? a. the Federal Housing Administration (FHA) b. the Veteran's Administration (VA) c. the Federal Deposit Insurance Corporation (FDIC) d. all of the above are guarantors of federally insured mortgages

c. The Federal Deposit Insurance Corporation (FDIC)

In a collateralized mortgage obligation (CMO), mortgages are segmented into ____ (or classes). a. balloon payments b. caps c. tranches d. strips

c. Tranches

When the Fed buys Treasury bills as a means of increasing the money supply, it places ____ pressure on their prices and ____ pressure on their yields. a. upward; upward b. downward; downward c. upward; downward d. downward; upward

c. Upward; downward

Costner National, a commercial bank, obtains short-term deposits and makes long-term fixed-rate loans. It should be adversely affected when the Fed: a. monetizes the debt. b. maintains a stable money supply. c. uses a tight-money policy. d. uses a loose-money policy.

c. Uses a tight-money policy.

A ____ dollar tends to exert inflationary pressure in the U.S. a. stable b. strong c. weak d. both A and B

c. Weak

____ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages. a. Strong; increase; decrease b. Strong; increase; increase c. Weak; decrease; increase d. Weak; increase; increase e. Weak; decrease; decrease

c. Weak; decrease; increase

The price O bidders will pay at a Treasury bill auction is the a. highest price entered by a competitive bidder. b. highest price entered by a noncompetitive bidder. c. weighted average price paid by all competitive bidders whose bids were accepted. d. equally weighted average price paid by all competitive bidders whose bids were accepted. e. none of the above

c. Weighted average price paid by all competitive bidders whose bids were accepted.

Which of the following is most likely to be described as a depository institution? a. finance companies b. securities firms c. credit unions d. pension funds e. insurance companies

c. credit unions

Mortgage prices would normally be expected to ____ when the interest rates ____, holding other factors constant. a. increase; increase b. decrease; decrease c. increase; decrease d. none of the above

c. increase; decrease

The foreign exchange market facilitates the exchange of: a. information between investors in different countries. b. debt securities. c. equity securities. d. currencies.

d. Currencies.

Generally, the failure of small banks a. causes more widespread concern about the safety of the banking system than the failure of large banks. b. causes equal concern about the safety of the banking system as the failure of large banks. c. causes less concern about the safety of the banking system than the failure of large banks. d. Either A or B can be true, depending on the type of business cycle that exists while the failures occur.

causes less concern about the safety of the banking system rather than the failure of large banks.

____ is (are) not a major source of funds for commercial banks. a. Deposit accounts b. Borrowed funds c. Commercial loans d. Bank capital e. All of the above are commercial banks sources of funds.

commercial loans

A federal bank charter is issued by the a. Comptroller of the Currency. b. Securities and Exchange Commission. c. U.S. Treasury. d. Federal Reserve. e. none of the above

comptroller of the currency

The intent of federal funds transactions is to a. correct short-term fund imbalances experienced by banks. b. correct long-term fund imbalances experienced by banks. c. serve as a permanent source of bank capital. d. serve as the primary depository source of funds.

correct short-term fund imbalances experienced by banks

Before the credit crisis, _________ were heavily used to protect against the credit (default) risk from investing in mortgage-backed securities. a. standby letters of credit b. interest rate swap contracts c. credit default swap contracts d. forward contracts on mortgage

credit default swap contracts

____ is not a characteristics used by the Federal Deposit Insurance Corporation (FDIC) to rate banks. a. Capital adequacy b. Current stock price c. Asset quality d. Management e. All of the above are used by the FDIC to rate banks.

current stock price

A purchase of Treasury securities by the Fed leads to a(n) ____ in interest rates and a(n) ____ in the level of business investment. a. increase; decrease b. decrease; decrease c. increase; increase d. decrease; increase

d. Decrease; increase

A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day maturity. What is the discount? a. 10.26 percent b. 0.26 percent c. $2,500 d. 10.00 percent e. 11.00 percent

d. 10.00 percent

Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One hundred days later, Jarrod sells the T-bill for $9,719. What is Jarrod's expected annualized yield from this transaction? a. 13.43 percent b. 2.78 percent c. 10.55 percent d. 2.80 percent e. none of the above

d. 2.80 percent

An investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If the Treasury bill is held to maturity, the annualized yield is ____ percent. a. 6.02 b. 1.54 c. 1.50 d. 6.20 e. none of the above

d. 6.20

Bill Yates, a private investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If Bill holds the Treasury bill to maturity, his annualized yield is ____ percent. a. 6.02 b. 1.54 c. 1.50 d. 6.20 e. none of the above

d. 6.20

An investor buys commercial paper with a 60-day maturity for $985,000. Par value is $1,000,000, and the investor holds it to maturity. What is the annualized yield? a. 8.62 percent b. 8.78 percent c. 8.90 percent d. 9.14 percent e. 9.00 percent

d. 9.14 percent

A(n) ____ in Federal Reserve float causes a(n) ____ in bank funds. a. increase; increase b. increase; decrease c. decrease; decrease d. A and C

d. A and C

Which of the following is currently a main role of the Federal Reserve's Board of Governors? a. regulating commercial banks b. regulating foreign trade c. controlling monetary policy d. A and C

d. A and C

Collateralized mortgage obligations (CMOs) are generally perceived to have a. no prepayment risk but some default risk. b. no prepayment risk and no default risk. c. the same interest rate risk as money market securities. d. a high degree of prepayment risk.

d. A high degree of prepayment risk.

Based on a 2003 policy, the primary credit lending rate is set a. lower than the federal funds rate. b. lower than the prevailing Treasury bill rate. c. lower than the expected inflation rate. d. above the federal funds rate.

d. Above the federal funds rate

Which of the following is not an activity of Fed district banks? a. clearing checks b. replacing old currency c. providing loans to depository institutions d. acting as an intermediary to match up lenders and borrowers in the stock market

d. Acting as an intermediary to match up lenders and borrowers in the stock market

International integration of securities markets allows: a. governments and corporations to have easier access to funding from creditors and investors in other countries. b. investors and creditors to benefit from investment opportunities in other countries. c. one's country's financial problems to adversely affect other countries. d. All of the above

d. All of the above

Which of the following financial intermediaries commonly invests in stocks and bonds? a. pension funds b. insurance companies c. mutual funds d. all of the above

d. All of the above

Mortgage prices are subject to a. interest rate risk. b. credit risk. c. prepayment risk. d. all of the above.

d. All of the above.

In a short sale of a home: a. the lender er forecloses and then sells the home for less than what is owed on the mortgage. b. the lender allows the homeowner to sell the home for less than what is owed on the mortgage. c. the lender does not recover the full amount of the mortgage. d. B and C e. A and C

d. B and C

The ____ the reserve requirement ratio, the ____ the ultimate effect of any initial increase in money supply. a. lower; less b. lower; greater c. greater; less d. B and C

d. B and C

____ are the most active participants in the federal funds market. a. Savings and loan associations b. Securities firms c. Credit unions d. Commercial banks

d. Commercial banks

Which of the following was not true of the eurozone during the Greek crisis? a. Fear of a financial crisis throughout Europe discouraged investors and firms from moving funds into Europe. b. By using a more stimulative monetary policy than it desired, the European Central Bank aroused concerns about potential inflation in the eurozone. c. There was concern that the austerity conditions could weaken the country's economy further. d. Greece, Spain, and Portugal focused their efforts on reducing tax rates in order to stimulate their economies.

d. Greece, Spain, and Portugal focused their efforts on reducing tax rates in order to stimulate their economies.

Inflation is commonly the result of a a. large budget deficit. b. high level of interest rates. c. high level of unemployment. d. high level of aggregate demand.

d. High level of aggregate demand.

Which of the following is not a reason that a stimulative monetary policy may be ineffective? a. The effects of a stimulative policy may be disrupted by expectations of inflation. b. Retirees who rely on interest income may restrict their spending c. Lending institutions may increase their standards for borrowers, so some potential borrowers may not qualify for loans. d. Higher interest rates encourage individuals to increase their savings.

d. Higher interest rates encourage individuals to increase their savings.

Equity securities should normally have a ____ expected return and ____ risk than money market securities. a. lower; lower b. lower; higher c. higher; lower d. higher; higher

d. Higher; higher

If investors speculate in derivative contracts rather than the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk. a. lower; lower b. lower; higher c. higher; lower d. higher; higher

d. Higher; higher

Long-term debt securities tend to have a ____ expected return and ____ risk than money market securities. a. lower; lower b. lower; higher c. higher; lower d. higher; higher

d. Higher; higher

Which of the following is not true with respect to inflation targeting? a. The Fed could lose credibility is the inflation rate deviates substantially from the Fed's target inflation rate. b. A complete focus on inflation could result in a much higher unemployment rate. c. Inflation targeting may not only satisfy the inflation goal, but could also achieve the employment stabilization goal in the long run. d. If unemployment is slightly higher than normal, while inflation is at the peak of the target range, and inflation targeting approach would like advocate a loose monetary policy.

d. If unemployment is slightly higher than normal, while inflation is at the peak of the target range, and inflation targeting approach would like advocate a loose monetary policy.

The Fed can ____ the level of spending as a means of stimulating the economy by ____ the money supply. a. increase; decreasing b. decrease; increasing c. decrease; decreasing d. increase; increasing

d. Increase; increasing

Which of the following is not true with respect to a growing-equity mortgage? a. It is similar to a graduated-payment mortgage. b. It allows borrowers to initially make small payments on the mortgage. c. It involves increased payments, on a graduated basis, over the first five to ten years of the mortgage. d. It involves payments that level off after the first five to ten years of the mortgage.

d. It involves payments that level off after the first five to ten years of the mortgage.

Money market securities generally have ____. Capital market securities are typically expected to have a ____. a. less liquidity; higher annualized return b. more liquidity; lower annualized return c. less liquidity; lower annualized return d. more liquidity; higher annualized return

d. More liquidity; higher annualized return

22. Which of the following is a nondepository financial institution? a. savings banks b. commercial banks c. savings and loan associations d. mutual funds

d. Mutual funds

If economic conditions cause investors to sell stocks because they want to invest in safer securities with much liquidity, this should cause a ____ demand for money market securities, which placed ____ pressure on the yields of money market securities. a. weak; downward b. weak; upward c. strong; upward d. none of the above

d. None of the above

When firms sell commercial paper at a ____ price than they projected, their cost of raising funds is ____ than projected. a. higher; higher b. lower; lower c. A and B d. none of the above

d. None of the above

International flows of funds can affect the Fed's monetary policy. For example, if there is downward pressure on U.S. interest rates that can be offset by foreign ____ of funds, the Fed may not feel compelled to use a ____ monetary policy. a. inflows; loose b. inflows; tight c. outflows; loose d. outflows; tight e. none of the above

d. Outflows; tight

Which of the following did the Fed not do during the credit crisis? a. purchase mortgage-backed securities b. purchase commercial paper c. reduce the targeted federal funds rate d. prevent depository institutions from obtaining funding through the discount window

d. Prevent depository institutions from obtaining funding through the discount window

The intent of the Fed's operation twist strategy in 2011 and 2012 was to:. a. increase long-term interest rates. b. require corporations to issue more commercial paper. c. require bond rating agencies to impose higher standards on their ratings. d. reduce long-term interest rates.

d. Reduce long-term interest rates.

If a security is undervalued, some investors would capitalize from this by purchasing that security. As a result, the security's price will ____, resulting in a ____ return for those investors. a. rise; lower b. fall; higher c. fall; lower d. rise; higher

d. Rise; higher

Which of the following mortgages allows the home purchaser to obtain a mortgage at a below-market interest rate throughout the life of the mortgage? a. second mortgage b. growing-equity mortgage c. graduated payment mortgage d. shared-appreciation mortgage

d. Shared-appreciation mortgage

According to the theory of rational expectations, if the Fed uses open market operations in order to increase the supply of loanable funds, the ultimate effect on interest rates is definitely a. a reduction in interest rates. b. an increase in interest rates. c. no effect on the interest rates. d. the impact on interest rates cannot be determined.

d. The impact on interest rates cannot be determined.

Which of the following is not a reason why depository financial institutions are popular? a. They offer deposit accounts that can accommodate the amount and liquidity characteristics desired by most surplus units. b. They repackage funds received from deposits to provide loans of the size and maturity desired by deficit units. c. They accept the risk on loans provided. d. They use their information resources to act as a broker, executing securities transactions between two parties. e. They have more expertise than individual surplus units in evaluating the creditworthiness of deficit units.

d. They use their information resources to act as a broker, executing securities transactions between two parties.

____ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages. a. Strong; decrease; decrease b. Strong; increase; increase c. Weak; increase; increase d. Weak; decrease; increase e. Weak; decrease; decrease

d. Weak; decrease; increase

Eurodollar deposits a. are U.S. dollars deposited in the U.S. by European investors. b. are subject to interest rate ceilings. c. have a relatively large spread between deposit and loan rates (compared to the spread between deposits and loans in the United States). d. are not subject to reserve requirements.

d. are not subject to reserve requirements.

When the Fed sells securities, the total funds of commercial banks ____ by the market value of securities sold by the Fed. This activity initiated by the FOMC's policy directive is referred to as a ____ of money supply growth. a. increase; loosening b. decrease; loosening c. increase; tightening d. decrease; tightening e. none of the above

d. decrease; tightening

Without the participation of financial intermediaries in financial market transactions, a. information and transaction costs would be lower. b. transaction costs would be higher but information costs would be unchanged. c. information costs would be higher but transaction costs would be unchanged. d. information and transaction costs would be higher.

d. information and transaction costs would be higher.

Financial institutions that hold fixed-rate mortgages in their asset portfolios are exposed to ____ risk, because they commonly use funds obtained from short-term customer deposits to make long-term mortgage loans. a. exchange rate b. prepayment c. reinvestment rate d. interest rate e. exchange rate

d. interest rate

Fannie Mae and Freddie Mac experienced financial problems during the credit crisis because they: a. were unwilling to finance new mortgages. b. invested heavily in balloon mortgages. c. invested only in prime mortgages that offered very low returns. d. invested heavily in subprime mortgages.

d. invested heavily in subprime mortgages.

The Trading Desk is sometimes directed to ____ a sufficient amount of Treasury securities that will ____ the federal funds rate to a new targeted level set by the FOMC. a. buy; decrease b. sell; increase c. buy; increase d. sell; decrease e. A and B

e. A and B

Which of the following is not a money market instrument? a. banker's acceptance b. commercial paper c. negotiable CDs d. repurchase agreements e. all of the above are money market instruments

e. All of the above are money market instruments

Which of the following statements is incorrect with respect to a single European monetary policy? a. It allows for more consistent economic conditions across the countries. b. It prevents any participating European country from solving local economic problems with its own unique monetary policy. c. A policy used in a particular period may not affect the participating countries equally, since they all have the same currency. d. Each participating country will still be able to apply its own fiscal policy (tax and government expenditure decisions). e. All of the above are true with respect to a single European monetary policy.

e. All of the above are true with respect to a single European monetary policy.

From the perspective of the lending financial institution, there is a ____ degree of interest rate risk for ____-maturity mortgages. a. higher; shorter b. higher; longer c. lower; shorter d. lower; higher e. Answers B and C are correct.

e. Answers B and C are correct.

When a firm sells its commercial paper at a ____ price than projected, their cost of raising funds will be ____ than what they initially anticipated. a. higher; higher b. lower; lower c. higher; lower d. lower; higher e. Answers C and D are correct.

e. Answers C and D are correct.

The probability that a borrower will default (credit risk) is influenced by all of the following, except a. economic conditions. b. the level of equity invested by the borrower. c. the borrower's income level. d. the borrower's credit history. e. Credit risk is affected by all of the above.

e. Credit risk is affected by all of the above.

Which of the following best describes the relationship between the Fed and the Administration? a. The Fed must receive approval by the Administration before conducting monetary policy. b. The Fed must implement a monetary policy specifically to the support the Administration's policy. c. The Administration must receive approval from the Fed before implementing fiscal policy. d. A and C e. none of the above

e. None of the above

Which of the following is true? a. Federal deficits require that the Fed purchase government securities. b. Federal deficits will always result in an increase in money supply. c. The Federal Reserve monetizes debt by selling securities which ultimately increases money supply. d. An agreement between the Fed and the Treasury exists whereby the Fed is directly responsible for monetizing the debt whenever the deficit increases. e. None of the above.

e. None of the above.

Which of the following is an "off-balance-sheet commitment?" a. long-term debt b. additional paid-in capital c. notes payable d. guarantees backing commercial paper issued by firm

guarantees backing commercial paper issued by firm

When financial institutions originate residential mortgages, the mortgage contract should not specify a. whether the mortgage is federally insured. b. the amount of the loan. c. whether the interest rate is fixed or adjustable. d. the maturity. e. the mortgage contract should specify all of the above

e. The mortgage contract should specify all of the above

To increase the money supply growth, the Fed could a. sell government securities in the secondary market. b. increase the primary credit lending rate. c. increase the reserve requirement ratio. d. all of the above e. none of the above

e. none of the above

The liquidity component of the CAMELS rating refers to a. regulators' concern about how a bank's earnings would change if economic conditions change. b. how well the bank's management would detect its own financial problems. c. a bank's sensitivity to financial market conditions. d. monitoring the type of loans that are given, the bank's process for deciding whether to provide loans, and the credit rating of debt securities that it purchases. e. excessive borrowing by banks from outside sources, such as the discount window.

excessive borrowing by banks from outside sources, such as the discount window

The Basel III framework proposes: a. lower capital requirements for banks to enable them to generate higher earnings to make up for their losses during the credit crisis. b. relying on the rating agencies to assess the risk of bank assets. c. increased capital requirements and liquidity requirements for banks. d. using the gap ratio to set the capital ratio.

increased capital requirements and liquidity requirements for banks

forward contract on currency: a. is a way to hedge credit (default) risk. b. is used to to swap fixed interest payments in euros for variable interest payments in dollars. c. is an agreement between a customer and a bank to exchange one currency for another on a specified date at a specified exchange rate. d. is an agreement between a customer and a bank to exchange one currency for another on a specified date at whatever the exchange rate is on that day.

is an agreement between a customer and a bank to exchange one currency for another on a specified date at a specified exchange rate

A single loan in the federal funds market is usually for ____; when a bank sells a single repurchase agreement, the maturity is usually ____. a. just a few days; one year or more b. several weeks; one year or more c. several weeks; just a few days d. just a few days; just a few days

just a few days; just a few days

Commercial banks that are not members of the Federal Reserve System ____ borrow from the Fed, and ____ subject to the Fed's reserve requirements. a. may; are b. may; are not c. may not; are not d. may not; are

may; are

From a bank manager's perspective, the differential in interest between a bank's loans and its deposits; a. must not exceed the federal funds rate. b. is called the primary credit lending rate. c. must be sufficient to cover the bank's other expenses and generate a reasonable profit for the bank's owners. d. must be sufficient to cover the bank's deposit insurance premiums and its reserve requirements at the Federal Reserve.

must be sufficient to cover the banks other expenses and generate a reasonable profit for the banks owners

____ are the largest bank source of funds (as a percentage of total liabilities). a. Small-denomination time deposits b. Large-denomination time deposits c. Transaction deposits d. Savings deposits (including MMDAs)

savings deposits (including MMDAs)

A bank can increase its capital ratio by: a. buying back shares of its stock from shareholders. b. selling assets. c. increasing its dividend to encourage more investors to purchase its stock. d. increasing its off-balance sheet activities.

selling assets

The moral hazard problem is minimized when deposit insurance premiums are a. zero (not imposed by the FDIC). b. the same percentage of assets for all banks. c. set at a fixed percentage of assets for large banks, and is zero for small banks. d. set at a percentage of assets that is based on the bank's risk level.

set at a percentage of assets that is based on the bank's risk level.

The Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010: a. ended the system of risk-based insurance premiums. b. set requirements for the Deposit Insurance Fund's reserves. c. raised the limit for insured deposits to $750,000 per depositor. d. allowed large insurance companies such as American International Group to compete with the FDIC to insure bank deposits.

set requirements for the deposit insurance fund's reserve

The Volcker rule, named for a former Fed chair: a. is intended to increase the powers of the Fed. b. states that the U.S. government will rescue certain large banks if necessary to reduce systemic risk in the financial system. c. sets limits on banks' proprietary trading. d. requires all banks to undergo annual stress tests.

sets limits on banks proprietary trading

National banks are regulated by ____, and state banks are regulated by ____. a. the Comptroller of the Currency; their state agency b. the Comptroller of the Currency; the Comptroller of the Currency c. their state agency; their state agency d. their state agency; the Comptroller of the Currency

the comptroller of the currency; their state agency

Banks sometimes prefer to minimize their amount of capital since a. interest payments must be paid by the bank on all capital that is held. b. they try to avoid diluting ownership of the bank. c. A and B d. none of the above

they try to avoid diluting ownership of the bank

During the 2008-2010 period, the ____ was implemented to alleviate the financial problems experienced by banks and other financial institutions with excessive exposure to mortgages or mortgage-backed securities. a. Riegle Program b. Sarbanes-Oxley Program c. FDIC Program d. Troubled Asset Relief Program (TARP)

troubled asset relief program (TARP)

When a bank engages in proprietary trading, it: a. uses its own funds to make investments. b. is not subject to regulations. c. lends the funds in the federal funds market. d. normally uses the funds to build its capital.

uses its own funds to make investments

Federal deposit insurance a. existed since the 1800s. b. was created in 1933. c. was created after World War II. d. was created in 1960.

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